10-Q/A 1 file001.htm AMENDMENT NO. 1 TO FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
(Amendment No. 1)


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

For the quarterly period ended March 31, 2004
or


	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: 0-29739

(Exact name of registrant as specified in its charter)


Delaware				11-3239091
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

575 Eighth Avenue, 8^th Floor, New York, New York				10018
(Address of principal executive offices)				(Zip code)

(212) 798-9100
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 No

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):

Yes No

As of May 4, 2004 there were 23,645,723 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS

EXPLANATORY NOTE

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Item 6.

Exhibits and Report on Form 8-K

EXPLANATORY NOTE

Register.com, Inc. (the "Company") is filing this amendment to its Quarterly Report on Form 10-Q for the three months ended March 31, 2004 (this "Amendment") to reflect the restatement of its financial statements as of December 31, 2003 and for the three months ended March 31, 2003 and the corresponding changes described below.

The restatement reflects the recognition of a deferred income tax asset as a result of a tax election made in the first quarter of 2003 which allowed the Company to record a tax benefit relating to an otherwise non-deductible goodwill impairment charge of $8.3 million recorded by RCOM Europe plc (formerly known as Virtual Internet plc) in the third quarter of 2002. At the time of the goodwill impairment charge, no income tax benefit was recorded as the goodwill impairment was not deductible for tax purposes in the country of domicile of RCOM Europe and therefore the tax benefit was not realizable. In March 2003, the Company filed an election with the Internal Revenue Service ("IRS") to include the consolidated income or loss of RCOM Europe in the Company's consolidated U.S. federal tax return starting in the year 2003. Accordingly, the goodwill that had been impaired for financial reporting purposes in the third quarter of 2002 became deductible in the U.S. over a period of approximately 14 years beginning on January 1, 2003. Based on the Company's expectation of generating future taxable income in the U.S., realization of an income tax benefit related to the tax deductibility of the goodwill is considered more likely than not and therefore a deferred income tax asset of $3.2 million should have been recorded in the first quarter of 2003 upon the change in tax status.

This restatement favorably impacted the provision for income taxes and increased net income for the three months ended March 31, 2003 by $3.2 million, and increased deferred tax assets and increased total stockholders' equity at December 31, 2003 and March 31, 2004 by $3.2 million. The restatement did not affect the Company's cash flow or income from operations for the three months ended March 31, 2003.

A discussion of the restatement is set forth in Note 3 to the Condensed Consolidated Financial Statements included in this Amendment. Changes also have been made to the following items in this Amendment as a result of the restatement:

Part I


•	Item 1, Consolidated Financial Statements


•	Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations


•	Item 4, Controls and Procedures

This Amendment does not reflect events that have occurred after May 7, 2004, the date the Quarterly Report on Form 10-Q was originally filed. Information with respect to those events has been or will be

set forth, as appropriate, in the Company's subsequent periodic filings, including its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Any reference to facts and circumstances at a "current" date refer to such facts and circumstances as of such original filing date.

The Company is concurrently filing with the Securities and Exchange Commission amendments on Form 10-K/A to its Annual Report for the year ended December 31, 2002, and Form 10-Q/A to its Quarterly Report on Form 10-Q for the six months ended June 30, 2004 to reflect changes required as a result of the restatement. No amendments have been made to the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003, June 30, 2003 or September 30, 2003 as all relevant changes have been reflected in this Amendment and in the Annual Report on Form 10-K/A for the year ended December 31, 2003 and Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2004.

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

(in thousands, except share amounts)


	March 31, 2004			December 31, 2003
	(Restated— See Note 3)
Assets	(Unaudited)
Current assets
Cash and cash equivalents	$	52,933		$	52,991
Short-term investments		39,001			39,043
Accounts receivable, less allowance of $1,667 and $1,850, respectively		6,479			6,505
Prepaid domain name registry fees		14,086			14,477
Deferred tax assets, net		17,433			17,454
Other current assets		3,776			2,388
Total current assets		133,708			132,858
Fixed assets, net		8,127			8,363
Assets held for sale		554			—
Prepaid domain name registry fees, net of current portion		9,830			9,856
Deferred tax asset, net		10,684			10,698
Other investments		496			396
Marketable securities		4,486			2,527
Goodwill and other intangibles, net		1,841			1,952
Total assets	$	169,726		$	166,650
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities	$	16,056		$	16,214
Deferred revenue		54,823			53,728
Total current liabilities		70,879			69,942
Deferred revenue, net of current portion		33,863			33,191
Total liabilities		104,742			103,133
Commitments and contingencies
Stockholders' equity
Preferred stock — $.0001 par value, 5,000,000 shares authorized; none issued and outstanding at March 31, 2004 and December 31, 2003, respectively		—			—
Common stock — $0.0001 par value, 200,000,000 shares authorized; 23,611,516 and 23,536,801 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively		2			2
Additional paid—in capital		100,273			100,228
Unearned compensation		(361	)		(528	)
Accumulated other comprehensive income		2,313			2,144
Accumulated deficit		(37,243	)		(38,329	)
Total stockholders' equity		64,984			63,517
Total liabilities and stockholders' equity	$	169,726		$	166,650

The accompanying notes are an integral part of these consolidated financial statements. The information for December 31, 2003 was obtained from audited financial statements but excludes certain disclosures required by generally accepted accounting principles.

(in thousands, except per share amounts)


	Three months ended March 31,
	2004		2003
			(Restated— See Note 3)
Net revenues	$	25,917	$	27,090
Cost of revenues		8,411		8,291
Gross profit		17,506		18,799
Operating costs and expenses Sales and marketing		7,305		6,647
Research and development		4,174		3,901
General and administrative (including non—cash compensation of $167 and $188, respectively)		4,614		6,092
Amortization of intangibles		158		134
Total operating expenses		16,251		16,774
Income from operations		1,255		2,025
Other income, net		359		879
Income before provision for income taxes		1,614		2,904
Provision (benefit) for income taxes		529		(2,331	)
Net income		1,085		5,235
Other comprehensive income Unrealized gain (loss) on marketable securities		12		(273	)
Unrealized gain (loss) on foreign currency translation		157		(216	)
Comprehensive income	$	1,254	$	4,746
Basic income per share	$	0.05	$	0.13
Diluted income per share	$	0.04	$	0.12
Weighted average number of shares outstanding:
Basic		23,560		40,685
Diluted		24,909		43,286

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


	Three months ended March 31,
	2004			2003
				(Restated— See Note 3)
Cash flows from operating activities:	(in thousands)
Net income	$	1,085		$	5,235
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,005			1,245
Compensatory stock options and warrants expense		167			(12	)
Deferred income taxes		35			(3,255	)
Changes in assets and liabilities affecting operating cash flows:
Accounts receivable		75			(829	)
Prepaid domain name registry fees		478			(361	)
Deferred revenues		1,558			1,420
Other current assets		(1,491	)		(1,858	)
Accounts payable and accrued liabilities		46			(660	)
Net cash provided by operating activities		2,958			925
Cash flows from investing activities:
Purchases of fixed assets		(1,141	)		(1,597	)
Purchases of investments		(87,784	)		(52,756	)
Maturities of investments		85,767			66,872
Net cash (used in) provided by investing activities		(3,158	)		12,519
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants		45			360
Repayment of notes payable		—			(4,185	)
Net cash provided by (used in) financing activities		45			(3,825	)
Effect of exchange rate changes on cash		97			(190	)
Net increase in cash and cash equivalents		(58	)		9,429
Cash and cash equivalents at beginning of period		52,991			50,557
Cash and cash equivalents at end of period	$	52,933		$	59,986

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

1. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Register.com, Inc. (the "Company") and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated.

Interim Financial Statements

The interim financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements included in this Report reflect all normal recurring adjustments which the Company considers necessary for fair presentation of its results of operations for the interim periods covered and its financial position at the date of the interim balance sheet. The December 31, 2003 balance sheet was obtained from the audited financial statements at that date. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes the disclosures are adequate for understanding the information presented. Operating results for interim periods are not necessarily indicative of operating results for the entire year. These interim financial statements should be read in conjunction with the Company's December 31, 2003 audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A.

Cash equivalents

The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents. The Company maintains its cash balances in highly rated financial institutions. At times, such cash balances exceed the Federal Deposit Insurance Corporation limit. The Company has pledged $3.1 million of its cash as of March 31, 2004 and December 31, 2003 as security deposits, primarily to support outstanding letters of credit.

Investments

The Company classifies its investments in debt securities as marketable securities in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are carried at fair market value, with unrealized gains and losses reported in stockholders' equity as a component of other comprehensive income (loss). Gains or losses on securities sold are based on the specific identification method.

Securities with maturities of less than one year are classified as current, and securities with maturities of greater than one year are classified as non-current.

Fixed assets

Depreciation and amortization is calculated using the straight-line method. Estimated useful lives are as follows: capitalized computer software — three years; equipment, furniture and fixtures — three to five years; buildings — fifty years; leasehold improvements — shorter of the estimated useful life of each improvement or the lease term. Costs of additions and improvements are capitalized, and repairs and maintenance costs are charged to operations as incurred.

As of March 31, 2004, the Company has classified certain owned real estate as Assets held for sale. The Company has a program to actively identify a buyer and expects the sale to be completed during the period ending September 30, 2004.

Revenue recognition

The Company's revenues are primarily derived from domain name registration fees, other products and services, and advertising.

Domain name registration fees

Registration fees charged to end-users for registration services are recognized on a straight-line basis over the registration term. A majority of end-user subscribers pay for services with credit cards for which the Company receives remittances from the credit card associations, generally within two business days after the sale transaction. A provision for estimated refunds to customers and chargebacks from customers is recorded as a reduction of deferred revenue and accounts receivable. For many of our corporate customers who register domain names through our Corporate Services division and participants in our Global Partner Network, we establish lines of credit based on credit worthiness. Referral commissions earned by participants in our Global Partner Network are deducted from gross registration revenue for presentation in our financial statements.

Other products and services

Revenue from other products and services are generally recognized on a straight-line basis over the period in which services are provided. Payments received in advance of services rendered are included in deferred revenue.

Advertising

Advertising revenues are derived principally from short-term advertising contracts. Advertising revenues are recognized in the periods in which the advertisements are displayed or the required number of impressions are achieved, provided that no significant Company obligation remains and collection of the resulting receivable is probable.

Deferred revenue

Deferred revenue represents the unearned portion of payments received and invoices rendered, net of provisions for estimated refunds to customers and chargebacks from customers, and referral commissions for certain Global Partner Network partners.

Prepaid domain name registry fees

Prepaid domain name registry fees represent advance payments to registries for domain name registrations. Registry fees are amortized to expense on a straight-line basis over the terms of the registrations.

Research and development and software development costs

Research and development costs are charged to expense as incurred. Software development costs incurred for each project subsequent to the preliminary project stage and prior to the post-implementation stage are capitalized and amortized to cost of revenues over the estimated useful life of the related product or service when ready or available for its intended use.

Income taxes

The Company recognizes deferred income taxes by the asset and liability method, based on differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect of a change in tax rates on deferred taxes is recognized in income in the period of the enactment date. In addition, valuation allowances are established when appropriate to reduce deferred tax assets to the amounts expected to be realized.

Fair value of financial instruments

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value because of the relatively short-term nature of these instruments.

Concentration of credit risk

Concentration of credit risk associated with accounts receivable is limited due to the large number of customers, as well as their dispersion across various industries and geographic areas. No single customer comprised more than 5% of our gross accounts receivable balance as of March 31, 2004. The Company has no derivative financial instruments.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company's most significant estimates relate to potential refunds to customers and chargebacks from customers; the realizability of accounts receivable, fixed assets, other investments, intangible assets, and deferred tax assets; potential liability to credit card associations for penalties for credit card chargebacks and refunds in excess of certain thresholds; potential liability for various matters in litigation; and estimated useful lives of fixed assets and intangible assets. Actual results could differ from management's estimates. The markets for the Company's products and services are characterized by intense competition, continual technology advances and new product/service introductions, all of which could impact the future realizability of the Company's assets.

Stock-based compensation

The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations. The Company provides the disclosures required by SFAS 123, "Accounting for Stock-Based Compensation."

The following table illustrates the pro forma effect on net income and net income per share had compensation cost for stock-based incentive plans been determined in accordance with the fair value based method of accounting for stock-based compensation as defined in SFAS 123. Because option grants awarded during 2004 and 2003 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair value based method.


	Three months ended March 31,
	2004		2003
			(Restated— See Note 3)
	(in thousands, except per share data)
Net income:
As reported	$	1,085	$	5,235
Add: Stock-based employee compensation included in net income as reported		167		188
Deduct: Total stock-based employee compensation expense determined under the fair value based method		714		1,224
Pro forma	$	538	$	4,199
Net income per share:
As reported — basic	$	0.05	$	0.13
As reported — diluted	$	0.04	$	0.12
Pro forma — basic	$	0.02	$	0.10
Pro forma — diluted	$	0.02	$	0.10

Net income per share

The Company calculates earnings per share in accordance with SFAS 128, "Earnings Per Share."

Basic earnings per share ("Basic EPS") is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share ("Diluted EPS") gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted EPS, the treasury stock method is used in determining the number of shares assumed to be purchased from the proceeds of exercises of options and warrants.


	Three months ended March 31,
	2004		2003
			(Restated— See Note 3)
	(in thousands, except per share data)
Net income per share — basic:
Net income available to common shareholders	$	1,085	$	5,235
Weighted average shares — basic		23,560		40,685
Net income per share — basic	$	0.05	$	0.13
Net income per share — diluted:
Net income	$	1,085	$	5,235
Weighted average shares outstanding — basic		23,560		40,685
Dilutive effect of stock options		187		298
Dilutive effect of warrants		1,162		2,303
Weighted average shares — diluted		24,909		43,286
Net income per share — diluted	$	0.04	$	0.12

During the three months ended March 31, 2004 and 2003, respectively, 3.1 million and 4.0 million stock options were excluded from the calculation of diluted earnings per share because the exercise price was greater that the average market price of the common shares and were therefore anti-dilutive; however, the dilutive effect of such options, had they been included in the calculation, would be substantially lower than 3.1 million and 4.0 million shares, respectively, because of the application of the Treasury Stock Method in determining the number of dilutive options.

Weighted average number of shares

The weighted average number of shares outstanding for the three months ended March 31, 2004 was 23,560,000 shares (basic) and 24,909,000 shares (diluted). The weighted average number of shares outstanding for the three months ended March 31, 2003 was 40,685,000 shares (basic) and 43,286,000 shares (diluted). As a result of the completion in September 2003 of the Company's $120 million self-tender offer, in which the Company purchased 17,910,347 shares of its common stock and warrants to purchase 987,283 shares of its common stock (based on the conversion of such warrants on a cashless basis at the $6.35 per share offer price), the weighted average number of shares declined as of that date. The lower weighted average number of shares will have the effect of increasing net income (loss) per share in future periods as compared to earlier periods where the number of outstanding shares was larger.

Comprehensive income

The Company follows SFAS 130, "Reporting Comprehensive Income." This statement requires that items of comprehensive income be classified by their nature in the financial statements, with accumulated balances shown separately.

The difference between net income and comprehensive income for the three months ended March 31, 2004 was $0.2 million, representing an unrealized gain on foreign currency translation and an unrealized gain on marketable securities. For the three months ended March 31, 2003 the difference between net income and comprehensive income was $0.5 million, representing a net unrealized loss on marketable securities of $0.3 million and an unrealized loss on foreign currency translation of $0.2 million.

Reclassification

Certain amounts in the financial statements of the prior periods have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

The Company has reviewed newly issued recent accounting pronouncements and has determined that there are no new pronouncements which impact the financial statements.

Intangible assets

A breakdown of the Company's intangible assets, all of which were recorded in connection with the acquisition of RCOM Europe, and the related amortization is:


	As of March 31, 2004
	Gross Book Value		Accumulated Amortization (in thousands)		Net Book Value
Intangible assets:
Software	$	497	$	324	$	173
Tradename		113		30		83
Customer list		2,150		565		1,585
Total	$	2,760	$	919	$	1,841
Projected amortization expense:
For the nine months ending December 31, 2004	$	600
Year 2005	$	455
Year 2006	$	410
Year 2007	$	410
Year 2008	$	75

2. Commitments and Contingencies

Litigation

In November 2001, the Company, its former Chairman, President and Chief Executive Officer Richard D. Forman and its former Vice President of Finance and Accounting, Alan G. Breitman (the "Individual Defendants"), and Goldman Sachs & Co. and Lehman Brothers, Inc., two of the underwriters in the syndicate for our March 3, 2000 initial public offering, were named as defendants in a class action complaint alleging violations of the federal securities laws in the United States District Court, Southern District of New York. Goldman Sachs & Co. and Lehman Brothers, Inc. distributed 172,500 of the 5,750,000 shares in the initial public offering. A Consolidated Amended Complaint captioned In re: Register.com, Inc. Initial Public Offering Securities Litigation (which is now the operative complaint), was filed on April 19, 2002. The Consolidated Amended Complaint seeks unspecified damages as a result of various alleged securities law violations arising from activities purportedly engaged in by the underwriters in connection with our initial public offering. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company's initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those

investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for the Company's initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies before one judge in the U.S. District Court for the Southern District of New York. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based on Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against the Company. The Company has approved a Memorandum of Understanding ("MOU") and related agreements which set forth the terms of a settlement between the Company, the plaintiff class and the vast majority of the other approximately 300 defendants. It is anticipated that any potential financial obligation of the Company to plaintiffs due pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies including the negotiation of a settlement agreement and its approval by the Court. We cannot predict whether or when a settlement will occur or be finalized.

Register.com has been named as a defendant in a purported class action lawsuit filed on May 2, 2002, which alleges that our SafeRenew program violates New York law. This lawsuit was filed by Brian Wornow, on behalf of himself and all others similarly situated, in the Supreme Court of the State of New York. Our SafeRenew program was implemented in January 2001 on an "opt-out basis" to .com, .net and .org registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of our services agreement, at the time a covered registration comes up for renewal, we attempt to charge a registrant's on-file credit card a one year renewal fee and, if the charge is successful, to renew the registration for that additional one-year period. Register.com believes that the SafeRenew program was properly adopted as an effort to protect our customers' online identities. Plaintiff sought a declaratory judgment that the SafeRenew program violates New York General Obligations Law Section 5-903, and also asserted claims for breach of contract, money had and received, and unjust enrichment. Plaintiff further sought to enjoin Register.com from automatically renewing domain name registrations, an award of compensatory damages, restitution, disgorgement of profits (plus interest), cost and expenses, attorneys' fees, and punitive damages. On September 6, 2002, Register.com filed a motion to dismiss the complaint in its entirety. On April 17, 2003, Register.com's motion was granted as to two counts (declaratory judgment and breach of contract), but denied as to two other counts (unjust enrichment and money had and received). On April 28, 2003, Register.com filed an answer denying the material allegations of the complaint. On May 2, 2003, Plaintiff filed a notice of appeal to the Appellate Division, First Department of the two counts that were dismissed. On May 15, 2003, Plaintiff filed an amended complaint asserting new causes of action against Register.com for (i) deceptive trade practices in violation of New York General Business Law Section 349; (ii) conversion; and (iii) breach of the implied covenant of good faith and fair dealing. On June 9, 2003, Register.com moved to dismiss Plaintiff's newly asserted causes of action. On July 23, 2003 the Court heard oral arguments on Register.com's motion. On February 2, 2004, Plaintiff perfected an appeal from the dismissal of the Section 5-903 claims. On February 19, 2004, Register.com's motion to dismiss the first, fourth and a fifth causes of action of Plaintiff's amended complaint was granted. Plaintiff has perfected an appeal from this ruling, and the two appeals have been consolidated. While we intend to continue to defend ourselves vigorously in this lawsuit, in an effort to mitigate a potential worst-case scenario, we entered into an insurance agreement pursuant to which, in accordance with its terms and conditions, to the extent that we have a final judgment in excess of $15 million our insurance carrier would cover up to an additional $30 million. Currently, we are unable to estimate the amount of loss, if any, which may result upon the resolution of the claim; accordingly, no provision has been included within the accompanying financial statements.

On or about January 17, 2003, individual stockholders of the Company filed complaints in the Delaware Court of Chancery purporting to commence class action lawsuits against the Company and each of the individual members of the Company's Board of Directors. The complaints were styled as

Lanza v. Morten, et al (C.A. No. 20123) and Norton v. Morten, et al (C.A. No. 20124). The complaints alleged, among other things, breaches of fiduciary duty by the directors in connection with certain publicly disclosed indications of interest in the acquisition of Company and further alleged that the directors were not fulfilling their fiduciary duties in connection with their review and response to such indications of interest. On January 9, 2004 the complaints were withdrawn by the plaintiff and on January 12, 2004 the court approved the dismissal of the complaints without prejudice.

In February 2001, Register.com was named as a defendant in a purported class action lawsuit pending in the Supreme Court of the State of New York. The complaint alleges that by linking new domain names registered through Register.com to a "Coming Soon" web page that informs visitors the name was recently registered through Register.com, and provides links to services provided by Register.com and its business partners, as well as a banner advertisement for such services, Register.com has (i) breached an implied covenant of good faith and fair dealing; (ii) engaged in deceptive trade practices in violation of New York General Business Law Section 349; and (iii) been unjustly enriched. Prior to the filing of the lawsuit, in addition to disclosing the Coming Soon page by means of such domain names, Register.com also disclosed the existence of the Coming Soon page in the "Help" and "Frequently Asked Questions" portions of its website. In March 2001, Register.com added an additional disclosure concerning the Coming Soon page to Register.com's Services Agreement. In April 2001, Register.com filed a motion to dismiss Plaintiff's claims for failure to state a claim upon which relief may be granted and in August 2001, Register.com's motion was granted. Plaintiff appealed the dismissal to the Appellate Division, First Department, and in April 2003 the Appellate Division affirmed the dismissal of the unjust enrichment cause of action, but reinstated the causes of action for breach of an implied covenant of good faith and fair dealing and deceptive trade practices. Thereafter, Register.com and Plaintiff agreed upon a settlement which, following notice to the proposed settlement class, was approved by the Court on November 3, 2003. In accordance with the settlement, Register.com has provided each member of the putative class with a coupon for a five dollar discount off of future purchases of Register.com's fees for domain name registrations and renewals and has paid attorney's fees in the amount awarded by the Court to class counsel. These coupons expire in October 2004, after which the settlement will be finalized and the case will be dismissed.

On or about August 7, 2003 and August 8, 2003, purported stockholders of the Company filed two separate complaints in the Court of Chancery of Delaware against the Company and certain current and past individual members of the Company's Board of Directors. The first complaint was styled as McBride v. Register.com, Inc., et al (C.A. No. 20470) and the second complaint was styled as DeMatte v. Register.com, Inc., et al (C.A. No. 20474). On November 3, 2003, the two cases were consolidated (C.A. No. 20470) and on November 5, 2003, an amended complaint was filed. The complaint alleges, among other things, that the named defendants breached their fiduciary duties in connection with the self tender that the Company commenced in August 2003 and completed in September 2003, and that the self tender is an attempt by the individual defendants to entrench their positions in the Company. The complaint seeks, among other things, the court's certification as a class action lawsuit, unspecified damages and rescission of the self tender. On December 5, 2003 Register.com filed a motion to dismiss for failure to state a claim upon which relief can be granted and failure to comply with the requirements of Rule 23.1 and on February 26, 2004 Register.com filed a brief in support of such motion.

There are various other claims, lawsuits and pending actions against the Company incidental to the operations of its business. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's financial position, results of operations or liquidity.

Credit Card Penalties

The Company has experienced high rates of refunds to customers and chargebacks from credit card associations, which have resulted in the assessment of financial penalties by two credit card associations. If the Company is unable to lower its refund and chargeback rates to levels deemed acceptable by the credit card associations, the Company could continue to face such penalties and may

lose its rights to accept credit card payments from customers through one or more credit card associations. The Company had not previously incurred penalties from one of those associations until August 2002, at which time it was assessed a penalty of $0.3 million applicable to the year 2001. Under that association's rules, additional potential penalties may be imposed at the discretion of the association. Because the imposition of any potential penalties is at the discretion of the association, subject to contractual limitations, generally accepted accounting principles require that the Company accrue charges to general and administrative expense of $0.5 million and $0.7 million for the three months ended March 31, 2004 and 2003, respectively, to cover what the Company estimates to be the maximum potential penalties that could be imposed under that association's rules for transactions occurring during those periods. As of March 31, 2004 the Company has accrued a total of $6.7 million for such potential penalties, which is included in Accounts payable and accrued liabilities on the Consolidated Balance Sheet. Any such potential penalties would be imposed on the Company's credit card processor by the association, and under the Company's contract with its processor, the Company is required to reimburse such penalties. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess accounts previously accrued as a reduction of general and administrative expense at that time.

Commitments

Under a prior registry agreement with ICANN, the Company had committed to provide up to $8.5 million in funding and other non-cash contributions to its subsidiary, RegistryPro, for its activities in establishing, operating and marketing the .pro top level domain (the "Funding Commitment"). Effective February 26, 2004, the Company sold the core assets of the RegistryPro business and ICANN agreed to the assignment of the agreement to the purchaser, although the Company has not obtained a release of the Funding Commitment from ICANN. Through March 31, 2004 the Company had contributed approximately $4.1 million in cash, and had also made non-cash contributions. In addition, the purchaser has agreed to assume up to $2.0 million of this Funding Commitment. We believe that we have satisfied our Funding Commitment under the registry agreement, although we have not obtained a release from ICANN. The impact of the sale of RegistryPro was not material to the financial statements of the Company.

Note 3 — Restatement of Financial Statements

The Company restated its consolidated financial statements as of December 31, 2003 and for the three months ended March 31, 2003. The restatement reflects the recognition of a deferred income tax asset as a result of a tax election made in the first quarter of 2003 which allowed the Company to record a tax benefit relating to an otherwise non-deductible goodwill impairment charge of $8.3 million recorded by RCOM Europe plc (formerly known as Virtual Internet plc) in the third quarter of 2002. At the time of the goodwill impairment charge, no income tax benefit was recorded as the goodwill impairment was not deductible for tax purposes in the country of domicile of RCOM Europe and therefore the tax benefit was not realizable. In March 2003, the Company filed an election with the Internal Revenue Service ("IRS") to include the consolidated income or loss of RCOM Europe in the Company's consolidated U.S. federal tax return starting in the year 2003. Accordingly, the goodwill that had been impaired for financial reporting purposes in the third quarter of 2002 became deductible in the U.S. over a period of approximately 14 years beginning on January 1, 2003. Based on the Company's expectation of generating future taxable income in the U.S., realization of an income tax benefit related to the tax deductibility of the goodwill is considered more likely than not and therefore a deferred income tax asset of $3.2 million should have been recorded in the first quarter of 2003 upon the change in tax status.

This restatement favorably impacted the provision for income taxes and increased net income for the three months ended March 31, 2003 by $3.2 million, and increased deferred tax assets and increased total stockholders' equity at March 31 2003 and December 31, 2003 by $3.2 million. The restatement did not affect the Company's cash flow or income from operations for the three months ended March 31, 2003.

In addition, there was a reclassification from current deferred tax asset to noncurrent deferred tax asset of approximately $7.8 million.

A summary of the aggregate effect of this restatement on the Company's Consolidated Balance Sheet as of December 31, 2003, and the Statement of Operations for the three months ended March 31, 2003, is shown below.


	As of December 31, 2003
	As Reported			As Restated
Changes to Consolidated Balance Sheet:
Deferred tax asset, net – current	$	24,927		$	17,454
Total current assets	$	140,331		$	132,858
Deferred tax asset, net – noncurrent	$	—		$	10,698
Total assets	$	163,425		$	166,650
Accumulated deficit	$	(41,554	)	$	(38,329	)
Total shareholders' equity	$	60,292		$	63,517


	Three months ended March 31, 2003
	As Reported		As Restated
Changes to Consolidated Statement of Operations:
Provision (benefit) for income taxes	$	894	$	(2,331	)
Net income	$	2,010	$	5,235
Comprehensive income	$	1,521	$	4,746
Basic income per share	$	0.05	$	0.13
Diluted income per share	$	0.05	$	0.12

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This report contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words "expects", "anticipates", "intends", "believes" or similar language. Actual results could differ materially from those anticipated in such forward-looking estatements. All forward-looking statements included in this document are based on information available to us on the date hereof. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we may not inform you immediately if they do. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. We caution investors that our business and financial performance are subject to substantial risks and uncertainties. In evaluating our business, prospective investors should carefully consider the information set forth under the caption "Risk Factors" in addition to the other information set forth herein and elsewhere in our other public filings with the Securities and Exchange Commission.

Restatement of Financial Statements

We restated our financial statements as of December 31, 2003 and for the three months ended March 31, 2003 to correct an error related to a deferred income tax benefit which should have been recorded in the first quarter of 2003 in connection with RCOM Europe's goodwill impairment charge of $8.3 million in the third quarter of 2002. The goodwill was initially recorded in March 2002 in connection with the acquisition of RCOM Europe. At the time of the goodwill impairment charge in the third quarter of 2002, no income tax benefit was recorded as the goodwill impairment was not deductible for tax purposes in the country of domicile of RCOM Europe and therefore the tax benefit was not realizable. In March 2003, the Company filed an election with the IRS to include the consolidated income or loss of RCOM Europe in the Company's consolidated U.S. federal tax return starting in the year 2003. Accordingly, the goodwill that had been impaired for financial reporting purposes in the third quarter of 2002 became deductible in the U.S. over a period of approximately 14 years beginning on January 1, 2003. Based on the Company's expectation of generating future taxable income in the U.S., realization of an income tax benefit related to the tax deductibility of the goodwill is considered more likely than not and therefore a deferred income tax asset of $3.2 million should have been recorded in the first quarter of 2003 upon the change in tax status. This restatement favorably impacted the provision for income taxes and increased net income for the three months ended March 31, 2003 by $3.2 million, and increased deferred tax assets and increased total stockholders' equity at March 31, 2003 and December 31, 2003 by $3.2 million. The restatement did not affect the Company's cash flow or income from operations for the three months ended March 31, 2003. The error was caused by a material control weakness which is further discussed in Item 4.

Overview

We are a provider of global domain name registration, website, email and other Internet services for businesses and consumers that wish to have a unique address and branded identity on the Internet. Domain names serve as addresses and identities on the World Wide Web. They enable a business or person to establish an Internet presence and are integral to the use of websites (e.g. www.register.com), email (e.g. johndoe@register.com) and other types of Internet-based services.

We began processing domain name registrations in the generic top level domains (gTLDs) .com, .net and .org in June 1999 and, as such, were the first registrar accredited by the Internet Corporation for Assigned Names and Numbers (ICANN) to compete in the domain name registration market after

ICANN introduced competition in the industry. We had approximately 3.1 million active domain name registrations under management as of March 31, 2004, representing approximately 1 million customers. Currently, we register, renew and transfer domain names in TLDs such as .com, .net, .org, .biz, .info and .name and in over 400 country code top level domains (ccTLDs), including .de for Germany and .jp for Japan and sub domains, such as .co.uk and .org.uk for the United Kingdom.

We believe that we offer a quick and user-friendly domain name registration process as well as responsive and reliable customer support. We also assist our customers in further developing and maintaining their Internet presence by offering them a range of website, email and other value-added products and services.

Domain name registration activity is driven by the use of the Internet by businesses and consumers for electronic commerce and communication, the promotion, marketing and protection of brands and identities across the world and other online activities. Our mission is to become the preferred provider of domain names, website, email and other Internet services for customers seeking to build, manage and promote their online presence.

Our Retail division focuses on small to medium-sized businesses and individuals. Generally, these customers purchase domain name registration services and other value-added services directly from our website located at www.register.com. In addition to our Retail division, we maintain a Corporate Services division. Our Corporate Services division provides domain name registration and related products and services, including global registration and management services and online brand and trademark protection, to large corporate enterprises with specialized registration needs. In order to extend the distribution reach of our products and services, we also maintain a Global Partner Network (GPN) wholesale division which works with companies that resell our domain name registration and related products and services to their customers using our software solutions. Our GPN partners are typically Internet Service Providers (ISPs), web-hosting companies, telecom carriers and web portals, but also include online and offline retailers and business aggregators.

In late 2002, we began a restructuring program to address the challenges facing our business. The primary goal of our restructuring program is to introduce new systems that will enable us to operate our business more efficiently. For our Retail division, we are building a new and more flexible systems architecture which we believe will enable us to introduce new products and services more rapidly and cost effectively and to improve our operating efficiencies and reduce costs. We believe that by making our technology architecture more flexible and efficient we will achieve these goals. For our Corporate Services division, we are developing a system to automate as much of the order processing and fulfillment for ccTLD registrations as possible. We anticipate that our new Corporate Services system will enable us take sales orders and fulfill them on a more highly automated basis, thereby reducing our costs and increasing our efficiency and accuracy.

As part of our cost reduction efforts, we have also relocated some of our groups and operations to our Canadian facility, where the overhead and labor costs are lower than in our other locations. In addition, in February 2004, we sold our RegistryPro business, which had received ICANN's approval to operate the .pro registry. We sold this business because we believe that operating a registry would have distracted us and taken time, energy and resources from our core business of operating a registrar and selling related value-added products and services.

Significant Accounting Policies

Use of Estimates

The preparation of our financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our most significant estimates relate to potential refunds to customers and chargebacks from customers; the realizability of accounts receivable, fixed assets, other investments, intangible assets, and deferred tax assets; potential liability to credit card associations for penalties for credit card chargebacks and refunds in excess of certain thresholds;

potential liability for various matters in litigation; and estimated useful lives of fixed assets and intangible assets. Actual results could differ from management's estimates. The markets for our products and services are characterized by intense competition, continual technology advances and new product/service introductions, all of which could impact the future realizability of our assets.

Net Revenues

We derive our net revenues from domain name registrations, other products and services and advertising. We earn registration fees in connection with new, renewed, and transferred-in registrations. Registration periods generally range from one to ten years.

Domain name registration revenues are deferred at the time of the registration and are recognized ratably over the term of the registration period. Under this subscription-based model, we recognize revenue over the period during which we provide the registration services, including customer service and maintenance of the individual domain name records. We require prepayment at the time of sale via credit card for most online domain name registration sales, which provides us with the full cash fee at the beginning of the registration period whereas we recognize the revenues over the registration period. For many of our customers who register domain names through our Corporate Services division, and certain of the participants in our Global Partner Network, we establish lines of credit based on credit worthiness.

Under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder's signature at the time of the transaction, even though the financial institution issuing the credit card may have approved the transaction. As a result, we must estimate the amount of credit card chargebacks we will receive in the future related to credit card sales in the current period. In determining our estimate, on a monthly basis we review historical rates of credit card chargebacks, current economic trends and changes in acceptance of our products and services. Deferred revenues and revenues recognized are presented net of provisions for estimated refunds to customers and chargebacks from customers.

In addition to our standard registration fees, many of which are published on our www.register.com website, we have a number of different fee structures for our domain name registration services. Our Corporate Services division delivers a diversified range of generally higher-priced services for our corporate customers and also extends volume-based discounts for domain name registrations and transfers. We pay referral commissions to certain participants in our Global Partner Network and to participants in our affiliate network. Other participants in our Global Partner Network pay us a wholesale price per registration, discounted off of our standard registration fee.

Our total domain names under management was approximately 3.1 million as of December 31, 2003 and March 31, 2004.

Other products and services, which primarily consist of email, domain name forwarding, web hosting, site submission to search engines, application processing fees for new gTLDs, intellectual property protection services related to the introduction of new gTLDs and software, and fees for modifying existing registrations, are sold either as one time offerings or through annual or monthly subscriptions, depending on the product or service. Revenues from our other products and services are recognized ratably over the period in which we provide such services. Revenues from processing fees for domain name applications, which may or may not result in domain name registrations, and other intellectual property protection services related to the introduction of new gTLDs, are recognized immediately upon the sale of the services.

Advertising revenues are derived from the sale of sponsorships and banner advertisements, typically under short-term contracts that range from one month to one year in duration. We recognize these revenues in the periods in which the advertisements are displayed or the required number of impressions are achieved, provided that no significant company obligation remains and collection of the resulting receivable is probable.

Cost of Revenues

Our cost of revenues consists of the costs associated with providing domain name registrations and other products and services. Cost of revenues for domain name registrations represents amortization of registry fees on a straight-line basis over the registration term, depreciation of the equipment used to process the domain name registrations, fees paid for co-location facilities housing our equipment, and fees paid to the financial institutions to process credit card payments on our behalf. Cost of revenues does not include penalties for excessive credit card chargebacks and refunds; such penalties are classified as general and administrative expense. We pay registry fees for gTLDs ranging from $5.30 per year for each .biz domain name registration to $6 per year for each .info, .com, .net and .org domain name registration. We pay registry fees ranging from $6 to $5,020 per year for one to ten-year country code domain name registrations. The largest component of our cost of revenues is registry fees which, while paid in full at the time the domain name is registered, are recorded as a prepaid expense and amortized to cost of revenues ratably over the terms of the registrations.

Cost of revenues for our other products and services consists of fees paid to third-party service providers, depreciation of equipment used to deliver the services, fees paid for co-location facilities housing our equipment, and fees paid to financial institutions to process credit card payments on our behalf. Cost of revenues for other products and services is recognized ratably over the periods in which the services are provided.

We have no direct cost of revenues associated with our advertising revenues and we have no incremental cost of revenues associated with delivering advertisements since we use the same equipment to deliver the advertisements as we use for our domain name registration services. Therefore, the gross profit margin on advertising revenue is 100%, and accordingly, any decrease in advertising revenue would represent a reduction of our gross profit of the same amount. We incur costs including salaries and commissions for our advertising sales staff, which are classified as operating expenses, not as cost of revenues.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development, general and administrative (including non-cash compensation), and amortization of intangibles. Our sales and marketing expenses consist primarily of employee salaries, including customer service representatives, marketing programs such as advertising, and commissions paid to our sales representatives. Research and development expenses consist primarily of employee salaries, fees for outside consultants, software licensing fees and related costs associated with the development and integration of new products and services, enhancement of existing products and services, and quality assurance. General and administrative expenses, excluding non-cash compensation, include salaries and other personnel-related expenses for executive, financial and administrative personnel, as well as professional fees, insurance premiums, penalties for excessive credit card chargebacks and refunds, and provisions for uncollectible receivables. Facilities costs are allocated across the various operating expense categories. We account for non-cash compensation expense in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. Non-cash compensation expense relates to grants of restricted stock, stock options and warrants to employees, directors, consultants and vendors with exercise prices below fair market value of the underlying stock on the date of grant. Based on such grants through March 31, 2004, we expect to record approximately $0.4 million in additional non-cash compensation expense through 2008 as follows: $0.3 million in the remaining nine months of 2004, and $0.1 million through 2008. Non-cash compensation expense will reduce our earnings or increase our losses, as applicable, in future periods.

The credit card associations may impose financial penalties if our chargebacks and/or refunds exceed certain thresholds. Such penalties are not charged to revenues, but are classified as general and administrative expense. Because the imposition of any potential penalties is at the discretion of the association, subject to contractual limitations, generally accepted accounting principles require that we accrue amounts to cover what we estimate to be the maximum potential penalties that could be

imposed under that association's rules. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess amounts previously accrued, as a reduction of general and administrative expense at that time.

If a significant percentage of customers continue to request refunds from us or contact their bank to request that the amount we charged to their credit card be charged back to us based on claims that their credit card was used fraudulently or without their consent, our business could be materially adversely affected. See "Risk Factors" and Note 2 to Consolidated Financial Statements "Commitments and Contingencies — Credit Card Penalties" for additional information in connection with penalties that may be imposed by credit card associations and other risks associated with the Company's credit card chargebacks and refunds.

We review our goodwill and intangibles for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess the recoverability of goodwill and intangibles using estimated undiscounted cash flows. These cash flows include an estimated terminal value based on a hypothetical sale of an acquisition at the end of the related amortization period. We also compare the total market value of our common stock with the book value of our stockholders' equity. Based on the foregoing factors, if we conclude that an other-than-temporary impairment of goodwill or intangibles has occurred, we record an impairment write-down.

Income Taxes

In preparing our financial statements, we make estimates of our current tax obligations and temporary differences resulting from timing differences for reporting items for financial statement and tax purposes, the most significant of which is deferred revenue. We recognize deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Valuation allowances are established when appropriate, based on management's judgment, to reduce the carrying value of deferred tax assets to the amounts expected to be realized.

Net Income (Loss)

Although we were profitable for the first quarter of 2004 and the year 2003, we were not profitable for the year 2002. Our net loss for 2002 included a goodwill impairment write-down and amortization of intangibles of $17.0 million. Although we have recently taken several initiatives intended to reduce our operating expenses in 2004, we cannot assure you as to when or if these reductions will be realized. Losses at RCOM Europe and RegistryPro have contributed to a decline in our profitability. Further, we anticipate that our revenues from advertising will be materially lower in future periods. We expect losses at RCOM Europe to impact our profitability negatively through the year 2004 and perhaps beyond. We sold our RegistryPro business in February 2004 and, accordingly, we believe that RegistryPro will not have a significant negative impact on our profitability in 2004 or beyond. In addition, unless we lower our credit card refunds and reduce our level of credit card chargebacks, we may continue to be potentially liable for significant penalties from credit card associations, which would continue to impact our profitability (see "Risk Factors" for additional information). From January 1, 2002 through March 31, 2004, the Company has accrued a total of $6.7 million for such potential penalties, which amount is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess amounts previously accrued as a reduction of general and administrative expense at that time.

For all the above reasons, we cannot assure you that we will be able to operate profitably or continue to generate positive cash flow in the future.

Results of Operations

The following tables set forth selected unaudited quarterly statement of operations data, in dollar amounts and as a percentage of net revenues, for the three months ended March 31, 2004 and 2003. In our opinion, this information has been prepared substantially on the same basis as the audited financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2003, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts set forth below to present fairly the unaudited quarterly results of operations data. The operating results in any quarter are not necessarily indicative of the results to be expected for any future period.


	Three months ended March 31,
	2004		2003
			(Restated)
	(in thousands)
Net revenues	$	25,917	$	27,090
Cost of revenues		8,411		8,291
Gross profit		17,506		18,799
Operating costs and expenses
Sales and marketing		7,305		6,647
Research and development		4,174		3,901
General and administrative (includes non-cash compensation of $167, and $188, respectively)		4,614		6,092
Amortization of intangibles		158		134
Total operating costs and expenses		16,251		16,774
Income from operations		1,255		2,025
Other income, net		359		879
Income before provision for income taxes		1,614		2,904
Provision for income taxes		529		(2,331	)
Net income		1,085		5,235
Other comprehensive income:
Unrealized gain (loss) on marketable securities		12		(273	)
Unrealized gain (loss) on foreign currency translation		157		(216	)
Comprehensive income	$	1,254	$	4,746


	Three months ended March 31,
	2004			2003
				(Restated)
Net revenues		100	%		100	%
Cost of revenues		32			31
Gross profit		68			69
Operating costs and expenses
Sales and marketing		28			25
Research and development		16			14
General and administrative (includes non-cash compensation of 0% and 0%, respectively)		18			22
Amortization of intangibles		1			—
Total operating costs and expenses		63			62
Income from operations		5			7
Other income, net		1			3
Income before provision for income taxes		6			11
Provision for income taxes		2			(9	)
Net income		4			20
Unrealized gain (loss) on marketable securities		—			(1	)
Unrealized gain (loss) on foreign currency translation		1			(1	)
Comprehensive income		5	%		18	%

Three months ended March 31, 2004 compared to three months ended March 31, 2003

Net Revenues

Total net revenues decreased 4% to $25.9 million for the first quarter of 2004 from $27.1 million for the first quarter of 2003.

Domain name registrations. Recognition of revenues from domain name registrations decreased 5% to $22.7 million for the first quarter of 2004 from $23.9 million for the first quarter of 2003. The decrease was due in part to a lower number of domain names registered and slightly lower average prices per year of subscription term in the first quarter of 2004, and in part to the inclusion in revenues for the first quarter of 2003 of a $0.5 million adjustment related to domain name transfers away for which revenue recognition was accelerated. We may face continued pricing pressure in the future, which would adversely impact our revenues and profitability.

Other Products and Services. Revenues from other products and services increased by $0.8 million to $2.9 million for the first quarter of 2004 from $2.1 million for the first quarter of 2003. The increase was due primarily to increased revenues from WebSiteNow!^TM, email services, web hosting, domain name recovery fees, and other services.

At March 31, 2004, we had $88.7 million of deferred revenue compared with $86.9 million at December 31, 2003, representing an increase of $1.8 million during the first quarter of 2004. The increase was due to sales of domain name registrations in the first quarter of 2004 exceeding revenue recognition of previously recorded sales. Our deferred revenue balance is an indicator of revenue to be recognized in future periods.

Advertising. Revenues from advertising decreased 73% to $0.3 million for the first quarter of 2004 from $1.2 million for the first quarter of 2003. From the fourth quarter of 2002 through the third quarter of 2003, our largest advertising customer, a provider of web-hosting services, accounted for approximately $1.0 million of advertising revenues per quarter. However, once we began selling web-hosting services directly to our own customers, this advertiser became a competitor and so we decided to discontinue our advertising relationship with them. We have not sold advertising to this advertising customer after September 30, 2003 and we do not anticipate any additional revenue from this customer. Accordingly, we anticipate that our advertising revenue will decline by approximately

$1.0 million per quarter compared with the level of advertising revenue in the third quarter of 2003, unless we can replace these revenues with advertising sales to other customers. Our sales of web-hosting services directly to our own customers will be classified as revenues from other products and services.

Cost of Revenues

Cost of Revenues. Total cost of revenues increased 1% to $8.4 million for the first quarter of 2004 from $8.3 million for the first quarter of 2003.

Cost of Domain Name Registrations. Cost recognized for domain name registrations increased 2% to $8.0 million for the first quarter of 2004 from $7.9 million for the first quarter of 2003. The increase was primarily due to a $0.5 million retroactive cost adjustment recognized in the first quarter of 2004 related to domain names seized from customers for which we had incurred registry fees which are not recoverable.

Cost of Other Products and Services. Cost of other products and services was $0.4 million for the first quarter of 2004 and $0.4 million for the first quarter of 2003. Although revenues from other products and services increased by $0.8 million in the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003, we did not have a corresponding increase in cost of other products and services because the products and services primarily responsible for the increase in these revenues require an insignificant amount of related costs.

Gross Profit Margin

Our gross profit margin decreased to 68% in the first quarter of 2004 from 69% in the first quarter of 2003, primarily as a result of lower advertising revenues in the first quarter of 2004, and in part as a result of the $0.5 million adjustment related to domain name transfers away in the first quarter of 2003 (which increased revenue in that period) and the $0.5 million cost adjustment in the first quarter of 2004 related to domain names seized from customers (which increased cost of revenues in that period).

Operating Expenses

Total operating expenses decreased 3% to $16.3 million for the first quarter of 2004 from $16.8 million for the first quarter of 2003.

Sales and Marketing. Sales and marketing expenses increased 10% to $7.3 million for the first quarter of 2004 from $6.6 million for the first quarter of 2003. The increase was primarily due to increases in television and radio advertisements and on-line media spending. We anticipate that our marketing expense will increase significantly in 2004.

Research and Development. Research and development expenses increased 7% to $4.2 million for the first quarter of 2004 from $3.9 million for the first quarter of 2003. The increase resulted primarily from higher costs for technology personnel working to improve our systems and operations. We anticipate that research and development expenses will remain high in the coming periods as we continue our efforts to upgrade and improve our systems.

General and Administrative. General and administrative expenses decreased 24% to $4.6 million for the first quarter of 2004 from $6.1 million for the first quarter of 2003. The decrease resulted primarily from the incurrence in 2003 of $1.0 million of advisory fees and expenses in connection with our consideration of various strategic alternatives following the unsolicited acquisition proposals we received in early 2003. Also contributing to the decrease was a reduction in our bad debt expense in the first quarter of 2004 as a result of our collections of past-due receivables. Generally accepted accounting principles require the Company to accrue amounts to cover what the Company estimates to be the maximum potential financial penalties that could be imposed by credit card associations if our chargebacks and/or refunds exceed certain thresholds. Accordingly, general and administrative expense for the first quarter of 2004 and 2003 includes $0.5 million and $0.6 million, respectively, for

such potential penalties. As of March 31, 2004 the Company has accrued a total of $6.7 million for such potential penalties, which amount is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet. Any such potential penalties would be imposed at the discretion of the credit card association. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess amounts previously accrued, as a reduction of general and administrative expense at that time.

Other Income, Net

Other income, net, which consists primarily of interest income, net of interest expense, decreased to $0.4 million for the first quarter of 2004 from $0.9 million for the first quarter of 2003. The decrease was primarily due to a reduction of $120 million in our investment portfolio in connection with our self-tender offer for $120 million of our common stock and warrants which was completed in September 2003, as well as lower prevailing interest rates in the first quarter of 2004.

Provision for Income Taxes

The provision for income taxes in the first quarter of 2004 was $0.5 million, representing an effective rate of 33% of pretax income. In the first quarter of 2003 we recorded a tax benefit, net, of $2.3 million, primarily as a result of our filing of an election with the IRS to include the consolidated income or loss of RCOM Europe in our consolidated U.S. federal tax return starting in the year 2003. That election resulted in our recording a deferred tax benefit of $3.2 million in the first quarter of 2003 in connection with RCOM Europe's goodwill impairment charge of $8.3 million which had been recorded in the third quarter of 2002. See further explanation above under "Restatement of Financial Statements". Our provision for income taxes in the first quarter of 2004 and 2003 was also favorably impacted by our receipt of tax-free interest income from our investment portfolio, and in part from research and development tax credits, in both periods.

Earnings Per Share — Weighted average number of shares

The weighted average number of shares outstanding for the first quarter of 2004 was 23,560,000 shares (basic) and 24,909,000 shares (diluted). The weighted average number of shares outstanding for the three months ended March 31, 2003 was 40,685,000 shares (basic) and 43,286,000 shares (diluted). As a result of our completion in September 2003 of our $120 million self-tender offer, in which we purchased 17,910,347 shares of our common stock and warrants to purchase 987,283 shares of our common stock (based on the conversion of warrants on a cashless basis at the $6.35 per share offer price), the weighted average number of shares declined as of that date. The lower number of shares outstanding will have the effect of increasing net income (loss) per share in future periods. The use of $120 million of our cash to consummate the self-tender offer will reduce our future interest income because our available cash and investment balances will be lower.

Liquidity and Capital Resources

Historically, we have funded our operations and met our capital expenditure requirements primarily through cash generated from operations, sales of equity securities and borrowings. We issued 5,222,279 shares of our common stock to the public on March 3, 2000, which enabled us to raise approximately $115.3 million in cash after deducting underwriting discount and other offering expenses. In September 2003, we used $120 million of our cash, short-term investments and marketable securities to complete a self-tender offer in which we purchased 17,910,347 shares of our common stock and warrants to purchase 987,283 shares of our common stock (based on the conversion of warrants on a cashless basis at the $6.35 per share offer price).

At March 31, 2004, our cash and cash equivalents, short-term investments and marketable securities totaled $96.4 million, compared with $94.6 million at December 31, 2003, representing an increase of $1.8 million during the first quarter of 2004. During the first quarter of 2004 we generated $3.0 million of cash from operations, and we used $1.1 million for capital expenditures.

We currently anticipate that our operating expenses will continue to represent a material use of our cash resources and we expect our expenses for research and development to increase from 2003 levels during the first half of 2004 and perhaps beyond, and we expect our sales and marketing expense to increase from 2003 levels for the full year 2004 and perhaps beyond. We believe that our current balance of cash, short-term investments and marketable securities together with anticipated cash to be provided from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, when compared to our financial position prior to the consummation of our $120 million self-tender offer in September 2003, we have significantly reduced our cash position and our future interest income, reduced our ability to engage in significant transactions without additional debt or equity financing, reduced our ability to cover existing contingent or other future liabilities, and potentially negatively impacted our liquidity during future periods of increased capital requirements or operating expenses.

Under a prior registry agreement with ICANN, we had committed to provide up to $8.5 million in funding and other non-cash contributions to our subsidiary, RegistryPro, for its activities in establishing, operating and marketing the .pro top level domain. Effective February 26, 2004, we sold the core assets of the RegistryPro business and ICANN agreed to the assignment of the registry agreement to the purchaser. Through March 31, 2004 we had contributed approximately $4.1 million in cash, and we had also made non-cash contributions which we have valued at approximately $2.4 million. In addition, the purchaser has agreed to assume $2.0 million of this $8.5 million commitment. Accordingly, we believe that we have satisfied our funding commitment in full, as well as our other obligations under the registry agreement, although we have not obtained a release of these obligations from ICANN.

A summary of our contractual obligations for operating leases and other commitments as of March 31, 2004 is as follows:


	Payments Due by Period
	Total		Less than 1 Year		2-3 Years		4-5 Years		More than 5 Years
	(in thousands)
Operating lease obligations	$	5,938	$	1,323	$	2,274	$	1,719	$	622
Purchase obligations ⁽¹⁾		3,232		1,499		1,516		215		2
Total	$	9,170	$	2,822	$	3,790	$	1,934	$	624


(1)	Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed minimum quantities to be purchased: fixed, minimum or variable pricing provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the risks described below, together with the other information contained in this report. If any of the following events actually occurs, our business, financial condition and results of operations may suffer materially. As a result, the market price of our common stock could decline, and you could lose all or part of your investment in our common stock.

Risks Related to Our Industry and Our Business

We have a recent history of losses and we cannot assure you that we will be able to operate profitably or sustain or attain positive cash flow in future periods.

Although we were profitable for the year 2003 and the first quarter of 2004, we were not profitable for the years 2002 and 2001. Our net loss for 2002 included a goodwill impairment writedown of $17.0 million and our net loss for 2001 included a $32.5 million writedown of intangibles. We incurred losses from operations of approximately $17.2 million for the year 2002 and $19.9 million for the year 2001. As of March 31, 2004 our accumulated deficit totaled $37.2 million. We expect our research and development costs to continue at high levels throughout 2004 as we continue our efforts to upgrade and improve our systems and we cannot assure you when our research and development costs will decrease. In addition, losses at our RCOM Europe and RegistryPro subsidiaries have contributed to a decline in our profitability. We are expecting losses at RCOM Europe to impact our profitability negatively through the year 2004 and perhaps beyond and we cannot assure you that RCOM Europe will achieve profitability. We sold our RegistryPro business in February 2004 and, accordingly, we believe that RegistryPro will not have a significant negative impact on our profitability in 2004 or beyond. We have also budgeted for a significant increase in our marketing expense in 2004 compared with 2003, and we cannot assure you that those additional marketing expenses will result in additional revenues. In addition, unless we lower the number of credit card refunds and reduce our level of credit card chargebacks, we may continue to be subject to significant penalties that would impact our profitability. Further, we anticipate that our revenues from advertising will be materially lower in future periods. For all these reasons, we cannot assure you that we will be able to operate profitably or sustain or attain positive cash flow in the future.

If our restructuring program is not successful, we may not achieve the operational and financial objectives we have set for the Company, and our business, financial condition and results of operations could be materially adversely affected.

We are in the midst of a restructuring program to address the core issues that were contributing to our inefficient cost structure and hindering our efforts to improve our results of operations and earnings. The primary focus of this program is our effort to build a new and more flexible Retail systems architecture, which we believe will enable us to introduce new products and services more rapidly and cost-effectively, and a new Corporate Services systems architecture, which we believe will enable us to reduce our costs of taking and fulfilling sales orders. Other goals of our restructuring program include reducing costs and reducing credit card chargeback and refund rates.

If we fail to complete our restructuring program successfully, and in particular fail to upgrade and improve our internal systems in a timely and cost-effective manner, our business, financial condition and results of operation could be materially adversely affected. In connection with our restructuring efforts, we have incurred, and expect to continue to incur through most of 2004, significant research and development expenditures as we continue to invest in systems architecture improvements, and seek to improve our business processes. We have dedicated technology consultants and personnel to effect these improvements even as we maintain our current systems with other personnel. As long as we are focused on improving our systems and business processes, we are limited in the time and resources we can dedicate to launching new products and services to meet the needs of our customers and to better compete in the marketplace. We have already experienced significant delays in the launch of our new systems which have in turn caused delays in the launch of new products or services

and in upgrades of current ones. Our inability to meet the needs of our customers will affect our ability to effectively compete, to attract and retain customers and to market new products and services.

We cannot assure you that our restructuring program will achieve the goals we have set for it. The implementation of new systems is a complex process that requires communication and coordination throughout our organization and has significant execution risks. We have experienced delays in various stages of these projects and cannot assure you when or if these projects will be successfully completed. Even if our new systems architecture is launched successfully, we cannot assure you that it will enable us to reduce our expenses to the significant extent and in the time frames we currently contemplate. We cannot assure you that our business will ultimately realize the additional benefits we hope to achieve from improved systems or that our new systems will not have unintended adverse impacts on our ability to service our customers and operate our business as planned.

If the marketplace for new domain names does not grow, the domain name registration industry would be adversely affected and our net revenues may decline.

Although there was a slowdown in the growth and expansion rate in the marketplace for new domain names in 2002 and 2003 compared to 2000 and 2001, there was an increase in the marketplace for new .com and .net domain names in the first quarter of 2004. However, we cannot assure you that this trend will continue and that the growth rate will continue to increase. In addition, even if the marketplace does begin to experience an increase in the growth rate, we cannot assure you that we will experience a commensurate increase in our domain name registrations. Our total number of domain names under management has declined from approximately 3.3 million names as of March 31, 2003 to approximately 3.1 million names as of March 31, 2004. We experienced a decline in the total number of domain name registrations, renewals and transfers to us for the quarter ended March 31, 2004 (580,400) as compared with the quarter ended March 31, 2003 (583,700). If there is a slowdown in the growth rate of the marketplace or if there is an expansion but competition continues to intensify and we are unable to maintain our current market share, our business, financial condition and results of operations could be materially adversely affected.

We face strong competition in the domain name registration services industry which we expect will continue to intensify and we may not be able to maintain or improve our competitive position or historical market share.

Competition in the domain name registration services industry continues to intensify among the market participants.

When we began providing online domain name registrations in the .com, .net and .org domains in June 1999, we were one of only five testbed competitive registrars accredited by ICANN to interface directly with Network Solutions' registry for .com, .net and .org domain names. After the testbed period ended ICANN began accrediting new registrars and as of May 3, 2004, ICANN had accredited 197 registrars, including us, to register domain names in one or more of the gTLDs, although not all of these accredited registrars are currently operational. The continued introduction of registrars and resellers into the domain name registration industry and the rapid growth of some who have entered the industry could make it difficult for us to maintain our industry competitive position. If we continue to experience a decline in the total number of paid domain name registrations, renewals and transfers to us, or of our market share, our business, financial condition and results of operations could be materially adversely affected.

We face competition from registrars and resellers that may have greater name recognition, particularly internationally, better systems or greater resources.

In addition to competition from other registrars, we also face competition from resellers including, among others, ISPs, web-hosting companies, Internet portals and search engines,

telecommunication and cable companies, systems integrators, consulting firms and Internet professional service firms, who align themselves with accredited registrars to resell domain name registration services. Many of these competitors have strong brand recognition, possess core capabilities to deliver ancillary services, such as customer service, billing services and network management and have a broad array of value-added products and services that they can bundle with domain name registrations. In addition, some of our competitors have designed their systems and built their businesses in a manner that, we believe, enables them to be lower-cost providers than we currently are. Our position could be harmed by any of these existing or future competitors, some of which may have greater name recognition, particularly internationally, and greater and more efficient financial, technical, marketing, distribution and other resources than we do.

Increasing competition in the domain name registration industry could force us to reduce our prices for our core products and services, which would negatively impact our results of operations.

We recognized lower revenues from domain name registrations for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003, which was due in part to a lower number of domain names registered and slightly lower average prices per year of subscription term in the first quarter of 2004, and in part to the inclusion in revenues for the first quarter of 2003 of a $0.5 million adjustment related to domain name transfers away for which revenue recognition was accelerated. Some of our competitors offer domain name registrations at a wholesale price level minimally above the registry fees or even below the registry fees when bundling registrations with other products or services. Other competitors have lower pricing or have reduced and may continue to reduce their pricing for domain name registrations, renewals and transfers both for short-term promotions and on a permanent basis. Some of these competitors have experienced a significant increase in their registrations, suggesting that customers are becoming more price sensitive. Further, some of our competitors have, in the past, offered domain name registrations for free, deriving their revenues from other sources. In response to increasing competition in the domain name registration industry, we may be required, by marketplace factors or otherwise, to reduce, perhaps significantly, the prices we charge for our core domain name registration and related products and services, especially if our competitors who charge these reduced fees are able to maintain customer service comparable to ours. Reducing the prices we charge for domain name registration services in order to remain competitive could materially adversely affect our business, financial position and results of operations.

If our customers do not renew their domain name registrations or if they transfer their registrations to our competitors, and we fail to replace their business or develop alternative sources of revenue, our business, financial condition and results of operations would be materially adversely affected.

Our business depends in great part on our customers' renewal of their domain name registrations through us and we cannot assure you that those customers who will renew their domain name registrations will do so through us. Although our renewal rate for paid domain name registrations for the twelve months ended March 31, 2004 increased to approximately 55% from 47% for the twelve months ended March 31, 2003, our total domain name registrations under management decreased by 8% during the year ended December 31, 2003 and have declined from a peak of approximately 3.8 million as of September 30, 2001 to approximately 3.1 million as of March 31, 2004. Also, as discussed further below, our renewal rates could be adversely affected by any future modifications we may make to our SafeRenew program. If we are unable to increase the number of new domain name registrations or continue to increase our overall renewal rate, the combination of fewer new customers, fewer customers renewing their registrations through us and the transfers of registrations to other registrars will have the cumulative effect of decreasing the number of domain name registrations under our management. Not only could this cause our revenues from domain name registrations to decrease, but we would be left with fewer domain name customers to whom we could market our other products and services. A decline in our domain name registrations or renewals could materially adversely affect our business, financial condition and results of operations.

If our customers do not find our expanded product and service offerings appealing, or if we fail to establish ourselves as a reliable source for these products and services, we may remain dependent on domain name registrations as a primary source of revenue and our net revenues may fall below anticipated levels.

A key part of our strategy is to diversify our revenue base by offering value-added products and services in addition to domain name registrations. Although we have recently experienced increased sales for other products and services such as email, web hosting and website creation tools, our efforts to date have still not resulted in substantial diversification. Further, it will be difficult to achieve substantial diversification in the near future as we focus significant resources on our restructuring efforts. Our primary business, domain name registrations, renewals and transfers, generated 88% of our net revenues during the quarter ended March 31, 2004. We cannot assure you that we will be able to attain the market's confidence in us as a reliable provider of products and services outside of our core business. If, over time, we fail to offer products and services that meet our customers' needs and that are competitive with those offered in the marketplace, or our customers elect not to purchase our products and services, our anticipated net revenues may fall below expectations, we may not generate sufficient revenue to offset the related costs and we will remain dependent on domain name registrations as our primary source of revenue. Our inability to successfully diversify our revenue base from domain name registrations could, together with a decline in that market, materially adversely affect our business, financial condition and results of operations.

Our advertising revenues have decreased significantly due to the discontinuation of our most significant advertising customer and we may not be able to find suitable replacement advertising to replace this revenue in the future.

From the fourth quarter of 2002 through the third quarter of 2003, our largest advertising customer, a provider of web hosting services, accounted for a significant portion of our advertising revenue. In the third quarter of 2003, revenues from this advertiser represented approximately 80% of our overall advertising revenue. However, once we began to offer web-hosting services to our customers, this advertiser became a competitor and so we decided to discontinue our advertising relationship with them. Accordingly, we did not sell advertising to this advertising customer during the fourth quarter of 2003 or the first quarter of 2004 and we do not anticipate any additional revenue from this advertising customer in the future. We cannot assure you that we will be able to replace these lost revenues with other advertising revenue or with revenues from sales of web hosting services to our own customers, and even if we can, it may take a long period of time to do so. We expect any decrease in our advertising revenue to have an adverse impact on our overall gross margin because the gross profit margin on advertising revenue is 100% and, accordingly, any decrease in advertising revenue not otherwise offset with new advertising revenue would represent a reduction of our gross profit in the same amount.

If we do not maintain a low rate of credit card chargebacks and/or reduce our rate of credit card refunds, we will continue to face the prospect of financial penalties and we could lose our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

A substantial majority of our revenues originate from online credit card transactions. Under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder's signature at the time of the transaction, even though the financial institution issuing the credit card may have authorized the transaction. We have experienced high rates of refunds to customers and chargebacks from customers that have resulted in the assessment of financial penalties by two credit card associations. We had not incurred penalties from one of those associations until August 2002, at which time we were assessed a penalty of $0.3 million applicable to the year 2001. Any such potential penalties would be imposed on our credit card processor by the association, and under our contract with our processor, we are required to reimburse it for such penalties. Because the imposition of any potential penalties is at the discretion of the credit card association, subject to contractual limitations, generally accepted accounting principles require

that we accrue amounts to cover what we estimate to be the maximum potential penalties that could be imposed under that association's rules. Accordingly, we accrued a $3.7 million charge to general and administrative expense in the year 2002, an additional $2.4 million during the year ended December 31, 2003, and an additional $0.5 million for the first quarter of 2004 to cover what we estimate to be the maximum potential penalties that could be imposed under that credit card association's rules for transactions in these periods. We have had preliminary discussions with our credit card processor to obtain resolution to these potential penalties and believe that upon final resolution, it is likely that we will not be required to pay the full amount accrued to date, or perhaps any amount at all. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess amounts previously accrued, as a reduction of general and administrative expense at that time. On the other hand, if we cannot reduce our refund and/or chargeback rates to levels that are acceptable to the credit card associations, and maintain acceptable levels, we will continue to face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Some of the measures we are implementing to reduce our rate of chargebacks and credit card refunds may reduce our net revenues.

In an effort to reduce our rate of chargebacks and credit card refunds, we have implemented a number of different measures. However, by implementing aggressive online fraud screens and post-transaction verifications designed to prevent fraudulent credit card transactions on our website, we may block legitimate customers from purchasing our services, thereby reducing our net revenues. Also, in an effort to protect our customers' online identities, our SafeRenew program was implemented in January 2001 on an "opt out" basis to .com, .net and .org domain name registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of our services agreement, at the time a covered registration comes up for renewal, we attempt to charge a registrant's on-file credit card a one-year renewal fee and, if the charge is successful, to renew the registration for that additional one-year period. In October 2002 we modified a portion of this program to an "opt in" basis with respect to international transactions, although we may choose to or be required to revise this program and our policies from time to time in the future. Any modifications we undertake that result in the lapse of a significant number of domain name registrations that would have been renewed through the SafeRenew program could damage our relationships with customers that had relied upon the SafeRenew program to renew their domain name registrations. In addition, implementing changes to the program may have an adverse effect on our renewal rates in future periods and, as a result, may materially adversely affect our net revenues.

We face certain risks as a result of the numerous recent key changes to our management team and challenges in retaining our key employees through our restructuring process.

Our success depends in large part on the contributions of our management team and key sales and technology personnel. Over each of the past several years, we have experienced a higher than average turnover rate among our employees and last year we experienced a significant number of changes to the members of our management team, including a new President and Chief Executive Officer, new General Manager of our Retail Division, new director of Canadian operations and new Vice President of Human Resources. As a result, many of our key employees have not worked with one another for long periods of time and may not be able to develop effective working relationships. Moreover, many of our managers are still learning about our company and our industry. If we cannot work together effectively to solve the operational challenges that exist in our business, or master the details of our business and our market, then our business will be harmed, and we will incur additional costs in seeking and retaining new management personnel.

In particular, the success of our current restructuring goals and the development of our systems architecture are highly dependent upon the work of our technology team. In April 2004, our Chief

Technology Officer resigned. We do not believe that the departure of this individual will significantly impact the success of the implementation of our new systems architecture, as we also recently appointed a new Chief Information Officer. Our new Chief Information Officer has been with the company for two years and had been responsible for managing significant components of our systems architecture. This individual will now be in charge of the development of our systems architecture, as well as our technology team. However, we cannot guarantee that the departure of our Chief Technology Officer will not cause further delays in the development of our new systems architecture. In addition, we compete with other technology and Internet companies, as well as companies in other industries, in hiring and retaining highly trained personnel and the competition for such individuals has increased in the past year. Accordingly, if we experience additional departures and vacancies in our technology team, we may incur additional costs in seeking and retaining new personnel. Although we do not believe that the departure of any one individual would significantly impact the timing or success of the implementation of our new system, the loss of a group of individuals from our technology team could significantly impact the development of our new systems and could have a material adverse effect on our business.

Our restructuring process has also resulted in significant organizational changes and morale challenges which continue to put our company at risk for high turnover this year. Although we have implemented several new programs in order to retain employees and keep them focused on our goals, morale challenges may persist, particularly in our RCOM Europe office, and we continue to face the challenge of keeping our employees motivated and focused on our strategies and goals. The loss or demotivation of such employees, particularly from our sales, operations or technology teams, could harm our business. We have moved some of our operations from our RCOM Europe office to our Canadian facility, causing some uncertainty among the remaining employees there, and recently several individuals have left our RCOM Europe office. If we continue to experience such departures and morale challenges, it could significantly impact our ability to operate our RCOM Europe office and, accordingly, the success of our Corporate Services division and the company as a whole.

Our past acquisitions, including Virtual Internet, subject us to significant risks, and any potential future acquisitions or strategic investments or mergers may subject us to significant risks, any of which could harm our business.

Our long-term growth strategy may include identifying and acquiring or investing in or merging with suitable candidates on acceptable terms. In particular, over time, we may acquire or make investments in or merge with providers of product offerings that complement our business and other companies in the domain name registration industry.

Acquisitions, including our acquisition in 2002 of Virtual Internet, involve a number of risks and present financial, managerial and operational challenges, including:


•	diversion of management attention from running our existing business;


•	increased expenses, including travel, legal, administrative and compensation expenses related to newly hired employees;


•	increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with our own;


•	potential exposure to additional liabilities;


•	potential adverse effects on our reported operating results due to possible write-down of goodwill associated with acquisitions;


•	potential disputes with the sellers of acquired businesses, technologies, services or products; and


•	inability to utilize tax benefits related to operating losses incurred by acquired businesses.

Moreover, performance problems with an acquired business, technology, service or product could also have a material adverse impact on our reputation as a whole. In addition, any acquired business,

technology, service or product could significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from our acquisitions.

We acquired Virtual Internet, now known as RCOM Europe, in March 2002, we sold its hosting division in May 2002 and we are in the process of integrating its business, technology, operations and personnel with those of our U.S. and Canadian operations. Our efforts to transition the back and front-end systems that we previously used in our U.S. Corporate Services division to those we acquired through Virtual Internet resulted in fulfillment delays and invoice issuance delays and inhibited the effectiveness of our U.S. Corporate Services support and sales teams. We may face similar issues as we make efforts to improve our Corporate Services systems and processes and further integrate the business. In 2002, RCOM Europe incurred a pre-tax loss of $10.5 million, including a charge of $8.3 million for goodwill impairment and in 2003, RCOM Europe incurred a pre-tax loss of $1.9 million. We are currently projecting a net loss for RCOM Europe for the year 2004 and we may not be able to increase revenues or cut expenses sufficiently to make it profitable in the future. We were not able to consolidate RCOM Europe's 2002 losses in our U.S. income tax returns for 2002, although we filed an election with the IRS to consolidate RCOM Europe's results for 2003 and beyond.

For all these reasons, our pursuit of an acquisition and/or investment and/or merger strategy or any individual acquisition or investment or merger, including our acquisition of RCOM Europe, could have a material adverse effect on our business, financial condition and results of operations.

Our international expansion exposes us to business risks that could limit the effectiveness of our growth strategy and cause our results of operations to suffer.

Although we have historically had customers in international markets, in 2002 we expanded our business and operations in international markets through our acquisition of RCOM Europe, and we now have a significant workforce in the United Kingdom and employees in France and Germany as well. In addition, as part of our cost reduction efforts, we have relocated some of our groups and operations to our Canadian facility where the overhead and labor costs are lower than in our other locations. Introducing and marketing our products and services internationally, developing direct and indirect international sales and support channels and managing foreign personnel and operations will continue to require significant management attention and financial resources. We face a number of risks associated with our conducting business internationally that could negatively impact our results of operation, including:


•	management, communication and integration problems resulting from cultural differences and geographic dispersion;


•	sufficiency of qualified labor pool in international markets;


•	political and economic instability in some international markets;


•	competition with foreign companies;


•	legal uncertainty regarding liability and compliance with foreign laws;


•	currency fluctuations and exchange rates;


•	potentially adverse tax consequences or inability to realize tax benefits;


•	difficulties in protecting intellectual property rights in international jurisdictions; and


•	the level of adoption of the Internet in international markets.

We may not succeed in our efforts to expand into additional international markets and if we do, we cannot assure you that one or more of the factors described above will not have a material adverse effect on our future international operations, if any, and consequently, on our business, financial condition and results of operation.

We cannot predict with any certainty the effect that new governmental and regulatory policies, or industry reactions to those policies, will have on our business.

Before April 1999, Network Solutions managed the domain name registration system for the .com, .net and .org domains pursuant to a cooperative agreement with the U.S. government. In

November 1998, the Department of Commerce recognized ICANN to oversee key aspects of the Internet domain name registration system. Since that time and particularly because the domain name industry is in its early stages of development, ICANN has been subject to strict scrutiny by the public and the government. Although it recently underwent a restructuring, ICANN continues to face significant questions regarding its financial viability and efficacy as a private sector entity. While these issues will take time to sort out, the long-term structure and mission of ICANN may evolve, even in the coming year, to address perceived shortcomings. Accordingly, we continue to face the risks that:


•	the U.S. government may, for any reason, reassess its decision to introduce competition into, or ICANN's role in overseeing, the domain name registration market;


•	the Internet community or the Department of Commerce or U.S. Congress may become dissatisfied with ICANN and refuse to recognize its authority or support its policies, which could create instability in the domain name registration system;


•	pending litigation against ICANN could affect ICANN's role in overseeing the domain name registration system;


•	ICANN may attempt to impose additional fees on registrars if it fails to obtain funding sufficient to run its operations;


•	accreditation criteria could change in ways that are disadvantageous to us;


•	ICANN's limited resources may seriously affect its ability to carry out its mandate; and


•	international regulatory bodies, such as the International Telecommunications Union, the U.N. or the European Union, may gain increased influence over the management and regulation of the domain name registration system, leading to increased regulation in areas such as taxation and privacy.

Our business could be materially harmed if in the future the administration and operation of the Internet no longer relies upon the existing domain name system.

The domain name registration industry continues to develop and adapt to changing technology. This development may include changes in the administration or operation of the Internet, including the creation and institution of alternate systems for directing Internet traffic without the use of the existing domain name system. Some of our competitors have begun registering domain names with extensions that rely on such alternate systems. These competitors are not subject to ICANN accreditation requirements and restrictions. Other competitors have attempted to introduce naming systems that use keywords rather than traditional domain names. The widespread acceptance of any alternative systems could eliminate the need to register a domain name to establish an online presence and could materially adversely affect our business, financial condition and results of operations.

Working with the different country code registries exposes us to a number of operational, legal and business challenges, which if not properly addressed, could have a material adverse effect on our business, financial condition and results of operations.

We currently work with hundreds of country code registries operating hundreds of country code top level domains (ccTLDs) throughout the world. Country code registries may be administered by the host country, entrepreneurs or other third parties. Different country code registries require registrars to comply with specific regulations. Many of these regulations vary from ccTLD to ccTLD. If we fail to comply with the regulations imposed by country code registries, these registries will likely prohibit us from registering or continuing to register domain names in their ccTLDs. Further, in most cases, our rights to provide ccTLD domain name registration services are not governed by written contract. In the case of our existing written contracts, there is uncertainty as to which country's law may govern. As a result, we cannot be certain that we will continue to be able to register domain names in the ccTLDs we currently offer. If these registry businesses cease operations or otherwise fail to process domain name registrations or the related information in ccTLDs, we would be unable to honor the subscriptions of registrants who have registered, or are in the process of registering, domain

names in the applicable ccTLD. In addition, the process for registering domain names with many of the ccTLD registries necessitates significant manual efforts to process numerous paper documents, resulting in high labor costs and an increased potential for clerical errors. The rules, requirements and processes of the registries are also subject to change, and each time a registry makes a change, we must make corresponding changes to our systems or processes. If we are unable to keep up with these administrative burdens or to honor a substantial number of subscriptions for our customers or if the ccTLD registries fail to process our customers' domain name registrations in a timely and accurate fashion, we could face claims of loss from our registrants and our business, financial condition and results of operations could be materially adversely affected.

We cannot assure you that our standard agreements will be enforceable.

We rely on several agreements that govern the terms of the services we provide to our users. These agreements contain a number of provisions intended to limit our potential liability arising from our providing services for our customers including liability resulting from our failure to register or maintain domain names. As most of our customers use our services online, execution of our agreements by customers occurs electronically or, in the case of our terms of use, is deemed to occur because of a user's continued use of the website following notice of those terms. We believe that our reliance on these agreements is consistent with the practices in our industry, but if a court were to find that either one of these methods of execution is invalid or that key provisions of our services agreements are unenforceable, we could be subject to liability that could have a materially adverse effect on our business, financial condition and results of operations.

Our failure to register, maintain, transfer or renew the domain names that we process on behalf of our customers may subject us to additional expenses, claims of loss or negative publicity, which could have a material adverse effect on our business.

Clerical errors and system and process failures have resulted in inaccurate and incomplete information in our database of domain names and in our failure to properly register or to maintain or renew the registration of certain domain names that we process on behalf of our customers. Our failure to properly register or to maintain or renew the registration of our customers' domain names, even if we are not at fault, may result in our incurring significant expenses and may subject us to claims of loss or negative publicity, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, ICANN recently implemented new policies regarding how we transfer out domain names and the acknowledgement process, which will require us to revise our transfer processes. Pursuant to these new policies, we will no longer be able to use certain safeguards that we had in place to acknowledge transfer requests, which could increase the risk of unauthorized or fraudulent transfers. Such transfers could increase claims of loss or subject us to negative publicity, which could have a material adverse effect on our business, financial condition and results of operations.

We may be held liable if third parties misappropriate our users' personal information.

If third parties succeed in penetrating our network security or otherwise misappropriate our customers' personal or credit card information, we could be subject to liability. Our liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims as well as for other misuses of personal information, including for unauthorized marketing purposes. These claims could result in penalties from credit card associations, potential termination by credit card associations of our ability to accept credit card payments, litigation and adverse publicity, any of which could have a material adverse effect on our business, financial condition and results of operations, as well as our reputation, as any well-publicized compromise of security could deter people from using online services such as the ones we offer.

In addition, the Federal Trade Commission and state agencies have investigated various Internet companies regarding their use of their customers' personal information. The federal government has enacted legislation protecting the privacy of consumers' nonpublic personal information. We cannot

guarantee that our current information-collection procedures and disclosure policies will be found to be in compliance with existing or future laws or regulations. Our failure to comply with existing laws, including those of foreign countries, the adoption of new laws or regulations regarding the use of personal information that require us to change the way we conduct our business or an investigation of our privacy practices could increase the costs of operating our business.

We may not be able to protect and enforce our intellectual property rights or protect ourselves from the claims of third parties.

We may be unable to protect and enforce our intellectual property rights from infringement.

We rely upon copyright, trade secret and trademark law, invention assignment agreements and confidentiality agreements to protect our proprietary technology and other assets, including software, applications and trademarks, and other intellectual property to the extent that protection is sought or secured at all. We do not currently have patents on any of our technologies or processes. While we typically enter into confidentiality agreements with our employees, consultants and GPN partners, and generally control access to and distribution and use of our proprietary information, we cannot ensure that our efforts to protect our proprietary information will be adequate against infringement or misappropriation of our intellectual property by employees, affiliates or third parties, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

Furthermore, because the validity, enforceability and scope of protection of proprietary rights in Internet-related industries is uncertain and still evolving, we cannot assure you that we will be able to defend our proprietary rights. In addition to being difficult to police, once any infringement is detected, disputes concerning the ownership or rights to use intellectual property could be costly and time-consuming to litigate, may distract management from operating the business and may result in our losing significant rights and our ability to operate our business.

We cannot assure you that third parties will not develop technologies or processes similar or superior to ours.

We cannot ensure that third parties will not be able to independently develop technology, processes or other intellectual property that is similar to or superior to ours. The unauthorized reproduction or other misappropriation of our intellectual property rights, including copying the content, look, feel or functionality of our website, could enable third parties to benefit from our technology without our receiving any compensation and could materially adversely affect our business, financial condition and results of operations.

We may be subject to claims of alleged infringement of intellectual property rights of third parties.

We do not conduct comprehensive patent searches to determine whether our technology infringes patents held by others. These matters are inherently uncertain in Internet-related industries due to the rapidly evolving technological environment. There may be numerous patent applications pending, many of which are confidential when filed, with regard to technologies similar to our own. Third parties may assert infringement claims against us with respect to past, current or future technologies, and these claims and any resultant litigation, should it occur, could subject us to significant liability for damages. Even if we prevail, litigation could be time-consuming and expensive to defend, and could result in the diversion of management's time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into agreements with the third parties making these claims. Such royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, if at all. If a successful claim of infringement is brought against us and we fail to develop non-infringing technology or to license the infringed or similar technology on a timely basis, it could materially adversely affect our business, financial condition and results of operations.

We rely on certain technologies that we license from other parties. We cannot assure you that these third-party technology licenses will not infringe on the proprietary rights of others or will

continue to be available to us on commercially reasonable terms, if at all. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could materially harm our business.

The nature of our services may subject us to alleged infringement and other claims relating specifically to domain names.

As a registrar of domain names and a provider of additional web services, we may be subject to various claims, including claims from third parties asserting trademark infringement or dilution, unfair competition and violations of publicity and privacy rights, to the extent that such parties consider their rights to be violated by the registration of particular domain names by our users or our hosting of our users' websites or secondary market activities.

For example, we provide an automated service enabling users to register domain names and do not monitor or review the content of such domain names. Users might register domain names which, based on the nature and content of such domain names, could be considered obscene, hateful or defamatory, or which could infringe or dilute a third party's intellectual property. The law relating to the liability of registrars stemming from the activities of registrants in this regard is currently unsettled in certain jurisdictions, and the actions of our users may therefore expose us to significant liability. Even if we were to prevail in a dispute concerning such actions, litigation could be time-consuming and expensive to defend, and could result in the diversion of management's time and attention.

In addition, the Anticybersquatting Consumer Protection Act was enacted in November 1999 to curtail a practice commonly known in the industry as "cybersquatting." A cybersquatter is generally defined in this Act as one who registers a domain name that is identical or similar to another party's trademark or the name of a living person, in each case with the bad faith intent to profit from use of the domain name. Cybersquatting is a problem that could be exacerbated with any additional top level domain names that may be established by ICANN. Although this Act states that registrars may not be held liable for registering or maintaining a domain name for another person absent a showing of the registrar's bad faith intent to profit from the use of the domain name, registrars may be held liable if they fail to comply promptly with procedural provisions under the Act. If we are held liable under this law, any liability could have a material adverse effect on our business, financial condition and results of operations.

Although established case law and statutory law have, to date, shielded us from liability relating to cybersquatting registrations on our site in the primary registration market, this law remains new and unsettled in many jurisdictions and the application of these laws and precedent to other domain name registration related services is still developing. Any determination that our other domain name registration related services facilitate cybersquatting could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Technology and the Internet

Systems disruptions and failures could cause our customers, resellers and advertisers to become dissatisfied with us and may impair our business.

Our customers, advertisers and resellers may become dissatisfied with our products and services due to interruptions in access to our website or our failure to adopt and adapt to changing technology.

Our ability to maintain our computer and telecommunications equipment in working order and to reasonably protect them from interruption is critical to our success. Our website must accommodate a high volume of traffic and deliver frequently updated information. In addition, the technology underlying the Internet and the applications available to simplify electronic commerce are continuously being enhanced or upgraded and to remain competitive, we must incorporate these emerging technologies into our infrastructure on a cost-effective and timely basis. We occasionally experience system application failures, as well as slower response times. We also conduct planned site

outages and experience unplanned site outages. To date, these disruptions of service and slower response times have had minimal impact on our business. However, our customers, advertisers and resellers may become dissatisfied by any systems failure that interrupts our ability to provide our products and services to them or increases response times. Substantial or repeated system failures would significantly reduce the attractiveness of our website and could cause our customers, advertisers and resellers to switch to another domain name registration service provider.

As part of our restructuring process, we have been incurring substantial expenses to update our technology, improve our systems' performance and develop new applications to meet the evolving needs of our customers and ensure the compatibility of our current systems with emerging technologies. We cannot assure you that we will be able to achieve these goals on a timely basis as changes in technologies occur. Also as part of our restructuring efforts to increase efficiencies, we have outsourced certain operations and may continue to explore opportunities to outsource others. Outsourcing operations may raise concerns with our resellers or customers regarding our ability to control the services we offer them if certain elements are managed by another company. In particular, in the event that these service providers fail to maintain adequate levels of support or if they discontinue their lines of business, our customer relations may be impacted negatively. We are currently aware of at least one service provider that is experiencing operational difficulties and a weakening financial condition. We cannot assure you that in the event that we encounter difficulties with our outsourced operations we will be able to effectively transition those functions that we may choose to outsource, as any such process involves complexity and risk.

Although we carry general liability and professional liability insurance, our insurance may not cover any claims by dissatisfied customers, advertisers, affiliates, or resellers, or may be inadequate to indemnify us for any liability that may be imposed in the event that a claim were brought against us. Our business could be materially harmed by any system failure, security breach or other damage that interrupts or delays our operations.

Our customers, advertisers and resellers may become dissatisfied with our products and services due to interruptions in our access to the registration systems of generic top level domain or country code registries.

We depend on the registration systems of generic top level domain and country code registries to register domain names on behalf of our customers. We have in the past experienced problems with the registration systems of these top level domain registries, including outages, particularly during their implementation phase. Any significant outages in the registration systems of these registries would prevent us from delivering or delay our delivery of our services to our customers. Prolonged or repeated interruptions in our access to the registries could cause our customers, advertisers and resellers to switch to another domain name registration service provider.

Our business would be materially harmed if our computer systems become damaged.

We currently do not have a comprehensive disaster recovery plan in effect and our systems redundancies are not geographically distributed. We have no current plans to add additional facilities to make our systems geographically redundant. Fires, floods, earthquakes, power losses, telecommunications failures, break-ins and similar events could damage these systems and severely harm our business because our services could be interrupted for an indeterminate length of time. Computer viruses, electronic break-ins, human error or other similar disruptive problems could also adversely affect our systems.

Despite any precautions we may take, the occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at any of our facilities including our hosting facilities, could result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data communications or any damage to or failure of our systems could result in interruptions in our service. Such interruptions would reduce our revenues and profits, and our future revenues and profits would be harmed if our users were to believe that our systems are unreliable. In addition, our business

interruption insurance may not be adequate to compensate us for losses that may occur. Accordingly, any significant damage to our systems or disruption in our ability to provide our services would have a material adverse effect on our business, financial condition and results of operations.

Our ability to deliver our products and services and our financial condition depend on our ability to license third-party software, systems and related services on reasonable terms from reliable parties.

We depend upon various third parties, including some competitors, for software, systems and related services, including access to the various registration systems of domain name registries. Many of these parties have a limited operating history or may depend on reliable delivery of services from others. If these parties fail to provide reliable software, systems and related services on agreeable license terms, we may be unable to deliver our products and services.

Failure by our third-party service providers to deliver their services will have a negative effect on our business.

We do not develop and maintain all of the products and services that we offer, so we are dependent, in part, on the services of other third-party service providers. We offer certain of our services to our customers through various third-party service providers engaged to perform these services on our behalf. In the event that these service providers fail to maintain adequate levels of support or if they discontinue their lines of business, our customer relations may be impacted negatively and we may be required to pursue replacement third-party relationships. If we are unable to find adequate replacements on a timely basis, or at all, we may be forced to either temporarily or permanently discontinue certain services. For instance, we are currently aware of at least one service provider that is experiencing operational difficulties and a weakening financial condition. Although we continually evaluate our relationships with our third-party service providers and plan for contingencies if a problem should arise with a provider, transitioning services and data from one provider to another can often be a complicated and time consuming process and we cannot assure that if we need to switch a provider we would be able to do so on a completely seamless basis, or at all. In addition, certain of our services are provided by non-U.S. based companies and to the extent that we encounter difficulties with our non-U.S. based suppliers, we may encounter difficulties enforcing agreements with entities located outside of the United States.

We have also engaged third parties to process credit card payments for our customers. Therefore, if these third parties or their systems fail for any reason to process credit card payments in a timely fashion, the domain name reservation process will be delayed and customers may be unable to obtain their desired domain name.

In addition, some of the domain names registered by our RCOM Europe corporate customers resolve to name servers that are owned and controlled by a third party. If these domain name servers are shut down for financial reasons or other unanticipated problems, our services may be interrupted, which could damage our relationship with our customers, our reputation and our business.

Our failure to respond to the rapid technological changes in our industry may harm our business.

If we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, we could lose customers, strategic alliances and market share. The Internet and electronic commerce are characterized by rapid technological change. Sudden changes in user and customer requirements and preferences, the frequent introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products, services and systems obsolete. The emerging nature of products and services in the domain name registration industry and their rapid evolution will require that we continually improve the performance, features and reliability of our products and services. Our success will depend, in part, on our ability:


•	to enhance our existing products and services;


•	to design, develop, launch and/or license new products, services and technologies that address the increasingly sophisticated and varied needs of our current and prospective customers; and


•	to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

The development of additional products and services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively or adapt our websites, internally developed technology or transaction-processing systems to customer requirements or emerging industry standards. Updating our technology internally and licensing new technology from third parties may require us to incur significant additional capital expenditures.

If Internet usage does not grow, or if the Internet does not continue to expand as a medium for commerce, our business may suffer.

Our success depends upon the continued development and acceptance of the Internet as a widely used medium for commerce and communication. We cannot assure you that use of the Internet will continue to grow at the pace it has in recent years. A number of factors could prevent continued growth, development and acceptance, including:


•	the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;


•	the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;


•	security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information, such as credit card numbers, and attempts by unauthorized computer users, so-called hackers, to penetrate online security systems; and


•	privacy concerns, including those related to the ability of websites to gather user information without the user's knowledge or consent, may impact consumers' willingness to interact online.

Any of these issues could slow the growth of the Internet, which could have a material adverse effect on our business, financial condition and results of operations.

We may become subject to burdensome government regulations and legal uncertainties affecting the Internet.

To date, government regulations have not materially restricted the use of the Internet. The legal and regulatory environment pertaining to the Internet, however, is uncertain and may change. Both new and existing laws may be applied to the Internet by state, federal or foreign governments, covering items such as:


•	sales and other taxes, including European Value-Added Tax;


•	user privacy and security issues;


•	the expansion of intellectual property rights;


•	pricing controls;


•	characteristics and quality of products and services;


•	consumer protection;


•	cross-border commerce;


•	libel and defamation;


•	copyright, trademark and patent infringement;


•	pornography; and


•	other claims based on the nature and content of Internet materials.

The adoption of any new laws or regulations or the new application or interpretation of existing laws or regulations to the Internet could hinder the growth in use of the Internet and other online

services generally and decrease the acceptance of the Internet and other online services as media of communications, commerce and advertising. Our business may be harmed if any slowing of the growth of the Internet reduces the demand for our services. In addition, new legislation could increase our costs of doing business and prevent us from delivering our products and services over the Internet, thereby harming our business, financial condition and results of operations.

The introduction of tax laws targeting companies engaged in electronic commerce could materially adversely affect our business, financial condition and results of operations.

We file tax returns in such countries and states as required by law based on existing regulations applicable to traditional businesses. However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies, such as ours, which engage in or facilitate electronic commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from such sales. Such proposals, if adopted, could substantially impair the growth of electronic commerce and materially adversely affect our business, financial condition and results of operations.

On April 29, 2004, the United States Senate extended a moratorium on certain state and local taxation of online services and electronic commerce until November 1, 2007. While the legislation extends the moratorium it is not a permanent ban on such taxes. The imposition of such taxes in the future could materially adversely affect our business, financial condition and results of operations.

In addition, on July 1, 2003, a directive became effective in the European Union (EU) requiring non-EU providers of electronically supplied services to private individuals and non-business organizations in the EU to impose value-added taxes (VAT) on such services. Although not all of the EU member states have yet implemented the directive nor have the tax authorities of all of the member states published official guidance on the rules, if we are required to comply with this directive, we will have to implement system changes. These systems changes may be significant and it is not yet clear which of our products and services would be subject to this directive. We are not currently in compliance with this directive and, as a result, we may be subject to claims for VAT dating back to July 1, 2003, plus interest and/or penalties. In addition, imposition of VAT may also lead to some of our services and products that we offer in EU countries becoming more expensive relative to services rendered in those countries by EU businesses, which could put us at a competitive disadvantage if we pass along the VAT to our customers, or could reduce our profit margin if we decide to absorb the VAT as an additional cost to our business.

Investment Risks

Our stock price is highly volatile.

The market price of our common stock has been and may continue to be highly volatile and significantly affected by a number of factors, including:


•	general market and economic conditions and market conditions affecting technology companies generally;


•	limited availability of our shares on the open market;


•	actual or anticipated fluctuations in our quarterly or annual operating results;


•	announcements of acquisitions or investments, developments in Internet governance or corporate actions;


•	industry conditions and trends; and


•	interest in the Company by potential acquirors.

The stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices of the securities of technology related companies. These fluctuations may adversely affect the market price of our common stock.

The market price for our shares could be negatively affected if we utilize a significant portion of our remaining cash and marketable securities.

If we utilize a significant portion of our cash and marketable securities, the market price for our shares could be negatively affected. We may in the future distribute additional cash to stockholders including by way of one or more dividends, distributions or repurchases of additional shares and/or warrants on the open market, in private transactions or by other methods, subject to the approval of our Board of Directors and compliance with applicable securities laws. If the market price of our stock declined significantly, it could, among other things, also result in:


•	our possible noncompliance with the Nasdaq National Market's listing requirements and the possible delisting of our shares;


•	reduced trading volumes, an illiquid market for the trading of our shares, and more difficulties involved with the selling of our shares by our stockholders;


•	our shares losing their appeal as a currency for future acquisitions; and/or


•	an impairment in our ability to access the capital markets should we desire or need to raise additional capital.

Our executive officers and directors own a significant percentage of our shares, which will limit your ability to influence corporate matters.

As of May 4, 2004, our executive officers and directors beneficially owned approximately 22.2% of our common stock. Accordingly, these stockholders could have significant influence over the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets. The interests of these stockholders may differ from the interests of our other stockholders. In addition, third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership.

Our charter documents, our Stockholder Rights Plan and Delaware law may inhibit a takeover that stockholders may consider favorable.

Provisions in our amended and restated certificate of incorporation, our amended and restated bylaws, our Stockholder Rights Plan and Delaware law could delay or prevent a change of control or change in management that would provide stockholders with a premium to the market price of their common stock. Our Stockholder Rights Plan has significant anti-takeover effects by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors. The authorization of undesignated preferred stock, for example, gives our board the ability to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the company. If a change of control or change in management is delayed or prevented, this premium may not be realized or the market price of our common stock could decline.

Item 4. Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of March 31, 2004, that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met and cannot detect all deviations. Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the Company have been detected. While we believe that our disclosure controls and procedures and our internal control over financial reporting have been effective, in light of the foregoing, we intend to continue to examine and refine our disclosure controls and procedures and our internal control over financial reporting to monitor ongoing developments in this area.

In connection with preparation of our 2003 U.S. federal tax returns and the "true-up" of the tax amount reflected on the 2003 tax returns to the 2003 financial statement tax provision, we found that an error had been made in the first quarter of 2003 in that we failed to recognize a deferred income tax asset which resulted from a tax election we made in that quarter. After we found that an error had been made, we performed a thorough analysis of the issue, including a calculation of the appropriate amount of deferred tax asset to be recognized, together with the corresponding increases to net income and stockholders' equity. This error was corrected by the filing of this Amendment, together with amendments to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and the Quarterly Report on Form 10-Q for the six months ended June 30, 2004, which included an appropriate restatement of the 2003 financial statements.

This restatement favorably impacted the provision for income taxes and increased net income for the year 2003 by $3.2 million, and increased deferred tax assets and increased total stockholders' equity at December 31, 2003 by $3.2 million. The restatement did not affect the Company's cash flow or loss from operations in 2003.

At the time this error occurred, although the Company had control procedures in place to determine its financial statement tax provision, those control procedures were not adequate to prevent the occurrence of this error. The Company has received a letter from its independent registered public accountants indicating that the error was attributable to a material weakness in the Company's internal control over financial reporting in 2003. The Company has informed the audit committee of this material weakness. The Company has implemented new control procedures which require the Controller of the Company to calculate the financial statement tax provision which is reviewed by the Chief Financial Officer and is implementing procedures to send this calculation to outside tax advisors for review. In addition, in the third quarter of 2004, the Company supplemented this control to now require an assessment of the financial statement impact of each non-recurring transaction, and documentation of such analysis with a memorandum to be prepared by the Company's Chief Financial Officer. The Company believes that these new control procedures will adequately remediate this material weakness.

Prior to the initial filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2003, the Company completed an evaluation under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2003 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the

SEC's rules and forms. However, as a result of the Company's decision to restate its financial statements, the Company completed in early November 2004, prior to filing this Amendment, a second evaluation under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003. Based on this second evaluation, the Company's principal executive officer and principal financial officer concluded that, solely as a result of the material weakness referred to above, the Company's disclosure controls and procedures were not effective as of December 31, 2003. However, as a result of the analysis and calculations discussed above and the remediation of the material weakness, management believes that the financial statements included in this Amendment fairly present in all material respects the Company's financial condition, results of operations and cash flows for the fiscal periods presented.

Except as disclosed above, there were no significant changes in our internal control over financial reporting subsequent to our evaluation of the Company's internal control over financial reporting that could materially affect or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6.

Exhibits and Report on Form 8-K.

(a) Exhibits


Number				Description
10.1				Separation Agreement and General Release with Walt Meffert Jr. dated April 23, 2004 (Incorporated by reference to Exhibit 10.1 to our report on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on May 7, 2004).
10.2*				Offer Letter with Sushant Mohanty dated September 9, 2002 (Incorporated by reference to Exhibit 10.2 to our report on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on May 7, 2004).
10.3*				Amendment dated April 26, 2004 to Offer Letter with Sushant Mohanty (Incorporated by reference to Exhibit 10.3 to our report on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on May 7, 2004).
31.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended.
31.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended.
32.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350.
32.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350.


*	Indicates management contract or compensatory plan or arrangement.

(b) The following reports on Form 8-K were filed during the quarter ended March 31, 2004.

On February 12, 2004, we filed a Current Report on Form 8-K, Item 12, furnishing a press release announcing our financial results for the fourth quarter and year ended December 31, 2003.

On March 12, 2004, we filed a Current Report on Form 8-K, Item 5, announcing the date for our Annual Meeting and related matters.

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.

EXHIBIT INDEX


Number				Description
10.1				Separation Agreement and General Release with Walt Meffert Jr. dated April 23, 2004 (Incorporated by reference to Exhibit 10.1 to our report on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on May 7, 2004).
10.2*				Offer Letter with Sushant Mohanty dated September 9, 2002 (Incorporated by reference to Exhibit 10.2 to our report on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on May 7, 2004).
10.3*				Amendment dated April 26, 2004 to Offer Letter with Sushant Mohanty (Incorporated by reference to Exhibit 10.3 to our report on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on May 7, 2004).
31.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
31.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
32.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350.
32.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350.


*	Indicates management contract or compensatory plan or arrangement.

REGISTER.COM, INC.

Date: November 9, 2004

By: /s/ Jonathan Stern

Name:    Jonathan Stern
Title:    Chief Financial Officer
  (Principal Financial and Accounting
  Officer and Duly Authorized Officer)