UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
 
xþ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended March 31, 20072008
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________

Commission file number: 000-26427

Stamps.com Inc.
(Exact name of registrant as specified in its charter)

Delaware
77-0454966
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)

12959 Coral Tree Place
Los Angeles, California 90066
(Address of Principal Executive Offices)principal executive offices)

(310) 482-5800
(Registrant’s telephone number, including area code: code)(310) 482-5800
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xþ No ¨ 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨Accelerated filer x        Non-accelerated filer ¨
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o ( (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xþ
 
As of April 30, 2007,2008, there were approximately 21,922,18419,374,305 shares of the Registrant’s Common Stock issued and outstanding.
 


STAMPS.COM INC.
 
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 20072008
 
TABLE OF CONTENTS
 
Page
Page
   
PART I - FINANCIAL INFORMATION2
  
ITEM 1.FINANCIAL STATEMENTS2
   
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS210
   
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK218
   
ITEM 4.CONTROLS AND PROCEDURES219
   
PART II - OTHER INFORMATION220
  
ITEM 1.LEGAL PROCEEDINGS220
   
ITEM 1A.RISK FACTORS221
   
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS221
   
ITEM 3.DEFAULTS UPON SENIOR SECURITIES221
   
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS221
   
ITEM 5.OTHER INFORMATION221
   
ITEM 6.EXHIBITS221


1

PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
STAMPS.COM INC.
BALANCE SHEETS
(In thousands, except per share data)
 
 
March 31,
 
December 31,
  
March 31,
 
December 31,
 
 
2007
 
2006
  
2008
 
2007
 
 (unaudited)    (unaudited)   
Assets
            
Current assets:            
Cash and cash equivalents
 $15,260 $11,740  $51,482 $43,667 
Restricted cash
  554  554   554  554 
Short-term investments
  46,965  45,635   23,044  22,084 
Trade accounts receivable, net
  2,392  2,365   2,605  2,519 
Other accounts receivable
  991  671   446  1,209 
Other current assets
  2,160  2,095   2,189  2,489 
Total current assets
  68,322  63,060   80,320  72,522 
Property and equipment, net
  4,716  5,084   3,523  3,790 
Intangible assets, net
  1,682  1,956   602  871 
Long-term investments
  40,971  48,145   15,221  24,518 
Deferred income taxes.
  3,671  — 
Other assets
  3,204  3,305   3,611  3,252 
Total assets
 $118,895 $121,550  $106,948 $104,953 
              
Liabilities and Stockholders’ Equity
              
Current liabilities:              
Accounts payable and accrued expenses
 $9,554 $11,015  $10,799 $9,935 
Deferred revenue
  2,380  2,576 
Total current liabilities  9,554  11,015   13,179  12,511 
Commitments and contingencies              
Stockholders’ equity:              
Common stock, $.001 par value
              
Authorized shares 47,500 in 2007 and 2006
       
Issued shares of 24,138 in 2007 and 24,082 in 2006
       
Outstanding shares of 21,873 in 2007 and 22,185 in 2006
  47  47 
Authorized shares 47,500 in 2008 and 2007
       
Issued shares: 24,277 in 2008 and 24,258 in 2007       
Outstanding shares: 19,348 in 2008 and 19,813 in 2007
  47  47 
Additional paid-in capital
  619,635  618,664   623,728  622,781 
Accumulated deficit
  (474,167) (477,221)  (461,357) (466,555)
Treasury stock, at cost, 2,265 shares in 2007 and 1,897 shares in 2006
  (35,738) (30,429)
Treasury stock, at cost, 4,929 shares in 2008 and 4,445 shares in 2007
  (68,237) (63,737)
Accumulated other comprehensive loss
  (436) (526)  (412) (94)
Total stockholders’ equity
  109,341  110,535   93,769  92,442 
Total liabilities and stockholders’ equity
 $118,895 $121,550  $106,948 $104,953 
       
       
The accompanying notes are an integral part of these financial statements.


2

STAMPS.COM INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited) 
 
 
Three Months ended
March 31,
  
Three Months ended
March 31,
 
 
2007
 
2006
  
2008
 
2007
 
Revenues:            
Service 
$
13,661
 
$
13,457
  
$
15,197
 
$
13,661
 
PhotoStamps  3,176  3,860   3,004  3,176 
Product  2,358  2,393   2,483  2,358 
Insurance  388  374 
Other
  827  832   —  453 
Total revenues  20,022  20,542   21,072  20,022 
Cost of revenues:              
Service  2,343  2,614   2,742  2,343 
PhotoStamps  2,083  2,421   2,127  2,083 
Product  799  753   880  799 
Insurance  120  116 
Other
  141  143   —  25 
Total cost of revenues  5,366  5,931   5,869  5,366 
Gross profit  14,656  14,611   15,203  14,656 
Operating expenses:              
Sales and marketing  7,831  6,824   8,623  7,831 
Research and development
  2,145  2,339   1,943  2,145 
General and administrative  2,747  3,157   3,943  2,747 
Total operating expenses  12,723  12,320   14,509  12,723 
Income from operations
  1,933  2,291   694  1,933 
Other income:              
Interest income
  1,213  1,078   917  1,213 
Other income
  21  — 
Total other income  1,213  1,078   938  1,213 
Income before income taxes
  3,146  3,369   1,632  3,146 
Provision for income taxes Basic
  92  12 
Income tax (benefit) expense
  (3,566) 92 
Net income
 
$
3,054
 
$
3,357
  
$
5,198
 
$
3,054
 
Net income per share (see Note 3):              
Basic Basic
 
$
0.14
 
$
0.14
 
Basic
 
$
0.26
 
$
0.14
 
Diluted 
$
0.14
 
$
0.14
  
$
0.26
 
$
0.14
 
Weighted average shares outstanding:       
Basic Basic
  21,892  23,268 
Weighted average shares outstanding       
Basic
  19,723  21,892 
Diluted  22,326  24,386   19,950  22,326 
       

The accompanying notes are an integral part of these financial statements.
 

3

STAMPS.COM INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Three Months ended
March 31,
  
Three Months ended
March 31,
 
 
2007
 
2006
  
2008
 
2007
 
Operating activities:            
Net income
 
$
3,054
 
$
3,357
  
$
5,198
 
$
3,054
 
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation and amortization
  788  688   722  788 
Stock-based compensation expense  461  795   779  461 
Deferred income tax  (3,671) — 
Changes in operating assets and liabilities:
              
Trade accounts receivable
  (27) (172)  (86) (27)
Other accounts receivable
  (320) 481   763  (320)
Other current assets
  (65) (639)
Prepaid expenses  300  (65)
Other assets  101  (718)  (359) 101 
Deferred revenue  (196) 160 
Accounts payable and accrued expenses
  (1,461) 1,171   864  (1,621)
Net cash provided by operating activities
  2,531  4,963   4,314  2,531 
       
Investing activities:              
Sale of short-term investments
  8,567  6,196   13,736  8,567 
Purchase of short-term investments
  (9,911) (9,760)  (15,014) (9,911)
Sale of long-term investments
  9,351  4,476   9,297  9,351 
Purchase of long-term investments  (2,073) (8,610)  —  (2,073)
Acquisition of property and equipment
  (146) (468)  (186) (146)
Net cash provided by (used in) investing activities
  5,788  (8,166)
Net cash provided by investing activities
  7,833  5,788 
       
Financing activities:              
Proceeds from exercise of stock options
  242  5,099   —  242 
Issuance of common stock under ESPP  268  238   168  268 
Repurchase of common stock
  (5,309) —   (4,500) (5,309)
Net cash (used in) provided by financing activities
  (4,799) 5,337 
Net cash used in financing activities
  (4,332) (4,799)
Net increase in cash and cash equivalents
  3,520  2,134   7,815  3,520 
Cash and cash equivalents at beginning of period
  11,740  20,768   43,667  11,740 
Cash and cash equivalents at end of period
 $15,260 
$
22,902
  $51,482 
$
15,260
 
       
       

The accompanying notes are an integral part of these financial statements. 

4

STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 20072008 AND 20062007 IS UNAUDITED)

1. Summary of Significant Accounting Policies
 
Basis of Presentation
 
TheWe prepared the financial statements included herein have been prepared by Stamps.com Inc. (Stamps.com or Company) without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with USUnited States (US) generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believesWe believe that the disclosures are adequate to make the information presented not misleading. It is suggestedWe recommend that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company'sour latest annual report on Form 10-K.
 
In theour opinion, of the Company, these unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly theour financial position of the Company as of March 31, 2007,2008, the results of its operations for the three months ended March 31, 20072008 and its cash flows for the three months ended March 31, 2007.2008. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007 and notes thereto.
 
Use of Estimates and Risk Management
 
The preparation of financial statements in conformity with US generally accepted accounting principles requires managementus to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. Examples include estimates of loss contingencies, promotional coupon redemptions, deferred income taxes and estimates regarding the useful lives of patents and other amortizable intangibles.
 
The Company isWe are involved in various litigation matters as a claimant and a defendant. The Company recordsWe record any amounts recovered in these matters when received. The Company recordsWe record liabilities for claims against itus when the loss is probable and estimable. Amounts recorded are based on reviews by outside counsel, in-house counsel and management. Actual results could differ from estimates.
Revenue Recognition
We recognize revenue from product sales or services rendered, as well as from licensing the use of our software and intellectual property, when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.
Service revenue is based on monthly convenience fees and is recognized in the period that services are provided. Product sales, net of return allowances, are recorded when the products are shipped and title passes to customers. Sales of our products, including PhotoStamps, to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances for expected product returns, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. We recognize licensing revenue ratably over the contract period. Commissions from the advertising or sale of products by a third party vendor to our customer base are recognized when the revenue is earned and collection is deemed probable.
Customers who purchase postage for use through our NetStamps, shipping label or mailing features, pay face value, and the funds are transferred directly from the customers to the United States Postal Service (USPS). We do not recognize revenue for this postage as it is purchased by our customers directly from the USPS. PhotoStamps revenue includes the price of postage.
On a limited basis, we allow third parties to offer products and promotions to the Stamps.com customer base. These arrangements generally provide payment in the form of a flat fee or revenue sharing arrangements where we receive payment upon customers accessing third party products and services. Total revenue from such advertising arrangements is currently immaterial.

5
STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2008 AND 2007 IS UNAUDITED)
We provide our customers with the opportunity to purchase parcel insurance directly through our software. Insurance revenue represents the gross amount charged to the customer for purchasing insurance and the related cost represents the amount paid to the insurance broker, Parcel Insurance Plan. We recognize revenue on insurance purchases upon the ship date of the insured package.
Revenue from gift cards, which is recognized at the time of redemption, is currently immaterial to our financial statements. Because we do not yet have meaningful historical data upon which to base estimates for gift cards that will never be redeemed (“breakage”), we have not recorded any breakage income related to our gift card program.
 
2. Legal Proceedings
 
Please refer to "Part II - Other Information - Item 1 - Legal Proceedings" of this report for a discussion of our current legal proceedings.
 
3. Net Income per Share
 
Net income per share represents net income attributable to common stockholders divided by the weighted average number of common shares outstanding during a reported period. The diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including convertible preferred stock and stock options and warrants (commonly and hereafter referred to as “common stock equivalents”), were exercised or converted into common stock. Diluted net income per share is calculated by dividing net income during a reported period by the sum of the weighted average number of common shares outstanding plus common stock equivalents for the period. The following table reconciles share amounts utilized to calculate basic and diluted net income per share (in thousands, except per share data):

5

STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2007 AND 2006 IS UNAUDITED)

 
Three Months Ended
March 31,
  
Three Months Ended
March 31,
 
 2007 2006  2008 2007 
Net income
 
$
3,054
 
$
3,357
  
$
5,198
 
$
3,054
 
              
Basic - weighted average common shares
  21,892  23,268   19,723  21,892 
Diluted effect of common stock equivalents
  434  1,118   227  434 
Diluted - weighted average common shares
  
22,326
  
24,386
   
19,950
  
22,326
 
              
Earnings per share:              
Basic
 
$
0.14
 
$
0.14
  
$
0.26
 
$
0.14
 
Diluted
 
$
0.14
 
$
0.14
  
$
0.26
 
$
0.14
 
       

The calculation of dilutive shares excludes the effect of the following options that are considered anti-dilutive (in thousands):

  
Three Months Ended
March 31,
 
  2007 2006 
Anti-dilutive stock options shares  
1,270
  183 
  
Three Months Ended
March 31,
 
  2008 2007 
Anti-dilutive stock options shares  
2,332
  
1,270
 


6
STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2008 AND 2007 IS UNAUDITED)
4. Stock-Based Employee Compensation
 
Effective January 1, 2006, the Company adopted theWe account for stock-based awards to employees and directors pursuant to Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), and related SEC rules included in Staff Accounting Bulletin No. 107 (SAB 107), which require the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values.
The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Financial Statements as of and for the three months ended March 31, 2007 and 2006 reflect the impact of SFAS 123R. The following table illustrates the stock-based compensation expense the Company recognized under SFAS 123R for the periods indicated:
  
Three Months Ended
March 31,
 
  2007 2006 
Stock-based compensation expense relating to:       
Employee and director stock options $414,000 $296,000 
Employee stock purchases  47,000  499,000 
Total stock-based compensation expense $461,000 $795,000 
        
. SFAS 123R requires companiesus to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expectedmodel and to vest is recognized as expense over the requisite service periods in the Company’s Statement of Income. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value method, norecognize stock-based compensation expense had been recognized in the Company’s Statement of Income prior to January 1, 2006 because the exercise price of the Company’s stock options granted to employees and directors was equal to or greater than the fair market value of the underlying stock at the date of grant.

6

STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2007 AND 2006 IS UNAUDITED)

Stock-based compensation expense recognized during theeach period is based on the value of thethat portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Statement of Income for the three months ended March 31, 2007 and 2006 included 1) compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and 2) compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
Compensation expense recognized for all employee stock options awards granted is recognized using the straight-line single method over their respective vesting periods of three or four years. As stock-based compensation expense recognized in the Statement of Income for the three months ended March 31, 2007 and 2006 is based on awards ultimately expected to vest, it has beenperiod, reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. InCompensation expense recognized for all employee stock options granted is recognized using the Company’s pro forma information requiredstraight-line single method over their respective vesting periods of three to four years.
The following table sets forth the stock-based compensation expense that we recognized under SFAS 123123R for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.indicated (in thousands):
 
  
Three Months Ended
March 31,
 
  2008 2007 
Stock-based compensation expense relating to:       
Employee and director stock options $749 $414 
Employee stock purchases  30  47 
Total stock-based compensation expense $779 $461 
        
Stock-based compensation expense relating to:       
Cost of revenues $75 $76 
Sales and marketing  176  73 
Research and development  152  150 
General and administrative  376  162 
Total stock-based compensation expense $779 $461 

In our SFAS 123R requires the cash flow resulting from tax benefits resulting from tax deduction in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Prior to fiscal 2005 the Company had a history of net operating losses and because it is uncertain as to when and if it may realize its deferred tax assets, the Company has placed a valuation allowance against its otherwise recognizable deferred tax asset. Therefore, there are no excess tax benefits recorded in the financing cash inflow that would have been classified as an operating cash inflow if the Company had not adopted SFAS 123R. During the three months ended March 31, 2007 and 2006, the Company received $510,000 and $5.3 million, respectively, in cash from stock options exercised and from shares issued through the Employee Stock Purchase Program.
Upon adoption of SFAS 123R the Company continued tocalculations, we use the Black-Scholes option valuation model, which requires managementus to make certain assumptions for estimating the fair valuea number of employee stock options granted at the date of the grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictionshighly complex and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’svolatility, expected term, risk-free interest rates and actual and projected employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123R using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
exercise behaviors. For options granted, the Company'sour assumption of expected volatility for valuing options using the Black-Scholes model was based on the historical volatility of the Company'sour stock price for the period January 1, 2002 through the date of the option grant because management believesgrant. We base the historical volatility since January 1, 2002 is more representative of prospective volatility. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The estimated expected life represents the weighted-average period the stock options are expected to remain outstanding and has been determined based on an analysis of historical exercise behavior.
 
The following are the weighted average assumptions used in the Black-Scholes valuation model for the periods indicated:
 
 
Three Months Ended
March 31,
  
Three Months Ended
March 31,
 
 2007 2006  2008 2007 
Expected dividend yield  —  —   —  — 
Risk-free interest rate  
4.67%
  4.56%   2.80% 4.67%
Expected volatility  47%  49%   51% 47%
Expected life (in years)  5  5   5  5 
Expected forfeiture rate  16%  12%   16% 16%

7

STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 20072008 AND 20062007 IS UNAUDITED)

The following table summarizes stock option activity related to the Company’s plan for the three months ended March 31, 2007:

  Number of Stock Options (in thousands) Weighted Average Exercise Price 
Weighted Average Remaining Contractual Life
(in years)
 
Aggregate Intrinsic Value
(in thousands)
 
Outstanding at December 31, 2006 
  2,197 $17.52       
Granted 
  66  15.26       
Exercised 
  (34) 7.12       
Forfeited or expired 
  (18) 21.80       
Balance at March 31, 2007 
  2,211  17.58    $6,296 
Exercisable at March 31, 2007  1,806  16.51  5.7 $6,231 
 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the company’s closing stock price of $14.37 at March 30, 2007, representing the last trading day of three months ended March 31, 2007, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date.

The weighted average grant date fair value of options granted during the three months ended March 31, 2007 and 2006 was $7.15 and $14.54, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $288,441and $5,780,940, respectively.

The following table summarizes the status of the Company’s nonvested shares as of March 31, 2007:

  Number of Stock Options (in thousands) Weighted Average Grant Date Fair Value 
Nonvested at December 31, 2006 
  432 $11.28 
Granted 
  66 $7.15 
Vested 
  (43)$10.34 
Forfeited 
  (50)$21.80 
Nonvested at March 31, 2007 
  405 $10.74 

As of March 23, 2007, there was approximately $3.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.7years.
5. Goodwill and Intangible Assets
 
The Company wrote off all of its goodwill in the first quarter of 2001 dueWe continue to impairment. The Company’samortize our other intangible assets, which consist of patents, trademarks and other intellectual property with a gross carrying value of $8.3 million as of March 31, 20072008 and December 31, 20062007 and accumulated amortization of approximately $6.6$7.7 million as of March 31, 20072008 and $6.3$7.4 million as of December 31, 2006, continue to be amortized2007, over their expected useful lives ranging from 4 to 17 years with a remaining weighted average amortization period of 1.1 years.less than one year. During the fiscal year 2006 the Company2007, we assessed whether events or changes in circumstances occurred that could potentially indicate that the carrying amount of the Company’sour intangible assets may not be recoverable. The CompanyWe concluded that there were no such events or changes in circumstances during the year ended December 31, 20062007 and determined that the fair value of the Company’sour intangible assets were in excess of their carrying value as of December 31, 2006.2007.
 

8

STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2007 AND 2006 IS UNAUDITED)

Aggregate amortization expense on patents and trademarks was approximately $273,000 and $275,000$270,000 for the three months ended March 31, 2007 and 2006, respectively. Amortization2008. We estimate that amortization expense on patents and trademarks is estimated to approximate $1.1 millionwill be approximately $871,000 for fiscal year 2007.2008.
 
6. Comprehensive Income
 
The following table provides the data required to calculate comprehensive income (in thousands):
 
 
Three Months Ended
March 31,
  
Three Months Ended
March 31,
 
 2007 2006  2008 2007 
Net income $3,054 $3,357  $5,198 $3,054 
Unrealized income (loss) on investments  90  (141)
Unrealized (loss) income on investments  (318) 90 
Comprehensive income $3,144 $3,216  $4,880 $3,144 
 
7. Income Taxes
 
The CompanyDuring the first quarter of 2008, our income tax benefit consists of alternative minimum federal and state taxes and a tax benefit relating to the release of a portion of our deferred tax asset valuation allowance. Our effective income tax rate differs from the statutory income tax rate primarily as a result of the partial release of our valuation allowance for the future benefits to be received from our deferred tax assets as well as our use of net operating losses to offset current tax expense. A valuation allowance was originally recorded against our deferred tax assets as we determined the realization of these assets did not meet the more likely than not criteria in accordance with SFAS No. 109, “Accounting for Income Taxes”. During the first quarter of 2008, we determined that a full valuation allowance against our deferred tax assets was not necessary. In making such determination we considered all available positive and negative evidence including our recent earnings trend and expected continued future taxable income. During the first quarter of 2008, we recorded a partial reversal of deferred tax valuation allowance of $3.7 million primarily consisting of net operating loss carryforwards and research tax credits carryforwards. We continue to maintain a valuation allowance for the remainder of our deferred tax assets. We recorded a current tax provision for corporate alternative minimum federal and state taxes of approximately $106,000 in the three months ended March 31, 2008. This resulted in an overall tax benefit of $3.6 million.
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. AtUnder FIN 48, we are required to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The adoption and as March 31, 2007, we hadof FIN 48 did not have a material effect on our financial statements. We have concluded that there are no material unrecognizedsignificant uncertain tax benefits and no adjustmentspositions requiring recognition in our financial statements.
Our policy is to liabilities or operations were required. We recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense.  As of March 31, 2008, we have not recorded any interest and penalty expense.

8

STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2008 AND 2007 IS UNAUDITED)
Our determination on the analysis of uncertain tax positions in incomeare related to tax expense which were zero for the three months ended March 31, 2007. Tax years 2003 through 2006 arethat remain subject to examination by the relevant tax authorities. These include the 2004 through 2006 tax years for federal purposes and state taxing authorities. There are no incomethe 2003 through 2006 tax examinations currently in process.years for California purposes.
8.Fair Value Measurements
We adopted SFAS No. 157, “Fair Value Measurement” (SFAS 157) on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The fair value hierarchy for disclosure of fair value measurements under SFAS 157 is as follows:
Level 1 -Valuations based on unadjusted quoted prices for identical assets in an active market
Level 2 -Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
Level 3 -Valuations based on inputs that are unobservable and involve management judgment and our own assumptions about market participants and pricing.
 
The provision for income taxes consists solelyfollowing table summarizes our financial assets measured at fair value on a recurring basis in accordance with SFAS 157 (in thousands):
    Fair Value Measurement at Reporting Date Using 
 
 
 
 
Description
 March 31, 2008 
Quoted Prices
 in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant Unobservable
Inputs
(Level 3)
 
          
Cash and cash equivalents $51,482 $51,482  —  — 
Available-for-sale debt securities  38,265  — $38,265  — 
Total $89,747 $51,482 $38,265  — 
The fair value of alternative minimum federalour available-for-sale debt securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and state taxes. The Company’s effective income tax rate differsmay incorporate available trade, bid and other market information and price quotes from the statutory income tax rate primarily as a result of the establishment of a valuation allowance for the future benefits to be received from the deferred tax assets including net operating loss carryforwardswell established independent pricing vendors and research tax credits carryforwards to offset taxable income. The Company recorded a tax provision subject to the corporate alternative minimum federal and state taxes of approximately $92,000 and $12,000 for the three months ended March 31, 2007 and 2006, respectively.
broker-dealers.

9

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 1934.1934, as amended (the “Exchange Act”). These statements relate to expectations concerning matters that are not historical facts. WordsYou can find many (but not all) of these statements by looking for words such as "projects," "believes," "anticipates," "estimates," "plans," "expects," "intends," and“approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar words and expressions are intended to identify forward-looking statements. Although Stamps.com believesin this report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that suchany 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, we cannot assure you that such expectationsthey are not guarantees of future performance and some will inevitably prove to be correct. Factors thatincorrect. 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” 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 such expectations are disclosed herein. All forward-looking statements attributable to Stamps.com are expressly qualifiedthose contained in their entirety by such language. Stamps.com does not undertake any obligation to update any forward-looking statements. You are also urged to carefully review and consider the various disclosures we have made which describe certain factors which affect our business. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto.

Stamps.com, NetStamps, PhotoStamps, Hidden Postage, Stamps.com Internet postage and the Stamps.com logo are our trademarks. This report also includesreferences trademarks of entities other entities.
SPECIAL NOTICE REGARDING PURCHASES OF MORE THAN 5% OF OUR STOCK
We currently have federal and state net operating loss carry-forwards. Under applicable law, those assets could be adversely affected by the acquisition by any person of more than Stamps.com.5% of our outstanding stock. Accordingly, we strongly urge you to contact us prior to allowing your ownership interest in our stock to exceed 800,000 shares.
 
Overview
 
Stamps.comÒ is the leading provider of Internet-based postage solutions. CustomersOur 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 (US Postal Service or USPS)(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. Stamps.com wasWe were the first ever USPS-licensed vendor to offer PC Postage® in a software-only business model in 1999. On August 10, 2004, we publicly launched a market test of PhotoStamps®PhotoStamps®, a new form of postage that allows consumers to turn digital photos, designs or images into valid US postage. ThroughoutAny reference in this document and in general when we refer to theour PC Postage business we mean excluding thedoes not include our PhotoStamps business.
 
Stamps.com Inc. wasWe were founded in September 1996 to investigate the feasibility of entering into the US Postal Service’sUSPS Information-Based Indicia Program and to initiate the certification process for our PC Postage service. In January 1998, we were incorporated in Delaware as StampMaster, Inc. and we changed, thereafter changing our name to Stamps.com Inc. in December 1998. We completed our initial public offering in June 1999. Our common stock is listed on the Nasdaq stock marketNASDAQ Stock Market under the symbol “STMP.”
 
Our principal executive offices are located at 12959 Coral Tree Place, Los Angeles, California, 90066, and our telephone number is (310) 482-5800.

Our Services and Products

We offer or have offered the following products and services to our customers:

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PC Postage Service
 
Our US Postal Service-approvedUSPS-approved PC Postage service enables users to print information-based indicia, or electronic stamps, directly onto envelopes, plain paper, or labels using ordinary laser or inkjet printers. Our service currently supports a variety of USPS classes including First-Class MailÒ, Priority MailÒ, Express MailÒ, Parcel PostÔ, Media MailÔ, Bound Printed Matter, and international mail. Customers can also add USPS Special Services such as Delivery Confirmation™, Signature Confirmation™, Registered Mail, Certified Mail, Insured Mail, Return Receipt, Collect on Delivery (“COD”) and Restricted Delivery to their mail pieces. Our service requires only a standard PC, printer and Internet connection. Our free software can be downloaded from the Internet or installed from a CD-ROM. After installing the 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 US Postal Service’sUSPS’s account. The majority of new customers currently signing up for our service pay a monthly convenience fee of $15.99. Our current customer mix includes monthly convenience fees ranging from $4.49$15.99 to $24.99 or more$49.99 based on individual product, pricing and promotions.
 

10
Stamps.com offers itsWe offer our customers three primary ways to print PC Postage. First, our NetStamps® feature and Photo NetStamps® feature enable customers to print postage for any value and for most classes of mail on NetStamps or Photo NetStamps labels. Photo NetStamps allowsallow customers to use digital photos, designs or images with NetStamps as compared to the standard designs available with normalregular NetStamps. After they are printed, NetStamps and Photo NetStamps can be used just like regular stamps. Second, our shipping feature tab allows customers to print postage for packages on plain 8.5” x 11” paper or on special labels, and to add electronic Delivery or Signature Confirmation at discounted prices versus standard USPS prices. Third, our mailing feature tab is typically used to print the postage and address directly on envelopes or on other types of mail or labels, in a single-step process that saves time and provides a professional look. Our PC Postage services also incorporate address verification technology that verifies each destination address for mail sent using our service against a database of all known addresses in the U.S. In addition,United States. As an added convenience, our PC Postage services have been designed to integrate into common small business and productivity software applications such as word processing, contact and address management, and accounting and financial applications.

PhotoStamps®
 
OnIn May 17, 2006,2007, we publicly launched our thirdfourth market test of PhotoStamps, a patented form of postage that allows consumers to turn digital photos, designs or images into valid U.S.US postage. With this product, peopleindividuals or businesses can now create customized U.S.US postage using pictures of their children, pets, vacations, celebrations, business logos and more. PhotoStamps is 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.
Since the beginning of the second market test on May 17, 2005, PhotoStamps has been prominently featured in the national media. For example, in its December 19, 2005 issue, BusinessWeek named PhotoStamps one of the best products of 2005. PhotoStamps is currently available under authorization of the USPS for its thirdfourth phase market test, with an initial authorization for one year through May 16, 2007 and an option for the USPS to extend the test for a second year.2008.
 
Mailing & Shipping Supplies Store
 
With the launch of NetStamps in July 2002, we began selling NetStamps labels directly to our customers via ourOur Mailing & Shipping Supplies Store (previously also referred to as our “Online(our “Supplies Store”) which is available to our customers from within our PC Postage software. Our Supplies Store has since expanded to sell themedsoftware, 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.
In September 2006 we launched a brand new Mailing & Shipping Our Supplies Store within version 6.0 of the PC Postage client software. This new store features a totally overhauled and reorganized store catalog, same day shipping capabilities, strong messaging of our free or discounted shipping promotions, strong cross sell during checkout, SKUproduct search capabilities, and new expedited and rush shipping options. We plan to continue to increase the breadth of products offered in our Supplies Store, in order to enhance customer convenience.Store.
 
Branded Insurance
 
We offer Stamps.com branded insurance to our userscustomers 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. We also offer official US Postal ServiceUSPS insurance alongside our branded insurance product. Our insurance is provided in partnership with Parcel Insurance Plan and is underwritten by Fireman's Fund.

Recent DevelopmentsSection 382 Update
 
On February 8, 2007, Stamps.com's BoardWe currently have federal and state net operating loss carry-forwards. Under applicable law, those assets could be adversely affected by the acquisition by any person of Directors approved an additional share repurchase program authorizing the purchasemore than 5% of up to $20 millionour outstanding stock. Under Internal Revenue Code Section 382, 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. When a change of Stamps.com stock as market and business conditions warrant (the “February 2007 Program”). The February 2007 Program will commence when the November 2006 Programownership is completed and will expire one year from its commencement date.
Share purchasestriggered, our net operating loss ("NOL" or "NOLs") asset may be made from timeimpaired. We estimate that, as of March 31, 2008 we were approximately at 34% compared with the 50% level that would trigger impairment of our NOLs. As part of our ongoing program to time on the open market or in negotiated transactions in compliance with Rule 10b-18preserve future use of the Securities Exchange Act of 1934. Our Company's purchase of anyour NOLs, we strongly urge anyone contemplating owning more than 800,000 of our shares is subject to limitations that may be imposed on such purchases by applicable securities laws and regulations and the rules of the Nasdaq Stock Market. Purchases may be made in the open market, or in privately negotiated transactions from time to time at our discretion. The timing of purchases, if any, and the number of shares to be bought at any one time will depend on market conditions.
contact usbeforedoing so.

11

In February 2007, we announced our plan to change our publicly available customer metrics starting with the fourth quarter 2006 earnings release and continuing forward into fiscal 2007. The new metrics will be based primarily on paid subscribers whereas our prior customer metrics were based primarily on registered subscribers. We believe that the new metrics will provide a simpler and clearer depiction of our business while also providing an improved means of comparing our metrics to those of other subscription-based Internet companies. A complete set of the old and new quarterly customer metrics is available currently at http://investor.stamps.com.
 
Critical Accounting Policies

General. The
Our discussion and analysis of our financial condition and results of operations are based onupon our Company’s financial statements which have been prepared in accordance with US generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to patents, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
 
Revenue Recognition. Recognition
We recognize revenue from product sales or services rendered, as well as from licensing the use of our software and intellectual property, when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured.
 
ServiceOur service revenue is based on monthly convenience fees and is recognized in the period that services are provided. Product sales, net of return allowances, are recorded when the products are shipped and title passes to customers. Sales of items,our products, including PhotoStamps, sold to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances for expected product returns, which reduce product revenue, by our best estimate of expected product returns, are estimated using historical experience. LicensingWe recognize licensing revenue is recognized ratably over the contract period. Commissions from the advertising or sale of products by a third party vendor to our customer basecustomers are recognized when the revenue is earned and collection is deemed probable.
Customers who purchase postage for use through our NetStamps, shipping label or mailing features, pay face value, and the funds are transferred directly from the customers to the US Postal Service. No revenue is recognized for this postage as it is purchased by our customers directly from the US Postal Service.
PhotoStamps revenue includes the price of postage and is made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier.
On a limited basis, we allow third parties to offer products and promotions to the Stamps.com customer base. These arrangements generally provide payment in the form of a flat fee or revenue sharing arrangements where we receive payment upon customers accessing third party products and services. Total revenue from such advertising arrangements is currently immaterial.
We provide our customers with the opportunity to purchase parcel insurance directly through the Stamps.com software. Insurance revenue represents the gross amount charged to the customer for purchasing insurance and the related cost represents the amount paid to the insurance broker, Parcel Insurance Plan. We recognize revenue on insurance purchases upon the ship date of the insured package.
 

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Advertising CostsIntangibles. We expense the costs of producing advertisements as incurred, and expense the costs of communicating and placing the advertising in the period in which the advertising space or airtime is used.
 
Internet Advertising. We recognize expense based on the specifics of the individual agreements. Under partner and affiliate agreements, third parties refer prospects to our web site and we pay the third parties when the customer completes the customer registration process, completes the first purchase or in some cases, upon the first successful billing of a customer. We record these expenses on a monthly basis as prospects are successfully converted to customers.
Intangibles. We make an assessment of the estimated useful lives of our patents and other amortizable intangibles. These estimates are made using various assumptions that are subjective in nature and could change as economic and competitive conditions change. If events were to occur that would cause our assumptions to change, the amounts recorded as amortization would be adjusted.
 
Contingencies and Litigation.
We are involved in various litigation matters as a claimant and as a defendant. We record any amounts recovered in these matters when collection is certain. We record liabilities for claims against us when the losses are probable and estimable. Any amounts recorded would be based on reviews by outside counsel, in-house counsel and management. Actual results may differ from estimates.
 
Promotional Expense.
New core servicePC Postage customers are generallytypically offered promotional items that are redeemed using coupons that are qualified for redemption after a customer is successfully billed beyond an initial trial period. This includes free postage and a free digital scale and is expensed in the period in which a customer qualifies using estimated redemption rates based on historical data. Promotional expense whichthat is included in the cost of service is incurred as customers qualify and thereby may not correlate directly with changes in revenue as the revenue associated with the acquired customer is earned over the customer's lifetime.

12
 
Recent Accounting Pronouncements
 
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FAS 115” (Statement(SFAS 159). StatementSFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. StatementSFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potentialThe adoption of SFAS 159 did not have a material impact of Statement 159 onto our financial statements. We do not expect the impact will be material.

Section 382 Update
13
Under Internal Revenue Code Section 382, 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. When a change of ownership is triggered, our net operating loss ("NOL" or "NOLs") asset may be impaired. We estimate that, as of March 31, 2007 we were approximately at 25% compared with the 50% level that would trigger impairment of our NOL asset. As part of our ongoing program to preserve future use of our NOL assets, Stamps.com requests that all of our current stockholders and prospective investors contact us prior to allowing their ownership interest to reach a five-percent level.

Results of Operations
 
Total revenue for the first quarter 2007of 2008 increased 5% to $21.1 million from $20.0 million in the first quarter of 2007. PC Postage subscriber related revenue, including service revenue, product revenue and insurance revenue in the first quarter of 2008 was approximately $20$18.1 million, an increase of 10% compared to $16.4 million in the first quarter of 2007. PhotoStamps revenue in the first quarter of 2008 was $3.0 million, a decrease of 3%5% compared to $3.2 million in 2007.
The PC Postage marketing channels we use to acquire customers include partnerships, online advertising, affiliate channel, direct mail, enhanced promotion online channel and others. In the enhanced promotion channel, we work with various companies to advertise our service in a variety of places across the Internet. These companies typically offer an additional promotion 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 believe it is more instructive to look at our enhanced promotion channel separately from our non-enhanced promotion channels.
We estimate that subscriber related revenue for customers acquired through our enhanced promotion channel for the first quarter 2006. Although PC postageof 2008 was $2.5 million, an increase of 5% from $2.4 million in the first quarter of 2007. We estimate that subscriber related revenue was up 2%, PhotoStamps revenue was down 18% year over yearfor customers acquired through our non-enhanced promotion channels for the first quarter.quarter of 2008 was $15.6 million, an increase of 11% from $14.0 million in the first quarter of 2007. The decreasesmaller increase in totalenhanced promotion subscriber revenue resulted mainly fromin relation to the declineincrease in PhotoStampsnon-enhanced promotion revenue which largely resulted fromwas attributable to a decreaseshift in our marketing of PhotoStampsstrategy and customer acquisition spending to focus on our non-enhanced promotion channels.
We define paid customers as ones from whom we successfully collected service fees at least once during the quarter. Total postage printed usingnumber of paid customers originally acquired through our servicenon-enhanced promotion channels during the first quarter 2007of 2008 was up 9% compared to305,000, an increase of 14% from 267,000 in the first quarter 2006. of 2007.
We believe that the increase in paid customers in the first quarter of 2008 was attributable to our increased customer acquisition spending. For customers originally acquired through our non-enhanced promotion channels, our average subscriber related monthly revenue per paid customer in the first quarter of 2008 was $17.00, a decrease of 3% from $17.51 in the first quarter of 2007.
During the first quarter 2007, we addedof 2008, our income tax benefit consists of alternative minimum federal and state taxes and a tax benefit relating to the release of a portion of our PC Postage business approximately 55,000 new paid customers who where successfully billeddeferred tax asset valuation allowance. Our effective income tax rate differs from the statutory income tax rate primarily as a result of the partial release of our valuation allowance for the future benefits to be received from our deferred tax assets as well as our use of net operating losses to offset current tax expense. A valuation allowance was originally recorded against our deferred tax assets as we determined the realization of these assets did not meet the more likely than not criteria in accordance with SFAS No. 109, “Accounting for Income Taxes”. During the first timequarter of 2008, we determined that a full valuation allowance against our deferred tax assets was not necessary. In making such determination we considered all available positive and negative evidence including our recent earnings trend and expected continued future taxable income. During the first quarter of 2008, we lostrecorded a partial reversal of deferred tax valuation allowance of $3.7 million primarily consisting of net operating loss carryforwards and research tax credits carryforwards. We continue to maintain a valuation allowance for the remainder of our deferred tax assets. We recorded a current tax provision for corporate alternative minimum federal and state taxes of approximately 50,000 existing paid customers, resulting$106,000 in the three months ended March 31, 2008. This resulted in an increase during the quarter to net paid customersoverall tax benefit of 5,000.$3.6 million.

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The following table sets forth our results of operationoperations as a percentage of total revenue for the periods indicated:
 
 
Three Months Ended
March 31,
  
Three Months Ended
March 31,
 
 2007 2006  2008 2007 
Total Revenues
              
Service  68% 66%  72% 68%
Product
  12% 12%
Insurance
  2% 2%
PhotoStamps
  16% 19%  14% 16%
Products
  12% 11%
Other  4% 4%  0% 2%
Total revenues  100% 100%  100% 100%
Cost of revenues
              
Service  12% 13%  13% 12%
Product
  4% 4%
Insurance
  1% 1%
PhotoStamps
  10% 12%  10% 10%
Products
  4% 3%
Other  1% 1%  0% 0%
Total cost of revenues
  27% 29%  28% 27%
Gross profit
  73% 71%  72% 73%
Operating expenses:              
Sales and marketing  39% 33%  41% 39%
Research and development
  11% 11%  9% 11%
General and administrative
  14% 15%  19% 14%
Total operating expenses
  64% 59%  69% 64%
Income from operations
  9% 12%  3% 10%
Other income, net  6% 5%
Other income (expense), net  5% 6%
Income before income taxes  15% 17%  8% 16%
Provision for income taxes  0% 0%
Income tax (benefit) expense  (17)% 1%
Net income
  
15
%
 
17
%
  25% 15%
 
Revenue.Revenue Revenue
Our revenue is derived primarily from fourfive sources: (1) service fees charged to customers for use of our PC Postage service; (2) PhotoStamps revenue from the sale of PhotoStamps; (3) product sales consisting of Supplies Store revenue from the direct sale of consumables and supplies; and (4) other revenue consisting of advertising revenue from controlled access advertising tosupplies through our existing customer base,Supplies Store (3) insurance revenue from our branded insurance offering,offering; (4) PhotoStamps revenue from our PhotoStamps business; and (5) other revenue, consisting of licensing revenue.revenue and advertising revenue derived from advertising programs with our existing customers. Total revenue decreasedincreased 5% from $20.5 million in the first quarter 2006 to $20.0 million in the first quarter of 2007 a decrease of 3%. 
Service fee revenue increased from $13.5to $21.1 million in the first quarter 2006 toof 2008.
Service fee revenue increased 11% from $13.7 million in the first quarter of 2007 an increaseto $15.2 million in the first quarter of 2%. 2008. The increase in service fee revenue is primarily due to anthe increase in average service fee revenue per paid customer. Weour successfully billed approximately 324,000 customers duringas a result of the first quarter 2006 and 2007. Average monthly service fee revenue per paidgrowth in our customer increased from $16.68 during the first quarter 2006 to $16.87 during first quarter 2007.base. As a percentage of total revenue, service fee revenue increased twofour percentage points to 72% in the first quarter of 2008 from 68% in the first quarter of 2007, as compared to 66% in the first quarter 2006. The increase in service fee revenueprimarily as a percentageresult of total revenue is attributable to the decrease in revenue from our PhotoStamps product. As a percentage of total revenue, service fee revenue may declinecontinue to increase over future periods ifas we may experience a lower total volume of PhotoStamps corresponding to our reduction in consumer PhotoStamps marketing spending. Further, we plan to continue to increase our level of spending on PC Postage customer acquisition in order to grow our service fee revenue increases in thosefuture periods.
Product revenue increased 5% from $2.4 million in the first quarter of 2007 to $2.5 million in the first quarter of 2008. The increase was primarily attributable to the following: (1) growth in our paid customer base; (2) marketing the store to our existing customer base; (3) the additional SKUs we added to our 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 first quarter of 2008 was $78 million, a 25% increase from the $63 million printed during the first quarter of 2007. We expect product revenue to increase in future periods as we expect continued growth in paid customers and in the volume of postage printed.

15
Insurance revenue increased 4% from $374,000 in the first quarter of 2007 to $388,000 in the first quarter of 2008, primarily as a result of an increase in the average of dollar value insured per transaction. As a percentage of total revenue, insurance revenue remained at 2% during each of the first quarters of 2008 2007. We expect insurance revenue to increase in future periods as we expect continued growth in our paid customer base.
 
PhotoStamps revenue decreased 5% from $3.9 million in the first quarter 2006 to $3.2 million in the first quarter of 2007 a decreaseto $3.0 million in the first quarter of 18%.2008. As a percentage of total revenue, PhotoStamps revenue decreased threetwo percentage points to 14% in the first quarter of 2008 from 16% in the first quarter of 2007 as compared to 19% in the first quarter of 2006. The decrease, both on an absolute basis and as a percentage of total revenue is primarily due to the decline in our PhotoStamps-based marketing efforts during the quarter. In addition, average revenue per PhotoStamps sheet declined due to a higher mix of business PhotoStamps orders, which carry a lower per sheet price.2007. Total PhotoStamps sheets shipped during the first quarter 2007of 2008 was approximately 189,000 as178,000, a 6% decrease compared to 210,000189,000 in the first quarter 2006. PhotoStampsof 2007. Average revenue may grow both on an absolute basis and as a percentage of total revenue in future periods if our level of marketing activityper sheet shipped for PhotoStamps increases. PhotoStamps marketing activity decreased in this period as we focused our marketing efforts towards our PC Postage business.

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Product revenue was approximately $2.4 million in the first quarter 2007of 2008 was $16.85 compared to $16.80 for the first quarter of 2007. The decrease in sheets shipped was primarily attributable to a decrease in consumer PhotoStamps orders. We reduced our PhotoStamps sales and 2006. As a percentage of total revenue, product revenue was 12%marketing spending during the first quarter of 2008 compared with the first quarter of 2007 and 2006. We expect product revenue to increase on an absolute basis as we plan to continue to increasereduce our sales and marketing spending on PhotoStamps in future periods to improve profitability in that business. We expect that the breadth of products offeredreduction will result in our Supplies Store.lower PhotoStamps revenue in future periods.
 
Other revenue decreased 100% from $832,000$453,000 in the first quarter 2006of 2007 to $827,000$0 in the first quarter 2007, aof 2008. The decrease of 1%. As a percentage of total revenue, other revenue was 4% during the first quarter of 2006 and 2007. Included in other revenue is our branded insurance program which was approximately $378,000mainly attributable to the expiration of a licensing agreement in the first quarter 2006 and $375,000 in the first quarter 2007, or approximately 2% of total revenue. We expect other revenue to decrease both on an absolute basis and as a percentage of total revenue in future periods as we focus our marketing efforts on Service fee and PhotoStamps revenue.June 2007.
 
Cost of Revenue. 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. Cost of revenue decreasedincreased 9% from $5.4 million in the first quarter of 2007 to $5.9 million in the first quarter 2006of 2008. As a percentage of total revenue, cost of revenue increased one percentage point to $5.4 million28% in the first quarter 2007, a decrease of 10%.2008 as compared to 27% in the first quarter of 2007.
 
Cost of service revenue decreasedincreased 17% from $2.6 million in the first quarter 2006 to $2.3 million in the first quarter 2007 a decreaseto $2.7 million in the first quarter of 10%.2008. As a percentage of total revenue, cost of service revenue decreasedincreased one percentage point to 13% in the first quarter of 2008 as compared to 12% in the first quarter 2007 as compared to 13% in the first quarter 2006. The decrease, both on an absolute basis and as a percentage of total revenue is mainly attributable to the decrease in the redemption rate of promotional items.
Included2007. Promotional expenses are included in cost of service revenue are promotional expenses.revenue. This includes free postage and a free digital scale offered to new customers, and was approximately $408,000 and $691,000 in the first quarters of 2007 and 2006, respectively. 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. However, the revenue associated with the acquired customer is earned over the customer's lifetime. Therefore, promotional expense for newly acquired customers may be higher than the revenue earned from those customers in that period.
Cost of PhotoStamps revenue decreased from $2.4 million$464,000 in the first quarter 2006 to $2.1 million inof 2007 and the first quarter 2007, a decrease of 14%. As a percentage of total revenue,2008, respectively. The increase in cost of PhotoStamps decreased two percentage points to 10% in the first quarter 2007, as compared to 12% in the first quarter 2006. The decrease,service revenue, both on an absolute basis and as a percentage of total revenue, is primarily due to higher Customer Support related expenses resulting from expanding retention programs and efforts to improve the decreaseoverall customer experience.
Cost of product revenue increased 10% from $799,000 in PhotoStamps sheets orderedthe first quarter 2007 to $880,000 in the first quarter of 2008. As a percentage of total revenue, cost of product revenue was 4% in each of the first quarters of 2007 and 2008. The increase, on an absolute basis, is mainly attributable to the increase in product sales. See “Product Revenue” in Results of Operation above for further discussion. We expect the cost of product sales to increase in future periods, which is consistent with our expectation that product sales will increase in future periods.
Cost of insurance revenue increased 3% from $116,000 in the first quarter of 2007 to $120,000 in the first quarter of 2008. The increase is mainly attributable to the increase in insurance sales as a result of the increase in the average of dollar value insured per transaction. As a percentage of total revenue, cost of insurance revenue was 1% in each of the first quarter of 2007 and the declinefirst quarter of 2008. We expect the cost of insurance to increase in related marketing activity.future periods, which is consistent with our expectation that insurance revenue will increase in future periods.
Cost of PhotoStamps revenue increased 2% from $2.1 million in the first quarter of 2007 to $2.1 million in the first quarter of 2008, primarily due to the increase in high volume business orders. As a percentage of total revenue, cost of PhotoStamps revenue was 10% in each of the first quarter of 2008 and first quarter of 2007. Additionally, the gross margin from PhotoStamps revenue is significantly lower than that of our other sources of revenue because we include the stated value of US Postal ServiceUSPS postage as part of our cost of PhotoStamps revenue. As a result, future increases in PhotoStamps sales would further increase the overall cost of PhotostampsPhotoStamps revenue as a percentage of total revenue. Costrevenue, but would not affect our profitability. While we expect PhotoStamps revenue to decrease in future periods, cost of PhotoStamps revenue may grow both on an absolute basis and asin future periods if high volume business PhotoStamps orders, which carry a lower gross margin compared with PhotoStamps website orders, compose a higher percentage of total revenue in future periods.orders.

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Cost of product revenue increased from $753,000 in the first quarter 2006 to $799,000 in the first quarter 2007, an increase of 6%. The increase is primarily due to the increase in our shipping and handling cost. As a percentage of total revenue, cost of product revenue increased one percentage point to 4% in the first quarter 2007 as compared to 3% in the first quarter 2006. We expect the cost of product sales to increase in future periods, which is consistent with our expectation that product sales may also increase in future periods.
 
Cost of other revenue decreased 100% from $143,000$25,000 in the first quarter 2006of 2007 to $141,000$0 in the first quarter 2007, a decrease of 1%. The decrease is2008, primarily due to the decreaseexpiration of one of our licensing agreements in insurance premium cost of sales. As a percentage of total revenue, cost of other revenue remained at 1% during the first quarters of 2007 and 2006.June 2007.
 
Sales and Marketing. Marketing
Sales and marketing expense principally consists of costs associated with strategic partnership relationships, advertising,spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing and business development activities. Sales and marketing expense increased 10% from $6.8million in the first quarter 2006 to $7.8million in the first quarter 2007 an increaseto $8.6 million in the first quarter of 15%.2008. As a percentage of total revenue, sales and marketing expenseexpenses increased sixtwo percentage points to 41% in the first quarter of 2008 from 39% in the first quarter 2007 as compared to 33% in the first quarter 2006.of 2007. The increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in various marketing program expenditures relating to the acquisition of customers for our PC Postage business, partially offset by a decrease in marketing expenditures related to PhotoStamps.our PhotoStamps business. Ongoing marketing programs include the following: traditional advertising, partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct mail and online advertising. We currently expect to increase our sales and marketing expenses in our PC Postage business throughout 2008, and to increase significantlydecrease sales and marketing expenses in fiscal 2007 as compared to fiscal 2006our PhotoStamps business as we plan to increase our marketing activityfocus on profitability in order to increase customer acquisition as we plan to increase our direct mail activity.that business.
 

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Research and Development. 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 expenseexpenses decreased 9% from $2.3 million in the first quarter 2006 to $2.1 million in the first quarter of 2007 a decreaseto $1.9 million in the first quarter of 8%.2008. This decrease is primarily due to the decrease in SFAS 123R stock-based compensation and temporary laborlower headcount related expenses. As a percentage of total revenue, research and development expense wasdecreased two percentage points from 11% in the first quartersquarter of 2007 and 2006.to 9% in the first quarter of 2008. We currently expect research and development expensesexpense to increase in fiscal 2007 as comparedfuture periods due to fiscal 2006 as we plan to hire additional employeesexpected increase in this area.headcount related expenses.
 
General and Administrative. 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 decreasedincreased 44% from $3.2 million in the first quarter 2006 to $2.7 million in the first quarter of 2007 a decreaseto $3.9 million in the first quarter of 13%. The decrease in general and administrative expense is primarily due to the decrease in legal expense.2008. As a percentage of total revenue, general and administrative expense decreased oneincreased five percentage pointpoints to 19% in the first quarter of 2008 from 14% in the first quarter 2007 as compared to 15% in theof 2007. The first quarter 2006.of 2008 general and administrative expense included $445,000 for an asset write-off of packaging material primarily relating to PhotoStamps. The increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in legal expenses relating to existing litigation and the asset write-off. We currently expect general and administrative expenses to continue to increase in fiscal 2007 as compared2008 primarily due to fiscal 2006 as we expect an increase in legal activity and spending as a result of increased activity in existing litigation.
 
Other Income, Net. Net
Other income, net consists of interest income from cash equivalents and short-term and long-term investments. Other income, net increaseddecreased 23% from $1.1 million in the first quarter 2006 to $1.2 million in the first quarter of 2007 an increaseto $938,000 in the first quarter of 13%.2008. As a percentage of total revenue, other income, net increaseddecreased one percentage point to 5% in the first quarter of 2008 as compared to 6% in the first quarter 2007 as compared to 5% in the first quarter 2006.of 2007. The increase,decrease, both on an absolute basis and as a percentage of total revenue, is primarily due to lower rates and lower investment balances as we sold certain investments and used the increasecash to repurchase shares of our common stock. We expect other income to decrease in future periods as a result of lower invested cash balance and lower interest rates.
 

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Liquidity and Capital Resources
 
As of March 31, 20072008 and 2006December 31, 2007 we had approximately $104$90.3 million and $114$90.8 million, respectively, in cash, restricted cash and short-term and long-term investments. We invest available funds in short and long-term securities including money market funds, commercial paper, corporate notesbonds, asset backed securities, and municipal securitiesgovernment 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 new corporate headquarters with aggregate lease payments of approximately $4 million through February 2010.
 
The following table is a schedule of our contractual obligations and commercial commitments, which is comprised of the future minimum lease payments under operating leases at March 31, 20072008 (in thousands):
 
 
Operating
  
Operating
 
Nine months ending December 31, 2007 $536 
Nine months ending December 31, 2008 $568 
Years ending December 31:        
2008
  751 
2009
  794   794 
2010
  134   134 
2011
  -   - 
 $2,215  $1,496 
    
 


During the first quarter 2007of 2008, we repurchased approximately 370,000484,000 shares of common stock for approximately $5.3$4.5 million. We will consider repurchasing stock throughout our current repurchase program by evaluating such factors as the price of the stock, the daily trading volume and the availability of large blocks and any additional constraints because of material inside information we may possess.
 
Net cash provided by operating activities was $2.5$4.3 million and $5$2.5 million during the three months ended March 31, 20072008 and 2006,2007, respectively. The decreaseincrease in net cash provided by operating activities resulted primarily from the payment of marketing expenses which principally consist of costs associated with strategic partnership relationships and advertising.increase in service revenue.
 
Net cash provided by investing activities was $7.8 million and $5.8 million during the three months ended March 31, 2007. Net cash used in investing activities was $8.2 million during the three months ended March 31, 2006.2008 and 2007, respectively. The decreaseincrease in net cash used inprovided by investing activities resulted primarily from the sale of investments to fund the repurchase of stock, as noted above.
 
Net cash used in financing activities was $4.3 million and $4.8million during the three months ended March 31, 2007. Net cash provided by financing activities was $5.3million during the three months ended March 31, 2006.2008 and 2007, respectively. The decrease in net cash provided byused in financing activities resulted primarily from the repurchase oflower average price paid per share for our stock repurchase in the first quarter of 2008 as noted above.compared to the first quarter of 2007.
 
We believe our available cash and marketable securities, together with the cash flow from operations, will be sufficient to fund our business for the foreseeable future.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. Our cash equivalents and investments are comprised of money market, U.S. government obligations and public corporate debt securities with weighted average maturities of 288139 days at March 31, 2007.2008. Our cash equivalents and investments, net of restricted cash, approximated $103$89.7 million and had a related weighted average interest rate of approximately 5.31%3.6%. Interest rate fluctuations can impact the carrying value of theour portfolio. We do not believe that the future market risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity.

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ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
OurWe maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
As of the end of the period covered by this Report, our management evaluated, with the participation of the Chiefour Principal Executive Officer and ChiefPrincipal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chiefour Principal Executive Officer and ChiefPrincipal Financial Officer have concluded, as of that time, that our disclosure controls and procedures were effective as ofin ensuring that information required to be disclosed by us in reports filed or submitted under the end ofExchange Act (i) is recorded, processed, summarized and reported within the period covered by this report.time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls
 
During the firstthird quarter ended March 31, 2007,2008, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II -– OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
On October 22, 2004, Kara Technology Incorporated filed suit against us in the United States District Court for the Southern District of New York, alleging, among other claims, that Stamps.comwe infringed certain Kara Technology patents and that Stamps.comwe misappropriated trade secrets owned by Kara Technology, most particularly with respect to our NetStamps feature. Kara Technology seeks an injunction, unspecified damages, and attorneys’ fees. On February 9, 2005, the court granted our motion to transfer this suit to the United States District Court for the Central District of California. On August 23, 2006, the court granted our summary judgment motions on the trade secret and other non-patent claims. The court has scheduledissued a “Markman” hearing to construeruling, construing the terms of the Kara Technology patents for May 31, 2007,on September 10, 2007. On April 3, 2008, the court granted our summary judgment motion that PhotoStamps does not infringe and denied our summary judgment motions that NetStamps does not infringe and the patents are invalid. The Court has scheduled a trial commencement date of July 31, 2007. We dispute Kara Technology’s claims and intend to defend the lawsuit vigorously.June 10, 2008.
 
On November 22, 2006, we filed a lawsuit against Endicia, Inc. and PSI Systems, Inc. in the United States District Court for the Central District of California for infringement of 11 Stamps.comeleven of our patents covering, among other things, Internet postage technology. On January 8, 2007, Endicia, Inc. and PSI Systems, Inc. filed counterclaims asking for a declaratory judgment that all 11eleven patents are invalid, unenforceable and not infringed. We dispute the counterclaims and intend to prosecute the lawsuit vigorously.The Court has scheduled a trial commencement date of January 6, 2009.
 
In May and June 2001, we were named, together with certain of our current and former board members and/or officers, as a defendant in 11 purported class-action lawsuits, filed in the U.S. District Court for the Southern District of New York. The lawsuits allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with our initial public offering and a secondary offering of our common stock. The lawsuits also name as defendants the principal underwriters in connection with our public offerings, and allege that the underwriters engaged in improper commission practices and stock price manipulations in connection with the sale of our common stock. The lawsuits allege that we and/or certain of our officers or directors knew of or recklessly disregarded these practices by the underwriter defendants, and failed to disclose them in our public filings. Plaintiffs seek damages and statutory compensation, including interest, costs and expenses (including attorneys’ fees). Over 1,000 similar lawsuits have been brought against over 250 companies which issued stock to the public in 1998-2000, and their underwriters. All of these lawsuits have been consolidated for pretrial purposes before U.S. District Court Judge Shira Scheindlin.
 
In October 2002, pursuant to a stipulation and tolling agreement with plaintiffs, our current and former board members and/or officers were dismissed from these lawsuits without prejudice. That agreement was extended as to those individuals by an addendum dated as of September 2007. In June 2003, we approved a proposed Memorandum of Understanding among the plaintiffs, issuers and insurers as to terms for a settlement of the litigation against us, which was further documented in a Stipulation and Agreement of Settlement filed with the court. The proposed settlement, which would not require Stamps.comhave required us to make any payments, was preliminarily approved by the court in February 2005 and was the subject of a fairness hearing in April 2006, but remains subject to final approval by the court.
We have placed our underwriters on notice of our rights to indemnification, pursuant to our agreements with the underwriters, but under the terms of the proposed settlement, we cannot assert these claims except as a defense to a claim against us by the underwriters. We have also provided notice to our directors' and officers' insurers who have agreed to fund the proposed settlement.2006.
 
In October 2004, however, the court issued an order regarding class certification in certain related matters. In December 2006, the U.S. Court of Appeals for the Second Circuit vacated that order, and determined that the related matters could not be certified as a class as currently defined. TheThat appellate court's decision rendersrendered uncertain whether our proposed settlement cancould be finally approved and consummated. Ifconsummated, and, in June 2007, the proposed settlement was terminated. As a result, plaintiffs have filed an amended complaint and proposed an alternative class definition in related litigation. If such a class definition does not receive final court approval and/or a later settlement is not consummated for any reason, we intend to defend the lawsuits vigorously because wevigorously.
On August 30, 2007, Sterling Realty Organization Co. filed suit against us in the Superior Court for the State of Washington for King County, alleging they are entitled under the doctrine of equitable subrogation to recover a $575,929 sales tax related payment for improvements under a lease related to our discontinued iShip business. The lawsuit also seeks pre-judgment interest and costs. On March 7, 2008, the Court granted our motion for summary judgment under the doctrine of equitable subrogation, but also granted the plaintiff’s motion to amend the complaint to allege indemnification and breach of the lease.
We are subject to various other routine legal proceedings and claims incidental to our business, or which involve primarily a claim for damages that does not exceed 10% of our consolidated assets. We believe that the claims against us andultimate results from these actions will not have a material adverse effect on our officers and directors are without merit.
We are not currently involved in any other material legal proceedings, nor are we awarefinancial position, results of any other material legal proceedings pending against us.operations or cash flows.

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ITEM 1A. RISK FACTORS
 
You should carefully considerThere have been no material changes from the following risks and the other informationrisk factors disclosed in this Report and our other filings with the SEC before you decide to invest in our company or to maintain or increase your investment. The risks and uncertainties described below are not the only ones facing Stamps.com. Additional risks and uncertainties may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In that case, the trading pricePart 1, Item 1A, of our common stock could decline, and you may lose all or part of your investment.
This2007 Annual Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about Stamps.com and the Internet. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including those described in this section and elsewhere in this Report. Stamps.com does not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Risks Related to Our Business
We may not successfully implement strategies to increase the adoption of our services and products which would limit our growth, adversely affect our business and cause the price of our common stock to decline.
Our continuing profitability depends on our ability to successfully implement our strategy of increasing the adoption of our services and products. Factors that might cause our revenues, margins and operating results to fluctuate include the factors described in the subheadings below as well as:
·The costs of our marketing programs to establish and promote the Stamps.com brands;
·The demand for our services and products;
·Our ability to develop and maintain strategic distribution relationships;
·The number, timing and significance of new products or services introduced by us and by our competitors;
·Our ability to develop, market and introduce new and enhanced products and services on a timely basis;
·The level of service and price competition;
·Our operating expenses;
·US Postal Service regulation and policies relating to PC Postage and PhotoStamps; and
·General economic factors.
We implemented pricing plans that may adversely affect our future revenues and margins.
Our ability to generate gross margins depends upon the ability to generate significant revenues from a large base of active customers. In order to attract customers in the future, we may run special promotions and offers such as free trials, discounts on fees, postage and supplies, and other promotions. We cannot be sure that customers will be receptive to future fee structures and special promotions that we may implement. Even though we have established a sizeable base of users, we still may not generate sufficient gross margins to remain profitable. In addition, our ability to generate revenues or sustain profitability could be adversely affected by the special promotions or additional changes to our pricing plans.

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If we do not successfully attract and retain skilled personnel for permanent management and other key personnel positions, we may not be able to effectively implement our business plan.
Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel. Any of the individuals can terminate his or her employment with us at any time. If we lose key employees and are unable to replace them with qualified individuals, our business and operating results could be seriously harmed. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled personnel. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel. Further, we may be unable to retain the employees we currently employ or attract additional qualified personnel to replace those key employees that may depart. The failure to attract and retain the necessary personnel could seriously harm our business, financial condition and results of operations.
The success of our business will depend upon the continued acceptance by customers of our service.
We must minimize the rate of loss of existing customers while adding new customers. Customers cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently. That the costs for service are too high, because they are going out of business, or other issues that are not satisfactorily resolved. We must continually add new customers both to replace customers who cancel and to continue to grow our business beyond our current customer base. If too many of our customers cancel our service, or if we are unable to attract new customers in numbers sufficient to grow our business, our operating results will be adversely affected. Further, if excessive numbers of customers cancel our service, we may be required to incur significantly higher marketing expenditures than we currently anticipate to replace these customers with new customers.
If we fail to effectively market and sell our services and products, our business will be substantially harmed and could fail.
In order to acquire customers and achieve widespread distribution and use of our services and products, we must develop and execute cost-effective marketing campaigns and sales programs. We currently rely on a combination of marketing techniques to attract new customers including direct mail, online marketing and business partnerships. We may be unable to continue marketing our services and products in a cost-effective manner. If we fail to acquire customers in a cost-effective manner, our results of operations will be adversely affected.
If we fail to meet the demands of our customers, our business will be substantially harmed and could fail.
Our services and products must meet the commercial demands of our customers, which include home businesses, small businesses, corporations and individuals. We cannot be sure that our services will appeal to or be adopted by an ever-growing range of customers. If we are unable to ship products such as items from our Supplies Store or PhotoStamps in a timely manner to our customers, our business may be harmed. Moreover, our ability to obtain and retain customers depends, in part, on our customer service capabilities. If we are unable at any time to address customer service issues adequately or to provide a satisfactory customer experience for current or potential customers, our business and reputation may be harmed. If we fail to meet the demands of our customers our results of operations will be adversely affected.
A failure to further develop and upgrade our services and products could adversely affect our business.
Any delays or failures in developing our services and products, including upgrades of current services and products, may have a harmful impact on our results of operations. The need to extend our core technologies into new features and services and to anticipate or respond to technological changes could affect our ability to develop these services and features. Delays in features or upgrade introductions could cause a decline in our revenue, earnings or stock price. We cannot determine the ultimate effect these delays or the introduction of new features or upgrades will have on our revenue or results of operations.
Increases in payment processing fees would increase our operating expenses and adversely affect our results of operations.
Our customers pay for our services predominately using credit cards and debit cards and, to a lesser extent, by use of automated clearing house, (“ACH”). Our acceptance of these payment methods requires our payment of certain fees. From time to time, these fees may increase, either as a result of rate changes by the payment processing companies or as a result in a change in our business practices which increase the fees on a cost-per-transaction basis. If these fees for accepting payment methods increase in future periods, it may adversely affect our results of operations.

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A decline in our ability to effectively bill our customers by credit card and debit card would adversely affect our results of operations.
Our ability to effectively charge our customers through credit cards and debit cards is subject to many variables, including our own billing technology and practices, the practices and rules of payment processing companies, and the practices and rules of issuing financial institutions. If we do not effectively charge and bill our customers in future periods through credit cards and debit cards, it would adversely affect our results of operations.
Third party assertions of violations of their intellectual property rights could adversely affect our business.
Substantial litigation regarding intellectual property rights exists in our industry. Third parties may currently have, or may eventually be issued, patents upon which our products or technology infringe. Any of these third parties might make a claim of infringement against us. We may become aware of, or we may increasingly receive correspondence claiming, potential infringement of other parties’ intellectual property rights. We could incur significant costs and diversion of management time and resources to defend claims against us regardless of their validity. Any associated costs and distractions could have a material adverse effect on our business, financial condition and results of operations. In addition, litigation in which we are accused of infringement might cause product development delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements, which might not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could be significantly harmed or fail. Any loss resulting from intellectual property litigation could severely limit our operations, cause us to pay license fees, or prevent us from doing business.
A failure to protect our own intellectual property could harm our competitive position.
We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our rights in our products, services, know-how and information. We have 59 issued US patents, 86 pending US patent applications, 9 international patents and 9 pending international patent applications. We also have a number of registered and unregistered trademarks. We plan to apply for more patents in the future. We may not receive patents for any of our patent applications. Even if patents are issued to us, claims issued in these patents may not protect our technology. In addition, a court might hold any of our patents, trademarks or service marks invalid or unenforceable. Even if our patents are upheld or are not challenged, third parties may develop alternative technologies or products without infringing our patents. If our patents fail to protect our technology or our trademarks and service marks are successfully challenged, our competitive position could be harmed. We also generally enter into confidentiality agreements with our employees, consultants and other third parties to control and limit access and disclosure of our confidential information. These contractual arrangements or other steps taken to protect our intellectual property may not prove to be sufficient to prevent misappropriation of technology or deter independent third party development of similar technologies. Additionally, the laws of foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the United States.
System and online security failures could harm our business and operating results.
Our services depend on the efficient and uninterrupted operation of our computer and communications hardware systems. In addition, we must provide a high level of security for the transactions we execute. We rely on internally-developed and third-party technology to provide secure transmission of postage and other confidential information. Any breach of these security measures would severely impact our business and reputation and would likely result in the loss of customers. Furthermore, if we are unable to provide adequate security, the US Postal Service could prohibit us from selling postage over the Internet.
Our systems and operations are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, telecommunications failure, break-ins, earthquakes and similar events. Our Internet host provider does not guarantee that our Internet access will be uninterrupted, error-free or secure. Our servers are also vulnerable to computer viruses, physical, electrical or electronic break-ins and similar disruptions. We have experienced minor system interruptions in the past and may experience them again in the future. Any substantial interruptions in the future could result in the loss of data and could completely impair our ability to generate revenues from our service. We do not presently have a full disaster recovery plan in effect to cover the loss of facilities and equipment. In addition, we do not have a fail-over site that mirrors our infrastructure to allow us to operate from a second location. We have business interruption insurance; however, we cannot be certain that our coverage will be sufficient to compensate us for losses that may occur as a result of business interruptions.

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A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Anyone who is able to circumvent our security measures could misappropriate confidential information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by any breach. We rely on specialized technology from within our own infrastructure to provide the security necessary for secure transmission of postage and other confidential information. Advances in computer capabilities, new discoveries in security technology, or other events or developments may result in a compromise or breach of the algorithms we use to protect customer transaction data. Should someone circumvent our security measures, our reputation, business, financial condition and results of operations could be seriously harmed. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information. As a result, we may be required to expend a significant amount of financial and other resources to protect against security breaches or to alleviate any problems that they may cause.
Risks Related to Our Industry
US Postal Service regulations or fee assessments may cause disruptions or discontinuance of our business.
We are subject to continued US Postal Service scrutiny and other government regulations. The availability of our services is dependent upon our service continuing to meet US Postal Service performance specifications and regulations. The US Postal Service could change its certification requirements or specifications for PC Postage or revoke or suspend the approval of one or more of our services at any time. If at any time our service fails to meet US Postal Service requirements, we may be prohibited from offering this service and our business would be severely and negatively impacted. In addition, the US Postal Service could suspend or terminate our approval or offer services which compete against us, any of which could stop or negatively impact the commercial adoption of our service. Any changes in requirements or specifications for PC Postage could adversely affect our pricing, cost of revenues, operating results and margins by increasing the cost of providing our service.
The US Postal Service could also decide that PC Postage should no longer be an approved postage service due to security concerns or other issues. Our business would suffer dramatically if we are unable to adapt our services to any new requirements or specifications or if the US Postal Service were to discontinue PC Postage as an approved postage method. Alternatively, the US Postal Service could introduce competitive programs or amend PC Postage requirements to make certification easier to obtain, which could lead to more competition from third parties or the US Postal Service itself. If we are unable to compete successfully, particularly against large, traditional providers of postage products like Pitney Bowes who enter the online postage market, our revenues and operating results will suffer.
The US Postal Service could decide to suspend or cancel the current market test of PhotoStamps, and may do so in the event that there is sufficient cause to believe that the market test presents unacceptable risk to US Postal Service revenues, degrades the ability of the US Postal Service to process or deliver mail produced by the test participants, exposes the US Postal Service or its customers to legal liability, or causes public or political embarrassment or harm to the US Postal Service in any way. If the US Postal Service decides to suspend or cancel the market test of PhotoStamps, our revenues and operating results will likely suffer.
Additionally, the US Postal Service could decide to amend, renegotiate or terminate our credit card cost sharing agreement, which is a key agreement that governs the allocation of credit card fees paid by the US Postal Service and us for the postage purchased by our customers. If the US Postal Service decides to amend, renegotiate or terminate our credit card cost sharing agreement, our revenues and operating results will likely suffer.
In addition, US Postal Service regulations may require that our personnel with access to postal information or resources receive security clearance prior to doing relevant work. We may experience delays or disruptions if our personnel cannot receive necessary security clearances in a timely manner, if at all. The regulations may limit our ability to hire qualified personnel. For example, sensitive clearance may only be provided to US citizens or aliens who are specifically approved to work on US Postal Service projects.

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If we are unable to compete successfully, particularly against large, traditional providers of postage products such as Pitney Bowes, our revenues and operating results will suffer.
The PC Postage segment of the market for postage is relatively new and is competitive. At present, Pitney Bowes and Endicia.com are authorized PC Postage providers with commercially available software and Zazzle.com and FujiFilm offer a competitive product to PhotoStamps using Pitney Bowes technology. If any more providers become authorized, or if Pitney Bowes or Endicia.com provide enhanced offerings, our operations could be adversely impacted. We also compete with other forms of postage, including traditional postage meters provided by companies such as Pitney Bowes, postage stamps and permit mail.
We may not be able to establish or maintain a competitive position against current or future competitors as they enter the market. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition, greater financial, marketing, service, support, technical, intellectual property and other resources than us. As a result, our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to web site and systems development than us. This increased competition may result in reduced operating margins, loss of market share and a diminished brand. We may from time to time make pricing, service or marketing decisions or acquisitions as a strategic response to changes in the competitive environment. These actions could result in reduced margins and seriously harm our business.
We could face competitive pressures from new technologies or the expansion of existing technologies approved for use by the US Postal Service. We may also face competition from a number of indirect competitors that specialize in electronic commerce and other companies with substantial customer bases in the computer and other technical fields. Additionally, companies that control access to transactions through a network or Web browsers could also promote our competitors or charge us a substantial fee for inclusion. In addition, changes in postal regulations could adversely affect our service and significantly impact our competitive position. We may be unable to compete successfully against current and future competitors, and the competitive pressures we face could seriously harm our business.
If we do not respond effectively to technological change, our services and products could become obsolete and our business will suffer.
The development of our services, products and other technology entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online operations. The Internet and the electronic commerce industry are characterized by rapid technological change; changes in user and customer requirements and preferences; frequent new product and service introductions embodying new technologies; and the emergence of new industry standards and practices.
The evolving nature of the Internet or the postage markets could render our existing technology and systems obsolete. Our success will depend, in part, on our ability to license or acquire leading technologies useful in our business; enhance our existing services; develop new services or features and technology that address the increasingly sophisticated and varied needs of our current and prospective users; and respond to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible with, our business. Furthermore, we may not be successful in using new technologies effectively or adapting our technology and systems to user requirements or emerging industry standards on a timely basis. Our ability to remain technologically competitive may require substantial expenditures and lead time. If we are unable to adapt in a timely manner to changing market conditions or user requirements, our business, financial condition and results of operations could be seriously harmed.
Our operating results could be impaired if we or the Internet become subject to additional government regulation and legal uncertainties.
Due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to user privacy, pricing, content, copyrights, distribution, characteristics and quality of products and services, and export controls.
The adoption of any additional laws or regulations may hinder the expansion of the Internet. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many issues, including property ownership, export of specialized technology, sales tax, libel and personal privacy. Our business, financial condition and results of operations could be seriously harmed by any new legislation or regulation. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could also harm our business.

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We have employees and offer our services in multiple states, and we may in the future expand internationally. These jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each state or foreign country. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Other states and foreign countries may also attempt to regulate our services or prosecute us for violations of their laws. Further, we might unintentionally violate the laws of foreign jurisdictions and those laws may be modified and new laws may be enacted in the future.
Risks Related to Our Stock
Changes in stock option accounting rules will have an adverse affect on our operating results.
We use options to acquire our common stock to attract, incentivize and retain our employees in a competitive marketplace. Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” allowed companies the choice of either using a fair value method of accounting for options that would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. Prior to our adoption of SFAS No. 123 (revised 2004), “Share Based Payment,” or Statement 123R, on January 1, 2006, we had elected to apply APB No. 25 and accordingly we generally did not recognize any expense with respect to employee options to acquire our common stock in periods ended on or prior to December 31, 2005 as long as such options were granted at exercise prices equal to the fair value of our common stock on the date of grant.
Statement 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. This cost will be measured based on the fair value of the equity instruments issued. We adopted Statement 123R on January 1, 2006, which is the first day of our 2006 fiscal year. We expect the adoption of Statement 123R to have an adverse effect on our operating results, as we continue to use options to attract, incentivize and retain our employees.
The tax value of our net operating losses could be impaired if we trigger a change of control pursuant to Section 382 of the Internal Revenue Code.
Under Internal Revenue Code Section 382 rules, a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more five-percent shareholders within a three-year period. When a change of ownership is triggered, the NOLs may be impaired. We estimate that, as of March 31, 2007 we were approximately at 25% compared with the 50% level that would trigger impairment of our NOL asset. As part of our ongoing program to preserve future use of our NOL assets, Stamps.com requests that all of our investors contact us prior to allowing their ownership interest to reach a five-percent level.
Our charter documents could deter a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares.
The provisions of our certificate of incorporation, bylaws and Delaware law could make it difficult for a third party to acquire us, even if it would be beneficial to our stockholders. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which could prohibit or delay a merger or other takeover of our Company, and discourage attempts to acquire us.
The US Postal Service may object to a change of control of our common stock.
The US Postal Service may raise national security or similar concerns to prevent foreign persons from acquiring significant ownership of our common stock or of Stamps.com. The US Postal Service also has regulations regarding the change of control of approved PC Postage providers. These concerns may prohibit or delay a merger or other takeover of our Company. Our competitors may also seek to have the US Postal Service block the acquisition by a foreign person of our common stock or our Company in order to prevent the combined company from becoming a more effective competitor in the market for PC Postage.

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Our stock price is volatile
The price at which our common stock has traded since our initial public offering in June 1999 has fluctuated significantly. The price may continue to be volatile due to a number of factors, including the following, some of which are beyond our control:
·variations in our operating results,
·variations between our actual operating results and the expectations of securities analysts,
·investors and the financial community,
·announcements of developments affecting our business, systems or expansion plans by us or others,
·and market volatility in general.
As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above their original purchase price. In the past, securities class action litigation often has been instituted against companies following periods of volatility in the market price of their securities. This type of litigation, if directed at us, could result in substantial costs and a diversion of management’s attention and resources.
Shares of our common stock held by existing stockholders may be sold into the public market, which could cause the price of our common stock to decline.
If our stockholders sell into the public market substantial amounts of our common stock purchased in private financings prior to our initial public offering, or purchased upon the exercise of stock options or warrants, or if there is a perception that these sales could occur, the market price of our common stock could decline. All of these shares are available for immediate sale, subject to the volume and other restrictions under Rule 144 of the Securities Act of 1933.Form 10-K.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 
 
We did not have any unregistered sales of common stock during the first quarter ended March 31, 2007.2008.
 
Issuer Purchases of Equity Securities

PeriodTotal Number of shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 1, 2007 -
January 31, 2007
368,357$14.41368,357$ 7,997,000
February 1, 2007 -
February 28, 2007
———$ 27,997,000
March 1, 2007 -
March 31, 2007
1,800$14.001,800$ 27,972,000
During the first quarter of 2008, we purchased our common stock as described in the following table:
 

Period Total Number of shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 
Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
(in 000’s)
 
January 1, 2008 - January 31, 2008  —  —  —  — 
February 1, 2008 - February 29, 2008  —  —  —  — 
March 1, 2008 - March 31, 2008  484,000 $9.30  484,000 $6,659 
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We have approximately 716,000 shares of common stock authorized for repurchase under our current stock purchase program.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS 
 
31.1Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 STAMPS.COM INC.
 (Registrant)
   
May 10, 20079, 2008By:/s/ KEN MCBRIDE
 
Ken McBride
Chief Executive Officer
   
May 10, 20079, 2008By:/s/ KYLE HUEBNER
 
Kyle Huebner
Chief Financial Officer