UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)




þ
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.




For the quarterly period ended June
30, 2010




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.
      Employerincorporation
      or organization)
            Identification
      No.)





12959
Coral Tree Place


Los
Angeles, California 90066


(Address
of principal executive offices, including zip code)





(310)
482-5800


(Registrant’s telephone
number, including area code)








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 þ   No
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    Yes  ̈   No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer  o
                Accelerated
      filer  þNon-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
þ




As of
July 31, 2010, there were approximately 14,272,502 shares of the Registrant’s
Common Stock issued and outstanding.










STAMPS.COM
INC. AND SUBSIDIARY


FORM
10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2010




TABLE
OF CONTENTS




PagePART
      I - FINANCIAL INFORMATION
                    2ITEM
      1.
                    FINANCIAL
      STATEMENTS
                    2ITEM
      2.
                    MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                    14ITEM
      3.
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                    22ITEM
      4.
                    CONTROLS
      AND PROCEDURES
                    22PART
      II – OTHER INFORMATION
                    23ITEM
      1.
                    LEGAL
      PROCEEDINGS
                    23ITEM 1A.
                    RISK
      FACTORS
                    23ITEM
      2.
                    UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                    23ITEM
      3.
                    DEFAULTS
      UPON SENIOR SECURITIES
                    23ITEM
      4.
                    RESERVED
                    23ITEM
      5.
                    OTHER
      INFORMATION
                    23ITEM
      6.
                    EXHIBITS
                    23


1


PART
I - FINANCIAL INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS




STAMPS.COM
INC.  AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except per share data)




June 30,
                        
                        
                        December 31,2010
                        
                        
                        2009(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        30,405
                        
                        
                        $
                        45,011Restricted
      cash
                        
                        
                        —
                        
                        
                        
                        554Short-term
      investments
                        
                        
                        6,160
                        
                        
                        
                        2,224Accounts
      receivable, net
                        
                        
                        4,058
                        
                        
                        
                        4,367Other
      current assets
                        
                        
                        3,772
                        
                        
                        
                        3,288Total
      current assets
                        
                        
                        44,395
                        
                        
                        
                        55,444Property
      and equipment, net
                        
                        
                        2,361
                        
                        
                        
                        2,102Intangible
      assets, net
                        
                        
                        897
                        
                        
                        
                        498Long-term
      investments
                        
                        
                        28,129
                        
                        
                        
                        23,956Deferred
      income taxes.
                        
                        
                        7,650
                        
                        
                        
                        3,671Other
      assets
                        
                        
                        3,620
                        
                        
                        
                        3,587Total
      assets
                        
                        $
                        87,052
                        
                        
                        $
                        89,258Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
                        
                        $
                        14,741
                        
                        
                        $
                        9,583Deferred
      revenue
                        
                        
                        4,202
                        
                        
                        
                        4,070Total
      current liabilities
                        
                        
                        18,943
                        
                        
                        
                        13,653Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.001 par valueAuthorized
      shares: 47,500 in 2010 and 2009Issued
      shares: 24,472 in 2010 and 24,429 in 2009Outstanding
      shares: 14,292 in 2010 and 15,681 in 2009
                        
                        
                        47
                        
                        
                        
                        47Additional
      paid-in capital
                        
                        
                        632,015
                        
                        
                        
                        630,322Accumulated
      deficit
                        
                        
                        (447,128
                        )
                        
                        
                        (450,214
                        )Treasury
      stock, at cost, 10,180 shares in 2010 and 8,748 shares in
    2009
                        
                        
                        (117,240
                        )
                        
                        
                        (104,344
                        )Accumulated
      other comprehensive income (loss)
                        
                        
                        415
                        
                        
                        
                        (206
                        )Total
      stockholders’ equity
                        
                        
                        68,109
                        
                        
                        
                        75,605Total
      liabilities and stockholders’ equity
                        
                        $
                        87,052
                        
                        
                        $
                        89,258





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


2


STAMPS.COM
INC.  AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME


(In
thousands, except per share data)


(Unaudited)




Three Months Ended
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Revenues:Service
                    
                    $
                    16,172
                    
                    
                    $
                    15,207
                    
                    
                    $
                    32,190
                    
                    
                    $
                    30,521Product
                    
                    
                    2,809
                    
                    
                    
                    2,580
                    
                    
                    
                    5,882
                    
                    
                    
                    5,197Insurance
                    
                    
                    392
                    
                    
                    
                    395
                    
                    
                    
                    786
                    
                    
                    
                    799PhotoStamps
                    
                    
                    1,816
                    
                    
                    
                    1,995
                    
                    
                    
                    3,317
                    
                    
                    
                    3,708Other
                    
                    
                    —
                    
                    
                    
                    5
                    
                    
                    
                    3
                    
                    
                    
                    5Total
      revenues
                    
                    
                    21,189
                    
                    
                    
                    20,182
                    
                    
                    
                    42,178
                    
                    
                    
                    40,230Cost
      of revenues:Service
                    
                    
                    3,253
                    
                    
                    
                    2,872
                    
                    
                    
                    6,736
                    
                    
                    
                    5,880Product
                    
                    
                    1,081
                    
                    
                    
                    1,030
                    
                    
                    
                    2,220
                    
                    
                    
                    1,975Insurance
                    
                    
                    118
                    
                    
                    
                    123
                    
                    
                    
                    232
                    
                    
                    
                    248PhotoStamps
                    
                    
                    1,372
                    
                    
                    
                    1,521
                    
                    
                    
                    2,450
                    
                    
                    
                    2,821Total
      cost of revenues
                    
                    
                    5,824
                    
                    
                    
                    5,546
                    
                    
                    
                    11,638
                    
                    
                    
                    10,924Gross
      profit
                    
                    
                    15,365
                    
                    
                    
                    14,636
                    
                    
                    
                    30,540
                    
                    
                    
                    29,306Operating
      expenses:Sales
      and marketing
                    
                    
                    7,622
                    
                    
                    
                    8,227
                    
                    
                    
                    15,606
                    
                    
                    
                    16,291Research
      and development
                    
                    
                    2,219
                    
                    
                    
                    2,199
                    
                    
                    
                    4,389
                    
                    
                    
                    4,426General
      and administrative
                    
                    
                    3,524
                    
                    
                    
                    3,306
                    
                    
                    
                    6,491
                    
                    
                    
                    6,570Legal
      settlements and reserves
                    
                    
                    5,211
                    
                    
                    
                    —
                    
                    
                    
                    5,211
                    
                    
                    
                    —Total
      operating expenses
                    
                    
                    18,576
                    
                    
                    
                    13,732
                    
                    
                    
                    31,697
                    
                    
                    
                    27,287Income
      (loss) from operations
                    
                    
                    (3,211
                    )
                    
                    
                    904
                    
                    
                    
                    (1,157
                    )
                    
                    
                    2,019Interest
      and other income, net
                    
                    
                    230
                    
                    
                    
                    232
                    
                    
                    
                    401
                    
                    
                    
                    589Income
      (loss) before income taxes
                    
                    
                    (2,981
                    )
                    
                    
                    1,136
                    
                    
                    
                    (756
                    )
                    
                    
                    2,608Income
      tax (benefit) expense
                    
                    
                    (3,922
                    )
                    
                    
                    84
                    
                    
                    
                    (3,842
                    )
                    
                    
                    334Net
      income
                    
                    $
                    941
                    
                    
                    $
                    1,052
                    
                    
                    $
                    3,086
                    
                    
                    $
                    2,274Net
      income per shareBasic
                    
                    $
                    0.07
                    
                    
                    $
                    0.06
                    
                    
                    $
                    0.21
                    
                    
                    $
                    0.14Diluted
                    
                    $
                    0.07
                    
                    
                    $
                    0.06
                    
                    
                    $
                    0.21
                    
                    
                    $
                    0.14Weighted
      average shares outstandingBasic
                    
                    
                    14,290
                    
                    
                    
                    16,301
                    
                    
                    
                    14,713
                    
                    
                    
                    16,581Diluted
                    
                    
                    14,450
                    
                    
                    
                    16,427
                    
                    
                    
                    14,861
                    
                    
                    
                    16,709





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


3


STAMPS.COM
INC.  AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)




Six Months Ended
                  June 30,2010
              
              
              2009Operating
      activities:Net
      income
              
              $
              3,086
              
              
              $
              2,274Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              449
              
              
              
              639Stock-based
      compensation expense
              
              
              1,422
              
              
              
              1,612Deferred
      income tax
              
              
              (3,979
              )
              
              
              —Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              309
              
              
              
              733Other
      current assets
              
              
              (484
              )
              
              
              635Other
      assets
              
              
              (33
              )
              
              
              320Deferred
      revenue
              
              
              132
              
              
              
              (321
              )Accounts
      payable and accrued expenses
              
              
              4,758
              
              
              
              (1,979
              )Net
      cash provided by operating activities
              
              
              5,660
              
              
              
              3,913Investing
      activities:Sale
      of short-term investments
              
              
              707
              
              
              
              15,329Purchase
      of short-term investments
              
              
              (4,606
              )
              
              
              —Sale
      of long-term investments
              
              
              4,987
              
              
              
              1,274Purchase
      of long-term investments
              
              
              (8,576
              )
              
              
              (20,424
              )Release
      of restricted cash
              
              
              554
              
              
              
              —Purchase
      of property and equipment
              
              
              (707
              )
              
              
              (156
              )Net
      cash used in investing activities
              
              
              (7,641
              )
              
              
              (3,977
              )Financing
      activities:Proceeds
      from exercise of stock options
              
              
              102
              
              
              
              82Issuance
      of common stock under ESPP
              
              
              169
              
              
              
              143Repurchase
      of common stock
              
              
              (12,896
              )
              
              
              (8,625
              )Net
      cash used in financing activities
              
              
              (12,625
              )
              
              
              (8,400
              )Net
      decrease in cash and cash equivalents
              
              
              (14,606
              )
              
              
              (8,464
              )Cash
      and cash equivalents at beginning of period
              
              
              45,011
              
              
              
              52,576Cash
      and cash equivalents at end of period
              
              $
              30,405
              
              
              $
              44,112





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


4


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





1.
            Summary
      of Significant Accounting Policies




Basis
of Presentation




We
prepared the financial statements included herein 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 United States (“US”) generally accepted accounting
principles (“GAAP”) have been condensed or omitted pursuant to such rules and
regulations. We believe that the disclosures are adequate to make the
information presented not misleading. We recommend that these financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in our latest annual report on Form 10-K.




In our
opinion, these unaudited financial statements contain all adjustments
(consisting of normal recurring adjustments) necessary to present fairly our
financial position as of June 30, 2010, the results of operations for the three
and six months ended June 30, 2010 and cash flows for the six months ended June
30, 2010.  The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010.




Principles
of Consolidation




The
consolidated financial statements include the accounts of Stamps.com Inc. and
PhotoStamps Inc. In October 2009, we formed PhotoStamps Inc., a wholly-owned
subsidiary, for the purpose of managing our retail gift card operations. Because
100% of the voting control is held by us, we have consolidated PhotoStamps Inc.
in the accompanying consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.




Use
of Estimates and Risk Management




The
preparation of financial statements in conformity with US GAAP requires us 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, and deferred income taxes and estimates regarding the useful lives
of patents and other amortizable intangibles.




Contingencies
and Litigation




We are
involved in various litigation matters as a claimant and a defendant. We record
any amounts recovered in these matters when received. We record liabilities for
claims against us 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.




Fair
Value of Financial Instruments




Carrying
amounts of certain of our financial instruments, including cash, cash
equivalents, restricted cash, accounts receivable, and accounts payable,
approximate fair value due to their short maturities. The fair values of
investments are determined using quoted market prices for those securities or
similar financial instruments.




Reclassifications




Certain
reclassifications have been made to prior year amounts to conform to current
year presentations.


5


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





Subsequent
Events




On July
27, 2010, we entered into binding terms of a settlement agreement with Kara
Technology Incorporated and Mr. Salim Kara to resolve all outstanding litigation
among the parties. Under the terms of the agreement, we will make a $5.1 million
payment for settlement of all claims asserted in the litigation, will purchase
the patents asserted in the litigation for $0.4 million, and will grant Salim
Kara options on 35,000 shares of Stamps.com stock. An accrual for the $5.1
million settlement expense is included in the second quarter 2010 financial
results, and the purchase of the patents will be amortized over the remaining
useful life of the patents. Mr. Kara also agreed to cooperate with the Company
in the prosecution and enforcement of any patents on which he is named as an
inventor, including the patents asserted in the Stamps.com vs. Endicia
litigation matters.  Because the events that gave rise to the
litigation occurred prior to June 30, 2010 and the settlement was reached before
our financial statements were released, an accrual for the $5.1 million
settlement expense is included in the financial results for the second quarter
of 2010, and the purchase of the patents will be amortized over the remaining
useful life of the patents.




Other
than the above, we are not aware of any material subsequent events or
transactions that have occurred that would require recognition in the financial
statements or disclosure in the notes to the consolidated financial
statements.




Revenue
Recognition




We
recognize revenue from product sales or services rendered and commissions from
advertising or sale of products by third party vendors to our customer base 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.




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, 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, are estimated using historical experience. 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
pay face value for postage purchased for use through our PC Postage software,
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 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 our
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 was not significant during the six months ended June 30, 2010 and
2009.




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, was not
significant to our consolidated financial statements during the three and six
months ended June 30, 2010 and 2009. Because we do not 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.


6


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





2.
            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 we infringed certain Kara Technology patents and that
we misappropriated trade secrets owned by Kara Technology, most particularly
with respect to our NetStamps feature. As discussed above under Subsequent
Events in Note 1, we settled this litigation, in July 2010.




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 eleven of our patents covering, among other things, Internet
postage technology. We seek an injunction, unspecified damages, and attorneys’
fees. On November 10, 2008, we were required to select fifteen claims (from over
six hundred claims available) to be the subject of the trial. On November 9,
2009, the Court granted the summary judgment motion of Endicia, Inc. and PSI
Systems, Inc. that the fifteen claims we selected are invalid. We have filed an
appeal.




On August
8, 2008, PSI Systems, Inc. filed a lawsuit against us in the same court,
alleging that we infringed three PSI Systems patents related to Internet postage
technology. PSI Systems seeks an injunction, unspecified damages, and attorneys’
fees. On September 16, 2008, we filed counterclaims for infringement of four
more of our patents. In our counterclaim, we seek an injunction, unspecified
damages, and attorneys’ fees. The Court issued a “Markman order” to determine
the meaning of the claims May 14, 2010. The Court has not scheduled a trial
commencement date.




In 2001,
we were named, together with certain of our current and former board members
and/or officers, as a defendant in several 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. Plaintiffs seek damages and statutory
compensation, including interest, costs and expenses (including attorneys’
fees). In October 2009, the court approved a settlement of this action, which
does not require us to make any payments. The court approval has been
appealed.




We are
subject to various other routine legal proceedings and claims incidental to our
business, and we do not believe that these proceedings and claims would
reasonably be expected to have a material adverse effect on our financial
position, results of operations or cash flows.





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 stock options (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):




7


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)




Three Months Ended
                    June 30,
                  
                  
                  Six Months Ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income
                  
                  $
                  941
                  
                  
                  $
                  1,052
                  
                  
                  $
                  3,086
                  
                  
                  $
                  2,274Basic
      - weighted average common shares
                  
                  
                  14,290
                  
                  
                  
                  16,301
                  
                  
                  
                  14,713
                  
                  
                  
                  16,581Diluted
      effect of common stock equivalents
                  
                  
                  160
                  
                  
                  
                  126
                  
                  
                  
                  148
                  
                  
                  
                  128Diluted
      - weighted average common shares
                  
                  
                  14,450
                  
                  
                  
                  16,427
                  
                  
                  
                  14,861
                  
                  
                  
                  16,709Earnings
      per share:Basic
                  
                  $
                  0.07
                  
                  
                  $
                  0.06
                  
                  
                  $
                  0.21
                  
                  
                  $
                  0.14Diluted
                  
                  $
                  0.07
                  
                  
                  $
                  0.06
                  
                  
                  $
                  0.21
                  
                  
                  $
                  0.14





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




Three Months Ended
                    June 30,
                  
                  
                  Six Months Ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Anti-dilutive
      stock option shares
                  
                  
                  2,142
                  
                  
                  
                  2,723
                  
                  
                  
                  2,287
                  
                  
                  
                  2,735





4.
            Stock-Based
      Employee Compensation




We are
required to estimate the fair value of share-based payment awards on the date of
grant using an option-pricing model and to recognize stock-based compensation
expense during each period based on the value of that portion of share-based
payment awards that is ultimately expected to vest during the period, reduced
for estimated forfeitures. We estimate forfeitures at the time of grant based on
historical data and revise, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Compensation expense recognized for all
employee stock options granted is recognized using the straight-line single
method over their respective vesting periods of three to five
years.


8


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





The
following table sets forth the stock-based compensation expense that we
recognized for the periods indicated (in thousands):




Three Months Ended
                    June 30,
                  
                  
                  Six Months Ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Stock-based
      compensation expense relating to:Employee
      and director stock options
                  
                  $
                  717
                  
                  
                  $
                  819
                  
                  
                  $
                  1,389
                  
                  
                  $
                  1,587Employee
      stock purchases
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  33
                  
                  
                  
                  25Total
      stock-based compensation expense
                  
                  $
                  717
                  
                  
                  $
                  819
                  
                  
                  $
                  1,422
                  
                  
                  $
                  1,612Stock-based
      compensation expense relating to:Cost
      of revenues
                  
                  $
                  58
                  
                  
                  $
                  69
                  
                  
                  $
                  121
                  
                  
                  $
                  140Sales
      and marketing
                  
                  
                  168
                  
                  
                  
                  198
                  
                  
                  
                  353
                  
                  
                  
                  389Research
      and development
                  
                  
                  128
                  
                  
                  
                  164
                  
                  
                  
                  279
                  
                  
                  
                  328General
      and administrative
                  
                  
                  363
                  
                  
                  
                  388
                  
                  
                  
                  669
                  
                  
                  
                  755Total
      stock-based compensation expense
                  
                  $
                  717
                  
                  
                  $
                  819
                  
                  
                  $
                  1,422
                  
                  
                  $
                  1,612


We use
the Black-Scholes option valuation model to estimate the fair value of
share-based payment awards on the date of grant, which requires us to make a
number of highly complex and subjective assumptions, including stock price
volatility, expected term, risk-free interest rates and actual and projected
employee stock option exercise behaviors. In the case of options we grant, our
assumption of expected volatility was based on the historical volatility of our
stock price. We base the risk-free interest rate on US 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 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
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Expected
      dividend yield
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Risk-free
      interest rate
                    
                    
                    2.1
                    %
                    
                    
                    2.2
                    %
                    
                    
                    2.1
                    %
                    
                    
                    2.0
                    %Expected
      volatility
                    
                    
                    50
                    %
                    
                    
                    53
                    %
                    
                    
                    50
                    %
                    
                    
                    53
                    %Expected
      life (in years)
                    
                    
                    4.5
                    
                    
                    
                    4.5
                    
                    
                    
                    4.5
                    
                    
                    
                    4.5Expected
      forfeiture rate
                    
                    
                    0
                    %
                    
                    
                    20
                    %
                    
                    
                    20
                    %
                    
                    
                    20
                    %





5.
            Intangible
      Assets




We have
amortizable and non-amortizable intangible assets consisting of patents,
trademarks and other intellectual property with a gross carrying value of $8.7
million and $8.3 million as of June 30, 2010 and December 31, 2009,
respectively.  Accumulated amortization was $7.8 million as of June
30, 2010 and December 31, 2009. The expected useful lives of our amortizable
intangible assets range from 4 to 17 years. During
2009, we assessed whether events or changes in circumstances occurred that could
potentially indicate that the carrying amount of our intangible assets may not
be recoverable. We concluded that there were no such events or changes in
circumstances during 2009 and determined that the fair value of our intangible
assets were in excess of their carrying value as of December 31, 2009. Aggregate
amortization expense on patents and trademarks was not material to our
consolidated financial statements for the three and six months ended June 30,
2010 and June 30, 2009. Our amortization expense for the next five years is
approximately $220,000.


9


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





6.
            Comprehensive
      Income




The
following table provides the data required to calculate comprehensive income (in
thousands):




Three Months Ended
                    June 30,
                  
                  
                  Six Months Ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income
                  
                  $
                  941
                  
                  
                  $
                  1,052
                  
                  
                  $
                  3,086
                  
                  
                  $
                  2,274Unrealized
      gain on investments
                  
                  
                  313
                  
                  
                  
                  989
                  
                  
                  
                  621
                  
                  
                  
                  826Comprehensive
      income
                  
                  $
                  1,254
                  
                  
                  $
                  2,041
                  
                  
                  $
                  3,707
                  
                  
                  $
                  3,100





7.
            Income
      Taxes




During
the three and six months ended June 30, 2010, our income tax expense consisted
of both federal and state alternative minimum tax. Our effective income tax rate
differs from the statutory income tax rate primarily as a result of our use of
net operating losses (NOLs) to offset current federal and state tax expense. A
valuation allowance was originally recorded against our deferred tax assets
because we determined that the realization of these assets did not meet the more
likely than not criteria. During the first quarter of 2008, we determined that a
full valuation allowance against our deferred tax assets was not necessary and
recorded a partial reversal of the deferred tax valuation allowance of $3.7
million. During 2009, we re-evaluated our deferred tax assets and determined
that the realization of our net deferred tax asset of $3.7 million continues to
be more likely than not.  During the second quarter of 2010, we
re-evaluated our deferred tax assets and determined that an additional release
of our valuation allowance was appropriate and as a result we recorded an income
tax benefit of approximately $4.0 million. In making such determination, we
considered all available positive and negative evidence, including our recent
earnings trend and expected continued future taxable income. We continue to
maintain a valuation allowance for the remainder of our deferred tax
assets.




In
September 2008, the State of California passed legislation temporarily
suspending the use of NOLs to offset current state income tax expense for the
tax years 2008 and 2009. As a result of not being able to use our state NOLs in
these years, we incurred approximately $51,000 and $258,000 of additional
California state income tax expense during the three and six months ended June
30, 2009, respectively. During the three and six months ended June 30, 2010, we
recorded a tax provision for corporate alternative minimum taxes of
approximately $57,000 and $137,000, respectively, which reflected our ability to
use our NOLs to offset 2010 state income tax expense.




8.
            Fair
      Value Measurements




Financial
assets measured at fair value on a recurring basis are classified in one of the
three following categories, which are described below:




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


10


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





The
following table summarizes our financial assets measured at fair value on a
recurring basis (in thousands):




Fair Value Measurement at Reporting Date UsingDescription
                
                June 30, 2010
                
                
                Quoted Prices
                    in Active
                    Markets for
                    Identical Assets
                    (Level 1)
                
                
                Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                
                
                Significant
                    Unobservable
                    Inputs
                    (Level 3)Cash
      equivalents
                
                $
                30,405
                
                
                $
                30,405
                
                
                $
                —
                
                
                $
                —Available-for-sale
      debt securitiesAsset-backed
      securities
                
                
                4,523
                
                
                
                —
                
                
                
                4,523
                
                
                
                —Corporate
      bonds
                
                
                28,739
                
                
                
                —
                
                
                
                28,739
                
                
                
                —US
      Treasury
                
                
                1,027
                
                
                
                1,027
                
                
                
                —
                
                
                
                —Total
                
                $
                64,694
                
                
                $
                31,432
                
                
                $
                33,262
                
                
                $
                —


The fair
value of our 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 may incorporate
available trade, bid and other market information and price quotes from well
established independent pricing vendors and broker-dealers.




There
were no non-financial assets or liabilities that were required to be measured at
fair value as of June 30, 2010.




9.
            Cash
      Equivalents and Investments




Our cash
equivalents and investments consist of money market, asset-backed securities, US
treasury and public corporate debt securities at June 30, 2010 and December 31,
2009. We consider all highly liquid investments with an original or remaining
maturity of three months or less at the date of purchase to be cash equivalents.
All of our investments are classified as available for sale and are recorded at
market value using the specific identification method. Realized gains and losses
are reflected in other income using the specific identification method. There
was no material realized gain or loss with respect to our investments during the
second quarter of 2010. Unrealized gains and losses are included as a separate
component of stockholders' equity. We have 9 securities with a total fair value
of $4.5 million that have unrealized losses of approximately $111,000 as of June
30, 2010. The following table summarizes realized gains and losses for the
period indicated (in thousands):




Three Months Ended
                    June 30,
                  
                  
                  Six Months Ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Realized
      gain
                  
                  $
                  8
                  
                  
                  $
                  1
                  
                  
                  $
                  10
                  
                  
                  $
                  36Realized
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5
                  )Net
      realized gain
                  
                  $
                  8
                  
                  
                  $
                  1
                  
                  
                  $
                  10
                  
                  
                  $
                  31


On at
least a quarterly basis, we evaluate our available for sale securities, and
record an “other-than-temporary impairment” (“OTTI”) if we believe their fair
value is less than historical cost, and it is probable that we will not collect
all contractual cash flows. We did not record any OTTI during the three and six
months ended June 30, 2010, after evaluating a number of factors including, but
not limited to:




·
            How
      much fair value has declined below amortized
  cost


·
            The
      financial condition of the issuers


·
            Significant
      rating agency changes on the issuer


·
            Our
      intent and ability to hold the security for a period of time sufficient to
      allow for any anticipated recovery in fair
value


11


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





The
following table summarizes our cash, cash equivalents, restricted cash and
investments as of June 30, 2010 and December 31, 2009 (in
thousands):




June 30, 2010Cost or
                  
                  
                  Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  EstimatedCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Fair
      ValueCash
      equivalents:Cash
                  
                  $
                  10,376
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  10,376Money
      market
                  
                  
                  20,029
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,029Cash
      and cash equivalents
                  
                  
                  30,405
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,405Short-term
      investments:Corporate
      notes and bonds
                  
                  
                  6,119
                  
                  
                  
                  49
                  
                  
                  
                  (8
                  )
                  
                  
                  6,160Short-term
      investments
                  
                  
                  6,119
                  
                  
                  
                  49
                  
                  
                  
                  (8
                  )
                  
                  
                  6,160Long-term
      investments:Corporate
      bonds and asset backed securities
                  
                  
                  26,745
                  
                  
                  
                  460
                  
                  
                  
                  (103
                  )
                  
                  
                  27,102US
      Treasury
                  
                  
                  1,010
                  
                  
                  
                  17
                  
                  
                  
                  -
                  
                  
                  
                  1,027Long-term
      investments
                  
                  
                  27,755
                  
                  
                  
                  477
                  
                  
                  
                  (103
                  )
                  
                  
                  28,129Cash
      equivalents and investments
                  
                  $
                  64,279
                  
                  
                  $
                  526
                  
                  
                  $
                  (111
                  )
                  
                  $
                  64,694




December 31, 2009Cost or
                                
                                
                                Gross
                                
                                
                                GrossAmortized
                                
                                
                                Unrealized
                                
                                
                                Unrealized
                                
                                
                                EstimatedCost
                                
                                
                                Gains
                                
                                
                                Losses
                                
                                
                                Fair
      ValueCash
      equivalents:Cash
                                
                                $
                                9,132
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                9,132Money
      market
                                
                                
                                35,879
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                35,879Cash
      and cash equivalents
                                
                                
                                45,011
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                45,011Restricted
      cash:Corporate
      notes and bonds
                                
                                
                                554
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                554Restricted
      cash
                                
                                
                                554
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                554Short-term
      investments:Corporate
      notes and bonds
                                
                                
                                2,221
                                
                                
                                
                                17
                                
                                
                                
                                (14
                                )
                                
                                
                                2,224Short-term
      investments
                                
                                
                                2,221
                                
                                
                                
                                17
                                
                                
                                
                                (14
                                )
                                
                                
                                2,224Long-term
      investments:Corporate
      bonds and asset backed securities
                                
                                
                                24,165
                                
                                
                                
                                250
                                
                                
                                
                                (459
                                )
                                
                                
                                23,956Long-term
      investments
                                
                                
                                24,165
                                
                                
                                
                                250
                                
                                
                                
                                (459
                                )
                                
                                
                                23,956Cash
      equivalents, restricted cash and investments
                                
                                $
                                71,951
                                
                                
                                $
                                267
                                
                                
                                $
                                (473
                                )
                                
                                $
                                71,745


12


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO JUNE 30, 2010 AND 2009 IS UNAUDITED)





The
following table summarizes contractual maturities of our marketable fixed-income
securities as of June 30, 2010 (in thousands):




Amortized
                    Cost
                
                
                Estimated
                    Fair ValueDue
      within one year
                
                $
                6,119
                
                
                $
                6,159Due
      after one year through five years
                
                
                26,257
                
                
                
                26,672Due
      after five years through ten years
                
                
                1,498
                
                
                
                1,458Total
                
                $
                33,874
                
                
                $
                34,289


13


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




Please
refer to the risk factors under “Item 1A. Risk Factors” of our Form 10-K for the
year ended December 31, 2009 as well as those described elsewhere in our public
filings.  The risks included are not exhaustive, and additional
factors could adversely affect our business and financial
performance.  We operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time, and it is not possible
for management to predict all such risk factors, nor can it assess the impact of
all such risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.





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




For
ease of presentation, all dollar figures in excess of $1 million are rounded to
the nearest $100,000 and all figures under $1 million are rounded to the nearest
$1,000; all percentages are rounded to the nearest percent unless otherwise
shown.




SPECIAL
NOTICE REGARDING PURCHASES OF MORE THAN 5% OF OUR STOCK




We
currently have federal and state net operating loss (“NOL”) carry-forwards of
approximately $230 million and $150 million, respectively, with potential value
of up to approximately $90 million in tax savings over the next 15 years. Under
Internal Revenue Code Section 382 rules, if a “change of ownership” is
triggered, our NOL asset may be impaired. A change in ownership can occur
whenever there is a shift in ownership by more than 50 percentage points by one
or more “5% shareholders” within a three-year period.




Under our
certificate of incorporation, any person, or entity, including company and
investment firm, that wishes to become a “5% shareholder” (as defined in our
certificate of incorporation) must first obtain a waiver from our board of
directors. In addition, any person, company or investment firm that is already a
“5% shareholder” of ours cannot make any additional purchases of our stock
without a waiver from our board of directors.  The NOL protective
provisions contained in our certificate of incorporation (the “NOL Protective
Measures”) are more specifically described in our Definitive Proxy filed with
the Securities and Exchange Commission on April 2, 2008.




On July 22, 2010, our Board of
Directors suspended the NOL Protective Measures by approving a waiver from the
NOL Protective Measures to all persons and entities, including companies and
investment firms.  As a result, our stockholders are now allowed to
become “5% shareholders” and existing “5% shareholders” are allowed to make
additional purchases of our stock each without having to comply with the
restrictions contained in the NOL Protective Measures. For complete
details about this waiver from the NOL Protective Measures, please see our Form
8-K filed on July 28, 2010.


14


Overview




Stamps.comÒ is the leading provider of
Internet-based postage solutions.  Our customers use our service to
mail and ship a variety of mail pieces, including postcards, envelopes, flats
and packages, using a wide range of United States Postal Service (the “USPS”)
mail classes, including First Class Mail®, Priority Mail®, Express Mail®, Media
Mail®, Parcel Post®, and others. Our customers include individuals, small
businesses, home offices, medium-size businesses and large enterprises, and
within these segments we target both mailers and shippers.   We
were the first ever USPS-licensed vendor to offer PC Postage® in a software-only
business model in 1999.




Services
and Products




We offer
the following products and services to our customers




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




In
addition to postage purchases, customers pay us a monthly service fee ranging
from $15.99 to $39.99 depending on the features and capabilities of the
particular service. Our Pro Plan offers a basic set of Stamps.com mailing &
shipping features with a single-user capability.  Our Premiere plan
for larger small businesses adds multiple-user functionality, automated
Certified Mail forms, FedEx label printing, additional reference codes and
higher allowable postage balances to our Pro Plan feature set. Our Professional
Shipper plan is targeted to higher volume shippers such as fulfillment houses,
retailers and e-commerce merchants and features direct integration into a
customer’s order databases, faster label printing speed, the ability to
customize and save shipping profiles, and integrations with many of the
industry’s leading shipping management systems. We have launched shipping
integrations with several of these e-commerce focused companies over the past
year. While these integrations have not had a material impact on our financial
results to date, we believe they have the potential to be material in the
future. Our Enterprise service is targeted to organizations with multiple
geographic locations and features enhanced reporting that allows a central
location such as a corporate headquarters greater visibility and control over
postage expenditures across their network of locations.




Our
software integrates directly into the most popular e-commerce platforms,
allowing webstore managers to completely automate their order fulfillment
process to process, manage, and ship orders from virtually any e-commerce source
from a single interface without manual data entry. Managers can retrieve order
data and print complete shipping labels for all USPS mail classes including
First Class International®.




During
July 2010 we launched a partnership with Amazon.com that makes our domestic and
international shipping labels available to Amazon.com Marketplace users. 
The service allows customers to automatically pay for postage using their
Marketplace Payments account, to set a default ship-from address so they don’t
have to type or write it for each shipment, and to automatically populate the
ship-to address on the label.  Domestic and international mail classes are
supported, and Marketplace users may request carrier pickup from USPS.  A
transaction fee is charged to customers for each label printed at $0.07 per
label.




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


15


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




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




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




Results
of Operations




Total
revenue in the second quarter of 2010 was $21.2 million, an increase of 5% from
$20.2 million in the second quarter of 2009.  Total revenue during the
six months ended June 30, 2010 was $42.2 million, an increase of 5% from $40.2
million during the six months ended June 30, 2009.  PC Postage
revenue, including service revenue, product revenue and insurance revenue, in
the second quarter of 2010 was $19.4 million, an increase of 7% from $18.2
million in the second quarter of 2009, and was $38.9 million in the six months
ended June 30, 2010, an increase of 6% from $36.5 million in the six months
ended June 30, 2009.  PhotoStamps revenue in the second quarter of
2010 was $1.8 million, a decrease of 9% from $2.0 million in the second quarter
of 2009, and was $3.3 million in the six months ended June 30, 2010, a decrease
of 11% from $3.7 million in the six months ended June 30, 2009.  The
following table sets forth the breakdown of revenue for the three and six months
ended June 30, 2010 and 2009 and the resulting percentage change (revenue in
thousands):




Three months ended June 30,
                    
                    
                    Six months ended June 30,2010
                    
                    
                    2009
                    
                    
                    % Change
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    % ChangeService
      revenue
                    
                    $
                    16,172
                    
                    
                    $
                    15,207
                    
                    
                    
                    6
                    %
                    
                    $
                    32,190
                    
                    
                    $
                    30,521
                    
                    
                    
                    5
                    %Product
      revenue
                    
                    
                    2,809
                    
                    
                    
                    2,580
                    
                    
                    
                    9
                    %
                    
                    
                    5,882
                    
                    
                    
                    5,197
                    
                    
                    
                    13
                    %Insurance
      revenue
                    
                    
                    392
                    
                    
                    
                    395
                    
                    
                    
                    (1
                    )%
                    
                    
                    786
                    
                    
                    
                    799
                    
                    
                    
                    (2
                    )%PC
      postage revenue
                    
                    $
                    19,373
                    
                    
                    $
                    18,182
                    
                    
                    
                    7
                    %
                    
                    $
                    38,858
                    
                    
                    $
                    36,517
                    
                    
                    
                    6
                    %PhotoStamps
      revenue
                    
                    $
                    1,816
                    
                    
                    $
                    1,995
                    
                    
                    
                    (9
                    )%
                    
                    $
                    3,317
                    
                    
                    $
                    3,708
                    
                    
                    
                    (11
                    )%Other
      revenue
                    
                    
                    —
                    
                    
                    
                    5
                    
                    
                    
                    (100
                    )%
                    
                    
                    3
                    
                    
                    
                    5
                    
                    
                    
                    (40
                    )%Total
      revenue
                    
                    $
                    21,189
                    
                    
                    $
                    20,182
                    
                    
                    
                    5
                    %
                    
                    $
                    42,178
                    
                    
                    $
                    40,230
                    
                    
                    
                    5
                    %





We use
several PC Postage marketing channels to acquire customers, including
partnerships, online advertising, affiliate channel, direct mail, traditional
media advertising and others. Beginning in 2007, we significantly increased our
investment in our non-enhanced promotion marketing channels based on our
estimated high return-on-investment in that area, and we continued to increase
our investment in 2010 as our estimated return-on-investment continued to be
attractive.  Primarily as a result of these decisions, PC Postage
revenue for customers acquired through our non-enhanced promotion channels was
$18.2 million in the second quarter of 2010, an increase of 9% from $16.6
million in the second quarter of 2009, and was $36.3 million in the six months
ended June 30, 2010, an increase of 9% from $33.2 million in the six months
ended June 30, 2009.


16


In the
enhanced promotion channel, we work with various companies to advertise our
service in a variety of sites on the Internet. These companies typically offer
an additional promotion (beyond what we typically offer) directly to the
customer in order to get the customer to try our service.  We have
been reducing our investment in this area over the last few years, which reduced
our revenue for customers acquired through this channel to $1.2 million in the
second quarter of 2010, a decrease of 23% from $1.5 million in the second
quarter of 2009, and $2.5 million in the six months ended June 30, 2010, a
decrease of 24% from $3.3 million in the six months ended June 30,
2009.




The
following table sets forth the breakdown of PC Postage revenue between customers
acquired through our non-enhanced promotion channels and customers acquired
through our enhanced promotion channels for the three and six months ended June
30, 2010 and 2009 and the resulting percent change (revenue in
thousands):




Three months ended June 30,
              
              
              Six months ended June 30,2010
              
              
              2009
              
              
              % Change
              
              
              2010
              
              
              2009
              
              
              % ChangeNon-enhanced
      promotion revenue
              
              $
              18,180
              
              
              $
              16,638
              
              
              
              9
              %
              
              $
              36,337
              
              
              $
              33,202
              
              
              
              9
              %Enhanced
      promotion revenue
              
              
              1,193
              
              
              
              1,544
              
              
              
              (23
              )%
              
              
              2,521
              
              
              
              3,315
              
              
              
              (24
              )%PC
      postage revenue
              
              $
              19,373
              
              
              $
              18,182
              
              
              
              7
              %
              
              $
              38,858
              
              
              $
              36,517
              
              
              
              6
              %




The
increase in revenue from customers acquired through our non-enhanced promotion
channels was driven by both an increase in paid customers and an increase in
average monthly revenue per paid customer.




The
number of paid customers originally acquired through our non-enhanced promotion
channels during the second quarter of 2010 was approximately 338,000, an
increase of 7% from approximately 317,000 in the second quarter of
2009.  We define paid customers for the quarter as ones from whom we
successfully collected service fees at least once during that
quarter.




The 7%
increase in paid customers over the past year was attributable to both increased
customer acquisition and reduced churn in these channels. We believe the
increased customer acquisition was primarily attributable to increased customer
acquisition spending and improvements in the economic environment. We believe
the decreased churn rates were primarily attributable to increased usage of our
service and improvements in the economic environment.




For
customers originally acquired through our non-enhanced promotion channels, our
average monthly revenue per paid customer for the second quarter of 2010 was
$17.91, an increase of 2% compared to $17.50 for the second quarter of
2009.  We believe the increase in average monthly revenue per paid
customer was partially attributable to having a larger number of customers on
higher-priced plans and partially attributable to an increase in the average
store revenue per paid customer driven by increased usage of our
service.


17


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




Three Months Ended
                        June 30,
                      
                      
                      Six Months Ended
                        June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Total
      RevenuesService
                      
                      
                      76.3
                      %
                      
                      
                      75.3
                      %
                      
                      
                      76.3
                      %
                      
                      
                      75.9
                      %Product
                      
                      
                      13.3
                      %
                      
                      
                      12.8
                      %
                      
                      
                      13.9
                      %
                      
                      
                      12.9
                      %Insurance
                      
                      
                      1.9
                      %
                      
                      
                      2.0
                      %
                      
                      
                      1.9
                      %
                      
                      
                      2.0
                      %PhotoStamps
                      
                      
                      8.5
                      %
                      
                      
                      9.9
                      %
                      
                      
                      7.9
                      %
                      
                      
                      9.2
                      %Other
                      
                      
                      —
                      
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %Total
      revenues
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %Cost
      of revenuesService
                      
                      
                      15.4
                      %
                      
                      
                      14.2
                      %
                      
                      
                      16.0
                      %
                      
                      
                      14.6
                      %Product
                      
                      
                      5.1
                      %
                      
                      
                      5.1
                      %
                      
                      
                      5.3
                      %
                      
                      
                      4.9
                      %Insurance
                      
                      
                      0.6
                      %
                      
                      
                      0.6
                      %
                      
                      
                      0.6
                      %
                      
                      
                      0.6
                      %PhotoStamps
                      
                      
                      6.4
                      %
                      
                      
                      7.5
                      %
                      
                      
                      5.7
                      %
                      
                      
                      7.0
                      %Total
      cost of revenues
                      
                      
                      27.5
                      %
                      
                      
                      27.4
                      %
                      
                      
                      27.6
                      %
                      
                      
                      27.1
                      %Gross
      profit
                      
                      
                      72.5
                      %
                      
                      
                      72.6
                      %
                      
                      
                      72.4
                      %
                      
                      
                      72.9
                      %Operating
      expenses:Sales
      and marketing
                      
                      
                      36.0
                      %
                      
                      
                      40.8
                      %
                      
                      
                      37.0
                      %
                      
                      
                      40.5
                      %Research
      and development
                      
                      
                      10.5
                      %
                      
                      
                      10.9
                      %
                      
                      
                      10.4
                      %
                      
                      
                      11.0
                      %General
      and administrative
                      
                      
                      16.6
                      %
                      
                      
                      16.4
                      %
                      
                      
                      15.4
                      %
                      
                      
                      16.3
                      %Legal
      settlements and reserves
                      
                      
                      24.6
                      %
                      
                      
                      0.0
                      %
                      
                      
                      12.4
                      %
                      
                      
                      16.3
                      %Total
      operating expenses
                      
                      
                      87.7
                      %
                      
                      
                      68.1
                      %
                      
                      
                      75.2
                      %
                      
                      
                      67.8
                      %Income
      (loss) from operations
                      
                      
                      (15.2
                      )%
                      
                      
                      4.5
                      %
                      
                      
                      (2.8
                      )%
                      
                      
                      5.1
                      %Interest
      income and other income, net
                      
                      
                      1.1
                      %
                      
                      
                      1.1
                      %
                      
                      
                      1.0
                      %
                      
                      
                      1.5
                      %Income
      (loss) before income taxes
                      
                      
                      (14.1
                      )%
                      
                      
                      5.6
                      %
                      
                      
                      (1.8
                      )%
                      
                      
                      6.6
                      %Income
      tax benefit (expense)
                      
                      
                      18.5
                      %
                      
                      
                      (0.4
                      )%
                      
                      
                      9.1
                      %
                      
                      
                      (0.8
                      )%Net
      income
                      
                      
                      4.4
                      %
                      
                      
                      5.2
                      %
                      
                      
                      7.3
                      %
                      
                      
                      5.8
                      %




Revenue




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




Service
revenue increased 6% to $16.2 million in the second quarter of 2010 from
$15.2 million in the second quarter of 2009 and increased 5% to $32.2
million in the six months ended June 30, 2010 from $30.5 million in the six
months ended June 30, 2009. The 6% increase in service revenue during the second
quarter of 2010 consisted of a 9% increase in service revenue from customers
acquired through our non-enhanced promotion channels, partly offset by a 23%
decrease in service revenue from customers acquired through our enhanced
promotion channel. The 5% increase in service revenue during the six months
ended June 30, 2010 consisted of a 9% increase in service revenue from customers
acquired through our non-enhanced promotion channels, partly offset by a 24%
decrease in service revenue from customers acquired through our enhanced
promotion channel. As a percentage of total revenue, service revenue increased
one percentage point to 76% in the second quarter of 2010 from 75% in the second
quarter of 2009 and was 76% during both the six months ended June 30, 2010 and
2009.


18


Product
revenue increased 9% to $2.8 million in the second quarter of 2010 from $2.6
million in the second quarter of 2009 and increased 13% to $5.9 million in the
six months ended June 30, 2010 from $5.2 million in the six months ended June
30, 2009. The increase was primarily attributable to the following: (1) growth
in our paid customer base; (2) marketing our Supplies Store to our existing
customer base; (3) the additional SKUs we added to our Supplies Store; and (4)
growth in postage printed, which helps drive sales of consumable supplies such
as labels. Total postage printed by customers using our service during the
second quarter of 2010 was $99 million, a 20% increase from the $83 million
printed during the second quarter of 2009. As a percentage of total revenue,
product revenue was 13% in both the quarters ended June 30, 2010 and 2009 and
increased one percentage point to 14% in the six months ended June 30, 2010 from
13% in the six months ended June 30, 2009.




Insurance
revenue decreased 1% to $392,000 in the second quarter of 2010 from $395,000 in
the second quarter of 2009 and decreased 2% to $786,000 in the six months ended
June 30, 2010 from $799,000 in the six months ended June 30, 2009, primarily as
a result of a decrease in the total number of transactions. As a percentage of
total revenue, insurance revenue was 2% during each of the second quarters of
2010 and 2009 and the six months ended June 30, 2010 and 2009.




We
reduced our PhotoStamps sales and marketing spending in 2010 compared with 2009
and plan to continue to reduce our sales and marketing spending on PhotoStamps
in future periods to improve profitability in that business.  As a
result of this decision, PhotoStamps revenue decreased 9% to $1.8 million
in the second quarter of 2010 from $2.0 million in the second quarter of 2009
and decreased 11% to $3.3 million in the six months ended June 30, 2010 from
$3.7 million in the six months ended June 30, 2009. As a percentage of total
revenue, PhotoStamps revenue decreased one percentage point to 9% in the second
quarter of 2010 from 10% in the second quarter of 2009 and decreased one
percentage point to 8% in the six months ended June 30, 2010 from 9% in the six
months ended June 30, 2009. Total PhotoStamps sheets shipped during the second
quarter of 2010 was approximately 103,000, a 12% decrease compared to
approximately 118,000 in the second quarter of 2009. Average revenue per sheet
shipped in the second quarter of 2010 was $17.6 compared to $16.9 in the second
quarter of 2009. The decrease in sheets shipped and increase in average revenue
per sheet was primarily attributable to a higher mix of lower volume, higher
priced consumer orders compared to higher volume, lower priced business
orders.




Other
revenue consisting of commissions from the advertising or sale of products by
third party vendors to our customer base was $0 in the second quarter of 2010
compared to $5,000 in the second quarter of 2009 and $3,000 in the six months
ended June 30, 2010 compared to $5,000 in the six months ended June 30, 2009.
Commission revenue was not material to our consolidated financial
statements.




Cost
of Revenue




Cost of
revenue principally consists of the cost of customer service, certain
promotional expenses, system operating costs, credit card processing fees, the
cost of postage for PhotoStamps, image review, printing and fulfillment costs
for PhotoStamps, parcel insurance offering costs, customer misprints and
products sold through our Supplies Store and the related costs of shipping and
handling. Total cost of revenue increased 5% to $5.8 million in the second
quarter of 2010 from $5.5 million in the second quarter of 2009 and increased 7%
to $11.6 million in the six months ended June 30, 2010 from $10.9 million in the
six months ended June 30, 2009. As a percentage of total revenue, total cost of
revenue was 28% in the second quarter of 2010 and 2009 and increased one
percentage point to 28% in the six months ended June 30, 2010 from 27% in the
six months ended June 30, 2009.




Cost of
service revenue increased 13% to $3.3 million in the second quarter of 2010 from
$2.9 million in the second quarter of 2009 and increased 15% to $6.7 million in
the six months ended June 30, 2010 from $5.9 million in the six months ended
June 30, 2009. The increase during the quarter and six months ended June 30,
2010 was primarily attributable to: 1) an increase in customer service costs
aimed at improving our overall customer experience and 2) an increase in
promotional expense. The increase in promotional expense was attributable to the
increase in customer acquisition and higher redemption rates of our free scale
and free postage offers. Promotional expense, which represents a material
portion of total cost of service revenue, was expensed in the period in which a
customer qualifies for the promotion, while the revenue associated with the
acquired customer was earned over the customer's lifetime. As a result,
promotional expense for newly acquired customers may exceed the revenue earned
from those customers in that period. Promotional expense was $589,000 and
$363,000 in the second quarter of 2010 and 2009, respectively. Promotional
expense was $1.3 million and $723,000 in the six months ended June 30, 2010 and
2009, respectively. As a percentage of total revenue, cost of service revenue
increased one percentage point to 15% in the second quarter of 2010 from 14% in
the second quarter of 2009 and increased one percentage point to 16% in the six
months ended June 30, 2010 from 15% in the six months ended June 30,
2009.


19


Cost of
product revenue increased 5% to $1.1 million in the second quarter of 2010 from
$1.0 million in the second quarter of 2009 and increased 12% to $2.2 million in
the six months ended June 30, 2010 from $2.0 million in the six months ended
June 30, 2009. The increase in costs was attributable to increased product
revenue as discussed above as well as higher fulfillment costs as we added an
east coast fulfillment center to reduce delivery times and improve customer
experience. As a percentage of total revenue, cost of product revenue was 5% in
both the second quarters of 2010 and 2009 and in both the six months ended June
30, 2010 and 2009.




Cost of
insurance revenue decreased 4% to $118,000 in the second quarter of 2010 from
$123,000 in the second quarter of 2009 and decreased 6% to $232,000 in the six
months ended June 30, 2010 from $248,000 in the six months ended June 30, 2009.
The decrease in costs was attributable to decreased insurance revenue and
transactions as discussed above. As a percentage of total revenue, cost of
insurance revenue was 1% in both the second quarters of 2010 and 2009 and in
both the six months ended June 30, 2010 and 2009.




Cost of
PhotoStamps revenue decreased 10% to $1.4 million in the second quarter of 2010
from $1.5 million in the second quarter of 2009 and decreased 13% to $2.5
million in the six months ended June 30, 2010 from $2.8 million in the six
months ended June 30, 2009, corresponding to the decrease in PhotoStamps revenue
as discussed above. The gross margin from PhotoStamps was significantly lower
than that of our other sources of revenue because we include the stated value of
USPS postage as part of our cost of PhotoStamps revenue. As a percentage of
total revenue, cost of PhotoStamps revenue decreased two percentage points to 6%
in the second quarter of 2010 from 8% in second quarter of 2009 and decreased
one percentage point to 6% in the six months ended June 30, 2010 from 7% in the
six months ended June 30, 2009.




Sales
and Marketing




Sales and
marketing expense principally consists of spending to acquire new customers and
compensation and related expenses for personnel engaged in sales, marketing, and
business development activities. Sales and marketing expense decreased 7% to
$7.6 million in the second quarter of 2010 from $8.2 million in the second
quarter of 2009 and decreased 4% to $15.6 million in the six months ended June
30, 2010 from $16.3 million in the six months ended June 30, 2009. As a
percentage of total revenue, sales and marketing expense decreased five
percentage points to 36% in the second quarter of 2010 from 41% in the second
quarter of 2009 and decreased four percentage points to 37% in the six months
ended June 30, 2010 from 41% in the six months ended June 30, 2009. The
decrease, both on an absolute basis and as a percentage of total revenue, was
primarily due to our decision to decrease our enhanced promotion marketing
program expenditures and to decrease our marketing expenditures related to
PhotoStamps, partially offset by an increase in marketing program expenditures
relating to the acquisition of customers outside the enhanced promotion channel
for our PC Postage business. Ongoing marketing programs include the following:
traditional advertising, partnerships, customer referral programs, customer
re-marketing efforts, telemarketing, direct mail, and online
advertising.




Research
and Development




Research
and development expense principally consists of compensation for personnel
involved in the development of our services, depreciation of equipment and
software and expenditures for consulting services and third party software.
Research and development expense was $2.2 million in the second quarter of both
2010 and 2009 and was $4.4 million in the six months ended both June 30, 2010
and 2009.  As a percentage of total revenue, research and development
expense was 11% in both the second quarter of 2010 and 2009, and decreased one
percentage point to 10% in the six months ended June 30, 2010 from 11% in the
six months ended June 30, 2009.




General and
Administrative




General
and administrative expense principally consists of compensation and related
costs for executive and administrative personnel, fees for legal and other
professional services, depreciation of equipment and software used for general
corporate purposes and amortization of intangible assets. General and
administrative expense increased 7% to $3.5 million in the second quarter of
2010 from $3.3 million in the second quarter of 2009 and decreased one
percentage point to $6.5 million in the six months ended June 30, 2010 from $6.6
million in the six months ended June 30, 2009. As a percentage of total revenue,
general and administrative expense increased one percentage point to 17% in the
second quarter of 2010 from 16% in the second quarter of 2009 and decreased one
percentage point to 15% in the six months ended June 30, 2010 from 16% in the
six months ended June 30, 2009. The increase, both on an absolute basis and as a
percentage of total revenue during the second quarter of 2010, was primarily due
to the increase in legal expenses as a result of higher legal activity during
the quarter. The decrease, both on an absolute basis and as a percentage of
total revenue during the six months ended June 30, 2010, was primarily due to
the decrease in legal expenses as a result of lower legal activity particularly
during the first quarter of 2010 compared to the first quarter of
2009.


20


Legal
Settlements and Reserves




Legal
settlements and reserves was $5.2 million in the second quarter of 2010 and six
months ended June 30, 2010. There were no legal settlements and reserves in the
second quarter of 2009 and six months ended June 30, 2009.  As a
percentage of total revenue, legal settlements and reserves was 25% in the
second quarter of 2010 and 12% in the six months ended June 30, 2010. The
increase, both on an absolute basis and as a percentage of total revenue, during
the second quarter and six months ended June 30, 2010 was primarily due to the
settlement of our Kara Technology lawsuit.  Please see “Subsequent
Events” in Note 1 to our consolidated financial statements for further
information.




Interest
and Other Income, Net




Interest
and other income, net primarily consists of interest income from cash
equivalents, short-term and long-term investments and other income, and was
immaterial to our consolidated financial statements. Interest and other income,
net decreased 1% to $230,000 in the second quarter of 2010 from $232,000 in the
second quarter of 2009 and decreased 32% to $401,000 in the six months ended
June 30, 2010 from $589,000 in the six months ended June 30, 2009.  As
a percentage of total revenue, interest and other income, was 1% in both the
second quarters of 2010 and 2009 and decreased one percentage point to 1% in the
six months ended June 30, 2010 from 2% in the six months ended June 30, 2009.
The decrease, both on an absolute basis and as a percentage of total revenue,
was primarily due to lower interest rates and lower investment balances, as we
sold certain investments and used the cash to repurchase shares of our common
stock.




Income
Tax Expense (Benefit)




In the
second quarter of 2010 we incurred an income tax benefit of $3.9 million
compared with income tax expense of $84,000 in the second quarter of
2009.  During the six months ended June 30, 2010 we incurred an income
tax benefit of $3.8 million compared with income tax expense of $334,000 in the
six months ended June 30, 2009. The income tax benefit in the second quarter of
2010 and six months ended June 30, 2010 was primarily due to the additional
partial release of our valuation allowance against our deferred tax assets.
Please see “Income Taxes” in our notes to consolidated financial statements for
further information.




Liquidity
and Capital Resources




As of
June 30, 2010 and December 31, 2009 we had $65 million and $72 million,
respectively, in cash, restricted cash and short-term and long-term investments.
We invest available funds in short-term and long-term securities, including
money market funds, corporate bonds, asset backed securities, and government and
agency bonds, and do not engage in hedging or speculative
activities.




There
have been no material changes to our contractual obligations and commercial
commitments included in Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the year ended December 31, 2009.




Net cash
provided by operating activities was $5.7 million and $3.9 million during the
six months ended June 30, 2010 and 2009, respectively.  The increase
in net cash provided by operating activities was primarily attributable to an
increase in net income and an increase in net working capital as a source of
cash.




Net cash
used in investing activities was $7.6 million and $4.0 million during the six
months ended June 30, 2010 and 2009, respectively. The increase in net cash used
in investing activities was primarily attributable to increased net sales of
investment securities to fund our share repurchase program and an increase in
our purchases of capital equipment.




Net cash
used in financing activities was $12.6 million and $8.4 million during the six
months ended June 30, 2010 and 2009, respectively. This increase was primarily
attributable to our increased use of cash to repurchase our
stock.


21




We
believe our available cash and marketable securities, together with the cash
flow from operations, will be sufficient to fund our business for at least the
next twelve months.
  Critical
Accounting Policies




Management’s
discussion and analysis of our financial condition and results of operations is
based on our unaudited financial statements. The preparation of these financial
statements is based on the selection of accounting policies and the application
of significant accounting estimates, some of which require management to make
judgments, estimates and assumptions that affect the amounts reported in the
financial statements and notes. For more information regarding our critical
accounting estimates and policies, see Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Estimates and Policies” of our Form 10-K for the
year ended December 31, 2009.




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. None of the instruments in our investment portfolio
are held for trading purposes. At June 30, 2010, our cash equivalents and
investments consist of money market, asset-backed securities, US treasury and
public corporate debt securities with duration of 504 days. At June 30, 2010 our
cash equivalents and investments were $65 million and had a related weighted
average interest rate of 1.4%. Interest rate fluctuations impact the carrying
value of the portfolio. The fair value of our portfolio of marketable securities
would not be significantly affected by either a 10 % increase or decrease in the
rates of interest due primarily to the short duration nature of the 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.




As we do
not have any operations outside of the United States, we are not exposed to
foreign currency risks.




ITEM
      4.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Our
management evaluated, with the participation of our Principal Executive Officer
and Principal 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, our Principal Executive Officer and Principal Financial Officer have
concluded, as of that time, that our disclosure controls and procedures were
effective.




Changes
in Internal Controls




During
the quarter ended June 30, 2010, there has been no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


22


PART
II – OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS




See Note
2 – Legal Proceedings of our Notes to Consolidated Financial
Statements.




ITEM 1A.
            RISK
      FACTORS




We are
not aware of any material changes to the risk factors included in Item 1A “Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31,
2009.




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None.




Issuer
Purchases of Equity Securities




During
the second quarter of 2010, 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)April
      1, 2010 –
                    April
      30, 2010
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  17,199May
      1, 2010 –
                    May
      31, 2010
                  
                  
                  8,000
                  
                  
                  $
                  10.00
                  
                  
                  
                  8,000
                  
                  
                  $
                  17,119June
      1, 2010 –
                    June
      30, 2010
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  17,119




On July
22, 2010, our Board of Directors approved a new share repurchase plan effective
upon the expiration of the current plan in August 2010, authorizing us to
repurchase up to 2.0 million shares of Stamps.com stock from August 2010 to
February 2011.




Our
repurchase of any of our shares will be subject to limitations that may be
imposed on such repurchases by applicable securities laws and regulations and
the rules of The NASDAQ Stock Market. Repurchases may be made in the open
market, or in privately negotiated transactions from time to time at our
discretion. We will consider repurchasing stock under our current repurchase
program by evaluating such factors as the price of the stock, the daily trading
volume and the availability of large blocks of stock and any additional
constraints related to material inside information we may possess. We have no
commitment to make any repurchases.




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




ITEM
      4.
            RESERVED




ITEM
      5.
            OTHER
      INFORMATION




None.




ITEM
      6.
            EXHIBITS




31.1
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.




31.2
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.




32.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002.




32.2
            Certification
      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)August
      5, 2010
              By:
              /s/ KEN MCBRIDEKen
      McBrideChief
      Executive OfficerAugust
      5, 2010
              By:
              /s/ KYLE HUEBNERKyle
      HuebnerChief
      Financial Officer


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