Historically, preserving photos and creating original, thoughtful compilations of memories was a difficult, expensive, manual, time-consuming and often inconvenient process for consumers. As a result of these constraints, the need for easy, convenient, versatile, affordable and trusted online photo services has emerged. Internet and digital photo-based technology enables consumers to create an archive of memories that extends beyond photos to include highly personalized, more engaging products and services that can be protected and preserved for future generations.

The growing use of digital cameras, largely driven by price decreases, has increased the demand for online photo-printing services. Industry sources estimate that in 2005, worldwide shipments of digital cameras reached approximately 94 million units, a 27% increase from the approximately 74 million units shipped in 2004. The United States accounted for more than 20 million of those units shipped in 2005, with the penetration of digital cameras reaching nearly half of U.S. households.

High-bandwidth, high-speed Internet access has spurred the integration of the Internet into daily life and provides consumers with improved performance and speed for sharing information, especially large files such as digital images. Industry sources estimate that by the end of 2006, there will be more than 1 billion Internet users worldwide. Another industry source estimates that in 2004, nearly 204 million Americans, representing approximately 75% of the U.S. population, had access to the Internet in their homes. In addition, more Internet users now have high-speed Internet access. Industry sources estimate that by the end of 2006, approximately 63% of all online U.S. households will have broadband Internet connectivity.

Customers can upload digital photos from their computer to the Company’s website one at a time, many at once through simple drag-and-drop or by using its new photo organization software. There are no limits to photo file sizes and the upload processes are accelerated by multi-threading, which enables photos to be uploaded simultaneously, thereby reducing image upload times. Unlike some competitive services, the Company does not compress image files as part of the upload process, which preserves quality and photo resolution.

Customers initially upload their photos into user-defined albums. The Company offers multiple ways to further organize and find pictures. Customers can also use the Company’s “favorites” function to tag their favorite photos with a star rating system on both the website and within the Studio.

Once photos have been uploaded, customers can choose to view their photos in a variety of ways, including photo slideshows. To improve picture quality, customers also have access to the Company’s free online editing and image enhancement tools. In addition to cropping and red-eye removal, the Company offers a variety of creative options, such as saturating photos with additional color or changing color shots to black-and-white or sepia. Customers are also able to choose from a wide variety of photo borders, and the Company offers free customized back printing on photos and the option to add captions to many of its products.

The Company enables customers to create a variety of personalized products from their photos, including prints in wallet, 4x6, 5x7, 8x10, 11x14, 16x20 and 20x30 sizes, greeting cards, calendars, photo books and other photo-based products and merchandise. The Company’s highly-interactive, design-it-yourself “creation paths” help even first-time customers make professional-looking, high-quality prints and products.

The Company enables its customers to share images in several different ways. Customers can e-mail friends, family and colleagues with a link to an individual album that can be viewed as a slideshow of images. In order to view those images, e-mail recipients simply click on the URL link in the e-mail and view images immediately without the need to register. Recipients can then order prints or save them into their own album.

Cost of revenues increased by $5.3 million, or 40%, from the six months ended June 30, 2005 to the six months ended June 30, 2006.

Technology and development expense increased by $3.2 million, or 63%, from the six months ended June 30, 2005 to the six months ended June 30, 2006.

Sales and marketing expense increased by $3.0 million, or 59%, from the six months ended June 30, 2005 to the six months ended June 30, 2006.

Interest expense increased by $47,000, or 47%, from the six months ended June 30, 2005 to the six months ended June 30, 2006.

Net loss increased by $2.4 million, or 183%, from a loss of $1.3 million in the six months ended June 30, 2005 to a loss of $3.7 million in the six months ended June 30, 2006.