professional fees and other general corporate expenses.

Stock-Based Compensation.    Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective method.

We grant stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R) is fully recognized on the grant date, and no estimate is required for post-vesting option forfeitures.

Gain on disposal of DVDs.    Gain on disposal of DVDs represents the difference between proceeds from sales of DVDs and associated cost of DVD sales. Cost of DVD sales includes the net book value of the DVDs sold, shipping charges and, where applicable, a contractually specified fee for the DVDs that are subject to revenue sharing agreements.

Results of Operations

The following table sets forth, for the periods presented, the line items in our consolidated statements of operations as a percentage of total revenues. The information contained in the table below should be read in conjunction with the financial statements and notes thereto included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

The increase in our revenues in 2008 as compared to 2007, and 2007 as compared to 2006, was primarily a result of the substantial growth in the average number of paying subscribers arising from increased consumer awareness of the benefits of online movie and TV episode rentals and other aspects of our service. This increase was offset in part by a decline in average monthly revenue per paying subscriber, resulting from the continued growth in our lower cost subscription plans, as well as a price reduction for our most popular subscription plans during the third quarter of 2007. We expect the average revenue per paying subscriber to continue to decline until the mix of new subscribers and existing subscribers is approximately equivalent by subscription plan price point.

The following table presents our ending subscriber information:

The increase in cost of subscription revenues in absolute dollars for 2008 as compared to 2007 was primarily attributable to the following factors:

 

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The number of DVDs mailed to paying subscribers increased 19%. This was driven by a 23% increase in the number of average paying subscribers, partially offset by a decline in monthly DVD rentals per average paying subscriber attributed to the continued growth of our lower priced plans.



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Postage and packaging expenses increased by 23%. This was primarily attributable to the increase in the number of DVDs mailed to paying subscribers and increases in the rates of first class postage in May 2007 and May 2008.



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Content expenses increased by 7%. This increase was primarily attributable to the increased investments in streaming content in 2008, as well as an increase in DVD revenue sharing costs.



The increase in cost of subscription revenues in absolute dollars for 2007 as compared to 2006 was primarily attributable to the following