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 that 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 $235 million and $150 million, respectively, with potential value of up to approximately $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 September 30, 2009 we were at approximately a 28% level compared with the 50% level that would trigger impairment of our NOL asset.

Under our certificate of incorporation, any person, company or investment firm that wishes to become a "5% shareholder" (as defined in our certificate of incorporation) 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. The NOL protective provisions contained in our certificate of incorporation are more specifically described in our Definitive Proxy filed with the Securities and Exchange Commission on April 2, 2008.

As of October 31, 2009, we had approximately 15,781,000 shares outstanding, and therefore ownership of approximately 789,000 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 $34.99.

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®

In May 2009, we successfully completed the market test for our PhotoStamps product. 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. 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.

Results of Operations

Total revenue was $20.2 million both for the third quarter of 2009 and 2008. Total revenue during the nine months ended September 30, 2009 was $60.4 million, a decrease of 3% from $62.6 million for the nine months ended September 30, 2008. PC Postage subscriber related revenue, including service revenue, product revenue and insurance revenue, in the third quarter of 2009 was $18.3 million, an increase of 1% from $18.1 million in the third quarter of 2008, and was $54.8 million in the nine months ended September 30, 2009, an increase of less than 1% from $54.7 million in the nine months ended September 30, 2008. PhotoStamps revenue in the third quarter of 2009 was $1.9 million, a decrease of 6% from $2.0 million in the third quarter of 2008, and was $5.6 million in the nine months ended September 30, 2009, a decrease of 29% from $7.9 million in the nine months ended September 30, 2008.

We use several PC Postage marketing channels to acquire customers, including partnerships, online advertising, affiliate channel, direct mail, traditional media advertising, enhanced promotion online channel, and others. 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 (beyond what we typically offer) directly to the customer in order to get the customer to try our service. Because our enhanced promotion channel is characterized by higher customer attrition rates and lower customer acquisition costs than our other channels, we decided in the first quarter of 2008 to shift our marketing strategy and customer acquisition spending to focus on our non-enhanced promotion channels.

Primarily as a result of this decision, we estimate that subscriber related revenue for customers acquired through our non-enhanced promotion channels in the third quarter of 2009 was $16.8 million, an increase of 5% from $16.0 million in the third quarter of 2008, and $50.0 million in the nine months ended September 30, 2009, an increase of 5% from $47.7 million in the nine months ended September 30, 2008, while subscriber related revenue for customers acquired through our enhanced promotion channel in the third quarter of 2009 was $1.6 million, a decrease of 27% from $2.1 million in the third quarter of 2008, and $4.9 million in the nine months ended September 30, 2009, a decrease of 31% from $7.0 million in the nine months ended September 30, 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 in the third quarter of 2009 was 315,000, an increase of 1% from 312,000 in the third quarter of 2008.

We believe that the slight increase in paid customers in the third quarter of 2009 was attributable to our increased customer acquisition spending on our non-enhanced promotional channels. For customers originally acquired through our non-enhanced promotion channels, our average subscriber related monthly revenue per paid customer in the third quarter of 2009 was $17.72, an increase of 4% from $17.07 in the third quarter of 2008. This increase is primarily attributable to more customers on higher priced subscription plans.

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

                                       Three Months Ended          Nine months ended
                                          September 30,              September 30,
                                        2009          2008          2009         2008
      Total Revenues
        Service                            76.2 %       76.6 %         76.0 %      73.8 %
      Product                              12.5 %       11.5 %         12.8 %      11.8 %
      Insurance                             1.9 %        1.9 %          1.9 %       1.8 %
      PhotoStamps                           9.4 %       10.0 %          9.3 %      12.6 %
      Other                                 0.0 %        0.0 %          0.0 %       0.0 %
      Total revenues                      100.0 %      100.0 %        100.0 %     100.0 %
      Cost of revenues
        Service                            14.5 %       13.0 %         14.6 %      12.2 %
      Product                               4.6 %        4.0 %          4.8 %       4.2 %
      Insurance                             0.6 %        0.6 %          0.6 %       0.6 %
      PhotoStamps                           7.6 %        7.4 %          7.2 %       9.1 %
          Total cost of revenues           27.3 %       25.0 %         27.2 %      26.1 %
        Gross profit                       72.7 %       75.0 %         72.8 %      73.9 %
      Operating expenses:
        Sales and marketing                36.4 %       38.0 %         39.1 %      40.0 %
      Research and development             10.9 %       11.1 %         11.0 %      10.0 %
      General and administrative           16.8 %       17.0 %         16.5 %      18.9 %
      Total operating expenses             64.1 %       66.1 %         66.6 %      68.9 %
      Income from operations                8.6 %        8.9 %          6.2 %       5.0 %
      Other income (expense), net           1.0 %        3.5 %          1.3 %       3.8 %
      Income before income taxes            9.6 %       12.4 %          7.5 %       8.8 %
      Income tax expense (benefit)          1.1 %        2.1 %          0.9 %      (4.9 %)

      Net income                            8.5 %       10.2 %          6.6 %      13.7 %

Revenue

Our revenue is derived primarily from five sources: (1) service fees charged to customers for use of our PC Postage service; (2) product revenue from the direct sale of consumables and supplies through our Supplies Store; (3) insurance revenue from our branded insurance offering; (4) PhotoStamps revenue from our PhotoStamps business; and (5) other revenue, consisting of advertising revenue derived from advertising programs with our existing customers.

Service revenue was essentially unchanged at $15.4 million in both the third quarter of 2009 and 2008 and decreased 1% to $45.9 million in the nine months ended September 30, 2009 from $46.2 million in the nine months ended September 30, 2008. The decrease in service revenue was primarily due to a strategic reduction in marketing spending on our enhanced promotion channel. As noted above, the decrease during the nine months ended September 30, 2009 consisted of a 27% decrease in subscriber related revenue from customers acquired through our enhanced promotional channels largely offset by a 5% increase in subscriber related revenue from customers acquired through our non-enhanced promotional channels. As a percentage of total revenue, service revenue decreased by approximately one percentage point to 76% in the third quarter of 2009 from 77% in the third quarter of 2008 and increased approximately two percentage points to 76% in the nine months ended September 30, 2009 from 74% in the nine months ended September 30, 2008, primarily as a result of the decrease in revenue from our PhotoStamps product.

Product revenue increased 9% to $2.5 million in the third quarter of 2009 from $2.3 million in the third quarter of 2008, and increased 5% to $7.7 million in the nine months ended September 30, 2009 from $7.4 million in the nine months ended September 30, 2008. The increase was primarily attributable to the following: (1) growth in our paid customer base; (2) marketing our Supplies Store to our existing customer base; (3) the additional SKUs we added to our Supplies Store; and (4) growth in postage printed, which helps drive sales of consumable supplies such as labels. Total postage printed by customers using our service during the third quarter of 2009 was $86 million, a 12% increase from the $77 million printed during the third quarter of 2008. As a percentage of total revenue, product revenue increased one percentage point to approximately 13% both in the third quarter of 2009 and the nine months ended September 30, 2009 from approximately 12% in the third quarter of 2008 and the nine months ended September 30, 2008.

Insurance revenue increased 1% to $377,000 in the third quarter of 2009 from $375,000 in the third quarter of 2008 and increased 3% to $1.2 million in the nine months ended September 30, 2009 from $1.1 million in the nine months ended September 30, 2008, primarily as a result of an increase in the average of the dollar value insured per transaction. As a percentage of total revenue, insurance revenue remained at approximately 2% during each of the third quarter of 2009 and 2008 and the nine months ended September 30, 2009 and 2008.

As previously announced, we reduced our PhotoStamps sales and marketing spending in the third quarter of 2009 compared with the third quarter of 2008 and plan to continue to reduce our sales and marketing spending on PhotoStamps in future periods to improve profitability in that business. As a result of this decision, PhotoStamps revenue decreased 6% to $1.9 million in the third quarter of 2009 from $2.0 million in the third quarter of 2008 and decreased 29% to $5.6 million in the nine months ended September 30, 2009 from $7.9 million in the nine months ended September 30, 2008. As a percentage of total revenue, PhotoStamps revenue decreased approximately one percentage point to 9% in the third quarter of 2009 from 10% in the third quarter of 2008 and decreased approximately four percentage points to 9% in the nine months ended September 30, 2009 from 13% in the nine months ended September 30, 2008. Total PhotoStamps sheets shipped during the third quarter of 2009 was approximately 114,000, a 5% decrease compared to 120,000 in the third quarter of 2008. Average revenue per sheet shipped in the third quarter of 2009 was $16.70 compared to $16.77 in the third quarter of 2008.

Other revenue consisting of commissions from the advertising or sale of products by third party vendors to our customer base was $1,000 in the third quarter of 2009 and $6,000 in the nine months ended September 30, 2009 compared to $0 in both the third quarter of 2008 and the nine months ended September 30, 2008. Commission revenue is currently not material to our financial statements.

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 increased 9% to $5.5 million in the third quarter of 2009 from $5.0 million in the third quarter of 2008 and increased 1% to $16.4 million in the nine months ended September 30, 2009 from $16.3 million in the nine months ended September 30, 2008. As a percentage of total revenue, total cost of revenue increased approximately two percentage points to 27% in the third quarter of 2009 from 25% in the third quarter of 2008 and increased approximately one percentage point to 27% in the nine months ended September 30, 2009 from 26% in the nine months ended September 30, 2008.

Cost of service revenue increased 11% to $2.9 million in the third quarter of 2009 from $2.6 million in the third quarter 2008. The increase during the quarter is primarily attributable to an increase in customer service costs aimed at improving our overall customer experience. Cost of service revenue increased 15% to $8.8 million in the nine months ended September 30, 2009 from $7.6 million in the nine months ended September 30, 2008. This increase is primarily attributable to a change in our assumption of future coupon redemptions relating to our promotional expense, which provided a one-time benefit during the second quarter of 2008 of approximately $266,000. 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. Promotional expense was $449,000 and $287,000 in the three months ended September 30, 2009 and 2008, respectively, and $1.2 million and $486,000 in the nine months ended September 30, 2009 and 2008, respectively. As a percentage of total revenue, cost of service revenue increased approximately two percentage points to 15% in the third quarter of 2009 from 13% in the third quarter of 2008 and increased approximately three percentage points to 15% in the nine months ended September 30, 2009 from 12% in the nine months ended September 30, 2008.

Cost of product revenue increased 16% to $940,000 in the third quarter of 2009 from $809,000 in the third quarter of 2008 and increased 11% to $2.9 million in the nine months ended September 30, 2009 from $2.6 million in the nine months ended September 30, 2008. As a percentage of total revenue, cost of product revenue increased approximately one percentage point to 5% in the three and nine months ended September 30, 2009 from 4% in the three and nine months ended September 30, 2008. The increase, on an absolute basis, is mainly attributable to the increase in fulfillment cost, as we added an east coast fulfillment center to reduce delivery times and increase store sales.

Cost of insurance revenue decreased 6% to $116,000 in the third quarter of 2009 from $124,000 in the third quarter of 2008 and increased less than 1% to $364,000 in the nine months ended September 30, 2009 from $363,000 in the nine months ended September 30, 2008. As a percentage of total revenue, cost of insurance revenue was unchanged at approximately 1% in the three and nine months ended September 30, 2009 and 2008.

Cost of PhotoStamps revenue was $1.5 million in both the third quarter of 2009 and 2008 and decreased 24% to $4.4 million in the nine months ended September 30, 2009 from $5.7 million in the nine months ended September 30, 2008, corresponding to the decrease in PhotoStamps revenue. 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 increased less than one percentage point to 8% in the third quarter of 2009 from 7% in third quarter of 2008 and decreased approximately two percentage points to 7% in the nine months ended September 30, 2009 from 9% in the nine months ended September 30, 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 4% to $7.4 million in the third quarter of 2009 from $7.7 million in the third quarter of 2008 and decreased 6% to $23.7 million in the nine months ended September 30, 2009 from $25.1 million in the nine months ended September 30, 2008. As a percentage of total revenue, sales and marketing expenses decreased approximately two percentage points to 36% in the third quarter of 2009 from 38% in the third quarter of 2008 and decreased approximately one percentage point to 39% in the nine months ended September 30, 2009 from 40% in the nine months ended September 30, 2008. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily due to our decision to decrease our enhanced promotion marketing program expenditures and to decrease our 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 and expenditures for consulting services and third party software. Research and development was $2.2 million in both the third quarter of 2009 and 2008 and increased 5% to $6.6 million in the nine months ended September 30, 2009 from $6.3 million in the nine months ended September 30, 2008. The increase during the nine months ended September 30, 2009 is primarily due to higher headcount related expenses as we continued to invest in the development and enhancement of our PC postage solutions. As a percentage of total revenue, research and development expense was approximately 11% in both the third quarter of 2009 and 2008 and increased one percentage point to 11% in the nine months ended September 30, 2009 from 10% in the nine months ended September 30, 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 was $3.4 million in both the third quarter of 2009 and 2008 and decreased 16% to $10.0 million in the nine months ended September 30, 2009 from $11.8 million in the nine months ended September 30, 2008. As a percentage of total revenue, general and administrative expense was approximately 17% in both the third quarter of 2009 and 2008 and decreased approximately two percentage points to 17% in the nine months ended September 30, 2009 from 19% in the nine months ended September 30, 2008. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily due to the decrease in legal expenses, as we incurred the cost of going to trial for the Kara Technologies lawsuit in the second quarter of 2008. Additionally, we incurred a one-time litigation charge of $710,000 during the second quarter of 2008 relating to a lawsuit by Sterling Reality Organization Co. stemming from our iShip business, which we divested in 2001.

Other Income, Net

Other income, net primarily consists of interest income from cash equivalents, . . .