The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2008 (the "2008 Annual Report").

Some of the statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report are forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "believes," "expects," "anticipates," "intends," "estimates," "may," "will," "continue," "should," "plan," "predict," "potential" and other similar expressions. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in these forward-looking statements, which are subject to a number of risks, uncertainties and assumptions including, but not limited to our ability to: attract members; convert members into paying subscribers and retain our paying subscribers; develop or acquire new product offerings and successfully implement and expand those offerings; keep pace with rapid technological changes; maintain the strength of our existing brands and maintain and enhance those brands and our dependence upon the telecommunications infrastructure and our networking hardware and software infrastructure; identify and consummate strategic acquisitions and integrate acquired companies or assets; and successfully implement our current long-term growth strategy, and other factors described in the "Risk Factors" section of our 2008 Annual Report.

General

The common stock of Spark Networks, Inc. is traded on the NYSE Amex. We are a leading provider of online personals services in the United States and internationally. Our Web sites enable adults to meet online, participate in a community and form relationships.

Segment Reporting

For segment information, please refer to Note 6 of the notes to the financial statements elsewhere in this document.

Key Metric - Average Paying Subscribers

We regularly review average paying subscribers as a key metric to evaluate the effectiveness of our operating strategies and monitor the financial performance of our business. Subscribers are defined as individuals for whom we collect a monthly fee for access to communication and Web site features beyond those provided to our non-paying members. Average paying subscribers for each month are calculated as the sum of the paying subscribers at the beginning and end of the month, divided by two. Average paying subscribers for periods longer than one month are calculated as the sum of the average paying subscribers for each month, divided by the number of months in such period.

Unaudited selected statistical information regarding average paying subscribers for our operating segments is shown in the table below. Prior period amounts have been reclassified to conform to current period presentation.

                                               Three Months Ended
                                                   March 31,
                 Average Paying Subscribers     2009        2008
                 Jewish Networks                 84,644     92,719
                 Other Affinity Networks         64,393     60,133
                 General Market Networks         17,810     37,435
                 Offline & Other Businesses       1,157      2,365

                 Total                          168,004    192,652

Results of Operations

The following table presents our operating results as a percentage of net
revenues:



                                                      Three Months Ended
                                                           March 31,
                                                      2009           2008
        Net revenues                                   100.0 %        100.0 %
        Direct marketing                                23.7           27.1

        Contribution margin                             76.3           72.9

        Operating expenses:
        Sales and Marketing                              7.7            7.0
        Customer Service                                 4.5            4.2
        Technical Operations                             7.2            7.1
        Development                                     10.9            8.1
        General and Administrative                      27.1           27.8
        Amortization                                     1.5            2.2
        Impairment of goodwill and other
        long-lived assets                                7.3             -

        Total operating expenses                        66.2           56.4

        Operating income                                10.1           16.5
        Interest and other expenses (income), net        4.1           (2.2 )

        Income before income taxes                       6.0           18.7
        Provision for income taxes                       3.4            8.3

        Net income                                       2.6 %         10.4 %

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net Revenues

Substantially all of our net revenues are derived from subscription fees. Approximately 4% of our net revenues for the three months ended March 31, 2009 and 2008, respectively, are generated through offline social and travel events, and advertising revenue. Revenues are presented net of credits and credit card chargebacks. Our subscriptions are offered in durations of varying length (typically, one, three, six and twelve months). Plans with durations longer than one month are available at discounted monthly rates. Following their initial terms, most subscriptions renew automatically for subsequent one-month periods until subscribers terminate them.

Net revenues decreased 20% to $12.0 million in the first quarter of 2009 compared to $15.0 million in the first quarter of 2008. The majority of this decrease can be attributed to the managed decline in the Company's General Market Networks segment and lower net revenues for the Jewish Networks. Net revenues for the Jewish Networks segment decreased 12.5% to $7.6 million in the first quarter of 2009 compared to $8.7 million in the first quarter of 2008. The decrease in net revenues is primarily driven by a lower average paying subscriber base, reflecting a downturn in the economy. Net revenues for our Other Affinity Networks segment decreased 1.7% to $3.3 million in the first quarter of 2009 compared to $3.4 million in the first quarter of 2008. Net revenues for the General Market Networks segment decreased 63.5% to $940,000 in the first quarter of 2009, compared to $2.6 million in the first quarter of 2008. The decrease in General Market Networks net revenues is due to the decrease in average paying subscribers, reflecting management's decision to eliminate inefficient marketing expenses. Net revenues of our Offline & Other Businesses segment decreased 50.2% to $212,000 in the first quarter of 2009 compared to $426,000 in the first quarter of 2008. The decrease in net revenues is largely attributable to a travel event for our members in the first quarter of 2008 versus no trips in the first quarter of 2009.

Direct Marketing Expenses

Direct marketing expenses decreased 30.0% to $2.9 million in the first quarter of 2009 compared to $4.1 million in the first quarter of 2008. The majority of this decline can be attributed to a reduction in inefficient marketing programs associated with the General Market Networks segment. Direct marketing expenses for the Jewish Networks segment decreased 20.1% to $563,000 in the first quarter of 2009 compared to $705,000 in the first quarter of 2008. The decrease reflects our shift to more efficient online marketing programs. Direct marketing expenses for the Other Affinity Networks segment increased 6.7% to $2.0 million for the first quarter of 2009 compared to $1.8 million in the first quarter of 2008, reflecting growth initiatives in this segment. Direct marketing expenses for the General Market Networks segment decreased 79.6% to $273,000 in the first quarter of 2009 compared to $1.3 million in the same period in 2008. The decrease reflects management's decision to pursue cost effective subscriber acquisition marketing campaigns. Direct marketing expenses for the Offline & Other Businesses segment decreased 74.1 % to $49,000 for the first quarter of 2009 compared to $189,000 in the same period in 2008 reflecting the cost of a travel event in 2008 and the absence of one in 2009.

Operating Expenses

Operating expenses consist primarily of sales and marketing, customer service, technical operations, development and general and administrative expenses. Operating expenses for the first quarter of 2009 were $8.0 million, a decrease of 5.9% compared to $8.5 million for the first quarter of 2008. The decrease over the first quarter of 2009 is primarily attributable to a $132,000 decrease in sales and marketing expense, a $193,000 decrease in technical operations expense and a $910,000 decrease in general and administrative expense, offset by $880,000 of asset impairment charges. We did not incur an impairment charge in the first quarter of 2008.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries for our sales and marketing personnel. Sales and marketing expenses decreased 12.5% to $921,000 in the first quarter of 2009 compared to $1.1 million in the first quarter of 2008. The decrease can be primarily attributed to lower stock-based compensation expense.

Customer Service. Customer service expenses consist primarily of costs associated with our customer service centers. Customer service expenses decreased 13.6% to $545,000 in the first quarter of 2009 compared to $631,000 in the first quarter of 2008. The expense decrease is primarily due to a reduction in payroll expenses and temporary labor. The lower payroll and temporary labor expenses reflect greater operating efficiencies at the Company's Beverly Hills, CA and Provo, UT locations.

Technical Operations. Technical operations expenses consist primarily of personnel and systems necessary to support our network, Internet connectivity and other data and communication requirements. Technical operations expenses decreased 18.2% to $870,000 in the first quarter of 2009 compared to $1.1 million in 2008. The decrease is primarily due to lower depreciation and stock-based compensation expense, offset by higher salary and benefits expense.

Development. Development expenses consist primarily of costs incurred in the development, enhancement and maintenance of our Web sites and services. Development expenses increased 7.1% to $1.3 million in the first quarter of 2009 compared to $1.2 million in 2008. The increased costs reflect higher payroll and depreciation expense.

General and Administrative. General and administrative expenses consist primarily of corporate personnel-related costs, professional fees, credit card processing fees, and occupancy and other overhead costs. General and administrative expenses decreased 21.8% to $3.3 million in the first quarter of 2009 compared to $4.2 million in 2008. The decrease is primarily attributable to lower stock-based compensation expense, lower payroll expense and lower credit card fees and fines in the first quarter of 2009.

Amortization of Intangible Assets. Amortization expenses consist primarily of amortization of intangible assets related to previous acquisitions, primarily MingleMatch, LDSSingles and HurryDate. Amortization expenses decreased 44.1% to $184,000 in the first quarter of 2009 compared to $329,000 in the first quarter of 2008.

Impairment of Goodwill and Other Long-lived Assets. Impairment of goodwill and other long-lived assets expenses primarily represent the write-down of investments in businesses and computer software. Impairment of goodwill and other long-lived assets increased $880,000 in the first quarter of 2009 from $0 in the first quarter of 2008. First quarter 2009 expenses consist primarily of HurryDate's earn-out payment that was concurrently impaired in the first quarter of 2009.

Interest Expense/Income and Other, Net. Interest expense/income and other consist primarily of interest income associated with temporary investments in interest bearing accounts and foreign exchange gains and losses and interest expense associated with borrowings from our revolving credit facility. Net expense was $492,000 for the first quarter of 2009 compared to income of $334,000 for the same period in 2008. The increase is primarily due to a foreign currency translation loss associated with the intercompany loan, and interest expense associated with the outstanding balance on the revolving credit facility.

Net Income and Earnings Per Share. Net income for the first quarter of 2009 was $311,000, or $0.02 per share, compared to $1.6 million, or $0.06 per share for 2008. The decrease to net income reflects lower contribution and higher asset impairment charges in the first quarter of 2009. First quarter 2009 earnings per share benefited from an approximate 5.5 million share reduction in fully diluted weighted average shares outstanding compared to the first quarter of 2008, reflecting our stock repurchase activities throughout 2008.

Liquidity and Capital Resources

As of March 31, 2009, we had cash and cash equivalents of $7.4 million. We have historically financed our operations with internally generated funds.

In February 2008, we entered into an agreement ("the Agreement") with Bank of America for a $30.0 million revolving credit facility. The initial term of the Agreement is for three years, and provides us with the opportunity to extend the initial term, subject to the lender's consent. The per annum interest rate for this facility is based upon a financial leverage ratio of less than 1.00, 1.00 to 1.49 and 1.50 and greater. The corresponding interest rates on LIBOR based borrowings are LIBOR plus 1.50%, 1.75% and 2.00%, respectively. In the event we elect to borrow under a base rate loan, the corresponding interest rates are the prime rate plus 0.50%, 0.75% and 1.00%, respectively. We pay a 0.125% per annum commitment fee on all funds not utilized under this facility, measured on a daily basis. There is no prepayment penalty or premium associated with the early termination of this facility. The Agreement includes customary affirmative and negative covenants.

As of March 31, 2009, we were in compliance with our covenants. At March 31, 2009, there was $7.5 million outstanding under the Agreement bearing an interest rate of 2.7% with $22.5 million of borrowing capacity remaining under this revolving credit facility.

Net cash provided by operations was $1.2 million for the three months ended March 31, 2009 compared to $2.9 million for the same period in 2008.

Net cash used in investing activities was $1.2 million in the first quarter of 2009 compared to net cash provided in 2008 of $177,000. In the first quarter of 2009, we paid $770,000 to the former owners of HurryDate pursuant to an earn-out obligation. Additionally, we invested $427,000 of cash in computer hardware and software.

Net cash provided in financing activities was $7,000 for the first quarter of 2009 compared to net cash used in 2008 of $3.6 million. Cash used in financing activities in 2008 was primarily due to stock repurchases totaling $3.3 million and payments for costs associated with our revolving credit facility of $284,000.

We believe our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs for working capital, planned capital expenditures and contractual obligations for at least the next 12 months. We may be required or find it desirable prior to such time to raise additional funds through bank financing or through the issuance of debt or equity.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually, limited purposes. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts.