The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the "Selected Financial Data" and our financial statements and the related notes thereto. This discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results including those set forth in the "Risk Factors" section of this report.

Overview

Stamps.com® is the leading provider of Internet-based postage solutions. Customers use our service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a wide range of USPS mail classes including First Class Mail®, Priority Mail®, Express Mail®, Media Mail®, Parcel Post®, and others. Our customers include home businesses, small businesses, corporations and individuals. We were the first ever USPS-licensed vendor to offer PC Postage® in a software-only business model in 1999. During 2004, we publicly launched a market test of PhotoStamps®, a new form of postage that allows consumers to turn digital photos, designs or images into valid US postage. Any reference in this document to the PC Postage business excludes our PhotoStamps business.

Section 382 Update

We currently have federal and state net operating loss ("NOL") carry-forwards of approximately $240 million and $150 million, respectively, with potential value of up to $95 million in tax savings over the next 15 years. Under Internal Revenue Code Section 382 rules, if a "change of ownership" is triggered, our NOL asset may be impaired. A change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more "5% shareholders" within a three-year period. We estimate that as of December 31, 2008 we were at approximately a 34% level compared with the 50% level that would trigger impairment of our NOL asset.

During the second quarter of 2008, we received shareholder approval to amend our articles of incorporation in order to protect our NOL asset (the "NOL Protective Measures") and those measures are now in effect. Under the NOL Protective Measures there is no change to the way that existing Stamps.com shares are held or traded, but any person, company or investment firm which wishes to become a "5% shareholder" of Stamps.com must first obtain a waiver from our board of directors. In addition, any person, company or investment firm which is already a "5% shareholder" of Stamps.com cannot make any additional purchases of Stamps.com stock without a waiver from our board of directors.

As of February 27, 2009, we had 16,653,144 shares outstanding, and therefore ownership of approximately 833,000 shares or more would currently constitute a "5% shareholder". We strongly urge that any stockholder contemplating owning more than 675,000 shares contact us before doing so.

Results of Operations
Years Ended December 31, 2008 and 2007

Total revenue in 2008 was $84.9 million, a decrease of 1% from $85.8 million in 2007. PC Postage subscriber related revenue, including service revenue, product revenue and insurance revenue, in 2008 was $73.0 million, an increase of 9% compared to $67.0 million in 2007. PhotoStamps revenue in 2008 was $11.9 million, a decrease of 34% compared to $17.9 million in 2007.

The PC Postage marketing channels we use to acquire customers include partnerships, online advertising, affiliate channel, direct mail, traditional media advertising, enhanced promotion online channel and others. We look at our enhanced promotion channel separately from our non-enhanced promotion channels. In the enhanced promotion channel, we work with various companies to advertise our service in a variety of sites on the Internet. These companies typically offer an additional promotion directly to the customer in order to get the customer to try our service. Although our enhanced promotion channel is characterized by lower customer acquisition costs than our other channels, its customer attrition rates are higher. In recent periods, we have decided to decrease our marketing investment in that channel and increase investments in our other non-enhanced promotion marketing channels.

As a result, we estimate that subscriber related revenue for customers acquired through our enhanced promotion channel for 2008 was $9.1 million, a decrease of 4% from $9.5 million in 2007. We estimate that subscriber related revenue for customers acquired through our non-enhanced promotion channels for 2008 was $63.9 million, an increase of 11% from $57.5 million in 2007.

We define paid customers as ones from whom we successfully collected service fees at least once during the quarter. The following table sets forth the total number of paid customers originally acquired through our non-enhanced promotion channels on a quarterly basis (in thousands):

[[Image Removed]]   [[Image Removed]]       [[Image Removed]]             [[Image Removed]]       [[Image Removed]]
                        First Quarter           Second Quarter Paid           Third Quarter          Fourth Quarter
Year                   Paid Customers                Customers               Paid Customers          Paid Customers
                            (000)                      (000)                      (000)                   (000)
2008                             305                        314                        312                     311
2007                             267                        270                        281                     293

We believe that the increase in paid customers in 2008 was attributable to our increased customer acquisition spending. For customers originally acquired through our non-enhanced promotion channels, our average subscriber related monthly revenue per paid customer in 2008 was $17.16 compared to $17.26 in 2007.

The following table sets forth our results of operations as a percentage of total revenue for the periods indicated:

[[Image Removed]]                      [[Image Removed]]      [[Image Removed]]
                                            Twelve Months Ended December 31,
                                               2008                   2007
Total Revenues:
Service                                           72.5 %                 65.2 %
Product                                           11.7 %                 11.2 %
Insurance                                          1.8 %                  1.7 %
PhotoStamps                                       14.0 %                 20.8 %
Other                                              0.0 %                  1.1 %
Total revenues                                   100.0 %                100.0 %
Cost of revenues:
Service                                           12.2 %                 11.3 %
Product                                            4.2 %                  3.8 %
Insurance                                          0.6 %                  0.5 %
PhotoStamps                                       10.0 %                 13.8 %
Other                                              0.0 %                  0.1 %
Total cost of revenues                            27.0 %                 29.5 %
Gross profit                                    73.0 %                 70.5 %
Operating expenses:
Sales and marketing                               39.5 %                 38.6 %
Research and development                           9.9 %                  9.6 %
General and administrative                        18.3 %                 14.6 %
Total operating expenses                          67.7 %                 62.8 %
Income from operations                             5.3 %                  7.7 %
Other income, net                                  3.4 %                  5.2 %
Income before income taxes                         8.7 %                 12.9 %
(Benefit) provision for income taxes              -3.3 %                  0.5 %
Net income                                        12.0 %                 12.4 %

Revenue

Our revenue is derived primarily from five sources: (1) service fees charged to customers for use of our PC Postage service; (2) product sales consisting of Supplies Store revenue from the direct sale of consumables and supplies (3) insurance revenue from our branded insurance offering; (4) PhotoStamps revenue from our

PhotoStamps business; and (5) other revenue, consisting of licensing revenue and advertising revenue derived from advertising programs with our existing customer base. Total revenue decreased 1% to $84.9 million in 2008 from $85.8 million in 2007.

Service revenue increased 10% to $61.6 million in 2008 from $55.9 million in 2007. The increase in service revenue is primarily due to the increase in our successfully billed customers as a result of the growth in our customer base. The 10% increase in service revenue consisted of a 13% increase in service revenue from customers acquired through our non-enhanced promotion channels and a 4% decrease in service revenue from customers acquired through our enhanced promotion channel. The 13% increase in service revenue from customers through the non-enhanced promotion channels consisted of a 12% increase in successfully billed customers and a 1% increase in average service revenue per customer. As a percentage of total revenue, service revenue increased approximately eight percentage points to 73% in 2008 from 65% in 2007, primarily as a result of the decrease in revenue from our PhotoStamps product.

Product revenue increased 3% to $9.9 million in 2008 from $9.6 million in 2007. The increase in product revenue was attributable to growth in the number of orders, partially offset by a decline in the average revenue per order. The increase in product revenue consisted of a 4% increase in store orders shipped and a 1% decrease in average revenue per order. The increase in store orders shipped was primarily attributable to an increase in our paid customer base. As a percentage of total revenue, product revenue increased approximately one percentage point to 12% in 2008 from 11% in 2007.

Insurance revenue increased 6.5% to $1.6 million in 2008 from $1.5 million in 2007. The increase in insurance revenue consisted of a 2% increase in insurance transactions and a 4% increase in average revenue per insurance transaction. The increase in insurance transactions was primarily attributable to an increase in our paid customer base and the increase in average revenue per transactions was primarily attributable to an increase in the average declared value per package. As a percentage of total revenue, insurance revenue was 2% in each of 2008 and 2007.

PhotoStamps revenue decreased 34% to $11.9 million in 2008 from $17.9 million in 2007. The decrease in revenue was primarily attributable to a decrease in the number of sheets shipped. PhotoStamps sheets shipped during 2008 was approximately 712,000, a 35% decrease compared to 1.1 million in 2007. Average revenue per sheet shipped for 2008 was $16.68, a 2% increase compared to $16.34 for 2007. We believe the decrease in PhotoStamps sheets shipped was primarily attributable to the weaker general economy and our reduction in PhotoStamps consumer sales and marketing spending. As a percentage of total revenue, PhotoStamps revenue decreased approximately seven percentage points to 14% in 2008 from 21% in 2007.

Because of the expiration of a licensing agreement in June 2007, we did not have any other revenue in 2008, compared to $907,000 in 2007.

Cost of Revenue

Cost of revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees, the cost of postage for PhotoStamps, image review, printing and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and handling. Total cost of revenue decreased 9% in 2008 to $22.9 million from $25.3 million in 2007. As a percentage of total revenue, cost of revenue decreased three percentage points to 27% in 2008 compared to 30% in 2007.

Cost of service revenue increased 7% to $10.4 million in 2008 from $9.7 million in 2007. The increase in cost of service revenue is primarily attributable to higher customer support related expenses resulting from expanding our support personnel and efforts to improve the overall customer experience. Promotional expenses, which includes free postage and a free digital scale offered to new customers, are included in cost of service revenue. Promotional expenses were approximately $791,000 and $1.7 million during 2008 and 2007, respectively. The decrease in promotional expense is primarily attributable to a change in our estimate of future coupon redemptions made during 2008. Promotional expense, which represents a material portion of total cost of service revenue, is expensed in the period in which a customer qualifies for the promotion while the revenue associated with the acquired customer is earned over the customer's lifetime. As a result, promotional expense for newly acquired customers may exceed the revenue earned from those customers in that

period. As a percentage of total revenue, cost of service revenue increased approximately one percentage point to 12% in 2008 as compared to 11% in 2007.

Cost of product revenue increased 7% to $3.5 million in 2008 from $3.3 million in 2007. The increase in cost of product revenue was primarily attributable to the increase in store sales and higher fulfillment costs in 2008 compared with 2007. As a percentage of total revenue, cost of product revenue was 4% in both 2008 and 2007.

Cost of insurance revenue increased 9% to $498,000 in 2008 from $455,000 in 2007. The increase in cost of insurance revenue was attributable to both an increase in the number of insurance transactions and an increase in the average cost per insurance transaction. As a percentage of total revenue, cost of insurance revenue was unchanged at 1% in 2008 and 2007.

Cost of PhotoStamps revenue decreased 28% to $8.5 million in 2008 from $11.9 million in 2007, corresponding to the decrease in PhotoStamps revenue. Additionally, the gross margin from PhotoStamps is significantly lower than that of our other sources of revenue because we include the stated value of USPS postage as part of our cost of PhotoStamps revenue. As a percentage of total revenue, cost of PhotoStamps revenue decreased approximately four percentage points to 10% in 2008 from 14% in 2007.

Because of the expiration of a licensing agreement in June 2007, we did not have any cost of other revenue in 2008 compared to $52,000 in 2007.

Sales and Marketing

Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing, and business development activities. Sales and marketing expense increased 1% to $33.5 million in 2008 from $33.1 million in 2007. As a percentage of total revenue, sales and marketing expense increased approximately one percentage point to 40% in 2008 from 39% in 2007. The increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in various marketing program expenditures relating to the acquisition of customers for our PC Postage business, partially offset by a decrease in marketing expenditures related to PhotoStamps. Ongoing marketing programs include the following: traditional advertising, partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct mail, and online advertising.

Research and Development

Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation of equipment and software and expenditures for consulting services and third party software. Research and development expense increased 2% to $8.4 million in 2008 from $8.3 million in 2007. The slight increase is mainly attributable to increased headcount related expenses. As a percentage of total revenue, research and development expense was 10% in 2008 and 2007.

General and Administrative

General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate purposes and amortization of intangible assets. General and administrative expense increased 24% to $15.6 million in 2008 from $12.5 million in 2007. As a percentage of total revenue, general and administrative expense increased approximately three percentage points to 18% in 2008 from 15% in 2007. The increase, both on an absolute basis and as a percentage of total revenue, is primarily attributable to the increase in legal expenses relating to existing litigation.

Other Income, Net

Other income, net primarily consists of interest income from cash equivalents, short-term and long-term investments. Other income, net decreased 35% to $2.9 million in 2008 from $4.5 million in 2007. As a percentage of total revenue, other income, net decreased approximately two percentage points to 3% in 2008 as compared to 5% in 2007. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily from lower interest income resulting from lower interest rates and lower investment balances, as we sold certain investments and used the cash to repurchase shares of our common stock.

Expectations for 2009

We expect the following trends for 2009 compared with 2008.

• We expect to increase our PC postage marketing spending on customers acquired through our non-enhanced promotion channels and expect that subscriber related revenue for customers acquired through these channels will increase slightly. We expect to reduce spending on our PC Postage marketing for customers acquired through the enhanced promotion channel and expect that subscriber related revenue for customers acquired through this channel will decrease. We expect that both our spending on PhotoStamps marketing and revenue from PhotoStamps will decrease.

• We expect PC Postage gross margins to be similar to 2008 and expect PhotoStamps gross margins to decrease compared with 2008 due to lower expected PhotoStamps revenue.

• We expect Other Income, net to decrease due to lower invested cash balances and lower interest rates.

Our results are subject to macro economic factors and a continued, prolonged recession, among other factors, could cause these trends to be worse than our current expectations.

Years Ended December 31, 2007 and 2006

Total revenue for 2007 increased 1% to $85.8 million from $84.6 million in 2006. PC Postage subscriber related revenue, including service revenue, product revenue and insurance revenue, in 2007 was $67.0 million, an increase of 5% compared to $64.0 million in 2006. PhotoStamps revenue in 2007 was $17.9 million, a decrease of 5% compared to $18.8 million in 2006.

We estimate that subscriber related revenue for customer acquired through our enhanced promotion channel for 2007 was $9.5 million, a decrease of 8% from $10.3 million in 2006. We estimate that subscriber related revenue for customers acquired through our non-enhanced promotion channels for 2007 was $57 million, an increase of 7% from $53.7 million in 2006. The decrease in enhanced promotion subscriber revenue and increase in non-enhanced promotion subscriber revenue was attributable to the decrease in our marketing investment in the enhanced promotion channel and our increase in marketing investments in other marketing channels.

The following table sets forth the total number of paid customers originally acquired through our non-enhanced promotion channels on a quarterly basis (in thousands):

[[Image Removed]]   [[Image Removed]]        [[Image Removed]]               [[Image Removed]]        [[Image Removed]]
                        First Quarter        Second Quarter Paid Customers       Third Quarter           Fourth Quarter
Year                 Paid Customers (000)                (000)                Paid Customers (000)       Paid Customers
                                                                                                              (000)
2007                              267                         270                          281                     293
2006                              268                         261                          251                     258

We believe that the increase in paid customers in 2007 was attributable to our increased customer acquisition spending. For customers originally acquired through our non-enhanced promotion channels, our average subscriber related monthly revenue per paid customer in 2007 was $17.26 compared to $17.23 in 2006.

The following table sets forth our results of operations as a percentage of total revenue for the periods indicated:

[[Image Removed]]            [[Image Removed]]     [[Image Removed]]
                                        Twelve Months Ended
                                           December 31,
                                    2007                  2006
Total Revenues:
Service                                 65.2 %                63.6 %
Product                                 11.2 %                10.3 %
Insurance                                1.7 %                 1.7 %
PhotoStamps                             20.8 %                22.2 %
Other                                    1.1 %                 2.2 %
Total revenues                         100.0 %               100.0 %
Cost of revenues:
Service                                 11.3 %                11.7 %
Product                                  3.8 %                 3.2 %
Insurance                                0.5 %                 0.5 %
PhotoStamps                             13.8 %                13.7 %
Other                                    0.1 %                 0.2 %
Total cost of revenues                  29.5 %                29.3 %
Gross profit                            70.5 %                70.7 %
Operating expenses:
Sales and marketing                     38.6 %                32.9 %
Research and development                 9.6 %                10.4 %
General and administrative              14.6 %                13.8 %
Total operating expenses                62.8 %                57.1 %
Income from operations                   7.7 %                13.6 %
Other income, net                        5.2 %                 6.0 %
Income before income taxes              12.9 %                19.6 %
Provision for income taxes               0.5 %                 0.2 %
Net income                              12.4 %                19.4 %

Revenue

Service revenue increased 4% from $53.8 million in 2006 to $55.9 million in 2007. The increase in service revenue is primarily due to the increase in our successfully billed customers as a result of the growth in our customer base. As a percentage of total revenue, service revenue increased one percentage point to 65% in 2007 from 64% in 2006, primarily as a result of the decrease in revenue from our PhotoStamps product.

Product revenue increased 11% from $8.7 million in 2006 to $9.6 million in 2007. The increase was primarily attributable to the following: (1) our launch of a new supplies store interface in September 2006 from which we derived the benefit during all of 2007; (2) growth in our paid customer base; (3) marketing the supplies store to our existing customer base; (4) the additional SKUs we added to our store; and (5) growth in postage printed, which helps drive sales of consumable supplies such as labels. Total postage printed by customers using our service during 2007 was $272 million, a 19% increase from the $229 million printed during 2006. As a percentage of total revenue, product revenue increased one percentage point to 11% in 2007 from 10% in 2006.

Insurance revenue increased 2% from $1.4 million in 2006 to $1.5 million in 2007, primarily as a result of an increase in the average of dollar value insured per transaction. As a percentage of total revenue, insurance revenue was 2% in each of 2007 and 2006.

PhotoStamps revenue decreased 5% from $18.8 million in 2006 to $17.9 million in 2007. As a percentage of total revenue, PhotoStamps revenue decreased one percentage point to 21% in 2007 from 22% in 2006. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily due to a decrease in

the average revenue per sheet shipped. Total PhotoStamps sheets shipped during 2007 was approximately 1.1 million, a 3% increase compared to 1.0 million in 2006. Average revenue per sheet shipped for 2007 was $16.34, an 8% decrease compared to $17.74 for 2006. Both the increase in sheets shipped and decrease in average revenue per PhotoStamps sheet shipped were primarily attributable to a higher mix of high volume business PhotoStamps orders, which carry a lower per sheet price. In addition, we reduced our PhotoStamps consumer sales and marketing spending during the fourth quarter of 2007.

Other revenue decreased 50% from $1.8 million in 2006 to $907,000 in 2007. The decrease in other revenue is mainly attributable to the expiration of a licensing agreement in June 2007.

Cost of Revenue

Cost of revenue increased 2% in 2007 to $25.3 million from $24.8 million in 2006. As a percentage of total revenue, cost of revenue increased one percentage point to 30% in 2007 as compared to 29% in 2006.

Cost of service revenue decreased 2% from $9.9 million in 2006 to $9.7 million in 2007. As a percentage of total revenue, cost of service revenue decreased one percentage point to 11% in 2007 as compared to 12% in 2006. Promotional expenses, which includes free postage and a free digital scale offered to new customers, are included in cost of service revenue. Promotional expenses were approximately $2.2 million and $1.7 million in 2006 and 2007, respectively. The decrease in cost of service revenue, both on an absolute basis and as a percentage of total revenue, is primarily due to lower promotional expenses resulting from decreased coupon redemptions of the promotional items. Promotional expense, which represents a material portion of total cost of service revenue, is expensed in the period in which a customer qualifies for the promotion while the revenue associated with the acquired customer is earned over the customer's lifetime. As a result, promotional expense for newly acquired customers may exceed the revenue earned from those customers in that period.

Cost of product revenue increased 22% from $2.7 million in 2006 to $3.3 million in 2007. As a percentage of total revenue, cost of product revenue increased one percentage point to 4% in 2007 as compared to 3% in 2006. The increase, both on an absolute basis and as percentage of total revenue, is mainly attributable to the increase in product sales.

Cost of insurance revenue increased 3% from $442,000 in 2006 to $455,000 in . . .