REGISTER COM INC - 10-Q Quarterly Report

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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

___________________ 

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 September 30, 2003 

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.

(Exact name of registrant as specified in its charter) 

Delaware	11-3239091

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

575 Eighth Avenue, 8th Floor, New York, New York	10018

(Address of principal executive offices)	(Zip Code)

(212) 798-9100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

þ Yes    ¨ No 

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

þ Yes    ¨ No 

As of November 11, 2003 there were 23,520,692 shares of the registrant’s common stock outstanding. 

Register.com, Inc.
FORM 10-Q

TABLE OF CONTENTS 

      PART
            I.   CONSOLIDATED
      FINANCIAL INFORMATION
      1

              Item
      1. Consolidated Financial Statements   
      1

              Item
          2. Management’s Discussion and Analysis of Financial Condition
          and Results          

                        of Operations.  
      11

              Item
      3. Quantitative and Qualitative Disclosures About Market Risk.
      46

        Item
      4. Controls and Procedures.

      47

      PART
      II.   OTHER INFORMATION

      48

              Item
      1. Legal Proceedings
      48

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

      51

              Item
      6. Exhibits and Report on Form 8-K
      52


	i

CONSOLIDATED FINANCIAL INFORMATION 

Item 1. Consolidated Financial Statements 

Register.com, Inc.
Consolidated Balance Sheet

(in thousands, except share amounts) 

	September 30, 2003			December 31, 2002

ASSETS	(Unaudited)
Current assets
Cash and cash equivalents	$	48,270		$	50,557
Short-term investments		36,678			105,283
Accounts receivable, less allowance of $2,421 and $2,695, respectively		8,442			8,453
Prepaid domain name registry fees		14,824			15,457
Deferred tax assets, net		21,682			23,052
Other current assets		3,599			3,303

Total current assets		133,495			206,105
Fixed assets, net		8,530			8,450
Prepaid domain name registry fees, net of current portion		9,404			7,131
Other investments		396			396
Marketable securities		5,222			61,205
Goodwill and other intangibles, net		1,971			2,317

Total assets	$	159,018		$	285,604


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	15,076		$	15,227
Deferred revenue		50,562			55,617
Acquisition notes payable		—			9,625

Total current liabilities		65,638			80,469
Deferred revenue, net of current portion		37,532			31,493

Total liabilities		103,170			111,962

Commitments and contingencies

Stockholders’ equity
Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued and outstanding at September 30, 2003 and December 31, 2002, respectively		—			—
Common stock - $0.0001 par value, 200,000,000 shares authorized; 23,487,901 and 40,624,502 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively		2			4
Additional paid-in capital		97,549			216,713
Unearned compensation		(816	)		(1,376	)
Accumulated other comprehensive income		1,553			2,179
Accumulated deficit		(42,440	)		(43,878	)

Total stockholders’ equity		55,848			173,642

Total liabilities and stockholders’ equity	$	159,018		$	285,604

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


	1

Register.com, Inc.
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)

(in thousands, except per share amounts) 

	Three months ended September 30,						Nine months ended September 30,

	2003			2002			2003			2002

Net revenues	$	25,749		$	25,490		$	79,006		$	79,757
Cost of revenues		7,748			8,182			24,609			26,092

Gross profit		18,001			17,308			54,397			53,665

Operating costs and expenses
Sales and marketing		6,098			7,270			19,344			23,798
Research and development		5,079			3,897			13,149			9,372
General and administrative (including non-cash compensation of $285, $492, $760 and $1,415, respectively)		4,877			10,030			22,323			18,693
Amortization and writedown of intangibles		137			17,003			406			17,156

Total operating expenses		16,191			38,200			55,222			69,019

Income (loss) from operations		1,810			(20,892	)		(825	)		(15,354	)
Other income, net		771			1,174			2,549			4,237

Income before provision for (benefit from) income taxes		2,581			(19,718	)		1,724			(11,117	)
Provision for (benefit from) income taxes		158			(5,155	)		287			(1,055	)

Net income (loss)		2,423			(14,563	)		1,437			(10,062	)

Other comprehensive income (loss)
Unrealized loss on marketable securities		(499	)		(266	)		(839	)		(637	)
Unrealized gain (loss) on foreign currency translation		33			(243	)		213			831

Comprehensive income (loss)		$ 1,957		$	(15,072	)	$	811		$	(9,868	)


Basic income (loss) per share	$	0.06		$	(0.36	)	$	0.04		$	(0.26	)

Diluted income (loss) per share	$	0.06		$	(0.36	)	$	0.03		$	(0.26	)

Weighted average number of shares outstanding:
Basic		37,426			40,049			39,830			39,370

Diluted		38,927			40,049			41,264			39,370

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


	2

Register.com, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

	Nine months ended September 30,

	2003			2002

Cash flows from operating activities:	(in thousands)
Net income (loss)	$	1,437		$	(10,062	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities net of acquisitions:
Depreciation and amortization		3,696			20,468
Compensatory stock options and warrants expense		760			1,109
Deferred income taxes		1,370			(4,130	)
Tax benefit from exercise of employee stock options		223			1,171
Changes in assets and liabilities affecting operating cash flows:
Accounts receivable		98			5,024
Prepaid domain name registry fees		(1,565	)		(685	)
Deferred revenues		722			5,710
Other current assets		372			1,866
Accounts payable and accrued expenses		(2,276	)		(2,793	)
Other current liabilities		1,570			(3,488	)

Net cash provided by operating activities		6,407			14,190

Cash flows from investing activities:
Purchases of fixed assets		(3,316	)		(2,920	)
Purchases of investments		(341,736	)		(226,965	)
Maturities of investments		465,569			222,097
Acquisitions, net		—			(9,380	)

Net cash provided by (used in) investing activities		120,517			(17,168	)

Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants		413			6,227
Retirement of common stock		(120,000	)		(333	)
Issuance of notes payable		—			8,552
Payment (issuance) of notes payable		(9,927	)		—
Principal payments on capital lease obligations		—			(212	)

Net cash (used in) provided by financing activities		(129,514	)		14,234

Effect of exchange rate changes on cash		303			1,314

Net (decrease) increase in cash and cash equivalents		(2,287	)		12,570
Cash and cash equivalents at beginning of period		50,557			61,932

Cash and cash equivalents at end of period	$	48,270		$	74,502

Supplemental disclosure of cash flow information
Cash paid for interest	$	184		$	8
Cash paid for income taxes	$	130		$	1,731

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


	3

REGISTER.COM, INC. 

Notes to Consolidated Financial Statements 

1. Summary of Significant Accounting Policies 

Principles of Consolidation 

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

Interim Financial Statements 

The interim financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements included in this Report reflect all normal recurring adjustments which the Company considers necessary for fair presentation of its results of operations for the interim periods covered and its financial position at the date of the interim balance sheet. The December 31, 2002 balance sheet was obtained from the audited financial statements at that date. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules
and regulations. However, the Company believes the disclosures are adequate for understanding the information presented. Operating results for interim periods are not necessarily indicative of operating results for the entire year. These interim financial statements should be read in conjunction with the Company’s December 31, 2002 audited financial statements and notes thereto included in the Company’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 $5.2 and $7.4 million of its cash as of September 30, 2003 and 2002, respectively, as security deposits against outstanding letters of credit. 

Investments 

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

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

Revenue recognition 

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

Domain name registration fees 

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

Other
  products and services 

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

Advertising 

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

Deferred revenue 

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

Prepaid domain name registry fees 

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


	2

Research and development and software development costs 

Research and development costs are charged to expense as incurred. Software development costs incurred subsequent to the establishment of technological feasibility and prior to the general release of the product or service to the public, are capitalized and amortized to cost of revenues over the estimated useful life of the related product or service. 

Income taxes 

The Company recognizes deferred income 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 of a change in tax rates on deferred taxes is recognized in income in the period of the enactment date. In addition, valuation allowances are established when appropriate to reduce deferred tax assets to the amounts expected to be realized. 

Fair value of financial instruments 

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

Use of estimates 

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

Stock based compensation 

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

The following table illustrates the pro forma effect on the Company’s net income and net income per share had compensation cost for the stock-based incentive plans been determined in accordance with the fair-value-based method of accounting for stock-based compensation as prescribed by SFAS 123. Because option grants awarded to date vest over several years and 

3

additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years operating results of the application of the fair-value-based method. 

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002

	(in thousands, except per share data)
Net income (loss):
As reported	$	2,423		$	(14,563	)	$	1,437		$	(10,062	)
Add: Stock-based employee compensation included in reported net income		285			492			760			1,415
Deduct: Total stock-based employee compensation expense determined under the fair-value based method		(370	)		(1,280	)		(1,380	)		(2,986	)

Pro forma net income (loss)	$	2,338		$	(15,351	)	$	817		$	(11,633	)

Net income (loss) per share:
As reported – basic	$	0.06		$	(0.36	)	$	0.04		$	(0.26	)

As reported – diluted	$	0.06		$	(0.36	)	$	0.03		$	(0.26	)

Pro forma – basic	$	0.06		$	(0.38	)	$	0.02		$	(0.30	)

Pro forma – diluted	$	0.06		$	(0.38	)	$	0.02		$	(0.30	)

Earnings per share 

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

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


	4

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002

	(in thousands, except per share data)
Net income (loss) per share – basic:
Net income (loss) available to common shareholders	$	2,423	$	(14,563	)	$	1,437	$	(10,062	)

Weighted average shares – basic		37,426		40,049			39,830		39,370

Net income (loss) per share – basic	$	0.06	$	(0.36	)	$	0.04	$	(0.26	)

Net income (loss) per share – diluted:
Net income (loss) available to common shareholders	$	2,423	$	(14,563	)	$	1,437	$	(10,062	)

Weighted average shares outstanding – basic		37,426		40,049			39,830		39,370
Diluted effect of stock options		410		387			343		773
Diluted effect of warrants.		1,091		2,026			1,091		2,026

Weighted average shares – diluted		38,927		42,462			41,264		42,169

As reported – diluted	$	0.06		*		$	0.03		*

* Inclusion of common stock equivalent shares would result in an anti-dilutive net loss per share. As a result, diluted net loss per share is the same as basic net loss per share. 

Weighted average number of shares 

The weighted average number of shares outstanding for the third quarter of 2003 was 37,426,000 shares (basic) and 38,927,000 shares (diluted). As a result of our completion in September 2003 of our $120 million self-tender offer, in which we purchased 17,910,347 shares of our common stock and warrants to purchase 987,283 shares of our common stock (based on the conversion of such warrants on a cashless basis at the $6.35 per share offer price), the weighted average number of shares will decline in the fourth quarter of 2003 and beyond. The reduced weighted average number of shares will have the effect of increasing net income (loss) per share. As of September 30, 2003, we had outstanding 23,487,901 shares of common stock and warrants to purchase 1,749,207 shares of common stock.

Comprehensive
    income (loss) 

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

Comprehensive income was $0.5 million less than net income for the three months ended September 30, 2003, representing a net unrealized loss on marketable securities of $0.5 million offset in part by an unrealized gain on foreign currency translation of $33,000. Comprehensive income was $0.6 million less than net income for the nine months ended September 30, 2003, representing a net unrealized loss on marketable securities of $0.8 million offset in part by an unrealized gain on foreign currency translation of $0.2 million. 


	5

Reclassification 

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

2. Notes Payable 

On March 8, 2002 the Company acquired Virtual Internet plc ("VI") for £11.99 million (US $16.9 million at the date of acquisition). Certain VI shareholders elected to receive loan notes issued by the Company in exchange for their VI shares. During the first six months of 2003, the Company fully repaid these notes. 

3. Commitments and Contingencies 

Litigation 

In November 2001, the Company, its former Chairman, President and Chief Executive Officer Richard D. Forman and its former Vice President of Finance and Accounting, Alan G. Breitman (the "Individual Defendants"), and Goldman Sachs & Co. and Lehman Brothers, Inc., two of the underwriters in the syndicate for our March 3, 2000 initial public offering, were named as defendants in a class action complaint alleging violations of the federal securities laws in the United States District Court, Southern District of New York. Goldman Sachs & Co. and Lehman Brothers, Inc. distributed 172,500 of the 5,750,000 shares in the initial public offering. 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. The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies before one judge in the U.S. District Court for the Southern District of New York. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based on Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against the Company. The Company has approved a Memorandum of Understanding ("MOU") and related agreements which set forth the terms of a settlement between the Company and the plaintiff class. It is anticipated that any potential financial obligation of the Company to plaintiffs due pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The MOU and related
agreements are subject to a number of contingencies including the negotiation of a settlement agreement and approval by the Court. We cannot predict whether or when a settlement will occur or be finalized. 


	6

Register.com has been named as a defendant in purported class action lawsuit filed on May 2, 2002, which alleges that our SafeRenew program violates New York law. This lawsuit was filed by Brian Wornow, on behalf of himself and all others similarly situated, in the Supreme Court of the State of New York. Our SafeRenew program was implemented in January 2001 on an "opt-out basis" to .com, .net and .org registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of our services agreement, at the time a covered registration comes up for renewal, we attempt to charge a registrant’s on-file credit card a one year renewal fee and, if the charge is successful, to renew the
registration for that additional one-year period. Register.com believes that the SafeRenew program was properly adopted as an effort to protect our customers’ online identities. Plaintiff sought a declaratory judgment that the SafeRenew program violates New York General Obligations Law Section 5-903, and also claimed breach of contract, money had and received, and unjust enrichment. Plaintiff further sought to enjoin Register.com from automatically renewing domain name registrations, an award of compensatory damages, restitution, disgorgement of profits (plus interest), cost and expenses, attorneys’ fees, and punitive damages. On September 6, 2002, Register.com filed a motion to dismiss the complaint in its entirety. On April 17, 2003, Register.com’s motion was granted as to two counts (declaratory judgment and breach of contract), but denied as to two other counts (unjust enrichment and money had and received). On April 28, 2003, Register.com filed an answer denying the material allegations o

f
 the
complaint. On May 2, 2003, Plaintiff filed a notice of appeal to the Appellate Division, First Department of the two counts that were dismissed. On May 15, 2003, Plaintiff filed an amended complaint asserting new causes of action against Register.com for (i) deceptive trade practices in violation of New York General Business Law Section 349; (ii) conversion; and (iii) breach of the implied covenant of good faith and fair dealing. On June 9, 2003, Register.com moved to dismiss Plaintiff’s newly asserted causes of action. On July 23, 2003 the Court heard oral arguments on Register.com’s motion. While we intend to continue to defend ourselves vigorously in this lawsuit, in an effort to mitigate a potential worst-case scenario, we entered into an insurance agreement pursuant to which, in accordance with its terms and conditions, to the extent that we have a final judgment in excess of $15 million our insurance carrier would cover up to an additional $30 million. 

On or about January 17, 2003, individual stockholders of the Company filed complaints in the Delaware Court of Chancery purporting to commence class action lawsuits against the Company and each of the individual members of the Company’s Board of Directors. The complaints were styled as Lanza v. Morten , et al (C.A. No. 20123) and Norton v. Morten , et al (C.A. No. 20124). The complaints allege, among other things, breaches of fiduciary duty by the directors in connection with certain publicly disclosed indications of interest in the acquisition of Company. The complaints further allege that the directors are not fulfilling their fiduciary duties in connection with their review and response to such indications of interest and seek an order requiring the defendants to, among other things, undertake an appropriate evaluation of the Company’s worth as a merger or acquisition candidate and to take all appropriate steps to effectively sell the Company. Among
other remedies, the complaints seek to enjoin the members of the Board from continuing their purported breaches of fiduciary duty and unspecified damages from the defendants. 


	7

In
    February 2001, Register.com was named as a defendant in a purported class
    action lawsuit pending in the Supreme Court of the State of New York. The
    complaint alleges that by linking new domain names registered through Register.com
    to a "Coming Soon" web page that informs visitors the name was recently registered
    through Register.com, and provides links to services provided by Register.com
    and its business partners, as well as a banner advertisement for such services,
    Register.com has (i) breached an implied covenant of good faith and fair
    dealing; (ii) engaged in deceptive trade practices in violation of New York
    General Business Law Section 349; and (iii) been unjustly enriched. Prior
    to the filing of the lawsuit, in addition to disclosing the Coming Soon page
    by means of such domain names , Register.com also disclosed the existence
    of the Coming Soon page in the "Help" and "Frequently Asked Questions" portions
    of its website. In March 2001, Register.com added an additional disclosure
    concerning the Coming Soon page to Register.com’s Services Agreement.
    Plaintiff has demanded a jury trial, and seeks class certification. Plaintiff
    further seeks an award of actual damages, disgorgement of profits (plus interest),
    cost and expenses, attorneys’ fees, and punitive damages. In April 2001,
    Register.com filed a motion to dismiss Plaintiff’s claims for failure
    to state a claim upon which relief may be granted and in August 2001, Register.com’s
    motion was granted. Plaintiff appealed the dismissal to the Appellate Division,
    First Department, and in April 2003 the Appellate Division affirmed the dismissal
    of the unjust enrichment cause of action, but reinstated the causes of action
    for breach of an implied covenant of good faith and fair dealing and deceptive
    trade practices. Thereafter, Register.com and Plaintiff agreed upon a settlement
    which, following notice to the proposed settlement class, was approved by
    the Court on November 3, 2003. In accordance with the settlement, Register.com
    will provide each member of the putative class with a five dollar discount
    off of future purchases of Register.com’s fees for domain name registrations
    and renewals and will pay attorney’s fees as awarded by the Court to
    class counsel. As of June 30, 2003, Register.com had accrued the fees and
    expenses that it expects to incur under the terms of the settlement agreement.
    These fees and expenses are expected to be paid in the fourth quarter of
    2003. 

On
    or about August 7, 2003 and August 8, 2003, purported stockholders of the
    Company filed two separate complaints in the Court of Chancery of Delaware
    against the Company and certain current and past individual members of the
    Company’s Board of Directors. The first compliant was styled as McBride v. Register.com,
    Inc. ,
    et al (C.A. No. 20470) and the second complaint was styled as DeMatte v. Register.com,
    Inc. ,
    et al (C.A. No. 20474). On November 3, 2003, the two cases were consolidated
    (C.A. No. 20470) and on November 5, 2003, an amended complaint was filed.
    The complaint alleges, among other things, that the named defendants breached
    their fiduciary duties in connection with the self tender that the Company
    commenced in August 2003 and completed in September 2003, and that the self
    tender is an attempt by the individual defendants to entrench their positions
    in the Company.  The complaint seeks, among other things, the court’s
    certification as a class action lawsuit, unspecified damages and rescission
    of the self tender. 

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

8

Credit Card Penalties 

The Company has experienced high rates of refunds to customers and chargebacks from credit card associations, which have resulted in the assessment of financial penalties by two credit card associations. If the Company is unable to lower its refund and chargeback rates to levels deemed acceptable by the credit card associations, the Company could continue to face such penalties and may lose its rights to accept credit card payments from customers through one or more credit card associations. The Company had not previously incurred penalties from one of those associations until August 2002, at which time it was assessed a penalty of $0.3 million applicable to the year 2001. Under that association’s rules, additional potential penalties may be imposed, at the discretion of the
association.
Because the imposition of any potential penalties is at the discretion of the association, subject to contractual limitations, the Company has accrued $0.6 million and $1.9 million, respectively, as general and administrative expense for the three months and nine months ended September 30, 2003, to cover what the Company estimates to be the maximum potential penalties that could be imposed under that association’s rules for transactions during that period. Any such potential penalties would be imposed on the Company’s credit card processor by the association, and under the Company’s contract with its processor, the Company is required to reimburse such penalties. The Company has accrued an aggregate of $5.6 million for such potential penalties through September 30, 2003, of which $3.7 million applies to 2002. The Company has had preliminary discussions with its credit card processor to obtain resolution to the 2002 penalties and believes that upon final resolution, the Company is not
likely to
 pay the full amount accrued for 2002. If the ultimate amount paid by the Company is less than the maximum potential penalties previously accrued, the Company would reverse any excess accrual as a reduction of general and administrative expense at that time. The Company had previously posted a $1.0 million letter of credit with its processor as security for its potential obligations. 

Commitments 

The Company has committed to provide up to $8.5 million in funding and other non-cash contributions to its wholly owned subsidiary, RegistryPro, for RegistryPro’s activities in establishing, operating and marketing the .pro top level domain through the first anniversary of its commencement-of-service date. However, the Company does not believe that RegistryPro’s agreement with ICANN requires RegistryPro to spend a specified amount to establish, operate and market the .pro top level domain. Accordingly, the Company’s contributions for these purposes could be less than $8.5 million. Through September 30, 2003 the Company had contributed approximately $3.8 million in cash, and had also made non-cash contributions. For the nine months ended September 30, 2003, RegistryPro
incurred $2.3 million of startup costs. 

Retention Bonuses and Change in Control Severance Programs and Termination Letters 

Effective March 2003, the Company implemented various retention bonus and change in control severance and termination benefit programs for certain employees. Retention bonuses totaling $0.5 million were paid in August 2003 to certain employees who remained employed with the Company through July 31, 2003. 


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The different change in control severance programs provide for severance ranging from two to twelve months (depending on the program in which the employee participates) if within one year following a change in control or effective change in control (each as defined in the applicable program) that occurs on or prior to May 31, 2004, the participating employee's employment with the Company is terminated (1) by the Company other than for cause, death or disability or (2) for participants in the executive change in control severance program, by the participant within 90 days following an event constituting good reason. The cash severance benefits payable under the terms of the programs will be reduced by other severance benefits payable under any plan, program, policy, practice, agreement
or arrangement between the participant and the Company, but will not be reduced by the payment of any retention bonuses described above. Approximately 200 employees are covered by these different change in control severance programs. 

In addition to the programs described above, ten employees are parties to change in control termination letter agreements pursuant to which they would receive a payment equal to five months' base salary within ten days after a voluntary termination during the 90-day period commencing 75 days after a change in control (as defined in the agreement) that occurs on or prior to May 31, 2004. If such employee receives a payment under one of the change in control severance programs for voluntarily resigning for good reason under that program, the change in control severance program, and not the change in control termination letter agreement, will control. 

4. Impairment of Goodwill 

In September 2002 the Company made a decision to abandon its Afternic business, which had been acquired in September 2000. As a consequence of that decision, as well as negative industry and economic trends affecting the Company and the general decline in technology company valuations, including the valuation of the Company’s common stock, the Company performed an impairment analysis of the goodwill and intangible assets recorded in connection with its various acquisitions. Because the total market value of the Company’s common stock as of September 30, 2002 was lower than the book value of its stockholders’ equity, the Company recorded a goodwill impairment writedown of approximately $17.0 million in September 2002. 

5. Self-Tender Offer 

In September 2003 we completed a $120 million self-tender offer in which we purchased 17,910,347 shares of our common stock and warrants to purchase 987,283 shares of our common stock (based on the conversion of such warrants on a cashless basis at the $6.35 per share offer price). 


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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 there
fore 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 undertake no duty to update any forward-looking statements herein. 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 

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 addresses and identities on the World Wide Web. They enable a business or person to establish a Web presence and are integral to the use of websites (e.g. www.register.com), email (e.g. johndoe@register.com) and other types of Internet communication. 

We began processing registrations in the generic top level domains (gTLDs) .com, .net and .org in June 1999 and, as such, were the first registrar accredited by the Internet Corporation for Assigned Names and Numbers (ICANN) to compete in the domain name registration market after ICANN introduced competition in the industry. We had approximately 3.1 million active domain name registrations under management as of September 30, 2003. 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 400 country code top level domains (ccTLDs), including sub domains, such as .co.uk and .org.uk for the United Kingdom, .de for Germany, .jp for Japan, etc. 

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


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Products and Services 

Provided by Us 

Products and Services 

Resold By Us 

website-creation tools under the names FirstStepSite ® and WebSiteNow!™
intellectual property and brand protection services related to domain name

domain name forwarding

email
search engine submission services

website design services

digital certificates

Domain name registration activity is driven by the use of the Internet by businesses and consumers for electronic commerce and communication, the promotion, marketing and protection of brands and identities across the world and other online activities. Our mission is to become the preferred partner for customers who seek to create, enhance and manage their Web presence. 

Our Retail division focuses on customers who are typically small to medium-size businesses as well as small offices/home offices and individuals. Generally, these customers purchase domain name registration services directly from our website located at www.register.com. In order to extend our distribution we maintain a Global Partner Network of companies that resell our domain name registration and Web services. Our network partners are typically Internet Service Providers (ISPs), web-hosting companies, telecom carriers and web portals, but also include online and offline retailers and business aggregators. Using our software solutions, these companies resell our domain name registration services and related products and services to their customers. 

With operations in the United States, Canada and Europe, 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 and online brand and trademark protection. 

Through our RegistyPro subsidiary, we have been working toward establishing a registry for the new gTLD .pro. The .pro domain is intended to be dedicated to certified professionals such as lawyers, doctors and accountants. All .pro domain names are planned to be issued with a digital certificate to facilitate secure communications and transactions. This product is intended to assist such professionals with their heightened confidentiality obligations. We are currently evaluating strategic alternatives for our RegistryPro subsidiary but cannot assure you that we will ultimately be able to execute on what we determine to be our preferred course of action. We also have a small equity stake in Afilias, the consortium of registrars, which manages the registry for the gTLD .info and provides
outsourced registry services to other top level domain registries including .org. 

In March 2002 we acquired Virtual Internet plc for £11.99 million (US $16.9 million at the date of acquisition). Virtual Internet plc, a U.K. based company, had operations in the 

12

United States and Europe and operated through two divisions: the Corporate Services division and the Hosting division. The Corporate Services division provides domain name registration and online intellectual property management and protection services and the Hosting division provided web-hosting services. In May 2002, we sold Virtual Internet plc’s Hosting division for $0.5 million. Our results of operations include those of Virtual Internet’s Corporate Services business subsequent to March 8, 2002. 

Restructuring 

In late 2002, we began a restructuring program to address the challenges our business faced.  The goals of our restructuring program are to reduce costs, improve our technology and systems, improve operating efficiencies and increase productivity and flexibility.  We intend to achieve these goals primarily by improving our systems and are actively working to make our technology architecture more flexible in order to enable us to introduce new products and services more rapidly and cost-effectively. 

As part of this restructuring program, our management has been focused on launching a new systems architecture, eliminating certain material internal control weaknesses and reducing credit card chargeback and refund rates. These issues have contributed to our inefficient cost structure and hindered our efforts to improve our results of operations and earnings. We cannot yet assure you when our new systems architecture is going to be launched and until it is, we expect that our operating expenses, particularly research and development expenses, will remain high as we continue to invest in systems architecture improvements and improve our business processes. 

Significant Accounting Policies 

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 over the period of the subscription term during which 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 many of our customers who register domain names through our Corporate Services division, and our partners who register domain names through 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

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 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 recognized are presented net of provisions recorded for estimated refunds to customers and chargebacks from credit card associations. The credit card associations may impose financial penalties if our chargebacks and/or refunds exceed certain thresholds. Such penalties are not charged to revenues, but are classified as general and administrative expenses. 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" and Note 3 to the Consolidated Financial Statements "Commitments and Contingencies – Credit Card Penalties" for additional information in connection with the penalties that may be imposed by credit card associations and other risks associated with the Company’s excessive credit card chargebacks and refunds. 

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

We experienced a decrease in our total names under management from approximately 3.3 million as of December 31, 2002 to approximately 3.1 million as of September 30, 2003. 

Other products and services, which primarily consist of email, domain name forwarding, web-hosting, site submission to search engines, application processing fees for new gTLDs, intellectual property protection services related to the introduction of new gTLDs and software, and fees for modifying existing registrations, are sold either as one time offerings or annual or monthly subscriptions, depending on the product or service. 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. Revenues from processing fees for 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 immediately upon the sale of the services. 

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


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

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

We have no direct cost of revenues associated with our advertising revenues and we have no incremental cost of revenues associated with delivering advertisements since we use the same equipment to deliver the advertisements as we use for our domain name registration services. Therefore, the gross profit margin on advertising revenue is 100%, and accordingly, any decrease in advertising revenue would represent a reduction of our gross profit of the same amount. We incur 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 (including non-cash compensation), and amortization of intangibles. Prior to January 1, 2002 our operating expenses also included amortization of goodwill; effective January 1, 2002 we adopted SFAS 142 and ceased 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, software licensing fees 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, insurance premiums, penalties for excessive credit card chargebacks and refunds, and provisions for uncollectible receivables. Facilities expenses are allocated across our different operating expense categories. We account for non-cash compensation expense in accordance with Accounting Principles Board Opinion No. 25 and 

15

related interpretations. Non-cash compensation expense relates to grants of restricted stock, stock options and warrants to employees, directors, consultants and vendors with exercise prices below fair market value on the date of grant. Based on such grants through September 30, 2003, we expect to record approximately $0.8 million in additional non-cash compensation expense through 2008 as follows: $0.3 million during the last three months of 2003, $0.4 million in 2004 and $0.1 million through 2008. Non-cash compensation expense will reduce our earnings or increase our losses, as applicable, in future periods. 

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

Income Taxes 

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

Net Income (Loss) 

Although we were profitable for the three and nine months ended September 30, 2003, we were not profitable for the first three or six months of 2003, nor for the years ended December 31, 2002 and 2001. Our net loss for 2002 included a goodwill impairment writedown and amortization of intangibles of $17.0 million. Although we have recently taken several initiatives intended to reduce our operating expenses in 2004, we cannot assure you when these reductions will be realized. Losses at Virtual Internet and RegistryPro have contributed to a decline in our profitability, and we expect
losses at RegistryPro and Virtual Internet to impact our profitability negatively through the remainder of the year 2003 and perhaps beyond. In addition, unless we lower our credit card refunds and reduce our level of credit card chargebacks, we may continue to incur significant penalties from credit card associations, which will impact our profitability (see "Risk Factors" for additional information). Further, we anticipate that our revenues from advertising will be materially lower in future periods. 

For the first nine months of 2003 we also incurred approximately $6.7 million in advisory fees and expenses in connection with our consideration of various strategic alternatives following 

16

two unsolicited takeover proposals received by the Company in early 2003 and in connection with our self-tender offer for $120 million of our outstanding common stock and warrants which we completed in September 2003. 

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

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 nine months ended September 30, 2003 and 2002. 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 2002, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts set forth below to present fairly the unaudited quarterly results of operations data. The operating results in any quarter are not necessarily indicative of the results to be expected for any future period. 

	Three months ended September 30,						Nine months ended September 30,

		2003			2002			2003			2002

Net revenues	$	25,749		$	25,490		$	79,006		$	79,757
Cost of revenues		7,748			8,182			24,609			26,092

Gross profit		18,001			17,308			54,397			53,665

Operating costs and expenses
Sales and marketing		6,098			7,270			19,344			23,798
Research and development		5,079			3,897			13,149			9,372
General and administrative (including non-cash compensation of $285, $492, $760 and $1,415, respectively)		4,877			10,030			22,323			18,693
Amortization and writedown of intangibles		137			17,003			406			17,156

Total operating expenses		16,191			38,200			55,222			69,019

Income (loss) from operations		1,810			(20,892	)		(825	)		(15,354	)
Other income, net		771			1,174			2,549			4,237

Income (loss) before provision for (benefit from) income taxes		2,581			(19,718	)		1,724			(11,117	)
Provision for (benefit from) income taxes		158			(5,155	)		287			(1,055	)

Net income (loss)		2,423			(14,563	)		1,437			(10,062	)

Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities		(499	)		(266	)		(839	)		(637	)
Unrealized gain on foreign currency translation		33			(243	)		213			831

Comprehensive income (loss)	$	1,957		$	(15,072	)	$	811		$	(9,868	)


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	Three months ended September 30,						Nine Months ended September 30,

	2003			2002			2003			2002

Net revenues		100	%		100	%		100	%		100	%
Cost of revenues		30			32			31			33

Gross profit		70			68			69			67

Operating costs and expenses
Sales and marketing		24			29			24			30
Research and development		20			15			17			12
General and administrative (including non- cash compensation)		19			39			28			23
Amortization and writedown of intangibles		—			67			1			21

Total operating expenses		63			150			70			86

Income (loss) from operations		7			(82	)		(1	)		(19	)
Other income, net		3			5			3			5

Income (loss) before (benefit from) provision for income taxes		10			(77	)		2			(14	)
Provision for (benefit from) income taxes		1			(20	)		—			(2	)

Net income (loss)		9			(57	)		2			(12	)
Unrealized gain (loss) on marketable securities		(2	)		(1	)		(1	)		(1	)
Unrealized gain on foreign currency translation		—			(1	)		—			1

Comprehensive income (loss)		7	%		(59)	%		1	%		(12)	%

Three months ended September 30, 2003 compared to three months ended September 30, 2002 

Net Revenues 

Total net revenues increased 1% to $25.7 million for the third quarter of 2003 from $25.5 million for the third quarter of 2002. 

Domain name registrations. Recognition of revenues from domain name registrations decreased 6% to $22.2 million in the third quarter of 2003 from $23.6 million in the third quarter of 2002. The decrease was due primarily to a lower number of domain names registered, and in part to lower average sale prices per year of subscription term. During the third quarter of 2003 we experienced a 1.5% decrease in the number of names under management, and we had a total of approximately 3.1 million names under management as of September 30, 2003. 

At September 30, 2003, we had $88.1 million of total deferred revenue compared with $89.2 million at June 30, 2003, representing a decrease of $1.1 million during the third quarter of 2003. The decrease resulted from recognition of revenue from previously recorded sales having exceeded new sales of subscription-based products and services during the third quarter of 2003. 

Other Products and Services. Revenues from other products and services increased 81% to $2.3 million for the third quarter of 2003 from $1.3 million for the third quarter of 2002. The increase was due primarily to increased revenues from email services and WebSiteNow! 


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Advertising. Revenues from advertising increased 98% to $1.2 million for the third quarter of 2003 from $0.6 million for the third quarter of 2002. Since the fourth quarter of 2002, our largest advertising customer, a provider of web-hosting services, has accounted for approximately $1.0 million of advertising revenues per quarter. Because we recently began to sell web-hosting services directly to our own customers, this provider of web-hosting services did not purchase advertising from us for the fourth quarter of 2003 and we do not anticipate any additional revenue from this customer. Accordingly, we anticipate that our advertising revenue will decline by approximately $1.0
million
 per quarter unless we can replace these revenues with advertising sales to other customers. Our sales of web-hosting services directly to our own customers will be classified as revenues from other products and services. 

Cost of Revenues 

Total cost of revenues decreased 5% to $7.7 million for the third quarter of 2003 from $8.2 million for the third quarter of 2002. 

Cost of Domain Name Registrations. Cost recognized for domain name registrations decreased 12% to $7.3 million for the third quarter of 2003 from $8.3 million for the third quarter of 2002. The decrease resulted primarily from a lower number of names registered. 

Cost of Other Products and Services. Cost of other products and services increased by $0.6 million in the third quarter of 2003 over the third quarter of 2002 , in part as a result of increased sales of other products and services in the third quarter of 2003, and in part because for the third quarter of 2002 these costs were offset by a $0.4 million refund we received from the .biz registry, as a result of that registry’s decision to cancel certain .biz applications. 

Gross Profit Margin 

Our gross profit margin increased to 69.9% in the third quarter of 2003 from 67.9% in the third quarter of 2002, due in large part to closure of redundant collocation facilities. If we cannot replace the advertising revenues which we anticipate losing as discussed above, there would be a corresponding decline in our gross profit margins. 

Operating Expenses 

Total operating expenses decreased 58% to $16.2 million for the third quarter of 2003 from $38.2 million for the third quarter of 2002. 

Sales and Marketing. Sales and marketing expenses decreased 16% to $6.1 million for the third quarter of 2003 from $7.3 million for the third quarter of 2002. The decrease was primarily due to reductions in on-line and off-line media spending. 

Research and Development. Research and development expenses increased 30% to $5.1 million for the third quarter of 2003 from $3.9 million for the third quarter of 2002. The increase resulted primarily from higher consulting fees and other costs incurred to improve our systems and operations, and in part from development expenses incurred by RegistryPro. We anticipate that research and development expenses will increase during the fourth quarter of 2003 as we continue our efforts to upgrade and improve our systems. 


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General and Administrative. General and administrative expenses decreased 51% to $4.9 million for the third quarter of 2003 from $10.0 million for the third quarter of 2002. The decrease was primarily due to a lower accrual in the third quarter of 2003 for potential credit card penalties for excessive chargebacks and refunds. In the third quarter of 2002 we recorded $3.6 million for credit card penalties, of which $3.1 million represented an accrual of our estimate of the maximum potential penalties which could be imposed for transactions under one credit card association’s rules retroactive to January 1, 2002. For the third quarter of 2003, we accrued $0.6 million for
such potential penalties. For additional information in connection with credit card penalties, see "Risk Factors" and Note 3 to Consolidated Financial Statements, "Commitments and Contingencies – Credit Card Penalties." General and administrative expense for the third quarter of 2003 also reflected a decrease of $1.3 million in the provision for bad debts compared with the third quarter of 2002, and also included $0.3 million of expenses related to our self-tender offer for $120 million of our common stock and warrants completed in September 2003. 

Amortization and Writedown of Goodwill and Other Intangibles. Amortization and writedown of goodwill and other intangibles was $0.1 million for the third quarter of 2003, compared with $17.0 million for the same period of last year. In September 2002, we made a decision to abandon the Afternic business, which we had acquired in September 2000. As a consequence of that decision, as well as negative industry and economic trends affecting the Company and the general decline in technology company valuations, including the valuation of our common stock, we performed an impairment analysis of the goodwill and intangible assets recorded in connection with our various acquisitions.
Because the total market value of our common stock as of September 30, 2002 was lower than the book value of our stockholders’ equity, we recorded a goodwill impairment writedown of approximately $17.0 million in September 2002. 

Other Income, Net 

Other income, net, which consists primarily of interest income, net of interest expense, declined to $0.8 million for the third quarter of 2003 from $1.2 million for the third quarter of 2002. The decrease was due in part to lower prevailing interest rates in the third quarter of 2003, and in part to a reduction of $120 million in our investment portfolio in connection with our self-tender offer for $120 million of our common stock and warrants completed in September 2003. 

Provision (Benefit) for Income Taxes 

The income tax provision in the third quarter of 2003 was $0.2 million, representing an effective rate of 6% of pre-tax income. This lower-than-statutory effective tax rate resulted in part from our receipt of tax-free interest income on our investment portfolio, in part from an increased estimate of the tax-deductible portion of advisory fees and expenses incurred in connection with our consideration of various strategic alternatives following two unsolicited takeover proposals received in early 2003, and in part from adjustments to the financial statement tax provision based on finalization of the prior year’s tax returns in September 2003. The effective tax rate for the third quarter of 2002 was a benefit of 26% of the pre-tax loss. This lower-than-statutory effective tax
benefit resulted in part because only a portion of the goodwill 

20

impairment writedown was tax deductible, and in part because no tax benefits were recorded in connection with losses generated by Virtual Internet as realization was not assured. 

Earnings Per Share – Weighted average number of shares 

The weighted average number of shares outstanding for the third quarter of 2003 was 37,426,000 shares (basic) and 38,927,000 shares (diluted). As a result of our completion in September 2003 of our $120 million self-tender offer, in which we purchased 17,910,347 shares of our common stock and warrants to purchase 987,283 shares of our common stock (based on the conversion of such warrants on a cashless basis at the $6.35 per share offer price), the weighted average number of shares will decline in the fourth quarter of 2003 and beyond. The reduced weighted average number of shares will have the effect of increasing net income (loss) per share. As of September 30, 2003, we had outstanding 23,487,901 shares of common stock, and warrants to purchase 1,749,207 shares of common stock.

Nine months ended September 30, 2003 compared to nine months ended September 30, 2002 

Net Revenues 

Total net revenues decreased 0.9% to $79.0 million in the first nine months of 2003 from $79.8 million in the first nine months of 2002. 

Domain name registrations. Recognition of revenues from domain name registrations decreased 6% to $68.7 million in the first nine months of 2003 from $73.1 million in the first nine months of 2002. The decrease was due primarily to a lower number of domain names registered, and in part to lower average sale prices per year of subscription term. We experienced a decrease in our total names under management from approximately 3.3 million as of December 31, 2002 to approximately 3.1 million as of September 30, 2003. 

Other Products and Services. Revenues from other products and services increased 95% to $6.6 million for the first nine months of 2003 from $3.4 million for the first nine months of 2002. The increase was due primarily to increased sales of email services and WebSiteNow! 

Advertising. Revenues from advertising increased 13% to $3.7 million for the first nine months of 2003 from $3.3 million for the first nine months of 2002. 

Cost of Revenues 

Total cost of revenues decreased 6% to $24.6 million in the first nine months of 2003 from $26.1 million in the first nine months of 2002. 

Cost of Domain Name Registrations. Cost recognized for domain name registrations decreased 11% to $23.2 million in the first nine months of 2003 from $26.0 million in the first nine months of 2002. The decrease resulted primarily from a lower number of names registered, offset in part by the inclusion of Virtual Internet in our results of operations after March 8, 2002. 

Cost of Other Products and Services. Cost of other products and services increased to $1.4 million in the first nine months of 2003 from $0.1 million for the same period of last year, 

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in part as a result of increased revenues from other products and services (primarily email services) in the first nine months of 2003, and in part because for the first nine months of 2002 these costs were offset by a $0.4 million refund we received from the .biz registry as a result of that registry’s decision to cancel certain .biz applications. 

Gross Profit Margin 

Our gross profit margin increased to 68.9% in the first nine months of 2003 from 67.3% in the first nine months of 2002, primarily as a result of higher revenues from other products and services, which carried a higher gross profit margin, and in part to closure of redundant collocation facilities. If we cannot replace the advertising revenues which we anticipate losing as discussed above, there would be a corresponding decline in our gross profit margins. 

Operating Expenses 

Total operating expenses decreased 20% to $55.2 million in the first nine months of 2003 from $69.0 million in the first nine months of 2002. 

Sales and Marketing. Sales and marketing expenses decreased 19% to $19.3 million in the first nine months of 2003 from $23.8 million in the first nine months of 2002. The decrease was primarily due to reductions in on-line and off-line media spending. 

Research and Development. Research and development expenses increased 40% to $13.1 million in the first nine months of 2003 from $9.4 million in the first nine months of 2002. The increase resulted primarily from higher consulting fees and other costs to improve our systems and operations, and in part from development expenses incurred by RegistryPro. We anticipate that research and development expenses will continue to remain high during the fourth quarter of 2003 as we continue our efforts to upgrade and improve our systems. 

General and Administrative. General and administrative expenses increased 19% to $22.3 million in the first nine months of 2003 from $18.7 million in the first nine months of 2002. The increase was primarily due to advisory fees and expenses incurred in 2003, partially offset by lower accruals for potential credit card penalties and lower bad debt expense. In the first nine months of 2003 we incurred $6.7 million in advisory fees and expenses in connection with our consideration of various strategic alternatives following the unsolicited acquisition proposals we received in early 2003 and in connection with the self-tender offer for $120 million of our common stock and warrants
completed in September 2003. Also in the first nine months of 2003, we accrued $1.9 million for credit card penalties, representing our estimate of the maximum potential penalties that could be imposed for transactions under one credit card association’s rules, compared with total expense recorded for credit card penalties in the first nine months of 2002 of $3.9 million, which included $3.1 million accrued for potential penalties for that credit card association. For additional information in connection with credit card penalties, see "Risk Factors" and Note 3 to Consolidated Financial Statements, "Commitments and Contingencies – Credit Card Penalties." The provision for bad debt expense declined by $1.8 million in the first nine months of 2003 compared with the first nine months of 2002. 

Amortization and Writedown of Goodwill and Other Intangibles. Amortization of intangibles was $0.4 million for the first nine months of 2003, compared with $17.2 million for 

22

the first nine months of 2002. In September 2002, we made a decision to abandon the Afternic business. As a consequence of that decision, as well as negative industry and economic trends affecting the Company and the general decline in technology company valuations, including the valuation of our common stock, we performed an impairment analysis of the goodwill and intangible assets recorded in connection with our various acquisitions. Because the total market value of our common stock as of September 30, 2002 was lower than the book value of our stockholders’ equity, we recorded a goodwill impairment writedown of approximately $17.0 million in September 2002. 

Other Income, Net 

Other income, net, which consists primarily of interest income, net of interest expense, decreased to $2.5 million in the first nine months of 2003 from $4.2 million in the first nine months of 2002. The decrease was due primarily to lower prevailing interest rates in the nine months ended 2003, and in part to a reduction of $120 million in our investment portfolio in connection with our self-tender offer for $120 million of our common stock and warrants completed in September 2003. 

Provision (Benefit) for Income Taxes 

The income tax provision in the first nine months of 2003 was $0.3 million, representing an effective rate of 17% of pre-tax income. This lower-than-statutory effective tax rate resulted in part from our receipt of tax-free interest income on our investment portfolio, and in part from adjustments to the financial statement tax provision based on finalization of the prior year’s tax returns in September 2003. The income tax benefit in the first nine months of 2002 was $1.1 million, representing an effective tax benefit of 9% of the pre-tax loss. This lower-than-statutory effective tax benefit resulted in part from the fact that only a portion of the goodwill impairment writedown was tax deductible, and in part because no tax benefits were recorded in connection with losses generated
by Virtual Internet as realization was not assured. 

Earnings Per Share – Weighted average number of shares 

The weighted average number of shares outstanding for the first nine months of 2003 was 39,830,000 shares (basic) and 41,264,000 shares (diluted). As a result of our completion in September 2003 of our $120 million self-tender offer, in which we purchased 17,910,347 shares of our common stock and warrants to purchase 987,283 shares (based on the conversion of warrants on a cashless basis at the $6.35 per share offer price) of our common stock, the weighted average number of shares will decline in the fourth quarter of 2003 and beyond. The reduced weighted average number of shares will have the effect of increasing net income (loss) per share. 

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 in cash after deducting the underwriting discount and other offering expenses. In September 2003 we used $120 million of our cash, short term investments 

23

and marketable securities to complete a self-tender offer in which we purchased 17,910,347 shares of our common stock and warrants to purchase 987,283 shares of our common stock (based on the conversion of warrants on a cashless basis at the $6.35 per share offer price). 

At September 30, 2003, our cash and cash equivalents, short-term investments and marketable securities totaled $90.2 million, compared with $217.0 million at December 31, 2002, representing a net reduction of $126.8 million during the first nine months of 2003. The net reduction was due primarily to our use of $120 million for the self-tender offer and $9.9 million to retire notes payable issued in connection with the acquisition of Virtual Internet, offset by funds provided by operations. Funds provided by operations in the first nine months of 2003 totaled $6.4 million, which reflects payments of $6.7 million of advisory fees and expenses in connection with our consideration of various strategic alternatives following the unsolicited acquisition proposals we received in early
2003 and in connection with the self-tender offer and also includes a $3.2 million refund of income taxes paid in prior years. 

Although we have no material commitments for capital expenditures or other long-term obligations other than lease obligations for office space, additional capital expenditures could arise in connection with our continued systems enhancement projects and potential additions of new products and services. 

Under an agreement with ICANN, RegistryPro, our wholly owned subsidiary, is obligated to launch the .pro top level domain. We have committed to provide up to $8.5 million in funding and other non-cash contributions to RegistryPro for RegistryPro’s activities in establishing, operating and marketing the .pro top level domain through the first anniversary of its commencement-of-service date. However, we do not believe that RegistryPro’s agreement with ICANN requires RegistryPro to spend a specified amount to establish, operate and market the .pro top level domain. Accordingly, our contributions for these purposes could be less than $8.5 million. Through September 30, 2003 we had contributed approximately $3.8 million in cash, and had also made non-cash contributions. We incurred
$2.3 million of startup costs for RegistryPro during the first nine months of 2003. We currently expect that RegistryPro will not launch its real-time automated registry services during the fourth quarter of 2003. We currently expect that RegistryPro will continue to incur net losses through the end of 2003 and we cannot assure you when RegistryPro will successfully launch its services, if at all. 

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


	24

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 Recently Completed Self Tender Offer 

Our recently completed $120 million self tender offer for our shares and warrants has significantly reduced our cash balances for future use thereby increasing certain risks, including our ability to finance certain expenditures, our financial flexibility and the market liquidity of our common stock. 

In September 2003 we completed a self tender offer for $120 million of our shares and warrants. The completion of this self tender significantly reduced our balances of cash, marketable securities and short-term investments. As a consequence, we expect a significant reduction in our interest income going forward and we have substantially less cash available for use in periods of increased capital or operating expenses or to cover existing, contingent or other future liabilities. We have also reduced our ability to engage in significant transactions without additional financing and we cannot assure you that we would be able to raise additional debt or equity financing in the future if we determine that we would like to do so. In addition, consummation of the tender offer significantly
reduced our "public float," which is the number of shares owned by non-affiliated stockholders and available for trading in the securities markets. This reduction in our public float may result in a lower stock price and/or reduced liquidity in the trading market for our common stock.

Risks Related to Our Industry and Our Business 

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

Although we were profitable for the three and nine months ended September 30, 2003, we were not profitable for the first three or six months of 2003, nor for the years ended December 31, 2002 and 2001. Our net loss for 2002 included a goodwill impairment writedown of $17.0 million. We incurred losses from operations of approximately $9.7 million for the year 2000, $19.9 million for the year 2001 and $17.2 million for the year 2002. As of September 30, 2003 our accumulated deficit totaled $42.4 million. Although we have recently taken initiatives intended to reduce our research and development operating expenses in 2004, we cannot assure you when or if these reductions will be realized and we expect our research and development expenses to increase during the fourth quarter of 2003 as we
continue our efforts to upgrade and improve our systems. In addition, losses at our Virtual Internet and RegistryPro subsidiaries have contributed to a decline in our profitability and we expect these losses at Virtual Internet and RegistryPro to have a negative impact on our profitability through the remainder of 2003 and perhaps beyond. In addition, unless we lower the number of credit card refunds and reduce our level of credit card chargebacks, we may continue to incur significant penalties that impact our 

25

profitability. Further, we anticipate that our revenues from advertising will be materially lower in future periods. For all these reasons, we cannot assure you that we will be able to operate profitably or sustain or attain positive cash flow in the future. 

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

In late 2002, we began a restructuring program to address the core issues that were contributing to our inefficient cost structure and hindering our efforts to improve our results of operations and earnings. Central to this program is our effort to build a new and more flexible systems architecture that we believe will enable us to introduce new products and services more rapidly and cost-effectively, improve operating efficiencies and increase productivity and flexibility. Other goals of our restructuring program include improving our financial and managerial controls and billing and reporting systems and procedures, improving the completeness and accuracy of the information in our database of domain name registrations and reducing credit card chargeback and refund rates. 

If we fail to complete our restructuring program successfully, and in particular fail to upgrade and improve our internal systems in a timely and cost-effective manner, our business, financial condition and results of operation could be materially adversely affected. In connection with our restructuring efforts, we have incurred, and expect to continue to incur through the end of 2003 and into the beginning of 2004, significant research and development expenditures as we continue to invest in systems architecture improvements, and as we seek to improve our business processes. We have dedicated technology consultants and personnel to effect these improvements even as we maintain our current systems with other personnel. As long as we are focused on improving our systems and business
processes,
we are limited in the time and resources we can dedicate to launching new products and services to meet the needs of our customers and to better compete in the marketplace. Any delays in the launch of new products or services, in upgrades of current ones, or in our inability to meet the needs of our customers will affect our ability to effectively compete, to attract and retain customers and to market new products and services. 

We cannot assure you that our restructuring program will achieve the goals we have set for it. The implementation of new systems is a complex process that requires communication and coordination throughout our organization and has significant execution risks. We have experienced delays in various stages of these projects and cannot assure you when or if these projects will be successfully
completed. Even
if our new systems architecture is launched successfully, we cannot assure you that it will enable us to reduce our expenses to the significant extent and in the time frames we originally contemplated for 2004 or in future years. We cannot assure you that our business will ultimately realize the additional benefits we hope to achieve from improved systems or that our new systems will not have unintended adverse impacts on our ability to service our customers and operate our business as planned. 


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If the marketplace for new domain names does not grow, and/or if we are unable to maintain our historical market share, our domain name registration business would be adversely affected and our net revenues may decline. 

We do not expect the domain name marketplace to experience the same high level of growth it has experienced in the past. In 2002, the VeriSign registry recorded approximately 10.6 million new registrations compared to 10.8 million new registrations during 2001, reflecting the slow-down in the growth and expansion of the marketplace for new domain names. While new domain registrations outside the VeriSign registry (e.g., .info, .biz and .us) may have offset some of the decline in overall domain registrations, the decline in .com, .net and .org registrations highlights the slower growth rate for domain names. Together with increased competition, this declining growth has contributed to a sequential quarterly decline in the number of our paid domain name registrations, transfers and renewals during each quarter from the first quarter of 2000 until the introduction of new gTLDs in the fourth quarter of 2001 and again from the first quarter of 2002 through the fourth quarter of 2002. During the first nine months of 2003, our total number of names under management declined by approximately 0.2 million names to approximately 3.1 million names as of September 30, 2003, and we experienced a decline in the total number of domain name registrations, renewals and transfers to us for the first nine months of 2003 (1.6 million) as compared with the first nine months of 2002 (1.9 million). If the domain name industry does not recover from this slowdown and competition continues to intensify, and/or if we are unable to maintain our historical market share, our business, financial condition and results of
operations
 could be materially adversely affected. 

We may not be able to maintain or improve our competitive position because of strong competition from new and existing registrars and resellers, and we 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. The four other testbed competitive registrars were America Online, CORE, France Telecom and Melbourne IT. Since the end of the testbed period on November 30, 1999, ICANN has continued to accredit new registrars, including several important competitors such as BulkRegister.com, eNOM, Go Daddy Software, DirectNic, DotRegistrar, Schlund, Dotster and Tucows. As of November 6, 2003, ICANN had accredited 174 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 registrars’ systems. The continued introduction of registrars and resellers into the domain name registration industry and the rapid growth of some who have entered the industry have made it difficult for us to maintain our industry competitive position. If we continue to experience a decline in the total number of paid domain name registrations, renewals and transfers to us, as we did in the first nine months of 2003 compared to the first nine months of 2002, our business, financial condition and results of operations could be materially adversely affected. 


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We face competition from registrars and resellers that may have longer operating histories, greater name recognition, particularly internationally, better systems 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 that they can bundle with domain name registrations. Some of our competitors have designed their systems and built their businesses in a manner that, we believe, enables them to be lower-cost providers than we currently are. In addition, our position could be harmed by any of these
existing or future competitors, some of which may have longer operating histories, greater name recognition, particularly internationally, and greater and more efficient financial, technical, marketing, distribution and other resources than we do. 

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

We recognized lower revenues from domain name registrations for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, which was due in part to fewer domain names registered and in part to lower average sale prices per year of subscription term for those names. 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 have lower pricing or have reduced and may continue to reduce their pricing for domain name registrations, renewals and transfers both for short-term promotions and on a permanent basis. Some of these competitors have experienced a significant increase in their registrations, suggesting that customers are becoming
more price sensitive. Further, some of our competitors have, in the past, offered domain name registrations for free, deriving their revenues from other sources. In response to increasing competition in the domain name registration industry, we may be required, by marketplace factors or otherwise, to reduce, perhaps significantly, the prices we charge for our core domain name registration and related products and services, especially if our competitors who charge these reduced fees are able to maintain customer service comparable to ours. Reducing the prices we charge for domain name registration services in order to remain competitive could materially adversely affect our business, financial position and results of operations. 

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

Our business depends in great part on our customers’ renewal of their domain name registrations through us. Our first expirations for .com, .net and .org domain names occurred in January 2001. 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 

28

who will renew their registrations will do so through us. Our renewal rate for paid registrations for the year ended December 31, 2002 and for the first nine months of 2003 was approximately 50%. Our total domain name registrations under management decreased by 1.5% during the third quarter of 2003 and has declined from a peak of approximately 3.8 million as of September 30, 2001 to approximately 3.1 million as of September 30, 2003. Also, as discussed below, our renewal rates could be adversely affected by any future modifications we may make to our SafeRenew program. If we are unable to increase our overall renewal rate or number of new registrations, the combination of our customers deciding not to renew their registrations through us and the transfers of registrations to
other registrars will have the cumulative effect of decreasing the number of domain name registrations under our management. Not only could this cause our revenues from domain name registrations to decrease, but we would be left with fewer domain name customers to whom we could market our other products and services. A decline in our domain name registrations or renewals could materially adversely affect our business, financial condition and results of operations. 

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

A key part of our strategy is to diversify our revenue base by offering value-added products and services in addition to domain name registrations. Although we have recently experienced increased sales for other products and services such as email and website creation tools, our efforts to date have still not resulted in substantial diversification. Further, it will be difficult to achieve substantial diversification in the near future as we focus significant resources on our restructuring efforts. Our primary business, domain name registration services, generated 87% of our net revenues during the nine months ended September 30, 2003. We cannot assure you that we will be able to attain the market’s confidence in us as a reliable provider of products and services outside of our
core business. If, over time, we fail to offer products and services that meet our customers’ needs and that are competitive with those offered in the marketplace, or our customers elect not to purchase our products and services, our anticipated net revenues may fall below expectations, we may not generate sufficient revenue to offset the related costs and we will remain dependent on domain name registrations as our primary source of revenue. Our inability to successfully diversify our revenue base from domain name registrations could, together with a decline in that market, materially adversely affect our business, financial condition and results of operations. 

We anticipate that our advertising revenues will decrease significantly due to the loss of our most significant advertising customer. 

Since
    the fourth quarter of 2002, our largest advertising customer, a provider
    of web hosting services, has accounted for approximately $1.0 million of
    our advertising revenues per quarter. In the third quarter of 2003 this represented
    approximately 75% of our advertising revenue. Because we recently began to
    sell web hosting services directly to our customers, this customer did not
    purchase advertising from us for the fourth quarter of 2003 and we do not
    anticipate any additional revenue from this customer. We cannot assure
    you that we will be able to replace these lost revenues with other advertising
revenue or with 

29

revenues from sales of web-hosting services to our own customers, and even if we can, it may take a long period of time to do so. We expect any decrease in our advertising revenue to have an adverse impact on our overall gross margin because the gross profit margin on advertising revenue is 100% and, accordingly, any decrease in advertising revenue not otherwise offset with new advertising revenue would represent a reduction of our gross profit in the same amount. 

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

A substantial majority of our revenues originate from online credit card transactions. Under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder’s signature at the time of the transaction, even though the financial institution issuing the credit card may have authorized the transaction. We have experienced high rates of refunds to customers and chargebacks from credit card associations that have resulted in the assessment of financial penalties by two credit card associations. We had not incurred penalties from one of those associations until August 2002, at which time we were assessed a penalty of $0.3 million applicable to the year 2001. Under that association’s rules, additional
penalties may be imposed at the discretion of the association. Any such potential penalties would be imposed on our credit card processor by the association, and under our contract with our processor, we are required to reimburse it for such penalties. Because the imposition of any potential penalties is at the discretion of the credit card association, we accrued a $3.7 million charge to general and administrative expense in the year 2002 and an additional $1.9 million for the first nine months of 2003 to cover what we estimate to be the maximum potential penalties that could be imposed under that credit card association’s rules for transactions in these periods. We have had preliminary discussions with our credit card processor to obtain resolution to the 2002 penalties and believe that upon final resolution, we are not likely to pay the full amount accrued for 2002. If the ultimate amount we pay is less than the maximum potential penalties previously accrued, we would reverse any excess accrual as a

reduction of general and administrative expense at that time. We have previously posted a $1.0 million letter of credit with our processor as security for our potential obligations to it. If we cannot reduce our refund and chargeback rates to levels that are acceptable to the credit card associations, and maintain acceptable levels, we will continue to face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition 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 and post-transaction verifications designed to prevent fraudulent credit card transactions on our website, we may block legitimate customers from purchasing our services, thereby reducing our net revenues. Our efforts to reduce our chargebacks and refunds included a modification of our SafeRenew program to an "opt in" program with respect to international transactions beginning October 2002. In an effort to protect our customers’ online identities, our SafeRenew program was implemented in January 

30

2001 on an "opt out" basis to .com, .net and .org registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of our services agreement, at the time a covered registration comes up for renewal, we attempt to charge a registrant’s on-file credit card a one-year renewal fee and, if the charge is successful, to renew the registration for that additional one-year period. Our modification of a portion of this program to an "opt in" basis with respect to international transactions beginning October 2002 and any further modifications we may undertake 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 changes to the program may have an adverse effect on our renewal rates in future periods and, as a result, may materially adversely affect our net revenues.

If not remedied, weaknesses in our internal accounting controls may materially adversely affect our ability to accurately report our financial position and results of operations on a timely basis and collect certain accounts receivable. 

We
    experienced significant growth and increased complexity in our operations
    in a short period of time, which strained our existing financial systems
    and procedures. As a result, aspects of our financial systems and internal
    accounting controls need to be updated and improved. We have material weaknesses
    in our internal accounting controls that may impair our ability to accurately
    record, track and amortize deferred revenues and prepaid registry fees through
    our systems; reconcile, on a detailed transaction basis, accounts receivable
    from our credit card processors; and completely reconcile, on a detailed
    transaction basis, invoices from registries to our database of domain names.
    Other material weaknesses may impair our ability to generate accurate invoices
    to corporate customers of  our Corporate Services group. To mitigate risks
    that might have resulted from such material weaknesses, we have implemented
    a number of processes designed to ensure the accuracy, in all material respects,
    of our reported financial position and results of operations. Due to growth
    in the complexity of our operations, the processes and procedures we have
    used in the past may not be adequate to compensate for these material weaknesses
    in the future. 

During the
    third quarter of 2003 we completed the implementation of new accounting system
    modules, including modules to perform certain reconciliations and to record,
    track and amortize deferred revenues and prepaid registry fees.  We
    also implemented a number of new control procedures in our Corporate Services
    area designed to improve our ability to generate accurate invoices to corporate
    customers.  Accordingly, we believe we have made significant progress
    towards remediating the related material weaknesses in our internal accounting
    controls.  When fully implemented, these new financial system modules
    and control processes are expected to correct these weaknesses. However,
    we cannot assure you that we will make sufficient additional progress toward
     implementing these systems and control processes on a timely basis and within
    anticipated budgets, nor can we assure you that their implementation will
    adequately remedy the weaknesses identified in our internal accounting systems
    and controls. If our efforts to implement these solutions are not successful,
    our ability to accurately report our 

31

financial position and results of operations on a timely basis, and to collect all of our accounts receivable from corporate customers, may be materially adversely affected. 

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

Our success depends in large part on the contributions of our management team and key sales and technology personnel. Over each of the past several years, we have experienced high turnover among our employees and during the past several months we have experienced a significant number changes to the members to our management team including (i) the appointment of a new President and CEO, Peter Forman, to replace his brother Richard Forman, our director and co-founder who resigned from these positions which he had held since March 1998 and March 1996, respectively; (ii) the hiring of a new General Manager of our Retail division; (iii) the hiring of a new director of our Canadian operations; (iv) the hiring of a new director of human resources; (v) the promotion of our Deputy General
Counsel to General Counsel and (vi) the promotion of our Vice President of Operations to Senior Vice President. Our current Executive Chairman of the Board of Directors, Mitchell Quain, has served in that capacity since November 2002, and his contract calls for him to return to the role of non-Executive Chairman in November 2003. Many of our key employees have not worked with one another for long periods of time and may not be able to develop an effective working relationship. Moreover, many of our managers are still learning about our company and our industry. If we cannot work together effectively to solve the operational challenges that exist in our business, or master the details of our business and our market, then our business will be harmed, and we will incur additional costs in seeking and retaining new management personnel. 

We compete with other technology and Internet companies, as well as companies in other industries, in hiring and retaining qualified personnel. Our restructuring process has resulted in significant organizational changes including workforce reductions. These changes, together with the unsolicited acquisition proposals we received in January 2003 and the potential for a proxy contest and general uncertainty that resulted created morale challenges. In response to these challenges and in order to retain other employees and keep them focused on our goals, we implemented retention bonus and change in control severance programs. Notwithstanding the resolution of the potential proxy fight and the implementation of these programs, morale challenges may persist, and we continue to face the
challenge of
 keeping our employees motivated and focused on our strategies and goals. The loss or demotivation of such employees, particularly from our marketing, sales and technology teams, could harm our business. 

We cannot assure you that our RegistryPro venture will be successful. 

We are evaluating the strategic alternatives for our RegistryPro subsidiary but cannot assure you that we will ultimately be able to execute on what we determine to be our preferred course of action. RegistryPro has been selected by ICANN to operate a registry for the .pro gTLD. The .pro domain is intended to be dedicated to certified or accredited professionals such as lawyers, doctors and accountants. All .pro domain names are planned to be issued with a digital certificate to facilitate secure communications and transactions. RegistryPro signed its contract with ICANN only in May 2002 and still faces operational challenges prior to launching, including finalizing the overall technological integration and functionality of the different aspects of the .pro top level domain product. The
initial launch date for RegistryPro has 

32

experienced several delays and although RegistryPro has not yet completed the implementation of its registry system, in April 2003, it launched the sunrise period for .pro defensive domain name registrations. We cannot assure you that RegistryPro will be able to successfully launch its registry system, or that the registrars authorized to register the .pro domain name will effectively market the .pro products and services. In addition, we cannot predict whether there will be a demand for the domain names for which RegistryPro serves as the registry, when or the extent to which we will be able to generate revenues from RegistryPro, or if it will ever be profitable. 

In its development stages, we anticipate that RegistryPro will require additional funding. We have committed to provide up to $8.5 million in funding and other non-cash contributions to RegistryPro for its activities in establishing, operating and marketing the .pro top level domain through the first anniversary of its commencement-of-service date. However, we do not believe that RegistryPro’s agreement with ICANN requires RegistryPro to spend a specified amount to establish, operate and market the .pro top level domain. Accordingly, our contributions for these purposes could be less than $8.5 million. Through September 30, 2003 we had contributed approximately $3.8 million in cash, and had also made non-cash contributions. For the nine months ended September 30, 2003
RegistryPro incurred $2.3 million of startup costs. We currently expect that RegistryPro will not launch its real-time automated registry services during the fourth quarter of 2003. Accordingly, we currently expect that RegistryPro will continue to incur net losses through the end of 2003 and we cannot assure when RegistryPro will successfully launch its services, if at all. Inadequate funding could impact RegistryPro’s ability to fully launch its services or its ability to promote the new top level domains in the marketplace. 

Our acquisitions, including Virtual Internet, subject us to significant risks, any of which could harm our business. 

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

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

diversion of management attention from running our existing business;
increased expenses, including travel, legal, administrative and compensation expenses resulting from newly hired employees;
increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with our own;
potential exposure to additional liabilities;
adverse effects on our reported operating results due to possible write-down of goodwill associated with acquisitions;


	33

potential disputes with the sellers of acquired businesses, technologies, services or products; and
inability to utilize tax benefits related to operating losses incurred by acquired businesses.

Moreover, performance problems with an acquired business, technology, service or product could also have a material adverse impact on our reputation as a whole. In addition, any acquired business, technology, service or product could significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from our acquisitions. 

We acquired Virtual Internet in March 2002, sold its hosting division in May 2002 and are in the process of integrating its business, technology, operations and personnel with those of our U.S. and Canadian operations. Our efforts to transition the back and front-end systems that we previously used in our U.S. Corporate Services division to those we acquired through Virtual Internet resulted in fulfillment delays and invoice issuance delays and inhibited the effectiveness of our U.S. Corporate Services support and sales teams. We may face similar issues as we make efforts to further integrate the businesses to drive additional synergies by improving our Corporate Services systems and processes. In 2002, Virtual Internet incurred a pre-tax loss of $10.5 million, including a charge of
$8.3 million for goodwill impairment and in the first nine months of 2003, Virtual Internet incurred a pre-tax loss of $2.1 million. We may not be able to increase revenues or cut expenses sufficiently to make it profitable in the near future. We were not able to consolidate Virtual Internet’s 2002 losses in our U.S. income tax returns for 2002, although we expect to be able to do so for 2003 and future years. 

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

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

We expanded our business into international markets through our acquisition of Virtual Internet, and we now maintain a large base in the United Kingdom and we have offices in France and Germany. Prior to this acquisition, our customer service operation in Canada was our only experience with operations outside of the United States. Introducing and marketing our products and services internationally, developing direct and indirect international sales and support channels and managing foreign personnel and operations will continue to require significant management attention and financial resources. We face a number of risks associated with our conducting business internationally that could negatively impact our results of operation, including: 

management and integration problems resulting from cultural differences;
political and economic instability in some international markets;
competition with foreign companies;


	34

legal uncertainty regarding liability and compliance with foreign laws;
currency fluctuations and exchange rates;
potentially adverse tax consequences or inability to realize tax benefits;
difficulties in protecting intellectual property rights in international jurisdictions; and
the level of adoption of the Internet in international markets.

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

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

Before April 1999, Network Solutions managed the domain name registration system for the .com, .net and .org domains pursuant to a cooperative agreement with the U.S. government. In November 1998, the Department of Commerce recognized ICANN to oversee key aspects of the Internet domain name registration system. Since that time and particularly because the domain name industry is in its early stages of development, ICANN has been subject to strict scrutiny by the public and the government. Although it recently undertook a restructuring, ICANN continues to face significant questions regarding its financial viability and efficacy as a private sector entity. While these issues will take time to sort out, the long term structure and mission of ICANN may evolve, even in the coming year, to
address perceived shortcomings. Accordingly, we continue to face the risks that: 

the U.S. government may, for any reason, reassess its decision to introduce competition into, or ICANN’s role in overseeing, the domain name registration market;
the Internet community or the Department of Commerce or U.S. Congress may become dissatisfied with ICANN and refuse to recognize its authority or support its policies,
which could create instability in the domain name registration system;
ICANN may attempt to impose additional fees on registrars if it fails to obtain funding sufficient to run its operations;
accreditation criteria could change in ways that are disadvantageous to us;
ICANN’s limited resources may seriously affect its ability to carry out its mandate; and

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

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

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

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

Country
    code registries may be administered by the host country, entrepreneurs or
    other third parties. Different country code registries require registrars
    to comply with specific regulations. Many of these regulations vary from
    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. If these registry
    businesses cease operations or otherwise fail to process domain name registrations
    or the related information in ccTLDs, we would be unable to honor the subscriptions
    of registrants who have registered, or are in the process of registering,
    domain names in the applicable ccTLD. In addition, the process for registering
    domain names with many of the ccTLD registries necessitates significant manual
    efforts to process numerous paper documents, resulting in high labor costs
    and an increased potential for clerical errors. If we are unable to honor
    a substantial number of subscriptions for our customers for any reason or
    if the country code registries fail to process our customers’ registrations
    in a timely and accurate fashion, we could face claims of loss from our registrants
    and our business, financial condition and results of operations could be
    materially adversely affected. 


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

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

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

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

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

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

In addition, the Federal Trade Commission and state agencies have investigated various Internet companies regarding their use of personal information. The federal government has enacted legislation protecting the privacy of consumers’ nonpublic personal information. We cannot guarantee that our current information-collection procedures and disclosure policies will be found to be in compliance with existing or future laws or regulations. Our failure to comply with existing laws, including those of foreign countries, the adoption of new laws or regulations regarding the use of personal information that require us to change the way we conduct our business or an investigation of our privacy practices could increase the costs of operating our business. 


	37

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. 

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

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

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

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

We do not conduct comprehensive patent searches to determine whether our technology infringes patents held by others. These matters are inherently uncertain in Internet-related industries due to the rapidly evolving technological environment. There may be numerous patent applications pending, many of which are confidential when filed, with regard to technologies similar to our own. Third parties may assert infringement claims against us with respect to past, current or future technologies, and these claims and any resultant litigation, should it occur, could subject us to significant liability for damages. Even if we prevail, litigation could be time-consuming and expensive to defend, and could result in the diversion of management’s time and attention. Any claims from third
parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into agreements with the third parties making these claims. Such royalty or licensing agreements, if required, may be 

38

unavailable on terms acceptable to us, if at all. If a successful claim of infringement is brought against us and we fail to develop non-infringing technology or to license the infringed or similar technology on a timely basis, it could materially adversely affect our business, financial condition and results of operations. 

We rely on certain technologies that we license from other parties. We cannot assure you that these third-party technology licenses will not infringe on the proprietary rights of others or will continue to be available to us on commercially reasonable terms, if at all. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could materially harm our business. 

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

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

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

In addition, the Anticybersquatting Consumer Protection Act was enacted in November 1999 to curtail a practice commonly known in the industry as "cybersquatting." A cybersquatter is generally defined in this Act as one who registers a domain name that is identical or similar to another party’s trademark or the name of a living person, in each case with the bad faith intent to profit from use of the domain name. Cybersquatting is a problem that could be exacerbated with any additional top level domain names that may be established by ICANN. Although 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 other domain name registration related services is still developing. Any determination that our other domain name registration related services facilitate cybersquatting could have a material adverse effect on our business, financial condition and results of operations. 


	39

Risks Related to Our Technology and the Internet 

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

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

Our ability to maintain our computer and telecommunications equipment in working order and to reasonably protect them from interruption is critical to our success. Our website must accommodate a high volume of traffic and deliver frequently updated information. In addition, the technology underlying the Internet and the applications available to simplify electronic commerce are continuously being enhanced or upgraded and to remain competitive, we must incorporate these emerging technologies into our infrastructure on a cost-effective and timely basis. We occasionally experience system application failures, as well as slower response times. We also conduct planned site outages and experience unplanned site outages. To date, these disruptions of service and slower response times have had
minimal
 impact on our business. However, our customers, advertisers and business partners may become dissatisfied by any systems failure that interrupts our ability to provide our products and services to them or increases response times. Substantial or repeated system failures would significantly reduce the attractiveness of our website and could cause our customers, advertisers and business partners to switch to another domain name registration service provider. 

As
    part of our restructuring process, we have been incurring substantial expenses
    to update our technology, improve our systems’ performance and develop
    new applications to meet the evolving needs of our customers and ensure the
    compatibility of our current systems with emerging technologies. We cannot
    assure you that we will be able to achieve these goals on a timely basis
    as changes in technologies occur. Also as part of our restructuring efforts
    to increase efficiencies, we have outsourced certain operations and may continue
    to explore opportunities to outsource others. Outsourcing
     operations
    may raise concerns among partners or customers regarding our ability to control
    the services we offer them if certain elements are managed by another company.
    In addition, we  cannot assure you that we will be able to effectively transition
    those functions that we may choose to outsource, as any such process involves
    complexity and risk. 

Although we carry general liability and professional liability insurance, our insurance may not cover any claims by dissatisfied customers, advertisers, affiliates, or participants in our Global Partner Network, 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. 


	40

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. 

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

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

Despite any precautions we may take, the occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at any of our facilities including our hosting facilities, could result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data communications or any damage to or failure of our systems could result in interruptions in our service. Such interruptions would reduce our revenues and profits, and our future revenues and profits would be harmed if our
users were
 to believe that our systems are unreliable. In addition, our business interruption insurance may not be adequate to compensate us for losses that may occur. Accordingly, any significant damage to our systems or disruption in our ability to provide our services would have a material adverse effect on our business, financial condition and results of operations. 

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

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


	41

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

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

In addition, we offer services to our users, including web-hosting, 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. 

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

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

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

to enhance our existing products and services;
to design, develop, launch and/or license new products, services and technologies that address the increasingly sophisticated and varied needs of our current and prospective customers; and
to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

The development of additional products and services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively or adapt our websites, internally developed technology or transaction-processing systems to customer requirements or 

42

emerging industry standards. Updating our technology internally and licensing new technology from third parties may require us to incur significant additional capital expenditures. 

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

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

the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;
the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;
security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information, such as credit card numbers, and attempts by unauthorized computer users, so-called hackers, to penetrate online security systems; and
privacy concerns, including those related to the ability of websites to gather user information without the user’s knowledge or consent, may impact consumers’ willingness to interact online.

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

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

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


	43

cross-border commerce;
libel and defamation;
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 countries and 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 1, 2003, a moratorium on certain state and local taxation of online services and electronic commerce expired. Although the moratorium has not yet been extended, the Internet Tax Nondiscrimination Act, if passed, would permanently extend the moratorium. If the bill is not passed and the moratorium is not extended, the imposition of such taxes, which may be heavily lobbied for by states, many of which face increasing budget deficits, could materially adversely affect our business, financial condition and results of operations. 

Investment Risks 

Our stock price is highly volatile. 

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

interest in the Company by potential acquirors;
general market and economic conditions and market conditions affecting technology companies generally;
limited availability of our shares on the open market;
actual or anticipated fluctuations in our quarterly or annual operating results;
announcements of acquisitions or investments, developments in Internet governance or corporate actions; 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 technology related companies. These fluctuations may adversely affect the market price of our common stock. 

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

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

our possible noncompliance with the Nasdaq National Market’s listing requirements and the possible delisting of our shares;
reduced trading volumes, an illiquid market for the trading of our shares, and more difficulties involved with the selling of our shares by our stockholders;
our shares losing their appeal as a currency for future acquisitions; and/or
an impairment in our ability to access the capital markets should we desire or need to raise additional capital.

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

As
    of November 11, 2003, our directors, executive officers and principal stockholders
    beneficially owned approximately 21.3% 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. 

45

The interests
    of these stockholders may differ from the interests of our other stockholders.
    In addition, third parties may be discouraged from making a tender offer
    or bid to acquire us because of this concentration of ownership. 

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 

Our exposure to market risk is primarily related to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. We believe that we are not subject to a material interest rate risk because substantially all 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 less than one year. Accordingly, the fair value of our investment portfolio would not be significantly impacted by a 100 basis point increase or decrease in interest rates. From time to time we also invest in publicly traded stocks, and we are subject to market price risk with respect to such investments. At September 30, 2003 the fair
value of our investments in publicly traded stocks was $ 0.4 million. We did not have any foreign currency hedging or derivative instruments at September 30, 2003. 

We generally do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. While we have no present intention of utilizing derivative financial instruments in the future, it is possible that we may enter into such transactions or similar transactions. At September 30, 2003 we had no long-term debt. 

Our
    consolidated financial statements are denominated in U.S. dollars. We derived 9%
    of our net revenues for the third quarter of 2003 from operations outside
    of the United States. We face foreign currency risks primarily as a result
    of the revenues that we receive from services delivered through our foreign
    subsidiaries. These subsidiaries incur most of their expenses in the local
    currency. Accordingly, our foreign subsidiaries use the local currency as
    their functional currency.  We are also exposed to foreign exchange
    rate fluctuations, primarily with respect to the Euro and the Canadian Dollar,
    as the financial results of our foreign subsidiaries are translated into
    U.S. dollars for consolidation. As exchange rates vary, such financial results,
    when translated into U.S. dollars,  may vary from expectations and may adversely
    impact our operating results and our net income. 


	46

Item 4. Controls and Procedures. 

  

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

During the quarterly period covered by this Report, other than as stated below, there were no significant changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

As previously disclosed, we have material weaknesses in our internal accounting controls. Certain of these weaknesses may impair our ability to accurately record, track, and amortize deferred revenues and prepaid registry fees through our systems; to reconcile on a detailed transaction basis accounts receivable from credit card processors to our database of domain names; and to reconcile completely on a detailed transaction basis invoices from registries to our database of domain names. Other material weaknesses may impair our ability to generate accurate invoices to corporate customers in our Corporate Services group. To mitigate risks that might have resulted from such material weaknesses, we have implemented a number of processes designed to ensure the accuracy, in all material respects, of our reported financial position and results of operations. 

During the third quarter of 2003 we completed the implementation of new accounting system modules, including modules to perform certain reconciliations and to record, track, and amortize deferred revenues and prepaid registry fees.  We also implemented a number of new control procedures in our Corporate Services area designed to improve our ability to generate accurate invoices to corporate customers.  Accordingly, we believe we have made significant progress towards remediating the related material weaknesses in our internal accounting controls.  


	47

PART
II.     OTHER INFORMATION 

Item 1. Legal Proceedings 

Litigation 

In
    November 2001, the Company, its former Chairman, President and Chief Executive
    Officer Richard D. Forman and its former Vice President of Finance and Accounting,
    Alan G. Breitman (the "Individual Defendants"), and Goldman Sachs & Co.
    and Lehman Brothers, Inc., two of the underwriters in the syndicate for our
    March 3, 2000 initial public offering, were named as defendants in a class
    action complaint alleging violations of the federal securities laws in the
    United States District Court, Southern District of New York. Goldman Sachs & Co.
    and Lehman Brothers, Inc. distributed 172,500 of the 5,750,000 shares in
    the initial public offering. 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. The action is being coordinated with
    approximately three hundred other nearly identical actions filed against
    other companies before one judge in the U.S. District Court for the Southern
    District of New York. On October 9, 2002, the Court dismissed the Individual
    Defendants from the case without prejudice based on Stipulations of Dismissal
    filed by the plaintiffs and the Individual Defendants. On February 19, 2003,
    the Court denied the motion to dismiss the complaint against the Company.
    The Company has approved a Memorandum of Understanding ("MOU") and related
    agreements which set forth the terms of a settlement between the Company
    and the plaintiff class. It is anticipated that any potential financial obligation
    of the Company to plaintiffs due pursuant to the terms of the MOU and related
    agreements will be covered by existing insurance. Therefore, the Company
    does not expect that the settlement will involve any payment by the Company.
    The MOU and related  agreements are subject to a number of contingencies
    including the negotiation of a settlement agreement and approval by the Court.
    We cannot predict whether or when a settlement will occur or be finalized. 

Register.com has been named as a defendant in purported class action lawsuit filed on May 2, 2002, which alleges that our SafeRenew program violates New York law. This lawsuit was filed by Brian Wornow, on behalf of himself and all others similarly situated, in the Supreme Court of the State of New York. Our SafeRenew program was implemented in January 2001 on an "opt-out basis" to .com, .net and .org registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of our services agreement, at the time a covered 

48

registration
    comes up for renewal, we attempt to charge a registrant’s on-file credit
    card a one year renewal fee and, if the charge is successful, to renew the
    registration for that additional one-year period. Register.com believes that
    the SafeRenew program was properly adopted as an effort to protect our customers’ online
    identities. Plaintiff sought a declaratory judgment that the SafeRenew program
    violates New York General Obligations Law Section 5-903, and also claimed
    breach of contract, money had and received, and unjust enrichment. Plaintiff
    further sought to enjoin Register.com from automatically renewing domain
    name registrations, an award of compensatory damages, restitution, disgorgement
    of profits (plus interest), cost and expenses, attorneys’ fees, and
    punitive dam ages. On September 6, 2002, Register.com filed a motion to dismiss
    the complaint in its entirety. On April 17, 2003, Register.com’s motion
    was granted as to two counts (declaratory judgment and breach of contract),
    but denied as to two other counts (unjust enrichment and money had and received).
    On April 28, 2003, Register.com filed an answer denying the material allegations
    of the complaint. On May 2, 2003, Plaintiff filed a notice of appeal to the
    Appellate Division, First Department of the two counts that were dismissed.
    On May 15, 2003, Plaintiff filed an amended complaint asserting new causes
    of action against Register.com for (i) deceptive trade practices in violation
    of New York General Business Law Section 349; (ii) conversion; and (iii)
    breach of the implied covenant of good faith and fair dealing. On June 9,
    2003, Register.com moved to dismiss Plaintiff’s newly asserted causes
    of action. On July 23, 2003 the Court heard oral arguments on Register.com’s
    motion. While we intend to continue to defend ourselves vigorously in this
    lawsuit, in an effort to mitigate a potential worst-case scenario, we entered
    into an insurance agreement pursuant to which, in accordance with its terms
    and conditions, to the extent that we have a final judgment in excess of
    $15 million our insurance carrier would cover up to an additional $30 million. 

On or about January 17, 2003, individual stockholders of the Company filed complaints in the Delaware Court of Chancery purporting to commence class action lawsuits against the Company and each of the individual members of the Company’s Board of Directors. The complaints were styled as Lanza v. Morten , et al (C.A. No. 20123) and Norton v. Morten , et al (C.A. No. 20124). The complaints allege, among other things, breaches of fiduciary duty by the directors in connection with certain publicly disclosed indications of interest in the acquisition of Company. The complaints further allege that the directors are not fulfilling their fiduciary duties in connection with their review and response to such indications of interest and seek an order requiring the defendants to, among other things, undertake an appropriate evaluation of the Company’s worth as a merger or acquisition candidate and to take all appropriate steps to effectively sell the Company. Among
other remedies, the complaints seek to enjoin the members of the Board from continuing their purported breaches of fiduciary duty and unspecified damages from the defendants. 

In
    February 2001, Register.com was named as a defendant in a purported class
    action lawsuit pending in the Supreme Court of the State of New York. The
    complaint alleges that by linking new domain names registered through Register.com
    to a "Coming Soon" web page that informs visitors the name was recently registered
    through Register.com, and provides links to services provided by Register.com
    and its business partners, as well as a banner advertisement for such services,
    Register.com has (i) breached an implied covenant of good faith and fair
    dealing; (ii) engaged in deceptive trade practices in violation of New York
    General Business Law Section 349; and (iii) been unjustly enriched. Prior
    to the filing of the lawsuit, in addition to disclosing the Coming Soon page
    by means of such domain names, Register.com also disclosed 

49

the existence of the Coming Soon page in the "Help" and "Frequently Asked Questions" portions of its website. In March 2001, Register.com added an additional disclosure concerning the Coming Soon page to Register.com’s Services Agreement. Plaintiff has demanded a jury trial, and seeks class certification. Plaintiff further seeks an award of actual damages, disgorgement of profits (plus interest), cost and expenses, attorneys’ fees, and punitive damages. In April 2001, Register.com filed a motion to dismiss Plaintiff’s claims for failure to state a claim upon which relief may be granted and in August 2001, Register.com’s motion was granted. Plaintiff appealed the dismissal to the Appellate Division, First Department, and in April 2003 the Appellate Division affirmed
the dismissal of the unjust enrichment cause of action, but reinstated the causes of action for breach of an implied covenant of good faith and fair dealing and deceptive trade practices. Thereafter, Register.com and Plaintiff agreed upon a settlement which, following notice to the proposed settlement class, was approved by the Court on November 3, 2003. In accordance with the settlement, Register.com will provide each member of the putative class with a five dollar discount off of future purchases of Register.com’s fees for domain name registrations and renewals and will pay attorney’s fees as awarded by the Court to class counsel. As of June 30, 2003, Register.com had accrued the fees and expenses that it expects to incur under the terms of the settlement agreement. These fees and expenses are expected to be paid in the fourth quarter of 2003. 

On or about August 7, 2003 and August 8, 2003, purported stockholders of the Company filed two separate complaints in the Court of Chancery of Delaware against the Company and certain current and past individual members of the Company’s Board of Directors. The first compliant was styled as McBride v. Register.com, Inc. , et al (C.A. No. 20470) and the second complaint was styled as
DeMatte v. Register.com, Inc. , et al (C.A. No. 20474). On November 3, 2003, the two cases were consolidated (C.A. No. 20470) and on November 5, 2003, an amended complaint was filed. The complaint alleges, among other things, that the named defendants breached their fiduciary duties in connection with the self tender that the Company commenced in August 2003 and completed in September 2003, and that the self tender is an attempt by the individual defendants to entrench their positions in the Company.  The complaint seeks, among other things, the court’s certification as a class action lawsuit,
 unspecified damages and rescission of the self tender. 

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


	50

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

Our Annual Meeting of Stockholders was held on July 31, 2003. Holders of an aggregate of 41,266,135 shares of our common stock at the close of business on July 9, 2003 were entitled to vote at the meeting, of which 37,869,026 were present in person or represented by proxy. At such meeting, the Company's stockholders voted as follows:

Proposal 1. To elect nine directors to serve until the 2004 Annual Meeting of Stockholders or until their respective successors shall have been duly elected and qualified.

Name of Nominee	Total Votes For	Total Votes Withheld

Niles H. Cohen	37,223,408	645,618
Dewain K. Cross	36,669,408	1,199,618
Peter A. Forman	33,749,807	4,119,219
Richard D. Forman	33,749,807	4,119,219
James A. Mitarotonda	37,762,905	106,121
Stanley Morten	36,669,408	1,199,618
Mitchell I. Quain	37,223,408	645,618
Jim Rosenthal	36,143,412	1,725,614
Reginald Van Lee	36,143,412	1,725,614

No other persons were nominated, or received votes, for election as directors of Register.com, Inc. at the 2003 Annual Meeting of Stockholders. There were no abstentions or broker non-votes with respect to this proposal. 

Proposal 2. To ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for the fiscal year ending December 31, 2003. 

Total Votes For	Total Votes Against	Abstentions

36,630,475	1,212,624	25,927

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


	51

  Item 6. Exhibits and Report on Form 8-K 

(a)     Exhibits 

Number	Description

10.46	Letter Agreement of Employment with Monica Schulze Hodges, dated as of August 6, 2003, (incorporated by reference to Exhibit (d)(1)(EE) to Amendment No. 1 to the Company’s Schedule TO, filed with the Securities and Exchange Commission on August 14, 2003).
31.1	Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, dated November 13, 2003.
31.2	Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, dated November 13, 2003.
32.1	Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350, dated November 13, 2003.
32.2	Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350, dated November 13, 2003.

(b)     The following report on Form 8-K was filed during the quarter ended September 30, 2003. 

On July 31, 2003, we filed a Current Report on Form 8-K, Item 9 (information provided under Item 12 Results of Operation and Financial Condition), announcing our financial results for the second quarter of 2003. 


	52

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. 

Date: November 13, 2003	REGISTER.COM, INC. By: /s/ Jonathan Stern

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


	53

EXHIBIT INDEX 

Number	Description

10.46	Letter Agreement of Employment with Monica Schulze Hodges, dated as of August 6, 2003, incorporated by reference to Exhibit (d)(1)(EE) to Amendment No. 1 to the Company’s Schedule TO, filed with the Securities and Exchange Commission on August 14, 2003.
31.1	Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, dated November 13, 2003.
31.2	Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, dated November 13, 2003.
32.1	Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350, dated November 13, 2003.
32.2	Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350, dated November 13, 2003.


	54

PART I. CONSOLIDATED FINANCIAL INFORMATION	1

Item 1. Consolidated Financial Statements	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	11

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	46

Item 4. Controls and Procedures.	47

PART II. OTHER INFORMATION	48

Item 1. Legal Proceedings	48

Item 4. Submission of Matters to a Vote of Security Holders	51

Item 6. Exhibits and Report on Form 8-K	52