This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to expectations concerning matters that are not historical facts. You can find many (but not all) of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "estimates," "intends," "plans," "would," "may" or other similar expressions in this report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this report, or which we may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

Please refer to the risk factors under "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2008 as well as those described elsewhere in our public filings. The risks included are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Stamps.com, NetStamps, PhotoStamps, Hidden Postage, Stamps.com Internet postage and the Stamps.com logo are our trademarks. This report also references trademarks of other entities.

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 March 31, 2009 we were at approximately a 32% 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 that 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 that 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. Full details of the NOL Protective Measures are contained in our Definitive Proxy filed with the Securities Exchange Commission on April 2, 2008.

As of April 30, 2009, we had approximately 16,302,000 shares outstanding, and therefore ownership of approximately 815,000 shares or more would currently constitute a "5% shareholder". We strongly urge that any stockholder contemplating owning more than 650,000 shares contact us before doing so.

Overview

Stamps.com® is the leading provider of Internet-based postage solutions. Our customers use our service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a wide range of United States Postal Service ("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.

Our Services and Products

We offer the following products and services to our customers:

PC Postage Service

Our USPS-approved PC Postage service enables users to print "electronic stamps" directly onto envelopes, plain paper, or labels using only a standard personal computer, printer and Internet connection. Our service currently supports a variety of USPS and international mail classes. Customers can also add USPS Special Services such as Delivery ConfirmationTM, Signature ConfirmationTM, Registered Mail, Certified Mail, Insured Mail, Return Receipt, Collect on Delivery and Restricted Delivery to their mail pieces. After installing our free software and completing the registration process, customers can purchase and print postage 24 hours a day, seven days a week. When a customer purchases postage for use through our service, the customer pays face value, and the funds are transferred directly from the customer's account to the USPS's account. Currently the majority of new customers signing up for our service pay a monthly convenience fee ranging from $15.99 to $19.99.

Our customers can print postage (i) on NetStamps® labels, which can be used just like regular stamps, (ii) directly on envelopes or on other types of mail or labels, in a single-step process that saves time and provides a professional look, (iii) on plain 8.5" x 11" paper or on special labels for packages, and
(iv) on integrated customs forms for international mail. For added convenience, our PC Postage services incorporate address verification technology that verifies each destination address for mail sent using our service against a database of all known addresses in the United States and can be integrated into common small business and productivity software applications such as word processing, contact and address management, and accounting and financial applications. We also offer several different versions of NetStamps such as Themed NetStamps and Photo NetStamps that allow customers to add stock or full custom designs to their mail while still providing the same NetStamps convenience of printing and using postage whenever it is needed.

PhotoStamps®

PhotoStamps is a patented form of postage that allows consumers to turn digital photos, designs or images into valid US postage. With this product, individuals or businesses can now create customized US postage using pictures of their children, pets, vacations, celebrations, business logos and more. PhotoStamps can be used as regular postage to send letters, postcards or packages. The product is available via our separately-marketed website at www.photostamps.com. Customers upload a digital photograph or image file, customize the look and feel by choosing a border color to complement the photo, select the value of postage, and place the order online. Each sheet includes 20 individual PhotoStamps, and orders arrive via US Mail in a few business days. PhotoStamps is currently available under authorization of the USPS for its fourth phase market test, with an authorization through May 2009. We do not include our PhotoStamps business when we refer to our PC Postage business.

Mailing & Shipping Supplies Store

Our Mailing & Shipping Supplies Store (our "Supplies Store") is available to our customers from within our PC Postage software, and sells NetStamps labels, shipping labels, other mailing labels, dedicated postage printers, OEM and private label inkjet and laser toner cartridges, scales, and other mailing and shipping-focused office supplies. Our Supplies Store features a store catalog, same day shipping capabilities, messaging of our free or discounted shipping promotions, cross sell during checkout, product search capabilities, and expedited and rush shipping options.

Branded Insurance

We offer Stamps.com branded insurance to our customers so that they may insure their mail or packages in a fully integrated, online process that eliminates any trips to the post office or the need to complete any special forms. Our branded insurance is provided in partnership with Parcel Insurance Plan and is underwritten by Fireman's Fund. We also offer official USPS insurance alongside our branded insurance product.

Recent Accounting Pronouncements

In April 2009, FASB issued FSP No. SFAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP SFAS 157-4"). FSP SFAS 157-4 provides guidelines for (1) estimating fair value in accordance with SFAS No. 157, "Fair Value Measurement", when the volume and level of activity for an asset or liability have significantly decreased and (2) identifying circumstances indicating that a transaction is not an orderly one. FSP SFAS 157-4 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt for the interim and annual periods ending after March 15, 2009. The adoption of FSP SFAS 157-4 will not have a material impact to our financial statements.

In April 2009, FASB issued FSP No. SFAS 115-2 and SFAS 124-2, "Recognition and Presentation of Other-Than Temporary Impairments" ("FSP SFAS 115-2 and SFAS 124-2"). FSP SFAS 115-2 and SFAS 124-2 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP SFAS 115-2 and SFAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods after March 15, 2009. The adoption of FSP SFAS 115-2 and SFAS 124-2 will not have a material impact to our financial statements.

In April 2009, FASB issued FSP No. SFAS 107-1 and APB 28-1, "Interim Disclosure about Fair Value of Financial Instruments" ("FSP SFAS 107-1 and APB 28-1"). FSP SFAS 107-1 and APB 28-1 amends the required disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and the required disclosures in summarized financial information at interim reporting periods. FSP SFAS 107-1 and APB 28-1 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods after March 15, 2009. The adoption of FSP SFAS 107-1 and APB 28-1 will not have a material impact to our financial statements.

Results of Operations

Total revenue in the first quarter of 2009 was $20.0 million, a decrease of 5% from $21.1 million in the first quarter of 2008. PC Postage revenue, including service revenue, product revenue and insurance revenue, in the first quarter of 2009 was $18.3 million, an increase of 1% compared to $18.1 million in the first quarter of 2008. PhotoStamps revenue in the first quarter of 2009 was $1.7 million, a decrease of 43% compared to $3.0 million in the first quarter of 2008.

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 non-enhanced promotion marketing channels.

As a result, we estimate that PC Postage revenue for customers acquired through our enhanced promotion channel for the first quarter of 2009 was $1.8 million, a decrease of 29% from $2.5 million in the first quarter of 2008. We estimate that PC Postage revenue for customers acquired through our non-enhanced promotion channels for the first quarter of 2009 was $16.6 million, an increase of 6% from $15.6 million in the first quarter of 2008.

We define paid customers as ones from whom we successfully collected service fees at least once during the quarter. Total number of paid customers originally acquired through our non-enhanced promotion channels during the first quarter of 2009 was approximately 321,000, an increase of 5% from 305,000 in the first quarter of 2008.

We believe that the increase in paid customers in the first quarter of 2009 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 the first quarter of 2009 was $17.18 compared to $17.00 in the first quarter of 2008.

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

                                                       Three Months Ended
                                                            March 31,
                                                      2009            2008
Total Revenues:
  Service                                                  76 %            72 %
  Product                                                  13 %            12 %
  Insurance                                                 2 %             2 %
PhotoStamps                                                 9 %            14 %
Total revenues                                            100 %           100 %
Cost of revenues:
  Service                                                  15 %            13 %
  Product                                                   5 %             4 %
  Insurance                                                 1 %             1 %
PhotoStamps                                                 6 %            10 %
    Total cost of revenues                                 27 %            28 %
  Gross profit                                             73 %            72 %
Operating expenses:
  Sales and marketing                                      40 %            41 %
  Research and development                                 11 %             9 %
  General and administrative                               16 %            19 %
 Total operating expensesTotal operating expenses          67 %            69 %
Income from operations                                      6 %             3 %
Other income, net                                           2 %             5 %
Income before income taxes                                  8 %             8 %
  Provision (benefit) for income taxes                      1 %           (17 %)
Net income                                                  6 %            25 %

Revenue

Our revenue is derived primarily from four 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; and (4) PhotoStamps revenue from our PhotoStamps business. Total revenue decreased 5% to $20.0 million in the first quarter of 2009 from $21.1 million in the first quarter of 2008.

Service revenue increased 1% to $15.3 million in the first quarter of 2009 from $15.2 million in the first quarter of 2008. 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 1% increase in service revenue consisted of a 7% increase in service revenue from customers acquired through our non-enhanced promotion channels and a 30% decrease in service revenue from customers acquired through our enhanced promotion channel. As a percentage of total revenue, service revenue increased approximately four percentage points to 76% in the first quarter of 2009 from 72% in the first quarter of 2008, primarily as a result of the decrease in revenue from our PhotoStamps product.

Product revenue increased 5% to $2.6 million in the first quarter of 2009 from $2.5 million in the first quarter of 2008. 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 5.3% increase in store orders shipped. Average revenue per order decreased 0.6% from $40.06 per order during the first quarter of 2008 to $39.84 during the first quarter of 2009. 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 13% in the first quarter of 2009 from 12% in the first quarter of 2008.

Insurance revenue increased 4% to $404,000 in the first quarter of 2009 from $388,000 in the first quarter of 2008. The increase in insurance revenue consisted of a 1% increase in insurance transactions and a 3% 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 the first quarter of 2009 and the first quarter of 2008.

PhotoStamps revenue decreased 43% to $1.7 million in the first quarter of 2009 from $3.0 million in the first quarter of 2008. The decrease in revenue was primarily attributable to a decrease in the number of sheets shipped. We shipped approximately 104,000 PhotoStamps sheets during the first quarter of 2009, a 41% decrease compared to the 178,000 shipped in the first quarter of 2008. Average revenue per sheet shipped for the first quarter of 2009 was $16.45, a 3% decrease compared to $16.91 for the first quarter of 2008. We believe the decrease in PhotoStamps sheets shipped was primarily attributable to the weaker general economy, lower high volume business orders and our reduction in PhotoStamps consumer sales and marketing spending. As a percentage of total revenue, PhotoStamps revenue decreased approximately five percentage points to 9% in the first quarter of 2009 from 14% in the first quarter of 2008.

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 8% in the first quarter of 2009 to $5.4 million from $5.9 million in the first quarter of 2008. As a percentage of total revenue, cost of revenue decreased one percentage point to 27% in the first quarter of 2009 compared to 28% in the first quarter of 2008.

Cost of service revenue increased 10% to $3.0 million in the first quarter of 2009 from $2.7 million in the first quarter of 2008. The increase in cost of service revenue is primarily attributable to higher customer support related expenses resulting from expanding our support personnel and increased costs related to our retention program aimed at retaining customers who call to cancel their service. Promotional expenses, which include free postage and a free digital scale offered to new customers, are included in cost of service revenue. Promotional expenses were approximately $361,000 and $464,000 during the first quarter of 2009 and the first quarter of 2008, 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 two percentage points to 15% in the first quarter of 2009 compared to 13% in the first quarter of 2008.

Cost of product revenue increased 7% to $945,000 in the first quarter of 2009 from $880,000 in the first quarter of 2008. The increase in cost of product revenue was primarily attributable to the increase in store sales and higher fulfillment costs in the first quarter of 2009 compared with the first quarter of 2008. As a percentage of total revenue, cost of product revenue increased one percentage point to 5% in the first quarter of 2009 from 4% in the first quarter of 2008.

Cost of insurance revenue increased 4% to $125,000 in the first quarter of 2009 from $120,000 in the first quarter of 2008. 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 the first quarter of 2009 and the first quarter of 2008.

Cost of PhotoStamps revenue decreased 39% to $1.3 million in the first quarter of 2009 from $2.1 million in the first quarter of 2008, 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 6% in the first quarter of 2009 from 10% in the first quarter of 2008.

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 decreased 6% to $8.1 million in the first quarter of 2009 from $8.6 million in the first quarter of 2008. As a percentage of total revenue, sales and marketing expense decreased approximately one percentage point to 40% in the first quarter of 2009 from 41% in the first quarter of 2008. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily due to a decrease in enhanced promotion marketing program expenditures and a decrease in marketing expenditures related to PhotoStamps, partially offset by an increase in marketing program expenditures relating to the acquisition of customers outside the enhanced promotion channel for our PC Postage business. 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 used in development and expenditures for consulting services and third party software. Research and development expense increased 15% to $2.2 million in the first quarter of 2009 from $1.9 million in the first quarter of 2008. The increase is mainly attributable to increased headcount related expenses. As a percentage of total revenue, research and development expense increased two percentage points to 11% in the first quarter of 2009 from 9% in the first quarter of 2008.

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 decreased 17% to $3.3 million in the first quarter of 2009 from $3.9 million in the first quarter of 2008. As a percentage of total revenue, general and administrative expense decreased approximately three percentage points to 16% in the first quarter of 2009 from 19% in the first quarter of 2008. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily attributable to the following factors: (1) a decrease in legal expenses relating to existing litigation, (2) a $445,000 asset write-off of packaging material primarily relating to PhotoStamps that we incurred in the first quarter of 2008 and (3) decreased amortization expense related to the completion of our E-Stamp patent amortization schedule in the second quarter of 2008.

Other Income, Net

Other income, net primarily consists of interest income from cash equivalents, short-term investments and long-term investments. Other income, net decreased 62% to $357,000 in the first quarter of 2009 from $938,000 in the first quarter of 2008. As a percentage of total revenue, other income, net decreased approximately three percentage points to 2% in the first quarter of 2009 compared to 5% in the first quarter of 2008. 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.

Liquidity and Capital Resources

As of March 31, 2009 and December 31, 2008 we had approximately $70 million and $74 million, respectively, in cash, restricted cash and short-term and long-term investments. We invest available funds in short-term and long-term securities, including money market funds, corporate bonds, asset backed securities, and government and agency bonds, and do not engage in hedging or speculative activities.

In November 2003, we entered into a facility lease agreement commencing in March 2004 for our corporate headquarters with aggregate lease payments of approximately $4 million through March 2010.

There have been no material changes to our contractual obligations and commercial commitments included in Item 7 "Management's Discussion and Analysis . . .