The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q. Except for the consolidated historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations and intentions. Our actual results could differ materially from results that may be anticipated by such forward-looking statements and discussed elsewhere herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and those discussed under "Risk Factors" in Item IA of Part II of this Quarterly Report on Form 10-Q and in Item IA of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the "Form 10-K"). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Overview
We are a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for our retail partners. Our core offerings in automated retail include our Coin and DVD businesses. Our Coin services consist of self-service coin counting kiosks where consumers can convert their coin to cash, a gift card or an e-certificate, among other options. Our DVD services consist of self-service DVD kiosks where consumers can rent or purchase movies. Our products and services also include money transfer services; and electronic payment ("E-payment") services such as stored value cards, payroll cards, prepaid debit cards and prepaid wireless products; and entertainment services such as skill-crane machines, bulk vending machines and kiddie rides. Our products and services can currently be found at more than 95,000 points of presence including supermarkets, drug stores, mass merchants, financial institutions, convenience stores, restaurants and money transfer agent locations.
Management of Business Segments
In early 2008, we assessed our business segments due to changes in our business and product lines as well as our organizational structure. We redefined our business segments from North America and International to:
• Coin and Entertainment services - We offer self-service coin-counting services and entertainment services such as skill-crane machines, bulk vending machines and kiddie rides. We own and service all of our coin-counting and entertainment services machines, providing a convenient and trouble-free service to retailers. We own and operate the only multi-national fully-automated network of self-service coin-counting kiosks across the United States, Canada, Puerto Rico, Ireland and in the United Kingdom. We generate revenue from coin-counting transaction fees from our customers and business partners. We also generate revenue from money deposited into our entertainment machines for plush toys, novelties and other items.

• DVD services - Through Redbox and DVDXpress, we offer self-service DVD offerings through kiosks where consumers can rent or purchase movies. Our DVD kiosks supply the functionality of a traditional video rental store, yet usually occupy an area of less than ten square feet. Consumers use a touch screen to select their DVD, swipe a valid credit or debit card, and go. The process is designed to be fast, efficient and fully automated with no upfront or membership fees. We generate revenue primarily through fees charged to rent or purchase a DVD.

• Money Transfer services - Through Coinstar Money Transfer ("CMT") and GroupEx Financial Corporation, JRJ Express Inc. and Kimeco, LLC (collectively, "GroupEx"), we offer money transfer services primarily in the United Kingdom, European countries, North America, and Central America. Our money transfer services provide an easy to use, reliable and cost-effective way to send money around the world. We generate revenue primarily through commissions earned on money transfer transactions.

• E-payment services - We offer E-payment services, including activating and reloading value on prepaid wireless accounts, selling stored value cards, loading and reloading prepaid debit cards and prepaid phone cards, selling prepaid phones and providing payroll card services. We generate revenue primarily through commissions or fees charged per E-payment transaction and pay our retailers a fee based on commissions earned on the sales of E-payment services.

We manage our business by evaluating the financial results of these segments, focusing primarily on segment revenue and segment operating income (loss) before depreciation and amortization and stock compensation expense ("segment operating income (loss)"). Segment operating income (loss) contains the internally allocated costs including the shared service functions, which consist primarily of field operations, sales, finance, legal, human resources, and information technology.
We utilize segment revenue and segment operating income/loss because we believe they provide useful information for effectively allocating resources among business segments, evaluating the health of our business segments based on metrics that management can actively influence, and gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO evaluates segment revenue and segment operating income/loss, and assesses the performance of each business segment based on these measures, as well as, among other things, the prospects of each of the segments and how they fit into our overall strategy. Our CEO then decides how resources should be allocated among our business segments. For example, if a segment's revenue decreases more than expected, our CEO may consider allocating less financial or other resources to that segment in the future.
Strategy
Our strategy is based upon leveraging our core competencies in the automated retail space to provide the consumer with convenience and value and to help our retail partners drive incremental traffic and revenue. Our competencies include success in building strong consumer and retailer relationships, and in scaling and managing kiosk businesses. We build strong consumer relationships by providing valuable self-service products and services in convenient locations. We build strong retailer relationships by providing our retail partners with turnkey solutions that complement their businesses without significant outlays of time and financial resources.

We expect to continue devoting significant resources to our automated retail strategy, developing the information technology systems and technology infrastructure necessary to support our products and services and adding administrative personnel to support our growing organization. We expect to continue evaluating new marketing and promotional programs to increase use of our products and services. As the money transfer services, E-payment services and entertainment services businesses do not leverage our core competencies in automated retail, we are currently considering strategic alternatives for these businesses.
See Note 6 of the Consolidated Financial Statements for additional information regarding business segments.
Purchase of the remaining non-controlling interests in Redbox Effective on January 18, 2008, when we exercised our option to acquire a majority ownership interest in the voting equity of Redbox and our ownership interest increased from 47.3% to 51.0%, we began consolidating Redbox's financial results into our Consolidated Financial Statements.
On February 26, 2009, we purchased the remaining outstanding interests of Redbox from GetAMovie, Inc. ("GAM") and other minority interest holders, and GAM's right, title and interest in a Term Promissory Note dated May 3, 2007 made by Redbox in favor of GAM in the principal amount of $10.0 million, and paid initial consideration in the form of cash in the amount of $10.1 million and 1.7 million shares of our common stock valued at $27.7433 per share. Redbox is now a wholly-owned subsidiary of Coinstar.
As of June 30, 2009, the total consideration paid for the Redbox transaction was $150.8 million including cash of $102.3 million and Coinstar common stock of $48.5 million, and the remaining deferred consideration payable balance was $10.8 million. The company has the option to pay off the deferred consideration payable balance before its due date of October 31, 2009. The expected payment will be between $11.2 million and $12.2 million according to the terms of the agreement.
Subsequent Event
Sony license agreement
On July 17, 2009, Redbox entered into a copy depth license agreement (the "License Agreement") with SPHE Scan Based Trading Corporation ("Sony"), a subsidiary of Sony Pictures Home Entertainment Inc. Redbox estimates that it will pay Sony approximately $460.0 million during the term of the License Agreement, which is expected to last from July 1, 2009 until September 30, 2014. However, at Sony's discretion, the License Agreement may expire earlier on September 30, 2011. Coinstar has guaranteed up to $25.0 million of Redbox's liability under the License Agreement. In addition, Coinstar has granted Sony 193,348 shares of restricted stock that will vest over the term of the License Agreement.
Under the License Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental in its DVD kiosks in the United States. The DVDs licensed and purchased from Sony are expected to represent approximately 19.9% percent of the total DVDs licensed and purchased by Redbox for 2009. Under the License Agreement, Redbox should receive delivery of the DVDs by the "street date," the initial date on which the pictures are distributed on a rental basis to the general public for home entertainment viewing.

Results of Operations
Summary of operating results
Total revenue/Total operating income

                                                       Six Month Periods Ended June 30,                                       Three Month Periods Ended June 30,
(In millions, except percentages)          2009              2008             $ Chng            % Chng             2009              2008             $ Chng           % Chng

Total consolidated revenue              $  585.1           $ 410.4           $ 174.7             42.6 %         $  314.0           $ 219.9           $ 94.1             42.8 %
Total consolidated income from
operations                              $   34.9           $  30.2           $   4.7             15.5 %         $   20.9           $  15.5           $  5.4             34.6 %
Income from operations as a % of
Total Revenue                                6.0 %             7.4 %                                                 6.6 %             7.0 %

The increases in our consolidated revenue for the six and three month periods ended June 30, 2009 compared to the six and three months ended June 30, 2008 were driven primarily by our DVD service segment as a result of the increased number

of DVD installed kiosks in our retailers' locations as well as the revenue growth of our existing installed kiosks. The increase was partially offset by the decrease in our Coin and Entertainment service revenue due to the reduced numbers of our entertainment machines at Walmart and less foot traffic at our retailers' locations. In addition, unfavorable currency exchange rates also negatively impacted our revenue generated from our foreign operations.
Our consolidated income from operations was $34.9 million and $30.2 million for the six months ended June 30, 2009 and June 30, 2008, respectively. Our total operating income, before depreciation, amortization and other of $53.2 million and stock compensation expense of $4.7 million totaled $92.9 million for the first half of 2009, compared to $74.7 million from the prior-year first half. The increase of $18.2 million was partially offset by depreciation and amortization due to the increase in installations of DVD kiosks. Our consolidated income from operations was $20.9 million and $15.5 million for the three months ended June 30, 2009 and June 30, 2008, respectively. Our total operating income, before depreciation, amortization and other of $27.9 million and stock compensation expense of $1.9 million totaled $50.7 million for the second quarter of 2009, compared to $38.5 million from the prior-year second quarter. The increase of $12.2 million was partially offset by depreciation and amortization due to the increase in installations of DVD kiosks.

Segment Revenue/Operating income (loss)
Coin and Entertainment services

                                                          Six Month Periods Ended June 30,                 Three Month Periods Ended June 30,
(In millions, except percentages)                     2009        2008       $ Chng      % Chng        2009            2008        $ Chng     % Chng

Coin and Entertainment services revenue             $ 187.1     $ 203.8     $ (16.7 )      -8.2 %    $  96.8        $   100.3     $ (3.5 )     -3.5 %
Coin and Entertainment services operating income    $  41.6     $  46.8     $  (5.2 )     -11.0 %    $  22.1        $    22.0     $  0.1        0.4 %
Operating income as a % of segment revenue             22.3 %      23.0 %                               22.8 %           21.9 %

The decreases in Coin and Entertainment revenue for the six and three month periods ended June 30, 2009 compared to the six and three months ended June 30, 2008 were primarily driven by a decrease in entertainment services revenue of $15.7 million and $3.9 million year over year as a result of the reduced number of our entertainment machines at Walmart and other locations, less foot traffic at our retailers' location and a decision to resign from certain lower performing accounts. In addition, the unfavorable foreign exchange rates have negatively impacted our Coin revenue by $4.8 million and $2.2 million for the six and three month periods ended June 30, 2009 compared to the prior year periods. Excluding the impact of foreign currency fluctuations, Coin revenue increased by $3.9 million (or 3.2%) and $2.5 million (or 3.9%) for the six and three month periods ended June 30, 2009 compared to the prior year periods.
The decrease in segment operating income for the six month period ended June 30, 2009 compared to the six months ended June 30, 2008 is the result of the decline in segment revenue, offset by the cost reduction in the direct operating expense associated with the fees and commissions paid to the retailers, field service expenses as well as coin pick-up transportation costs. The decrease in expense was in line with the revenue decrease as these expenses are variable in nature. As a result, Coin and Entertainment services operating income as a percentage of revenue was 22.3% and 23.0% for the six months periods ended June 30, 2009 and June 30, 2008 and 22.8% and 21.9% for the three month periods ended June 30, 2009 and June 30, 2008.

DVD services

                                                    Six Month Periods Ended June 30,                 Three Month Periods Ended June 30,
(In millions, except percentages)               2009        2008       $ Chng      % Chng         2009          2008       $ Chng     % Chng

DVD services revenue                          $ 343.6     $ 150.4     $ 193.2       128.5 %    $  188.9        $ 90.0     $ 98.9       109.9 %
DVD services operating income                 $  57.6     $  32.1     $  25.5        79.3 %    $   31.0        $ 19.2     $ 11.8        61.2 %
Operating income as a % of segment revenue       16.8 %      21.3 %                                16.4 %        21.3 %

DVD services revenue for the first six months of 2008 above does not include $11.0 million for the period January 1, 2008 through January 17, 2008 when we did not consolidate Redbox. The remaining increases in DVD services revenue for the six and three month periods ended June 30, 2009 compared to the six and three months ended June 30, 2008 were driven by the increase in the number of rentals as a result of new kiosk placements as well as revenue growth from existing kiosks compared to the prior year. At June 30, 2009, we had placed over 8,300 additional DVD kiosks from June 30, 2008 with retailers.

The DVD services segment operating income increased year over year for both the six and three month periods ended June 30, 2009 compared to prior year. The increases in segment operating income reflect the favorable revenue increase, offset in part by the DVD product costs to support the increased rental transactions, declines in DVD salvage values, increased general and administration expenses to sustain the growth of the segment and additional marketing activities to attract new and repeat customers. The segment operating income as a percentage of revenue was 16.8% and 21.3% for six month periods and 16.4% and 21.3% for three month periods ended June 30, 2009 and June 30, 2008. The declines in DVD segment income as a percentage of revenue were mostly driven by higher product costs primarily from the decrease in DVD salvage value.

Money Transfer services

                                                  Six Month Periods Ended June 30,                 Three Month Periods Ended June 30,
(In millions, except percentages)              2009         2008       $ Chng     % Chng        2009          2008       $ Chng     % Chng

Money Transfer services revenue             $   42.1      $  44.3     $ (2.2 )     -5.0 %    $   22.2       $  23.8     $ (1.6 )      -6.7 %
Money Transfer services operating loss      $   (6.1 )    $  (5.9 )   $ (0.2 )      3.7 %    $   (2.3 )     $  (4.1 )   $  1.8       -43.7 %
Operating loss as a % of segment revenue       -14.5 %      -13.3 %                             -10.4 %       -17.2 %

The declines in segment revenue for the six and three month periods ended June 30, 2009 compared to the six and three months ended June 30, 2008 were largely due to a decrease in the average amount per transaction from approximately $590 to approximately $510.
The decrease of $1.8 million in segment operating loss in the second quarter of 2009 compared to the prior year period was primarily due to the write-off of acquisition related costs of $1.0 million for acquisitions we determined not to pursue further in the second quarter of 2008 and the write-off of an aged VAT receivable of $0.5 million determined to be uncollectible in the second quarter of 2008.

E-payment services

                                                            Six Month Periods Ended June 30,                 Three Month Periods Ended June 30,
(In millions, except percentages)                       2009         2008      $ Chng      % Chng        2009          2008       $ Chng      % Chng

E-payment revenue                                     $  12.3      $ 11.9     $  0.4          3.4 %    $   6.1        $  5.8     $  0.3          5.2 %
E-payment operating (loss) income                     $  (0.2 )    $  1.8     $ (2.0 )     -111.4 %    $  (0.1 )      $  1.5     $ (1.6 )     -105.3 %
Operating loss or income as a % of segment revenue       -1.7 %      15.1 %                               -1.3 %        25.9 %

The increases in segment revenue were from our UK gift card business, while prepaid card sales in US were relatively flat in comparison to the first half of 2008.
The decreases in segment operating income during both the six and three month periods ended June 30, 2009 compared to prior year were due to income from the InComm settlement which generated $2.0 million of pre-tax income in the second quarter of 2008.
Expenses
Direct Operating Expenses
Our direct operating expenses consist primarily of (1) amortization of our DVD inventory, (2) the percentage of transaction fees and commissions we pay to our retailers and agents, (3) field operations support, (4) coin pick-up, transportation and processing expenses and credit card fees and (5) the cost of plush toys and other products dispensed from the skill-crane and bulk-vending machines. Variations in the percentage of transaction fees and commissions we pay to our retailers and agents may result in increased expenses. Such variations are based on certain factors, such as total revenue, E-payment

capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, co-op marketing incentives, or other criteria.

                                           Six Month Periods Ended June 30,                 Three Month Periods Ended June 30,
(In millions, except percentages)      2009         2008       $ Chng      % Chng        2009           2008       $ Chng     % Chng

Direct operating expenses            $  416.2     $ 281.8     $ 134.4       47.7 %    $  224.2        $ 150.5     $ 73.7       49.0 %
as a % of Total Revenue                  71.1 %      68.7 %                               71.4 %         68.4 %

Direct operating expenses increased in the six and three month periods ended June 30, 2009 compared to the six and three month periods ended June 30, 2008 primarily due to the increased revenue in the DVD service segment, and the resulting variable expenses associated with the increased revenue. In addition, the direct operating expenses as a percentage of revenue increased by 240 basis points and 300 basis points for the six and three month periods ended June 30, 2009 compared with the prior year periods. These increases were driven mainly by DVD product costs primarily resulting from a decrease in DVD salvage value. The total increase in direct operating expenses for DVD services were $150.0 million and $80.0 million for the six and three month periods ended June 30, 2009. These increases were partially offset by the decrease from our Coin and Entertainment direct operating expenses in the amount of $10.3 million and $2.8 million, respectively for the six and three months ended June 30, 2009. The decreases for Coin and Entertainment services direct operating expenses was consistent with the decline in Coin and Entertainment revenue; more specifically due to the cost reduction associated with the fees and commission paid to the retailers, field operating support, plush toy costs as well as coin pick-up transportation. Marketing
Our marketing expenses represent our cost of advertising, traditional marketing, on-line marketing and public relation efforts in national and regional advertising and the major international markets in which we operate our Money Transfer services.

                                           Six Month Periods Ended June 30,                  Three Month Periods Ended June 30,
(In millions, except percentages)       2009          2008       $ Chng     % Chng       2009           2008         $ Chng     % Chng

Marketing                            $   10.8        $  6.6      $ 4.2       63.6 %    $   5.7        $   3.8        $ 1.9       50.0 %
as a % of Total Revenue                   1.8 %         1.6 %                              1.8 %          1.7 %

Marketing expenses increased in the six and three month periods ended June 30, 2009 compared to the six and three month periods ended June 30, 2008 primarily as a result of the growth of DVD services. Marketing expenses for DVD services increased $2.9 million and $1.1 million for the six and three month periods ended June 30, 2009 compared to the six and three month periods ended June 30, 2008.
Research and Development
Our research and development expenses consist primarily of development costs of our coin-counting kiosk software, network applications, machine improvements and new product development. Research and development expenses represent expenditures to support development and design of our complementary new product ideas and to continue our ongoing efforts to enhance our existing products and services.

                                            Six Month Periods Ended June 30,                  Three Month Periods Ended June 30,
(In millions, except percentages)      2009           2008        $ Chng     % Chng       2009           2008         $ Chng     % Chng

Research and development             $   2.6        $   2.4       $ 0.2        8.3 %    $   1.3        $   1.2        $ 0.1        8.3 %
as a % of Total Revenue                  0.4 %          0.6 %                               0.4 %          0.5 %

Research and development expenses have remained relatively consistent for the six and three month periods ended June 30, 2009 and June 30, 2008.

General and Administrative
   Our general and administrative expenses consist primarily of administrative
support for field operations, customer service, systems and engineering support,
computer network operations, finance, human resources, occupancy expenses, legal
expenses and insurance.

                                           Six Month Periods Ended June 30,                 Three Month Periods Ended June 30,
(In millions, except percentages)      2009          2008       $ Chng     % Chng        2009           2008        $ Chng     % Chng

General and administrative           $  67.4        $ 45.8     $ 21.6       47.2 %    $   34.1        $   24.7      $ 9.4       38.0 %
as a % of Total Revenue                 11.5 %        11.2 %                              10.9 %          11.2 %

General and administrative expenses increased for the six and three month periods ended June 30, 2009 compared to the six and three month period ended June 30, 2008 primarily as a result of increased administrative costs to sustain the growth of the DVD business segment, expensing acquisition related costs upon adoption of SFAS 141R in the first quarter of 2009, as well as certain management transition costs.
Proxy, write-off of acquisition costs, and litigation settlement During the second quarter of 2008 there were unique events resulting in expenses for a proxy contest and the write-off of acquisition costs as well as income from the litigation settlement agreement with InComm Holding Inc.

                                                      Six Month Periods Ended June 30,                                    Three Month Periods Ended June 30,
(In millions, except percentages)         2009            2008            $ Chng            % Chng             2009             2008            $ Chng            % Chng

. . .