annual basis by providing a credit card or check form of payment. Fees are recorded initially as deferred revenue and then recognized as earned revenue on a daily basis over the prepaid subscription period.
We also generate a small amount of revenue from professional services which primarily consist of the creation of customized templates for our customers. Revenue generated from professional services accounted for less than 2% of gross revenue for each of the three months ended March 31, 2008 and 2007. Cost of Revenue and Operating Expenses
We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation of general office assets to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Cost of Revenue. Cost of revenue consists primarily of wages and benefits for software operations and customer support personnel, credit card processing fees, and depreciation, maintenance and hosting of our software applications underlying our product offerings. We allocate a portion of customer support costs relating to assisting trial customers to sales and marketing expense. The expenses related to our hosted software applications are affected by the number of customers who subscribe to our products and the complexity and redundancy of our software applications and hosting infrastructure. We expect cost of revenue to increase moderately as a percentage of revenue for the remainder of 2008 as we plan to expand our operations to include a second sales and support office and as we absorb the full impact to cost of our recently opened second third-party hosting facility. Over the longer term, we anticipate that these expenses will increase in absolute dollars but decrease as a percentage of revenue as we expect to continue to increase our number of customers over time.
Research and Development. Research and development expenses consist primarily of wages and benefits for product strategy and development personnel. We have focused our research and development efforts on both improving ease of use and functionality of our existing products as well as developing new offerings. We primarily expense research and development costs. The small percentage of direct development costs related to software enhancements which add functionality are capitalized and depreciated as a component of cost of revenue. We expect that on an annual basis research and development expenses will increase in absolute dollars, but decrease as a percentage of revenue, as we expect to continue to enhance and expand our product offerings.
Sales and Marketing. Sales and marketing expenses consist primarily of advertising and promotional costs, wages and benefits for sales and marketing personnel, partner referral fees, and the portion of customer support costs that relate to assisting trial customers. Advertising costs consist primarily of pay-per-click payments to search engines, other online and offline advertising media, including radio and print advertisements, as well as the costs to create and produce these advertisements. Advertising costs are expensed as incurred. Promotional costs consist primarily of public relations, memberships, and event costs. Our advertising and promotional expenditures have historically been highest in the fourth quarter of each year as this reflects a period of increased sales and marketing activity for many small organizations. In order to continue to grow our business and brand and category awareness, we expect that we will continue to commit substantial resources to our sales and marketing efforts. As a result, we expect that on an annual basis sales and marketing expenses will increase in absolute dollars, but decrease as a percentage of revenue, as we anticipate that we will continue to grow.
General and Administrative. General and administrative expenses consist primarily of wages and benefits for administrative, human resources, legal, internal information technology support, finance and accounting personnel, professional fees, other taxes and other corporate expenses. We expect that general and administrative expenses will increase as we continue to add personnel in connection with the anticipated growth of our business and incur further costs related to operating as a public company. Therefore, we expect that our general and administrative expenses will increase in absolute dollars as we continue to grow and operate as a public company.

Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our significant accounting policies, which are described in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC, the following accounting policies involve the most judgment and complexity:
• Revenue recognition

• Income taxes

• Software and website development costs

• Stock-based compensation

Accordingly, we believe the policies set forth above are critical to aid in fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. There have been no material changes in our critical accounting policies since December 31, 2007. For further information please see the discussion of critical accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC. Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007 Revenue. Revenue for the three months ended March 31, 2008 was $18.2 million, an increase of $8.5 million, or 87%, over revenue of $9.7 million for the three months ended March 31, 2007. The increase in revenue resulted primarily from an 82% increase in the number of average monthly email marketing customers and an increase in average revenue per customer. Average monthly email marketing customers increased to 175,183 in the three months ended March 31, 2008 from 96,384 in the three months ended March 31, 2007, while average revenue per customer in the three months ended March 31, 2008 increased to $34.57 from $33.59 in the three months ended March 31, 2007. We expect our average revenue per customer to increase in 2008 as we expect to generate additional revenue from our email marketing customers for add-ons to the email marketing product and from our survey product.
Cost of Revenue. Cost of revenue for the three months ended March 31, 2008 was $4.8 million, an increase of $2.1 million, or 75%, over cost of revenue of $2.7 million for the three months ended March 31, 2007. As a percentage of revenue, cost of revenue was 26% for the three months ended March 31, 2008 and 28% for the three months ended March 31, 2007. The increase in absolute dollars primarily resulted from an 82% increase in the number of average monthly email marketing customers which resulted in increased hosting and operations expense and customer support costs. Of the increase in cost of revenue, $1.1 million resulted from increased personnel costs attributable to additional employees in our customer support and operations groups to support customer growth. Additionally, $602,000 resulted from increased depreciation, hosting and maintenance costs as a result of scaling and adding capacity to our hosting infrastructure, and $213,000 related to increased credit card fees due to a higher volume of billing transactions. We expect cost of revenue to increase modestly as a percentage of revenue for the remainder of 2008 as we expand our operations to include a second sales and support office and as we absorb the full impact to cost of our recently opened second third-party hosting facility. Research and Development Expenses. Research and development expenses for the three months ended March 31, 2008 were $3.3 million, an increase of $1.1 million, or 54%, over research and development expenses of $2.2 million for the three months ended March 31, 2007. The increase was primarily due to additional personnel related

costs of $1.0 million because we increased the number of research and development employees to further enhance our products. We expect research and development expenses to increase in absolute dollars but decrease as a percentage of revenue.
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2008 were $8.7 million, an increase of $2.6 million, or 42%, over sales and marketing expenses of $6.1 million for the three months ended March 31, 2007. The increase was primarily due to increased advertising and promotional expenditures of $1.1 million due to continued expansion of our multi-channel marketing strategy. Additionally, personnel related costs increased by $871,000 because we added employees to accommodate the growth in sales leads. In addition, partner referral fees increased by $216,000 as the number of new customers generated from our channel partners increased. We expect sales and marketing expenses to increase in absolute dollars but decrease as a percentage of revenue.
General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2008 were $2.0 million, an increase of $900,000, or 87%, over general and administrative expenses of $1.1 million for the three months ended March 31, 2007. The increase was primarily due to additional personnel related costs of $566,000 because we increased the number of general and administrative employees to support our overall growth, and to increased stock-based compensation expense due to the increase in the value of our common stock. We also incurred increased insurance and professional fees to support the reporting and regulatory requirements of a public company.
Interest and Other Income (Expense), Net. Interest and other income (expense), net for the three months ended March 31, 2008 was $976,000, an increase of $1.3 million from interest and other income (expense), net of ($291,000) for the three months ended March 31, 2007. The increase was primarily due to a $832,000 increase in interest income from investments in marketable securities and cash equivalents primarily due to an increase in the balance of investments and cash equivalents as a result of the proceeds we received in our initial public offering, which was completed in the fourth quarter of 2007. Additionally in 2007, we accounted for an outstanding redeemable convertible preferred stock warrant as a liability held at fair market with changes in value recorded as other expense. For the three months ended March 31, 2007, we recorded a charge of $420,000 relating to this warrant. As a result of the exercise of the warrant in the fourth quarter of 2007 we no longer record warrant related charges. Liquidity and Capital Resources
At March 31, 2008, our principal sources of liquidity were cash and cash equivalents and marketable securities of $102 million.
Since our inception we have financed our operations primarily through the sale of redeemable convertible preferred stock, issuance of convertible promissory notes, borrowings under credit facilities and, to a lesser extent, cash flow from operations. On October 9, 2007, we completed our initial public offering, in which we issued and sold 6,199,845 shares of common stock at a price to the public of $16.00 per share. We raised approximately $90.4 million in net proceeds after deducting underwriting discounts and commissions and other offering costs. We used $2.6 million of proceeds to repay our outstanding principal and interest under our term loan facility. Subsequent to the end of our first quarter in 2008, we completed a secondary public offering in which we issued and sold 314,465 shares of common stock at a price to the public of $16.00 per share. We raised approximately $4.1 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering costs. In the future, we anticipate that our primary sources of liquidity will be cash generated from our operating activities. Cash Provided By Operating Activities
Net cash provided by operating activities was $3.9 million for the three months ended March 31, 2008 as compared to net cash used in operating activities of $1.8 million for the three months ended March 31, 2007. Net cash provided by operating activities for the three months ended March 31, 2008 consisted of the contribution from net income of $338,000, working capital accounts of $2.1 million and non-cash charges of $1.4 million. The contribution from working capital accounts was primarily due to an increase in deferred revenue of $1.7 million and a decrease in prepaid expenses and other receivables of $259,000. Cash provided by an increase in accrued

expenses of $1.2 million was mostly offset by a decrease in accounts payable of $1.1 million. The non-cash charges consisted primarily of depreciation and amortization of $882,000 and stock-based compensation expense of $560,000. Net cash used in operating activities for the three months ended March 31, 2007 of $1.8 million consisted of the net loss of $2.7 million and net change in working capital accounts of $140,000 partially offset by non-cash charges of $991,000. Working capital accounts used cash primarily due to an increase in prepaid expenses and other receivables of $289,000 and a decrease in accounts payable and accrued expense totaling $1.2 million partially offset by an increase in deferred revenue of $1.4 million. The non-cash charges consisted primarily of depreciation and amortization of $532,000 and the change in fair value of the redeemable convertible preferred stock warrant of $420,000. Cash Used in Investing Activities
Net cash used in investing activities was $147,000 for the three months ended March 31, 2008 compared to $921,000 for the three months ended March 31, 2007. Net cash used in investing activities during the three months ended March 31, 2008 consisted primarily of cash paid to purchase property and equipment of $3.2 million partially offset by cash received from the maturities of marketable securities of $3.1 million. Property and equipment purchases consist of hardware and software to support our product infrastructure, capitalization of certain software development costs, computer equipment for our employees and equipment and leasehold improvements primarily related to additional office space. Net cash used in investing activities during the three months ended March 31, 2007 of $921,000 consisted primarily of net cash paid to purchase property and equipment of $985,000 and an increase in restricted cash due to an amendment to the Company's operating lease partially offset by proceeds from the net change in short-term marketable securities.
Cash Used in Financing Activities
Net cash used by financing activities was $313,000 for the three months ended March 31, 2008 and was primarily due to the payments of issuance costs for our secondary public offering of common stock, which was completed in the second quarter of 2008. We capitalized issuance costs of $354,000 for our secondary public offering and as of March 31, 2008, these amounts were included in prepaid expenses and other current assets. This was partially offset by proceeds from the issuance of our common stock pursuant to the exercise of stock options. Net cash used in financing activities was $126,000 for the three months ended March 31, 2007 and consisted of repayment of outstanding borrowings under the term loan facility of $137,000 partially offset by proceeds from the issuance of our common stock pursuant to the exercise of stock options. Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2008 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

                                                                         Payments Due In
                                                      Less Than                                                    More Than
                                      Total            1 Year            1 - 3 Years          3 - 5 Years           5 Years
                                                                          (In thousands)
Operating lease obligations (1)         5,646              2,225                3,421                    0                  0
Contractual commitments                 8,851              1,825                3,376        $       3,070        $       580

Total                                $ 14,497        $     4,050        $       6,797        $       3,070        $       580




(1)   In April 2008,
      we entered
      into an
      amendment to
      lease
      additional
      office space
      commencing
      immediately
      and
      terminating in
      September 2010
      representing
      additional
      minimum lease
      obligations of
      $72,000,
      $124,000 and
      $93,000 in
      2008, 2009 and
      2010,
      respectively.

Our future capital requirements may vary materially from those now planned and will depend on many factors, including, but not limited to, development of new products, market acceptance of our products, the levels of advertising and promotion required to launch additional products and improve our competitive position in the marketplace, the expansion of our sales, support and marketing organizations, the establishment of additional offices in the United States and worldwide and the building of infrastructure necessary to support our anticipated growth, the response of competitors to our products and our relationships with suppliers and clients. Since the introduction of our on-demand email marketing product in 2000, we have experienced increases in our expenditures consistent

with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase in the future.
We opened a second third-party hosting facility in the first quarter of 2008 to provide additional redundancy and increased scaleability for our product infrastructure. We made capital expenditures in 2007 and in early 2008 and plan to make additional capital expenditures in 2008 for capital equipment to be used in this facility. We also plan to open a second sales and support office in the second half of 2008. We anticipate making capital commitments in 2008 and 2009 associated with the build-out and outfitting of this office. Additionally we anticipate continuing investments in property and equipment to support the anticipated growth in our business. We believe that our current cash, cash equivalents and marketable securities and operating cash flows will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. Thereafter, we may need to raise additional funds through public or private financings or borrowings to develop or enhance products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.
During the last three years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. Subsequent to the end of our first quarter in 2008, we completed a secondary public offering in which we issued and sold 314,465 shares of common stock at a price to the public of $16.00 per share. We raised approximately $4.1 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering costs.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities. Recent Accounting Pronouncements
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, or SFAS 159, which permits companies to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. As of January 1, 2008 and for the period ended March 31, 2008, we elected not to apply the fair value option to any of our financial assets or liabilities.
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements, or SFAS 157, for financial assets and liabilities, which defines fair value, establishes . . .