REGISTER COM INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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

For the quarterly period ended June 30, 2002

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

REGISTER.COM, INC.
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(Exact name of registrant as specified in its charter)

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

575 Eighth Avenue, 11th Floor, New York, New York 10018
- --------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)

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

- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

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. /X/ Yes / / No

As of August 5, 2002, there were 40,026,223 shares of the registrant's
common stock outstanding.

REGISTER.COM, INC.
FORM 10-Q

INDEX

PART I. CONSOLIDATED FINANCIAL INFORMATION.........................................................................2

Item 1. Consolidated Financial Statements......................................................................2

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................13

Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................48

PART II. OTHER INFORMATION.........................................................................................49

Item 1. Legal Proceedings.....................................................................................49

Item 4. Submission of Matters to a Vote of Security Holders...................................................49

Item 6. Exhibits and Report on Form 8-K.......................................................................50

PART I. CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

REGISTER.COM, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)

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

2

REGISTER.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

3

REGISTER.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

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

4

REGISTER.COM, INC.
NOTES TO FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND ORGANIZATION

NATURE OF BUSINESS

Register.com, Inc. (the "Company" or "Register.com") provides Internet
domain name registration and other products and services such as website
creation, web-hosting, email, domain name forwarding, domain name re-sale
services, intellectual property and brand protection services related to domain
names and advertising.

Register.com began processing registrations in the generic top level
domains (gTLD) .com, .net and .org in June 1999 and, as such, was 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. Currently, the Company registers, renews and
transfers domain names across the .com, .net and .org gTLDs, in new gTLDs such
as .biz, .info and .name and in over 250 country code top level domains
(ccTLDs), such as .co.uk and .org.uk for the United Kingdom, .de for Germany and
..jp for Japan.

Through its RegistryPro subsidiary, the Company is planning to
establish a new registry for the gTLD .pro, which will be restricted to
certified professionals such as lawyers, doctors and accountants. The Company
also has a small equity stake in Afilias, the consortium of 18 registrars, which
manages the registry for the new gTLD .info which went live in October 2001.

In March 2002, the Company acquired Virtual Internet plc, a provider
of online intellectual property protection services based in the United Kingdom.

ORGANIZATION

The Company originally operated as Forman Interactive Corp.
("Forman"), a New York corporation that was formed in November 1994. Pursuant to
a Merger Agreement dated June 23, 1999 by and among Register.com, a Delaware
corporation formed in May 1999 specifically for the purpose of this merger, and
Forman, the stockholders of Forman exchanged their shares for an equivalent
number of shares of Register.com. References herein to the operations and
historical financial information of the Company prior to the date of the merger
refer to the operations and historical financial information of Forman. On March
3, 2000, the Company sold shares of its common stock through its initial public
offering.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Intercompany balances and
transactions have been eliminated.

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INTERIM FINANCIAL STATEMENTS

The interim financial statements have been prepared by Register.com
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
Register.com considers necessary for fair presentation of the results of
operations for the interim periods covered and of the financial position of
Register.com at the date of the interim balance sheet. 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,
Register.com believes that the disclosures are adequate for understanding the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
interim financial statements should be read in conjunction with Register.com's
December 31, 2001 audited financial statements and notes thereto included in
Register.com's Annual Report on Form 10-K.

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 may exceed the Federal Deposit Insurance Corporation limit.
The Company has pledged approximately $7.4 million in cash equivalents and
short-term investments as collateral against outstanding letters of credit as of
June 30, 2002, and $9.1 million in cash has been deposited with a bank to
guarantee repayment of notes payable in connection with the Virtual Internet
acquisition (see Note 4).

INVESTMENTS

The Company classifies the debt securities it has purchased as
marketable securities in accordance with the provisions of Statement of
Financial Accounting Standards 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. Gains or losses on securities sold are based on
the specific identification method.

Securities with maturities of less than one year are classified as
short-term investments, and securities with maturities of greater than a year
are non-current and are classified as marketable securities, within the
consolidated balance sheet.

REVENUE RECOGNITION

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

DOMAIN NAME REGISTRATION FEES

Registration fees charged to end-users for registration services are
recognized on a straight-line basis over the life of the registration term for
initial registrations and registration

6

renewals. A majority of end-user subscribers pay for services with credit cards
for which the Company receives daily remittances from the credit card carriers.
A provision for estimated chargebacks from the credit card carriers is included
in accounts payable and accrued expenses. Such amounts are separately recorded
and deducted from gross registration fees in determining net revenues. For some
of our customers who register domain names through our Corporate Services
division and through our Virtual Internet subsidiary, and for some participants
in our Global Partner Network, we establish lines of credit based on credit
worthiness. Referral commissions earned by the Company's participants in the
Company's Global Partner Network are deducted from gross registration revenue in
determining net revenues.

OTHER PRODUCTS AND SERVICES

Revenue from other products and services is recognized on a
straight-line basis over the period in which services are provided. Payments
received in advance of services being provided are included in deferred revenue.
Revenues from escrow services are recognized upon completion of the escrow
service provided.

ADVERTISING

Advertising revenues are derived principally from short-term
advertising contracts. Advertising revenues are recognized ratably in the period
in which the advertisement is displayed, provided that no significant
obligations remain, at the lesser of the ratio of impressions delivered over
total guaranteed impressions or the straight-line basis over the term of the
contract. To the extent that minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenues until the guaranteed
impressions are achieved.

DEFERRED REVENUE

Deferred revenue primarily relates to the unearned portion of revenues
related to the unexpired term of registration fees net of an estimate for credit
card chargebacks and refunds and external commissions, deferred advertising
revenue, and other products and services revenue.

PREPAID DOMAIN NAME REGISTRY FEES

Prepaid domain name registry fees represent amounts paid to registries
for generic and country code domains for updating and maintaining the
registries. Domain name registry fees are recognized on a straight-line basis
over the life of the registration term.

INCOME TAXES

The Company recognizes deferred taxes by the asset and liability
method. Under that 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 in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.

7

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the management of the Company 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 credit card chargebacks and refunds, the realizability of accounts
receivable and deferred tax assets, and the amortization period of intangible
assets. Actual results could differ from those estimates. The markets for the
Company's products and services are characterized by intense competition,
technology advances and new product/service introductions, all of which could
impact the future realizability of the Company's assets.

EARNINGS PER SHARE

The Company accounts for earnings per share in accordance with
Statement of Financial Accounting Standards No. 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 conversion of
common stock equivalents or the proceeds from exercises of options and warrants.

COMPREHENSIVE INCOME

The Company follows SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement requires companies to classify items of their
comprehensive income by their nature in the financial statements and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The difference between net income and comprehensive income
for the three months and six months ended June 30, 2002 included $869,000 and
$371,000, respectively, of net unrealized losses in marketable securities and
$1.2 million, and $1.1 million, of unrealized gain from foreign currency
translation. The difference between net income and comprehensive income for the
three months and six months ended June 30, 2001 included $162,000 and $931,000,
respectively, of net unrealized gain in marketable securities.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142").

SFAS 141 establishes accounting and reporting for business
combinations by requiring that all business combinations be accounted for under
the purchase method. Use of the pooling-of-interests method is no longer
permitted. The adoption of SFAS 141 did not have a material impact on the
Company's financial condition or results of operations.

8

SFAS 142 requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. The Company adopted the Statement and
ceased amortization of goodwill effective January 1, 2002.

In accordance with the adoption provisions of SFAS 142, the following
is a reconciliation of net income, basic income per share and diluted income per
share with the amounts reported by the Company for the three and six months
ended June 30, 2001 as if SFAS 142 had been in effect for the stated period.

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144"). SFAS 144 provides a single accounting model for
long-lived assets to be disposed of and changes the criteria that would have to
be met to classify an asset as held-for-sale. SFAS 144 retains the requirement
of APB Opinion 30, to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held for sale. SFAS 144 is effective
January 1, 2002 for the Company. The adoption of SFAS 144 did not have a
material impact on the Company's financial condition or results of operations.

RECLASSIFICATION

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

9

3. CONTINGENCIES

LITIGATION

In November 2001, the Company, its Chairman, President, 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
IPO. On April 19, 2002, the Company and the Individual Defendants were named as
defendants in a Consolidated Amended Complaint (now the operative complaint)
filed in the Southern District of New York and captioned IN RE: REGISTER.COM,
INC. INITIAL PUBLIC OFFERING SECURITIES LITIGATION. 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. On July 15, 2002, the Company and the Individual Defendants
moved to dismiss all claims against them. The Court has not ruled on this
motion. The Company intends to vigorously defend the action, which is being
coordinated with over 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.

Register.com has been named as a defendant in a lawsuit filed on May
2, 2002, which alleges that the Company's 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. In an effort
to protect the Company's customers' online identities, 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 the Company's 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 an additional one-year period. Plaintiff seeks class
certification and alleges violation of certain New York statutes as well as a
breach of contract, money had and received and unjust enrichment. Plaintiff
further seeks 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. The Company intends to defend these claims vigorously.

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

10

have a material adverse effect on the Company's financial position, results of
operations or liquidity.

4. ACQUISITION OF VIRTUAL INTERNET PLC

As of March 8, 2002, the Company acquired substantially all of the
shares of Virtual Internet plc for approximately $16.9 million in cash. In
connection with the acquisition, the Company issued approximately 6.0 million
pounds sterling (approximately $9.1 million at June 30, 2002) in loan notes.
These loan notes bear interest at a floating rate of LIBOR minus 1% and may be
redeemed at the request of the holder at any time between September 8, 2002 and
June 30, 2003, at which time they mature. The loan notes are guaranteed as to
principal by Barclays Bank plc, whose guarantee is currently supported by a cash
deposit of approximately 6.0 million pounds sterling (approximately $9.1 million
at June 30, 2002) by the Company. The cash portion of the Virtual Internet
acquisition was funded with the Company's available cash resources. Virtual
Internet plc is based in the U.K. and has operations in the United States and
Europe and at the time of the acquisition, operated through two divisions: the
Corporate Services division and the Hosting division The Company sold the
Hosting division on May 9, 2002 for proceeds of $500,000.

The results of operations for Virtual Internet plc's Corporate
Services business have been included in the Company's consolidated financial
results since March 8, 2002. In the second quarter of 2002, Virtual Internet
recorded revenue of $2.1 million and incurred a loss of $892,000, and the
Company did not record a tax benefit in connection with that loss.

Presented below are the pro forma financial results of the Company
prepared under the assumption that the acquisition of Virtual Internet plc and
the disposition of the Hosting assets had been completed as of January 1, 2001.
These pro forma financial results include the following significant assumptions:

- The acquisition has been accounted for under the provisions of
SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and
Other Intangible Assets" as if adopted January 1, 2001.
Intangibles with a US dollar equivalent at June 30, 2002 of $2.4
million have been identified and these primarily consist of
trademarks, customer relationships and software technology with a
weighted average life of 5.4 years. Goodwill with a US dollar
equivalent at June 30, 2002 of $8.3 million has been recognized
in connection with this transaction. The Goodwill and identified
intangibles reflect the preliminary allocation of the excess of
the acquisition cost over the fair value of the assets and
liabilities acquired. The estimate of fair value and the
identification of certain intangible assets is preliminary and
subject to change. For purposes of preparing this pro forma
statement in order to maintain comparability between the reported
results for fiscal 2002 and 2001, all the intangible assets of
Virtual Internet plc with an indefinite life and goodwill have
not been amortized in the pro forma results.

- The acquisition price of approximately $16.9 million at the date
of acquisition was funded with the issuance of $8.5 million of
floating rate notes and $8.4 million of cash. The floating rate
notes had an assumed interest rate of 4.75% in 2001 and

11

0.90% in 2002. An increase of 0.25% in the average short-term
interest rate would result in a change to interest expense of
$21,000 on an annual basis.

- The exchange rates used in the translation of the historical
financial results of Virtual Internet from U.K. pounds to U.S.
dollars for the three and six months ended June 30, 2002 and 2001
were US$1.46 and US$1.44 per U.K. pound in 2002, and US$1.42 and
US$1.44 per U.K. pound in 2001, respectively.

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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 statements. 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 progress, 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 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 below 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.

OVERVIEW AND SIGNIFICANT ACCOUNTING POLICIES

We are a provider of global domain name registration and Internet
services for businesses and consumers that wish to have a unique address and
branded identity on the Internet. Domain names serve as part of the
infrastructure for Internet communications, including websites, email, audio,
video and telephony.

We began processing registrations in the generic top level domains
(gTLD).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 3.4 million domain name
registrations under management as of June 30, 2002, which number includes a
small percentage of domain name registrations which have been seized by us for
non-payment. Currently, we register, renew and transfer domain names across the
..com, .net and .org gTLDs, in new gTLDs such as .biz, .info and .name and in
over 250 country code top level domains (ccTLDs), such as .co.uk and .org.uk for
the United Kingdom, .de for Germany and .jp for Japan.

We believe that we offer a quick and user-friendly registration
process as well as responsive and reliable customer support. We also offer a
suite of value-added products and services targeted to assist our customers in
developing and maintaining their online identities, including:

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PRODUCTS AND SERVICES PRODUCTS AND SERVICES
PROVIDED BY US RESOLD BY US

- - website-creation tools under the names - email
FirstStepSite(R) and WebSiteNow!(TM)

- - intellectual property and brand protection - search engine submission
services related to domain names services

- - domain name re-sale services offered - digital certificates
through our Afternic.com subsidiary

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 brand and identity across the world and
other online activities. Our mission is to become the preferred partner for
customers who seek to create, enhance and manage their Internet presence.

Our retail customers are typically small to medium-size businesses as
well as small office/home office and individuals. Generally, these customers
purchase domain name registration services directly from our website at
www.register.com. Our Corporate Services division provides domain name
registration and related products and services to large corporate enterprises
with specialized registration needs, including global registration and
management services, brand and trademark protection and enhanced security.

In order to extend our distribution we maintain a Global Partner
Network of Internet Service Providers (ISPs), web-hosting companies, telecom
carriers, web portals and other e-businesses. Using our software solutions,
these companies are authorized to resell our domain name registration services
and related products and services to their customers.

Registry Advantage(TM), our domain registry solution, enables domain
name registries to take advantage of our systems on an outsourced basis.

Through our RegistryPro subsidiary, we are establishing a registry for
the new gTLD .pro, which will be dedicated to certified professionals such as
lawyers, doctors and accountants. We also have a small equity stake in Afilias,
the consortium of 18 registrars, which manages the registry for the new gTLD
..info which went live in October 2001.

We are the successor by merger to Forman Interactive Corp. Forman
Interactive commenced operations in 1994 as a developer of electronic commerce
software, and began offering web-hosting and related products and services in
1997. In February 1998, we began to distribute domain names for free and, to a
lesser extent, on a commission basis when we distributed domain names for
international registrars and registries. In April 1999, we commenced offering
registration services for ccTLDs. On June 23, 1999, Forman Interactive merged
with and into Register.com, Inc. and we began operating as a paid registrar in
the .com, .net and .org domains. In June 2000, we acquired Inabox, Inc. and we
used Inabox's software to

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develop our FirstStepSite(R) and WebSiteNOW!(TM) products and My.register.com,
one of the reseller solutions offered to our Global Partner Network. We acquired
Inabox, Inc. for approximately $1.0 million in cash and 280,019 shares of our
common stock. In September 2000, we acquired Afternic.com, Inc., a leading
secondary market exchange for domain names, for approximately $10.0 million cash
and 4,378,289 shares of our common stock. Each of these transactions was
accounted for using the purchase method of accounting. As a result, the
financial results of Inabox and Afternic.com are consolidated with our financial
results from the dates of their respective acquisitions.

RECENT EVENT - ACQUISITION OF VIRTUAL INTERNET PLC

In March 2002 we acquired Virtual Internet plc for approximately
L11.99 million (approximately US $16.9 million at date of acquisition).
Virtual Internet plc, a U.K. based company, has operations in the United States
and Europe and, at the time of acquisition, operated through two divisions: the
Corporate Services division and the Hosting division. The Corporate Services
division provides online intellectual property management and protection
services under the NetSearchers brand. The Hosting division provided web-hosting
services under the Virtual Internet brand. On May 9, 2002, we sold Virtual
Internet plc's Hosting division for $500,000. Virtual Internet plc shareholders,
other than shareholders in certain jurisdictions outside of the U.K., were given
the opportunity to elect to receive loan notes to be issued by Register.com
(U.K.) Limited in exchange for their shares and as of June 30, 2002 we had $9.1
million of these loan notes outstanding. Our results of operations for the three
and six months ended June 30, 2002, include those of Virtual Internet's
Corporate Services business since March 8, 2002.

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, extended 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 when we
provide the registration services, including customer service and maintenance of
the individual domain name records. We require prepayment 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 while we recognize the revenues
over the registration period. For some of our customers who register domain
names through our Corporate Services division and through our Virtual Internet
subsidiary, and for some 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, we review historical rates of credit card chargebacks, current
economic trends and changes in acceptance of our products and services on a
monthly basis. Deferred revenues and revenues

15

recognized are presented net of provisions recorded for estimated refunds and
chargebacks. If a significant percentage of customers continue to request
refunds from us or contact their bank to request that the amount 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" for additional information on the
penalties and other risks associated with the Company's excessive credit card
chargebacks and refunds.

In addition to our standard registration fees 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 higher-priced services for our corporate customers and
extends volume-based discounts for domain name registrations and transfers. We
pay referral commissions based on a percentage of the net registration revenues
derived from registrations processed through certain participants in our Global
Partner Network and those we process through our www.register.com website
referred to us by participants in our affiliate network. Other participants in
our Global Partner Network (those who use our My.register.com(TM) and TPP
interfaces) pay us a fee per registration, discounted off of our standard
registration fee.

We believe that the high growth rate experienced in the domain name
registration market in late 1999 and 2000 is not an indication of anticipated
future growth rates. During that period substantial numbers of domain name
registrations were driven by factors including: (i) the desire by businesses to
establish an online presence; (ii) significant registration activity by domain
name speculators, who register names with the intention of reselling them rather
than putting them to use; and (iii) extremely strong growth in new business
start-ups in the Internet sector. In late 2000, the domain name registration
market's growth rate began to decrease. Since the end of the third quarter of
2001, the overall number of domain name registrations in the VeriSign registry
decreased from approximately 32 million as of September 30, 2001 to
approximately 27.3 million as of June 30, 2002. We believe this was due, in
large part, to the large number of names registered in 1999 and 2000 by domain
name speculators. Because we had a significant number of promotional names
registered through various marketing efforts, including our NameDemo.com service
which we discontinued in February 2001, a significant percentage of the domain
name registrations managed by us were not renewed and lapsed in the fourth
quarter of 2001. This resulted in a decrease of our total names under management
to approximately 3.3 million as of December 31, 2001 from approximately 3.8
million as of September 30, 2001. The number of paid domain name registrations,
renewals and transfers, decreased sequentially each quarter from the first
quarter of 2000 until the introduction of new gTLDs in the fourth quarter of
2001. We experienced a similar sequential decline from the first to the second
quarter of 2002 as we believe that the number of new and renewed registrations
have declined as small and medium-sized businesses either shut down or did not
start up new ventures that would have required domain name registrations.

Registration renewals contribute to our revenues from domain name
registrations as our customers' initial registrations reach the end of their
terms and a portion of these customers renew their registrations. Over time, we
would expect to see an increase in renewal rates across the industry. Taking
into account all of these dynamics, we anticipate that revenues from domain name
registrations would remain relatively flat for the short term, but would
increase over time if our renewal and other marketing efforts are successful and
the overall economic

16

environment improves. We anticipate that revenue from domain names will continue
to be the largest component of our revenues for the foreseeable future.

Other products and services, which primarily consist of email, domain
name forwarding, web-hosting, site submission to search engines, applications
for new gTLDs, intellectual property protection services related to the
introduction of new gTLDs and software, are sold either as one time offerings or
annual or monthly subscriptions, depending on the product or service offering.
Revenues from domain name applications, which may or may not result in domain
registrations, and other intellectual property protection services related to
the introduction of new gTLDs are recognized upon the sale of the applications
and related services. Revenues from our other products and services, such as
email and domain name forwarding, are recognized ratably over the period in
which we provide such services. To date, our software revenues have not been
material and we do not expect these revenues to be material for the foreseeable
future.

Advertising revenues are derived from the sale of sponsorships and
banner advertisements under short-term contracts that range from one month to
one year in duration. We recognize these revenues ratably over the period in
which the advertisements are displayed 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 on a straight-line basis over
the life of the registration term of registry fees, depreciation on the
equipment used to process the domain name registrations, the fees paid to the
co-location facilities maintaining our equipment and fees paid to the financial
institutions to process credit card payments on our behalf, including penalties
for excessive chargebacks. We pay registry fees for gTLDs ranging from $5.30 per
year for each .biz and .info domain name registration to $6 per year for each
..com, .net and .org domain name registration and registry fees of approximately
$5 to $160 for one- or two-year country code domain name registrations. The
largest component of our cost of revenues is the registry fees, which, while
paid in full at the time that the domain name is registered, are recorded as a
prepaid expense and recognized ratably over the term of the registration.

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

There are no material costs associated with our software revenues.

We have no direct cost of revenues associated with our advertising
revenue and 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.

17

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 in the same amount. We do incur operational costs including
salaries and commissions for our advertising sales staff, which are classified
as operating expenses.

OPERATING EXPENSES

Our operating expenses consist of sales and marketing, research and
development, general and administrative, non-cash compensation expenses, and
amortization of intangible assets. Prior to January 1, 2002 our operating
expenses also included amortization of goodwill. Our sales and marketing
expenses consist primarily of employee salaries, 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 and related costs associated with the development and integration of
new products and services, the enhancement of existing products and services,
and quality assurance. General and administrative expenses, excluding non-cash
compensation, consist primarily of employee salaries and other personnel-related
expenses for executive, financial and administrative personnel, as well as
professional services fees and bad debt accruals. Non-cash compensation expenses
are related to grants of restricted stock, stock options and warrants to
employees, directors, consultants and vendors. Facilities expenses are allocated
across our different operating expense categories. Based on grants of restricted
stock, options and warrants to date, we estimate that we will record
approximately $3.3 million in additional non-cash compensation charges through
2006 as follows: $1.9 million in 2002, $952,000 in 2003, $237,000 in 2004 and
$211,000 in 2005 and beyond. These charges primarily relate to grants of
restricted stock, and to issuance of stock options and warrants with exercise
prices below fair market value on the date of grant. The non-cash compensation
charges will reduce our earnings or increase our losses, as applicable, in
future periods.

NET INCOME

Although we achieved profitability for the quarter and six months
ended June 30, 2002 and for the year ended December 31, 2000, we were not
profitable for the year ended December 31, 2001. Our net loss for 2001 included
a write-down of approximately $32.5 million of intangible assets associated with
the acquisition of Afternic and the reversal of a tax valuation allowance of
$2.5 million. Our year 2000 profitability was due, in part, to a gain of $4.6
million from the sale of our investment in a private company and to interest
income. Prior to 2002 our operating results reflected amortization of goodwill.
We anticipate that our operating expenses will increase in the foreseeable
future as we develop new products and services, improve our operational and
financial systems, broaden our customer service capabilities, explore strategic
opportunities, expand internationally, increase our sales and marketing
operations and develop new distribution channels and strategic relationships,.
In addition, losses at Virtual Internet have contributed to a decline in our
profitability for this past quarter and losses at RegistryPro and Virtual
Internet may reduce our profitability in 2002. During the second quarter of 2002
we offered lower prices to certain members of our global partner network and as
promotions for .us ccTLD subscriptions, and as a result, our profitability may
be reduced in future periods as the related deferred revenue is recognized over
the subscription periods. We cannot assure you that we will be able to remain
profitable or sustain or increase our positive cash flow in the future.

18

RESULTS OF OPERATIONS

The following tables set forth our selected unaudited quarterly
statement of operations data, in dollar amounts and as a percentage of net
revenues, for the three and six months ended June 30, 2002 and 2001. 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, 2001, and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated 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.

19

Income before provision for income taxes............ 11% 19% 16% 19%
Provision for income taxes.......................... (8%) (12%) (8%) (13%)
------------ ----------- ----------- -----------
Net income..................................... 3% 7% 8% 6%
Unrealized (loss) gain on marketable securities..... (3)% 0% (0)% 2%
Unrealized gain on foreign currency translation..... 4% 0% 2% 0%
------------ ----------- ----------- -----------
Comprehensive income........................... 4% 7% 10% 8%
============ =========== =========== ===========

SECOND QUARTER OF 2002 AND 2001

NET REVENUES

Total net revenues decreased 10% to $27.0 million for the second
quarter of 2002 from $30.0 million for the same period of last year.

DOMAIN NAME REGISTRATIONS. Recognition of revenues from domain name
registrations decreased 5% to $24.6 million for the second quarter of 2002 from
$25.8 million for the same period of last year. This decrease was due primarily
to lower amortization of deferred revenues as a result of a longer
dollar-weighted-average subscription period in the second quarter of 2002, due
to higher sales of five and ten-year subscriptions in the second quarter of
2002, and in part to lower prices which we offered to certain members of our
global partner network and as promotions for the newly re-launched .us ccTLD. At
June 30, 2002, we had $93.7 million of deferred revenue compared with $89.6
million at March 31, 2002, representing a net increase of $4.1 million during
the second quarter of 2002. The increase was due in part to higher sales of
renewed and transferred domain registrations, and in part to the acquisition of
Virtual Internet on March 8, 2002, which accounted for $1.3 million of the
increase in deferred revenue during the second quarter of 2002.

OTHER PRODUCTS AND SERVICES. Revenues from other products and services
remained flat at $1.3 million for the second quarter of 2002 compared with the
same period of last year. In the second quarter of 2002, this revenue was
derived principally from increased sales of email and WebSiteNow!(TM) services,
while in the second quarter of 2001, this revenue was derived principally from
sales of intellectual property services in connection with the launch of new
gTLDs.

ADVERTISING. Revenues from advertising decreased 64% to $1.1 million
for the second quarter of 2002 from $3.0 million for the same period of last
year, primarily as a result of a decrease in our rates and volume of advertising
and sponsorships sold on our www.register.com, FirstStepSite(R) and other web
pages. We anticipate continuing softness in the Internet advertising market in
future periods.

COST OF REVENUES

Total cost of revenues increased 7% to $9.3 million for the second
quarter of 2002 from $8.6 million for the same period of last year.

COST OF DOMAIN NAME REGISTRATIONS. Cost of domain name registrations
increased 8% to $9.1 million for the second quarter of 2002 from $8.4 million
for the same period of last year. The increase was due in part to the inclusion
of Virtual Internet in our results of operations after

20

March 8, 2002, in part to higher credit card processing fees including penalties
for excessive chargebacks, and in part to higher costs related to equipment and
co-location facilities, offset in part by lower expense for fees paid to
registries as a consequence of lower domain name registrations.

COST OF OTHER PRODUCTS AND SERVICES. Cost of other products and
services remained flat at $0.2 million for the second quarter of 2002 compared
with the same period of last year.

GROSS PROFIT MARGIN

Our gross profit margin declined to 66% in the second quarter of 2002
from 71% in the same period of last year, in part due to lower advertising
revenues, in part to higher credit card processing fees including penalties for
excessive chargebacks, and in part to lower prices which we offered to certain
members of our global partner network and as promotions for the newly
re-launched .us ccTLD.

OPERATING EXPENSES

Total operating expenses decreased 9% to $16.3 million for the second
quarter of 2002 from $17.9 million for the same period of last year.

SALES AND MARKETING. Sales and marketing expenses decreased 4% to $8.2
million for the second quarter of 2002 from $8.5 million for the same period of
last year. The decrease was primarily due to lower media advertising spending.
We anticipate that sales and marketing expenses for the year 2002 will show an
increase as compared to the year 2001 as we market new products and services in
accordance with our customer segmentation strategy and expand into new markets.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
55% to $3.2 million for the second quarter of 2002 from $2.0 million for the
same period of last year. The increase resulted in part from salaries associated
with new technology personnel to improve our systems and operations, and in part
from the inclusion of the results of operations of Virtual Internet after March
8, 2002. We anticipate that research and development expenses will continue to
increase as we develop, modify and improve our systems to accommodate change in
our business and continue to position the Company for growth.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 39% to $4.8 million for the second quarter of 2002 from $3.5 million
for the same period of last year. The increase was due in part to salaries
associated with newly hired personnel and related costs required to manage our
operations and facilities expansion, in part to an $862,000 provision for bad
debts in the second quarter of 2002, and in part to the inclusion of Virtual
Internet in our results of operations after March 8, 2002. We expect that our
general and administrative expenses will increase as appropriate to support our
operations.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of
goodwill and other intangibles decreased to $123,000 for the second quarter of
2002 from $3.9 million for the same period of last year. In accordance with SFAS
142, we ceased amortization of goodwill effective January 1, 2002.

21

OTHER INCOME, NET

Other income, net, which consisted primarily of interest income, net
of interest expense, decreased to $1.5 million for the second quarter of 2002
from $2.3 million for the same period of last year. The decrease was primarily
due to lower interest rates in the second quarter of 2002 and a shift in our
portfolio from higher-rate taxable securities to lower-rate tax-exempt
securities.

PROVISION FOR INCOME TAXES

The provision for income taxes in the second quarter of 2002
represented 71% of income before income taxes, compared with 65% for the same
period of last year. The increase in the effective tax rate in 2002 is primarily
due to losses generated by Virtual Internet for which no tax benefit was
recorded because realization is not assured.

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

NET REVENUES

Total net revenues decreased 11% to $54.3 million for the six months
ended June 30, 2002 from $60.6 million for the same period of last year.

DOMAIN NAME REGISTRATIONS. Recognition of revenues from domain name
registrations decreased 5% to $49.5 million for the six months ended June 30,
2002 from $51.8 million for the same period of last year. This decrease was due
primarily to lower amortization of deferred revenues as a result of a longer
dollar-weighted-average subscription period in 2002, due primarily to higher
sales of five and ten-year subscriptions in 2002, and in part to lower prices
which we offered to certain members of our global partner network and as
promotions for the newly re-launched .us ccTLD.

At June 30, 2002, we had $93.7 million of deferred revenue compared
with $77.4 million at December 31, 2001, representing a net increase of $16.3
million for the six months ended June 30, 2002. The increase was due in part to
higher sales of renewed and transferred domain registrations, and in part to the
acquisition of Virtual Internet on March 8, 2002, whose balance sheet included
deferred revenue of $6.9 million at the date of acquisition.

OTHER PRODUCTS AND SERVICES. Revenues from other products and services
remained flat at $2.1 million for the six months ended June 30, 2002 compared
with the same period of last year. In the six months ended June 30, 2002, this
revenue was derived principally from increased sales of email and
WebSiteNow!(TM) services, while in the six months ended June 30, 2001, this
revenue was derived principally from sales of intellectual property services in
connection with the launch of new gTLDs.

ADVERTISING. Revenues from advertising decreased 61% to $2.6 million
for the six months ended June 30, 2002 from $6.7 million for the same period of
last year, primarily as a result of a decrease in our rates and volume of
advertising and sponsorships we sold on our www.register.com, FirstStepSite (R)
and other web pages during the current period.

22

COST OF REVENUES

Total cost of revenues increased 5% to $17.9 million for the six
months ended June 30, 2002 from $17.1 million for the same period of last year.

COST OF DOMAIN NAME REGISTRATIONS. Cost of domain name registrations
increased 8% to $17.7 million for the six months ended June 30, 2002 from $16.5
million for the same period of last year. The increase was due in part to the
inclusion of Virtual Internet in our results of operations after March 8, 2002,
in part to higher credit card processing fees including penalties for excessive
chargebacks, and in part to higher costs related to equipment and co-location
facilities, offset by lower expense for fees paid to registries as a consequence
of lower domain name registrations.

COST OF OTHER PRODUCTS AND SERVICES. Cost of other products and
services decreased 70% to $0.2 million for the six months ended June 30, 2002
from $0.6 million for the same period of last year, primarily due to
higher-than-anticipated refunds in 2002 of fees previously paid in connection
with .biz applications.

GROSS PROFIT MARGIN

Our gross profit margin declined to 67% in the six months ended June
30, 2002 from 72% in the same period of last year, in part due to lower
advertising revenues, in part to higher credit card processing fees including
penalties for excessive chargebacks, and in part to lower prices which we
offered to certain members of our global partner network and as promotions for
the newly re-launched .us ccTLD.

OPERATING EXPENSES

Total operating expenses decreased 15% to $30.8 million for the six
months ended June 30, 2002 from $36.3 million for the same period of last year.

SALES AND MARKETING. Sales and marketing expenses decreased 1% to
$16.5 million for the six months ended June 30, 2002 from $16.7 million for the
same period of last year. The decrease was primarily due to lower media
advertising spending.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
36% to $5.5 million for the six months ended June 30, 2002 from $4.0 million for
the same period of last year. The increase resulted primarily from salaries
associated with new technology personnel to improve our systems and operations,
and the inclusion of the results of operations of Virtual Internet after March
8, 2002.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 11% to $8.7 million for the six months ended June 30, 2002 from $7.8
million for the same period of last year. The increase was due in part to
salaries associated with newly hired personnel and related costs required to
manage our operations and facilities expansion, in part to higher bad debt
expense, and in part to the inclusion of the results of operations of Virtual
Internet. Non-cash compensation expenses, included herein, decreased to $865,000
for the six months ended June 30, 2002 from $924,000 for the same period of last
year. The non-cash compensation expenses

23

were primarily attributable to amortization of deferred compensation related to
grants of restricted stock and issuance of certain options and warrants. Based
on grants of restricted stock and issuance of options and warrants to date, we
expect to record approximately $2.4 million of non-cash compensation charges in
future periods as follows: $985,000 for the remainder of 2002, $952,000 in 2003,
$237,000 in 2004 and $226,000 in 2005 and beyond.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of
goodwill and other intangibles decreased to $153,000 for the six months ended
June 30, 2002 from $7.8 million for the same period of last year. In accordance
with SFAS 142, we ceased amortization of goodwill effective January 1, 2002.

OTHER INCOME, NET

Other income, net, which consisted primarily of interest income, net
of interest expense, decreased to $3.1 million for the six months ended June 30,
2002 from $4.8 million for the same period of last year. The decrease was
primarily due to lower interest rates in 2002 and a shift in our portfolio from
higher-rate taxable securities to lower-rate tax-exempt securities.

PROVISION FOR INCOME TAXES

The provision for income taxes in the six months ended June 30, 2002
represented 48% of income before income taxes, compared with 67% for the same
period of last year. The lower effective tax rate in 2002 was due in part to a
shift in our portfolio from taxable securities to tax-exempt securities.

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 generated approximately $115.3
million after deducting the underwriting discount and other offering expenses.

At June 30, 2002, our cash and cash equivalents, short-term
investments and marketable securities totaled $211.4 million. This is compared
to $197.8 million at December 31, 2001. We generated $13.9 million of cash from
operations in the six months ended June 30, 2002 compared with $10.3 million in
the same period of last year. This increase in cash generated from operations
was primarily due to higher sales of paid domain name registrations during 2002,
the cash receipts from which were credited to deferred revenues, and to the tax
benefit arising from exercises of stock options by employees.

Net cash used for investing activities was $15.3 million in the six
months ended June 30, 2002, comprised of $9.2 million (net of cash acquired) for
the acquisition of Virtual Internet, $1.8 million for capital expenditures, and
$4.3 million (net) for purchases of marketable securities. Net cash provided by
financing activities totaled $9.8 million in the six months ended June 30, 2002,
primarily from issuance of notes payable related to the acquisition of Virtual
Internet, and also from exercises of options and warrants. The notes are
redeemable at

24

the option of the holders any time between September 8, 2002 and June 30, 2003,
at which time they mature.

Although we have no material commitments for capital expenditures or
other long-term obligations, we anticipate that we will increase our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel, including the addition of new products
and services, implementation of additional co-location facilities and various
capital expenditures associated with expanding our facilities. We currently
anticipate that we will continue to experience growth in our operating expenses
for the foreseeable future and that our operating expenses will be a material
use of our cash resources. We believe that our existing cash and 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.

In August 2002, we began to purchase shares of our common stock
pursuant to our previously announced stock repurchase program. Under this
program, our Board of Directors authorized us to repurchase up to $10 million of
our shares through early May 2003. Any purchases under the stock repurchase
program may be made, from time-to-time, in the open market, through block trades
or otherwise. Depending on market conditions and other factors, these purchases
may be commenced or suspended at any time or from time-to-time without prior
notice.

25

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 HISTORY OF LOSSES AND ALTHOUGH WE WERE PROFITABLE FOR THE YEAR ENDED
DECEMBER 31, 2000 AND FOR THE FIRST HALF OF 2002, WE CANNOT ASSURE YOU THAT WE
WILL SUSTAIN OR INCREASE OUR PROFITABILITY OR POSITIVE CASH FLOW IN THE FUTURE.

Although we achieved profitability for the quarters ended March 31,
2002, June 30, 2002 and for the year ended December 31, 2000, we were not
profitable for the year ended December 31, 2001. In addition, our year 2000
profitability was due, in part, to a one-time gain of $4.6 million from the sale
of our investment in a private company and the recognition of interest income.
We incurred losses from operations of approximately $9.7 million for the year
ended December 31, 1999, $9.7 million for the year ended December 31, 2000 and
$19.9 million for the year ended December 31, 2001. As of June 30, 2002 our
accumulated deficit totaled $29.0 million. We have only a limited operating
history as a domain name registrar upon which our current business and prospects
can be evaluated, and our operating results, since June 1999, are not comparable
to our results for prior periods. We anticipate that our operating expenses will
increase in the foreseeable future as we develop new products and services,
improve our operational and financial systems, broaden our customer service
capabilities, explore strategic opportunities, expand internationally, increase
our sales and marketing operations and develop new distribution channels and
strategic relationships. In addition, losses at Virtual Internet have
contributed to a decline in our profitability for this past quarter and losses
at Virtual Internet and RegistryPro may reduce our profitability in 2002.
Accordingly, we cannot assure you that we will be able to remain profitable or
sustain or increase our positive cash flow in the future.

IF THE GROWTH RATE OF THE MARKET FOR DOMAIN NAMES CONTINUES TO FALL, OUR NET
REVENUES FROM DOMAIN NAME REGISTRATIONS MAY FALL BELOW ANTICIPATED LEVELS.

The domain name market is still in its early stages of development and
we do not expect that it will experience the same high level of growth it has
experienced in the past. Based on VeriSign, Inc.'s press releases, the total
number of domain registrations in the VeriSign registry decreased from
approximately 32.4 million as of June 30, 2000 to approximately 27.3 million as
of June 30, 2002. The decline in the overall market, together with increased
competition, contributed to a sequential quarterly decline in the number of our
paid domain name registrations, transfers and renewals from the first quarter of
2000 until the introduction of new gTLDs in the fourth quarter of 2001. We
experienced a similar sequential decline from the first quarter of 2002 to the
second quarter of 2002, as we believe that the number of new and renewed
registrations have declined as small and medium-sized businesses either shut
down or did not

26

start up new ventures that would have required domain name registrations. If the
market does not recover from this slowdown and the competition in the domain
name industry continues to intensify, our business, financial condition and
results of operations could be materially adversely affected.

IF WE DO NOT REDUCE OUR RATE OF CREDIT CARD CHARGEBACKS, WE COULD LOSE OUR
ABILITY TO ACCEPT PAYMENT THROUGH CREDIT CARD ASSOCIATIONS, WHICH WOULD HAVE A
MATERIAL ADVERSE AFFECT ON OUR RESULTS OF OPERATIONS.

A substantial majority of our revenues are obtained through online
credit card transactions. Under current credit card industry practices, we
are liable for fraudulent and disputed credit card transactions because we do
not have the actual card nor do we 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. Although we have implemented
procedures to reduce fraudulent and disputed credit card transactions, we
continue to have a higher than acceptable rate of credit card chargebacks and
refunds. As a result, we have been, and continue to be, assessed significant
financial penalties from one credit card association and have been informed
that if we do not reduce our rate of chargebacks and refunds to a level
acceptable to it in the near future, we may lose our ability to accept
payment through credit cards issued by the association. Another credit card
association has notified us that the monthly financial penalties will
increase significantly every month if our chargeback and refund ratios are
not reduced below its acceptable level. Although we have made recent progress
reducing our levels of chargebacks, we currently face the prospect of
continued significant financial penalties, which adversely affect our results
of operations, as well as the risk that one or more credit card associations
may, at any time, terminate our ability to accept payment through credit
cards issued by the associations, which would have a material adverse affect
on our business, financial condition and results of operations.

SOME OF THE MEASURES WE ARE IMPLEMENTING TO REDUCE OUR RATE OF CHARGEBACKS AND
CREDIT CARD REFUNDS MAY REDUCE OUR NET REVENUES.

By implementing aggressive online fraud screens designed to prevent
fraudulent credit card transactions on our website, we may block legitimate
credit card users from purchasing our services, thereby reducing our net
revenues. In addition, our efforts to reduce our chargebacks and refunds may
include a modification of some portion or all of our SafeRenew program to an
"opt in" program. 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 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 an additional one-year period. Our modification of some or
all of this program to an "opt in" basis may result in the lapse of a
significant number of domain name registrations that would have been renewed
through the SafeRenew program, which could damage our relationship with
customers that had relied upon the SafeRenew program to renew their domain name
registrations. In addition, implementing this change may have an adverse affect
on our renewal rate and our net revenues.

27

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. Our first expirations for
..com, .net and .org domain names occurred in January 2001. As such, we have only
limited experience to date with registration renewals. We have difficulty
predicting the number of registration renewals and related revenues we should
expect for a particular period and cannot assure you that those customers who
will renew their registrations will do so through us. Our renewal rate for paid
registrations for the year ended December 31, 2001 and for the quarter ended
June 30, 2002 was less than 50%. We have experienced and anticipate very low
renewal rates for promotional and other speculative registrations. Our total
domain name registrations under management declined from approximately 3.8
million as of September 30, 2001 to approximately 3.4 million as of June 30,
2002. We believe that the number of new and renewed registrations have declined
in 2002 as small and medium-sized businesses either shut down or did not start
up new ventures that would have required domain name registrations. Also, as
discussed above, we anticipate that our renewal rates may be adversely affected
if we modify our SafeRenew program to an "opt in" basis. If we are unable to
increase our overall renewal rate or number of new registrations, the
combination of our customers deciding not to renew their registrations through
us and the increase we have experienced in the transfers of registrations to
other registrars will continue to have the cumulative effect of decreasing the
number of domain name registrations under our management. This could cause our
revenues from domain name registrations to decrease and could materially
adversely affect our business, financial condition and results of operations.

IF NOT REMEDIED, A WEAKNESS IN OUR INTERNAL ACCOUNTING CONTROLS MAY MATERIALLY
ADVERSELY AFFECT OUR ABILITY TO ACCURATELY REPORT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ON A TIMELY BASIS.

We have experienced significant growth and increased complexity in
our operations over the past two years, which have strained our existing
financial systems. As a result, our financial systems and internal accounting
controls need to be updated and improved. We have a material weakness in our
internal accounting controls that may impair our ability to accurately record
and track deferred revenues and prepaid registry fees through our systems. We
have implemented a number of processes and solutions to aid in the recording
and tracking procedures and to ensure the accuracy, in all material respects,
of our current and historical reported financial condition and results of
operations. Due to the growing complexity of our operations, the processes
and solutions we have used in the past may not be adequate to compensate for
this material weakness in the future. We intend to implement new accounting
system modules, including modules to perform certain reconciliations and to
record and track deferred revenues and prepaid registry fees. We cannot
assure you that these solutions will be implemented on a timely basis, nor
can we assure you that their implementation will adequately remedy the
weaknesses identified in our internal accounting systems and controls. If our
solutions are not successful, our ability to accurately report our financial
condition and results of operations on a timely basis may be materially
adversely affected.

28

THE INCREASED SIZE AND COMPLEXITY OF OUR BUSINESS HAS STRAINED OUR MANAGERIAL,
OPERATIONAL, FINANCIAL, ACCOUNTING AND INFORMATION SYSTEMS, CUSTOMER SERVICE
STAFF AND OFFICE RESOURCES, AND COULD CAUSE US TO INCUR SIGNIFICANT CAPITAL
EXPENDITURES TO IMPROVE OUR COMPUTER SYSTEMS.

Our expanded operations have placed a significant strain on our
resources as we have had to expand and need to improve all aspects of our
business, including our computer systems, telecommunications systems and
related infrastructure, customer service capabilities and sales and marketing
efforts. The demands on our network infrastructure, technical staff and
technical resources have grown rapidly with our customer base, our expansion
of operations to Canada and Europe, our acquisitions and the increasing
complexity of our product and service offerings. As a result of this growth,
we are working to improve our financial and managerial controls, billing
systems, reporting systems and procedures, and to train and manage our
workforce. In connection with these efforts, we may be required to incur
significant capital and operating expenditures to expand and improve our
computer systems. We cannot assure you that our infrastructure, technical
staff and technical resources will adequately accommodate these changes or
that we will be able to improve our infrastructure rapidly enough to meet the
demands of our increasingly complex business. As a result, any delays in the
launch of our products and services or our inability to meet the needs of our
customers, especially large corporate customers, will affect our ability to
effectively compete in our market, to attract and retain customers and to
market new products and services in the future. If we fail to manage our
business effectively 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.

WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
STRONG COMPETITION FROM VERISIGN, INC.

NETWORK SOLUTIONS' AUTHORIZATION BY THE U.S. GOVERNMENT TO ACT AS THE SOLE
DOMAIN NAME REGISTRAR PRIOR TO APRIL 1999 IN THE .com, .net AND .org DOMAINS
GIVES VERISIGN A SIGNIFICANT COMPETITIVE ADVANTAGE IN THE DOMAIN NAME
REGISTRATION INDUSTRY.

Before the introduction of competition into the domain name
registration industry in 1999, Network Solutions was the sole entity authorized
by the U.S. government to serve as the registrar for domain names in the .com,
..net and .org domains. This position allowed Network Solutions to develop a
substantial customer base, which gives it advantages in securing customer
renewals and in developing and marketing ancillary products and services. On
June 9, 2000, Network Solutions was acquired by VeriSign, Inc. We face
significant competition from VeriSign as we seek to increase our revenue from
domain name registration services, and we cannot assure you that we will be able
to maintain or improve our competitive position. The acquisition of Network
Solutions by VeriSign has not only facilitated cross-marketing between the two
companies, but it has also strengthened VeriSign's competitive advantage by
enabling it to bundle registration services with an expanded range of products
and services. This leadership position together with VeriSign's broader array of
products and service offerings and strong financial position, enable it to
compete more effectively than most registrars in the formation of strategic
partnerships, and the pursuit of acquisition targets. We cannot assure you that
we will

29

be able to overcome VeriSign's advantages and may therefore lose certain
customer, partnership and acquisition opportunities to VeriSign.

VERISIGN'S EXCLUSIVE CONTROL OVER THE REGISTRY FOR THE .com, .net AND .org
DOMAINS GIVES IT AN ADVANTAGE OVER ALL COMPETITIVE REGISTRARS.

On May 25, 2001, ICANN finalized agreements with VeriSign that
supercede the original agreements between the parties and enable VeriSign to
continue to operate the .com registry until at least 2007 and the .net registry
until at least June 30, 2005 while retaining ownership and control over its
registrar business. The agreements also provide that, under certain conditions,
VeriSign may continue to operate both registries beyond these dates. VeriSign is
also required to divest the .org registry in or about December 2002.

As the exclusive registry for these domains, VeriSign receives from
us, and from every other competitive registrar, $6 per domain name per year. The
substantial net revenues from these registry fees, and the certainty of
receiving them, provide VeriSign significant advantages over any competitive
registrar. The most recent ICANN-VeriSign agreements strengthen VeriSign's
competitive advantage over us and other competitive registrars by securing
VeriSign's ability to act as a registrar while it is the sole registry for the
..com, .net and .org domains and earns revenues from the fees competitive
registrars pay. We cannot assure you that developments under these
ICANN-VeriSign agreements, or any future amendments to them will not materially
harm our business, financial condition and results of operation.

WE ALSO FACE COMPETITION FROM OTHER COMPETITIVE REGISTRARS AND OTHERS IN THE
DOMAIN NAME REGISTRATION INDUSTRY AND EXPECT THIS COMPETITION TO CONTINUE TO
INTENSIFY.

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. Since the end of the testbed
period on November 30, 1999, ICANN has continued to accredit new registrars. As
of July 31, 2002, ICANN had accredited 158 competitive registrars, including us,
to register domain names in one or more of the gTLDs, though not all of these
accredited registrars are operational. We also face substantial competition from
many resellers that are not accredited registrars but offer domain name
registrations through a competing accredited registrar's system. The continued
introduction of competitive registrars and resellers into the domain name
registration industry and the rapid growth of some competitive registrars and
resellers who have already entered the industry made it difficult for us to
maintain our unit market share during 2000 and 2001. This, together with a
decline in the domain name registration market, contributed to a sequential
quarterly decline in the number of paid domain name registrations, transfers and
renewals we performed from the first quarter of 2000 until the introduction of
new gTLDs in the fourth quarter of 2001. We experienced a similar sequential
decline from the first quarter of 2002 to the second quarter of 2002, as we
believe that the number of new and renewed registrations have declined as small
and medium-sized businesses either shut down or did not start up new ventures
that would have required domain name

30

registrations. If we were to again experience a decline in paid domain name
registrations, transfers and renewals our business, financial condition and
results of operations could be materially adversely affected.

WE FACE COMPETITION FROM COMPETITIVE REGISTRARS AND OTHERS IN THE DOMAIN NAME
REGISTRATION INDUSTRY THAT MAY HAVE LONGER OPERATING HISTORIES, GREATER NAME
RECOGNITION, PARTICULARLY IN INTERNATIONAL MARKETS OR GREATER RESOURCES.

Our competitors in the domain name registration industry include
companies with strong brand recognition and Internet industry experience, such
as major telecommunications firms, cable companies, ISPs, web-hosting providers,
Internet portals, systems integrators, consulting firms and other registrars.
Many of these companies also 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 which they can bundle
with domain name registrations. Our market position could be harmed by any of
these existing or future competitors, some of which may have longer operating
histories, greater name recognition, particularly in international markets, and
greater 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.

In response to increasing competition in the domain name registration
industry, we may be required, by market factors or otherwise, to reduce, perhaps
significantly, the prices we charge for our core domain name registration and
related products and services. Some of our competitors offer domain name
registration services at a wholesale price level minimally above the $6 registry
fee for .com, .net and .org domains. Other competitors, including VeriSign, have
reduced and may continue to reduce their pricing for domain name registrations
both for short-term promotions and on a permanent basis. Further, some of our
competitors have offered domain name registrations for free, deriving their
revenues from other sources. Reducing the prices we charge for domain name
registration services through our core Register.com branded offerings in order
to remain competitive could materially adversely affect our results of
operations.

IF NEW gTLDS ARE NOT INTRODUCED IN THE FUTURE, AND WE ARE UNABLE TO IMPROVE OUR
SALES OF EXISTING gTLDS, GENERATE ALTERNATE REVENUE STREAMS OR IMPROVE OUR
RENEWAL RATE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD
BE MATERIALLY ADVERSELY AFFECTED.

Although the overall number of registrations in each new gTLD that has
been launched has been significantly lower than the number of .com
registrations, the new gTLDs and the products and services that we sold in
connection with their respective launches contributed to our revenue for 2001
and the first quarter of 2002. We do not currently anticipate the introduction
of any additional commercial gTLDs in the near future other than the launch of
the .pro gTLD. As a result, in order to grow our revenue we need to increase
sales of existing gTLDs, renewals, transfers or other products and services in
lieu of the opportunities that were presented by the

31

new gTLDs in 2001 and early 2002. A resumption of the decline in our paid domain
name registrations, transfer and renewals could materially adversely affect our
business, results of operations and financial condition. Our business and
results of operations could be materially adversely affected if the popularity
of new gTLDs decreases, additional new top level domains are not introduced, or
if substantial numbers of our customers turn to other registrars for their new
gTLD registration needs.

OUR REVENUES FROM ADVERTISING MAY CONTINUE TO BE ADVERSELY AFFECTED BY PERCEIVED
WEAKNESS OF INTERNET ADVERTISING AND THE CONTINUED WEAKNESS IN THE INTERNET
ADVERTISING MARKET.

Our revenues from advertising depend on the use of the Internet as an
advertising and marketing medium. The demand for and market acceptance of
Internet advertising are uncertain as is its effectiveness relative to
traditional advertising. If advertisers perceive the Internet to be a limited or
ineffective advertising medium or perceive our websites to be less effective or
less desirable than other Internet advertising vehicles, advertisers may be
reluctant to advertise on our websites.

The overall market for Internet advertising has been characterized by
continuing and significant reduction in demand, a reduction or cancellation of
advertising contracts, a significant increase in the estimated amounts of
uncollectable receivables from advertisers, and a significant reduction of
Internet advertising budgets, especially by Internet-related companies. In
addition, an increasing number of Internet-related companies have experienced
deteriorating financial results and liquidity positions, and/or ceased
operations or filed for bankruptcy protection, or may be expected to do so.

For the year ended 2001, our advertising revenues were down 22.5%
compared to the year ended December 31, 2000, and constituted 8.2% of our net
revenues. For the three months ended June 30, 2002, this trend continued as our
advertising revenues were down 61% from the six months ended June 30, 2001. This
decline has had, and any continued decline will 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 would represent a
reduction of our gross profit in the same amount. The price we are able to
charge for advertisements has been negatively affected by the overall Internet
advertising market, which negatively affects our business. Given the current
market conditions, some of our advertising customers may be anticipating or
experiencing difficulty raising capital and therefore may elect to scale back
the resources they devote to advertising. Since the majority of our advertising
revenue is generated by a limited number of customers, the loss of these larger
customers would have an adverse affect on our results of operations. The
softness in the market for Internet advertising coupled with the actual or
perceived ineffectiveness of Internet advertising in general could materially
adversely affect our business, financial condition and results of operations.

32

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.

Part of our long-term strategy includes diversifying our revenue base
by offering value-added products and services related to domain name usage. We
expect to incur significant costs in acquiring, developing and marketing these
new products and services. We cannot assure you that we will be able to develop
new products and services outside of our primary business and, if we are able to
develop such products and services, that we will succeed in attaining the
market's confidence in us as a reliable provider of these products and services.
Our primary business, domain name registration services, generated 90% of our
net revenues during the quarter ended June 30, 2002. If we fail to offer
products and services that meet our customers' needs, or we do not provide
products and services 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. In addition, as we
offer new products and services, we may need to increase the size and will need
to expand the training, of our customer service staff to ensure that they can
adequately respond to customer inquiries. If we fail to provide our customer
service staff with training and staffing sufficient to support our new products
and services, we may lose customers who feel that their inquiries have not been
adequately addressed. 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.

WE CANNOT ASSURE YOU THAT THE REGISTRYPRO AND AFILIAS VENTURES WILL BE
SUCCESSFUL. IN ADDITION, WE INTEND TO INCUR ADDITIONAL CAPITAL EXPENDITURES TO
ESTABLISH AND DEVELOP REGISTRYPRO'S PRODUCTS AND SERVICES. SUCH EXPENDITURES
WOULD REDUCE THE FINANCIAL RESOURCES WE COULD USE FOR OUR PRIMARY BUSINESS.

In November 2000, Afilias, LLC, a consortium of 18 ICANN-accredited
registrars including us, was selected to operate a registry for the .info gTLD,
and RegistryPro, initially a joint venture between Virtual Internet plc and us,
was selected to operate a registry for the .pro gTLD which will be exclusively
for accredited professionals. In March 2002, we acquired Virtual Internet. While
Afilias launched real time .info registrations in October 2001, RegistryPro only
recently signed its contract with ICANN and still faces many operational
challenges prior to launch, including finalizing the overall technological
integration and function of the .pro top level domain product. In their early
stages, these ventures will likely require additional infusions of capital as
they establish themselves as registries of new top level domains. As they
require further funding it may be difficult to obtain financing from outside
sources, and we expect we will have to invest our own capital to build systems
to support RegistryPro and to market its services. The same may occur with
Afilias. A lack of adequate funding could impact RegistryPro's ability to launch
its services or either registry's ability to promote the new top level domains
in the marketplace once launched. We cannot predict whether there will be a
demand for the domain names for which these ventures would serve as the
registry, when or the extent to which we will be able to generate revenues from
Afilias and RegistryPro, or if either of these ventures will be profitable. If
there is no demand, or demand is

33

lower than anticipated, for these new gTLDs, or if the returns on our capital
expenditures are lower than expected or take longer to materialize, our
business, financial condition and results of operation could be materially
adversely affected.

OUR ACQUISITION STRATEGY, AND OUR RECENT ACQUISITION OF VIRTUAL INTERNET,
SUBJECTS US TO SIGNIFICANT RISKS, ANY OF WHICH COULD HARM OUR BUSINESS.

Acquisitions, including our recent acquisition 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 resulting from newly hired employees;

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

- 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.

We acquired Virtual Internet in March 2002, sold its hosting division
in May 2002 and are in the process of integrating its NetSearchers division. We
may not be successful in integrating the business, technology, operations and
personnel of Virtual Internet or any other acquired company. 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.

Our recent acquisition of Virtual Internet presents a number of
challenges, including:

- Virtual Internet incurred a loss of $892,000 in the second
quarter of 2002 and we may not be able to increase revenues
and/or cut expenses sufficiently to turn it profitable; and

- we face increased managerial and operational challenges due to
the European location of Virtual Internet's operations.

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

34

WE RECENTLY EXPANDED OUR BUSINESS INTERNATIONALLY. THIS EXPANSION COULD EXPOSE
US TO BUSINESS RISKS THAT COULD LIMIT THE EFFECTIVENESS OF OUR GROWTH STRATEGY
AND CAUSE OUR RESULTS OF OPERATIONS TO SUFFER.

We recently expanded our business into international markets, through
our acquisition of Virtual Internet which is based in the United Kingdom and has
offices in France and Italy. Prior to this acquisition, our customer service
operation in Canada was our only experience with operations outside of New York
or the United States. Introducing and marketing our products and services
internationally, developing direct and indirect international sales and support
channels and managing Virtual Internet's foreign personnel and operations will
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 and integration problems resulting from cultural
differences;

- 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 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.

IF WE ARE UNABLE TO MAKE SUITABLE ACQUISITIONS AND INVESTMENTS, OUR LONG-TERM
GROWTH STRATEGY COULD BE IMPEDED.

Our long-term growth strategy includes identifying and acquiring or
investing in suitable candidates on acceptable terms. In particular, we intend
over time to acquire or make investments in providers of product offerings that
complement our business and other companies in the domain name registration
industry. In pursuing acquisition and investment opportunities, we may be in
competition with other companies having similar growth and investment
strategies. Competition for these acquisitions or investment targets could also
result in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment. Our long-term growth strategy could be impeded if we fail to
identify and acquire or invest in promising candidates on terms acceptable to
us.

35

IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL
PERSONNEL, OUR BUSINESS MAY BE HARMED.

Our success depends in large part on the contributions of our senior
management team and technology personnel and in particular Richard D. Forman,
our President and Chief Executive Officer. We compete with other technology and
Internet companies in hiring and retaining qualified personnel. As a result, we
may be unable to retain our employees or attract, integrate, train and retain
other highly qualified employees in the future. Over the past several years, we
experienced high turnover among our employees and have added a significant
number of new members to our management team, most recently a new Chief
Financial Officer in June 2002. These individuals have not worked with one
another before and may not be able to develop an effective working relationship.
Moreover, our new managers are still learning about our company and our industry
while working to expand our business into new areas. If our management team
cannot work together effectively and cannot 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. The loss of services of
these or any other executive officers or the loss of the services of other key
employees could harm our business. In addition, if we fail to attract and
successfully integrate new personnel, or retain and motivate our current
personnel, our business, financial condition and results of operations could be
materially adversely affected.

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. ICANN faces significant questions
regarding its financial viability and efficacy as a private sector entity, and
its President recently recommended a restructuring of the organization,
including proposals for greater public accountability and a more diverse
representation of interests on its Board of Directors. 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;

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

36

- 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 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 WILL 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.

IF WE FAIL TO COMPLY WITH THE REGULATIONS OF THE COUNTRY CODE REGISTRIES OR ARE
UNABLE TO REGISTER DOMAIN NAMES WITH THOSE REGISTRIES, OUR BUSINESS COULD BE
MATERIALLY ADVERSELY AFFECTED.

Each of the country code registries requires registrars to comply with
specific regulations. Many of these regulations vary from country code to
country code. 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 country codes. Further, in most
cases, our rights to provide country code 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. Any restrictions on our ability to offer domain
name registrations in a significant number of country codes, or in a significant
country, could materially adversely affect our business, financial condition and
results of operations.

IF COUNTRY CODE REGISTRIES CEASE OPERATIONS OR OTHERWISE FAIL TO PROCESS
REGISTRATIONS OR RELATED INFORMATION ACCURATELY, WE WOULD BE UNABLE TO HONOR OUR
SUBSCRIPTIONS RELATING TO THOSE COUNTRY CODES.

Country code registries may be administered by the host country,
entrepreneurs or other third parties. 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. If we are unable to honor a substantial number of
subscriptions

37

for our customers for any reason or if the country code registries fail to
process our customers' registrations in a timely and accurate fashion, 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, including, but not limited to, domain name registration
and secondary market services. 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 OR MAINTAIN OR RENEW THE DOMAIN NAMES THAT WE PROCESS ON
BEHALF OF OUR CUSTOMERS, MAY SUBJECT US TO NEGATIVE PUBLICITY OR CLAIMS OF LOSS,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

Clerical errors or systems failures have resulted in our failure to
properly register or to maintain or renew the registration of 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 subject us to negative publicity or claims of loss, which,
together with the costs associated with defending such claims, 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.

A fundamental requirement for online communications and commerce is
the secure transmission of confidential information over public networks. 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 litigation and
adverse publicity, which could have a material adverse effect on our business,
financial condition and results of operations, as well as our reputation.

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

38

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 make it cost-prohibitive to operate our business and prevent us
from pursuing our business strategies.

WE MAY INCUR SIGNIFICANT EXPENSES RELATED TO THE SECURITY OF PERSONAL
INFORMATION ONLINE.

The need to physically secure and securely transmit confidential
information online has been a significant barrier to electronic commerce and
online communications. Any well-publicized compromise of security could deter
people from using online services such as the ones we offer, or from using them
to conduct transactions that involve transmitting confidential information.
Because our success depends on the general acceptance of online services and
electronic commerce, we may incur significant costs to protect against the
threat of security breaches or to alleviate problems caused by these breaches.

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 strategic 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 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.

We have received initial rejections from the U.S. Patent and Trademark
Office on our trademark applications for "register" and "register.com" based on
descriptiveness. We have responded to these initial rejections arguing that
these brands have become widely known through extensive use in commerce and are
valid trademarks. We filed a reconsideration request and notice of appeal with
the U.S. Patent and Trademark Office on June 12, 2002 with respect to the
rejection of the "register" mark. While we will be taking all reasonable
measures to secure federal trademark registrations for the "register" and
"register.com" marks, we cannot assure you that we will be able to obtain these
registrations. Our inability to obtain these trademark registrations could
materially harm our business.

Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are or
will be made available. We also expect to license proprietary rights such as
trademarks or copyrighted material to strategic partners in the course of
planned national and international expansion. While we will attempt to ensure in
our agreements that licensees will maintain the quality of our service, we
cannot assure you that they

39

will not take actions that might diminish the value of our proprietary rights or
reputation, which could thereby materially harm our business.

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 look, feel and
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. In addition, technology
development in Internet-related industries is inherently uncertain 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.
For instance, VeriSign has licensed us the right to use key software products
and database technology. 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.

40

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, a provider of web-hosting services,
and a participant in the secondary market for domain names, 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 both within the United States
and abroad, 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 the 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 the secondary
market or other domain name registration related services is still developing.
Any determination that our secondary market activities or other domain name
registration related services facilitate cybersquatting could have a material
adverse effect on our business, financial condition and results of operations.

41

RISKS RELATED TO OUR TECHNOLOGY AND THE INTERNET

SYSTEMS DISRUPTIONS AND FAILURES COULD CAUSE OUR CUSTOMERS AND ADVERTISERS TO
BECOME DISSATISFIED WITH US AND MAY IMPAIR OUR BUSINESS.

OUR CUSTOMERS, ADVERTISERS AND BUSINESS ALLIANCES 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. Our website has in the past experienced slower
response times. We have conducted planned site outages and experienced unplanned
site outages with minimal impact on our business. If we were to experience a
substantial increase in traffic and fail to increase our capacity or adopt new
technology as it is introduced, our customers would experience slower response
times or disruptions in service. Our customers, advertisers and business
partners may become dissatisfied by any systems failure that interrupts our
ability to provide our products and services to them or increased response times
as our technology becomes outdated. Substantial or repeated system failures
would significantly reduce the attractiveness of our website and could cause our
customers, advertisers and business partners to switch to another domain name
registration service provider. We may incur substantial expenses to update our
technology, 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.

OUR CUSTOMERS, ADVERTISERS AND BUSINESS PARTNERS 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 business alliances to
switch to another domain name registration service provider.

DELAYS OR SYSTEMS FAILURES UNRELATED TO OUR SYSTEMS COULD HARM OUR BUSINESS.

Our customers depend on ISPs, online service providers and others to
access our websites. Many of these parties have experienced outages and could in
the future experience outages, delays and other difficulties due to systems
failures unrelated to our systems. Although

42

we carry general liability insurance, our insurance may not cover any claims by
dissatisfied customers, advertisers or parties to our strategic alliances, 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 BUSINESS WOULD BE MATERIALLY HARMED IF OUR COMPUTER SYSTEMS BECOME DAMAGED.

Our network and communications systems are located at hosting
facilities in New Jersey and New York. We are continually building out our
systems located at these facilities and may in the future add additional
facilities to make our systems geographically redundant. We cannot assure you
that our systems are, or ever will be geographically redundant, particularly
because of the proximity of our current facilities to one another and in light
of the increased threat of terrorism following the events of September 11, 2001.
Fires, floods, earthquakes, power losses, telecommunications failures, break-ins
and similar events could damage these systems. 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 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 have engaged Cybersource to process credit card payments for our
individual customers. Therefore, if Cybersource or its system fails 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.

43

In addition, we offer services to our users, including electronic mail
and digital certificates, through various third party service providers engaged
to perform on our behalf. In the event that these service providers fail to
maintain adequate levels of support or otherwise discontinue their lines of
business, our customer relations may be impacted negatively and we may be
required to pursue replacement third party relationships.

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 develop and 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. Rapid
growth in the uses of and interest in the Internet is a relatively recent
phenomenon, and we cannot assure you that use of the Internet will continue to
grow at its current pace. 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;

44

- 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 DEPEND ON THE TECHNOLOGICAL STABILITY AND MAINTENANCE OF THE INTERNET
INFRASTRUCTURE.

Our success and the viability of the Internet as an information medium
and commercial marketplace will depend in large part upon the stability and
maintenance of the infrastructure for providing Internet access and carrying
Internet traffic. Failure to develop a reliable network system or timely
development and acceptance of complementary products, such as high-speed modems,
could materially harm our business. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity or due to
increased government regulation.

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
issues that include:

- sales and other taxes;

- user privacy;

- the expansion of intellectual property rights;

- pricing controls;

- characteristics and quality of products and services;

- consumer protection;

- cross-border commerce;

- libel and defamation;

45

- copyright, trademark and patent infringement;

- security;

- 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 states as required by law based on
principles 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 November 28, 2001, President Bush signed the Internet Tax
Nondiscrimination Act, which limits the ability of the states to impose taxes on
Internet-based transactions. While this legislation provides significant
benefits to Internet-based businesses, it will expire on November 1, 2003 and if
not renewed, would allow various states to impose taxes on Internet-based
commerce. The imposition of such taxes could materially adversely affect our
business, financial condition and results of operations.

INVESTMENT RISKS

OUR STOCK PRICE, LIKE THAT OF MANY INTERNET COMPANIES, IS HIGHLY VOLATILE.

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

- general market and economic conditions and market conditions
affecting technology and Internet stocks generally;

- limited availability of our shares on the open market;

46

- actual or anticipated fluctuations in our quarterly or annual
registrations or operating results;

- announcements of technological innovations, acquisitions or
investments, developments in Internet governance or corporate
actions such as stock splits; and

- industry conditions and trends.

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

OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS OWN A SIGNIFICANT
PERCENTAGE OF OUR SHARES, WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE
MATTERS.

As of August 1, 2002, our directors, executive officers and principal
stockholders beneficially owned approximately 24% 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, and also could prevent or cause a change in
control. 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.

SHARES ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY AFFECT OUR STOCK PRICE.

As of July 15, 2002, 842,188 shares of common stock held by the former
stockholders of Afternic.com were subject to lock-up agreements and will be
released on a monthly basis until the expiration of the lock-up agreements on
September 15, 2004. Of these shares, 32,392 shares are released from the lock-up
each month, of which 2,796 shares are covered by a registration statement and
29,596 shares are not covered by a registration statement. Additionally, a
number of holders of our common stock and common stock issuable upon the
exercise of warrants have the right to require us to register their shares under
the Securities Act. If we register these shares, they can be sold in the public
market. The market price of our common stock could decline as a result of sales
by these existing stockholders of their shares of common stock in the market or
the perception that these sales could occur. These sales also might make it
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate.

OUR CHARTER DOCUMENTS 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 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. 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

47

management is delayed or prevented, this premium may not be realized or the
market price of our common stock could decline.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our exposure to market risk is primarily limited to interest rates and
foreign currency exchange rates. We believe that we are not subject to any
material interest rate risk because most of our investments are in fixed-rate,
short-term securities having a maturity of not more than two years with a
majority having a maturity of under one year. The fair value of our investment
portfolio or related income would not be significantly impacted by either a 100
basis point increase or decrease in interest rates due mainly to the fixed-rate,
short-term nature of the majority of our investment portfolio. We are also
subject to market risk with respect to the shares of common stock held in our
investment portfolio, and as of June 30, 2002 the total market value of such
shares was insiginficant.

We consider our exposure to foreign currency exchange rate
fluctuations to be minor. Both the revenues and expenses of our wholly owned
subsidiaries are denominated in local currencies. In these regions, we believe
this serves as a natural hedge against exchange rate fluctuations because
although an unfavorable change in the exchange rate of the foreign currency
against the United States dollar will result in lower revenues when translated
to United States dollars, operating expenses will also be lower in these
circumstances. Because of our limited exposure to the adverse impact of foreign
currency exchange rate fluctuations, we have not engaged in any hedging
activities, although if future events or changes in circumstances indicate that
hedging activities would be beneficial, we may consider such activities.

We generally do not enter into financial instruments for trading or
speculative purposes and do not currently utilize derivative financial
instruments.

48

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information in Note 3 to the Notes to Financial Statements is
hereby incorporated by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on May 23, 2002. Holders
of an aggregate of 39,502,118 shares of our common stock at the close of
business on April 5, 2002 were entitled to vote at the meeting, of which
27,193,327 were present in person or represented by proxy. At such meeting, the
Company's stockholders voted as follows:

Proposal 1. To elect seven directors to serve until the 2003 Annual
Meeting of Stockholders or until their respective successors shall have been
duly elected and qualified.

No other persons were nominated, or received votes, for election as
directors of Register.com Inc. at the 2002 Annual Meeting of Stockholders. There
were no abstentions or broker non-votes with respect to this proposal.

Proposal 2. To approve the Amended and Restated 2000 Stock Incentive
Plan.

There were no broker non-votes with respect to this proposal.

Proposal 3. To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors of the Company for the fiscal year ending December 31,
2002.

There were no broker non-votes with respect to this proposal.

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ITEM 6. EXHIBITS AND REPORT ON FORM 8-K

(a) Exhibits

NUMBER DESCRIPTION

4.10 Stock Option Agreement with Jonathan Stern.

4.11 Stock Issuance Agreement, dated August 13, 2002, with Rajiv
Samant.

10.21 Separation Agreement and General Release, dated June 7,
2002, with Rene M. Mathis.

10.22 Consulting Agreement, dated as of June 7, 2002, with Rene
M. Mathis.

10.23 Letter Agreement of Employment, dated as of June 11, 2002,
with Jonathan Stern.

99.1 Certification of Richard D. Forman, Chief Executive Officer
of the Company, pursuant to 18 U.S.C. Section 1350,
dated August 14, 2002.

99.2 Certification of Jonathan Stern, Chief Financial Officer of
the Company, pursuant to 18 U.S.C. Section 1350, dated
August 14, 2002.

b) The following report on Form 8-K was filed during the quarter ended
June 30, 2002.

On May, 22, 2002, we filed a Current Report on Form 8-K/A, Item 7
amending our Current Report on Form 8-K filed on March 25, 2002. The
Form 8-K/A contained certain audited financial information for Virtual
Internet Plc and pro forma financial information for the Registrant.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

REGISTER.COM, INC.

Date: August 14, 2002 By: /s/ Jonathan Stern
Name: Jonathan Stern
Title: Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)

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EXHIBIT INDEX

NUMBER DESCRIPTION

4.10 Stock Option Agreement with Jonathan Stern.

4.11 Stock Issuance Agreement, dated August 13, 2002, with Rajiv
Samant.

10.21 Separation Agreement and General Release, dated June 7,
2002, with Rene M. Mathis.

10.22 Consulting Agreement, dated as of June 7, 2002, with Rene
M. Mathis.

10.23 Letter Agreement of Employment, dated as of June 11, 2002,
with Jonathan Stern.

99.1 Certification of Richard D. Forman, Chief Executive Officer
of the Company, pursuant to 18 U.S.C. Section 1350,
dated August 14, 2002.

99.2 Certification of Jonathan Stern, Chief Financial Officer
of the Company, pursuant to 18 U.S.C. Section 1350, dated
August 14, 2002.

52