was implemented in January 2001 on an "opt-out basis" to .com, .net and .org registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of our services agreement, at the time a covered registration comes up for renewal, we attempt to charge a registrant's on-file credit card a one year renewal fee and, if the charge is successful, to renew the registration for that additional one-year period. Register.com believes that the SafeRenew program was properly adopted as an effort to protect our customers' online identities. Plaintiff sought a declaratory judgment that the SafeRenew program violates New York General Obligations Law Section 5-903, and also asserted claims for breach of contract, money had and received, and unjust enrichment. Plaintiff further sought to enjoin Register.com from automatically renewing domain name registrations, an award of compensatory damages, restitution, disgorgement of profits (plus interest), cost and expenses, attorneys' fees, and punitive damages. On September 6, 2002, Register.com filed a motion to dismiss the complaint in its entirety. On April 17, 2003, Register.com's motion was granted as to two counts (declaratory judgment and breach of contract), but denied as to two other counts (unjust enrichment and money had and received). On 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 February 19, 2004, Register.com's motion to dismiss the first, fourth and a fifth causes of action of Plaintiff's amended complaint was granted. Plaintiff has perfected an appeal from this ruling and on June 8, 2004 the Appellate Division, First Department affirmed the dismissal of all five counts. Register.com and the Plaintiff have agreed upon a settlement, the terms of which remain subject to approval by the Court. A fairness hearing has been scheduled for December 2, 2004. In the second quarter of 2004, the Company recorded a provision of $1.4 million for the settlement which it estimates to be its probable exposure net of contributions to be made by its insurance carrier.

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 alleged 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 (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) was unjustly enriched. In August 2001, the Court granted Register.com's motion to dismiss Plaintiff's claims for failure to state a claim upon which relief may be granted. Plaintiff appealed the dismissal and in April 2003 the Appellate Division, First Department affirmed the dismissal of the unjust enrichment cause of action, but reinstated the causes of action for breach of an implied covenant of good faith and fair dealing and deceptive trade practices. Thereafter, Register.com and Plaintiff agreed upon a settlement which, following notice to the proposed settlement class, was approved by the Court on November 3, 2003. In accordance with the settlement, Register.com has provided each member of the putative class with a coupon for a five dollar discount off of future purchases of Register.com's fees for domain name registrations and renewals and has paid attorney's fees in the amount awarded by the Court to class counsel. These coupons expired in October 2004 and the case has been dismissed.

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

Credit card penalties

The Company is experiencing high rates of refunds to customers in excess of the contractual specified levels, which, combined with high rates of chargebacks in the past, have resulted in the assessment of financial penalties by two credit card associations for periods through December 31, 2001. If the Company is unable to lower its refund rates to levels defined in the credit card associations' rules, the Company

10

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. Under one association's rules, additional potential penalties may be imposed at the discretion of the association, and the Company would be contractually obligated to pay such penalties if assessed. Any such 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.

Because the imposition of any potential penalties is at the discretion of the association, subject to contractual limitations, generally accepted accounting principles require that the Company accrue charges to general and administrative expense to cover what the Company estimates to be the maximum potential penalties that could be imposed under that association's rules for transactions occurring during those periods. Accordingly, the Company accrued expense charges of $0.5 million and $1.5 million for the three and nine months ended September 30, 2004, respectively, and $0.6 million and $1.9 million for the three and nine months ended September 30, 2003, respectively.

On October 5, 2004, the Company obtained a release from its credit card processor for any penalties which any credit card association may be entitled to impose for excessive chargebacks and refunds processed through September 30, 2003. Accordingly, in accordance with generally accepted accounting principles applicable for extinguishments of liabilities, in the fourth quarter of 2004 the Company will reverse the expense accruals previously recorded during the period from January 1, 2002 through September 30, 2003 in the amount of $5.6 million. This expense reversal will be recorded as a reduction of general and administrative expense in the fourth quarter of 2004.

The Company is continuing to have discussions and correspondence with its credit card processor regarding the potential penalties for periods not covered by the release. Based on these discussions and correspondence, the Company believes that it is likely that it will not be required to pay the full amount accrued, or perhaps any amount at all for periods after September 30, 2003. However the Company's credit card processor will not confirm that the credit card association will not exercise its contractual right to assess penalties for periods after September 30, 2003. Accordingly, the Company is required to continue to accrue for such potential penalties for periods after September 30, 2003. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess amounts previously accrued as a reduction of general and administrative expense at that time.

3.    Geographic and Product Data

The Company maintains operations in the United States and the United Kingdom. Geographic information for the three and nine months ending September 30, 2004 and 2003 are as follows:

				Three months ended September 30,								Nine months ended September 30,
				2004				2003				2004				2003 (Restated – See Note 4)
				(in thousands)
Net income(loss):
United States				$	626			$	2,856			$	1,635			$	6,749
Europe					(274	)			(433	)			(583	)			(2,087	)
				$	352			$	2,423			$	1,052			$	4,662
Net revenues:
United States				$	22,130			$	23,357			$	66,682			$	71,504
Europe					2,443				2,392				8,228				7,502
				$	24,573			$	25,749			$	74,910			$	79,006

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				September 30, 2004				December 31, 2003
				(in thousands)
Long lived assets:
United States				$	17,550			$	16,317
Europe					2,364				3,854
				$	19,914			$	20,171

The Company maintains three separate product lines. Product line information for the three and nine months ended September 30, 2004 and 2003 are as follows:

				Three months ended September 30,								Nine months ended September 30,
				2004				2003				2004				2003
				(in thousands)
Net revenue:
Domain name registrations				$	20,121			$	22,167			$	63,707			$	68,524
Other products and services					4,068				2,344				10,163				6,797
Advertising					384				1,238				1,040				3,685
				$	24,573			$	25,749			$	74,910			$	79,006

Note 4 - Restatement of Financial Statements

The Company restated its consolidated financial statements as of December 31, 2003 and for the nine months ended September 30, 2003. The restatement reflects the recognition of a deferred income tax asset as a result of a tax election made in the first quarter of 2003 which allowed the Company to record a tax benefit relating to an otherwise non-deductible goodwill impairment charge of $8.3 million recorded by RCOM Europe plc (formerly known as Virtual Internet plc) in the third quarter of 2002. At the time of the goodwill impairment charge, no income tax benefit was recorded as the goodwill impairment was not deductible for tax purposes in the country of domicile of RCOM Europe and therefore the tax benefit was not realizable. In March 2003, the Company filed an election with the Internal Revenue Service ("IRS") to include the consolidated income or loss of RCOM Europe in the Company's consolidated U.S. federal tax return starting in the year 2003. Accordingly, the goodwill that had been impaired for financial reporting purposes in the third quarter of 2002 became deductible in the U.S. over a period of approximately 14 years beginning on January 1, 2003. Based on the Company's expectation of generating future taxable income in the U.S., realization of an income tax benefit related to the tax deductibility of the goodwill is considered more likely than not and therefore a deferred income tax asset of $3.2 million should have been recorded in the first quarter of 2003 upon the change in tax status.

This restatement favorably impacted the provision for income taxes and increased net income for the nine months ended September 30, 2003 by $3.2 million, and increased deferred tax assets and increased total stockholders' equity at September 30 2003 and December 31, 2003 by $3.2 million. The restatement did not affect the Company's cash flow or loss from operations for the nine months ended September 30, 2003. In addition, there was a reclassification from current deferred tax asset to noncurrent deferred tax asset of approximately $7.8 million.

A summary of the aggregate effect of this restatement on the Company's Consolidated Balance Sheet as of December 31, 2003, and the Statement of Operations for the nine months ended September 30, 2003, is shown below.

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

				Nine months ended September 30, 2003
				As Reported				As Restated
Changes to Consolidated Statement of Operations:
Provision (benefit) for income taxes				$	287			$	(2,938	)
Net income				$	1,437			$	4,662
Comprehensive income				$	811			$	4,036
Basic income per share				$	0.04			$	0.12
Diluted income per share				$	0.03			$	0.11

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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 progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we may not inform you immediately if they do. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. We caution investors that our business and financial performance are subject to substantial risks and uncertainties. In evaluating our business, prospective investors should carefully consider the information set forth under the caption "Risk Factors" in addition to the other information set forth herein and elsewhere in our other public filings with the Securities and Exchange Commission.

Restatement of Financial Statements

We restated our financial statements as of December 31, 2003 and for the nine months ended September 30, 2003 to correct an error related to a deferred income tax benefit which should have been recorded in the first quarter of 2003 in connection with RCOM Europe's goodwill impairment charge of $8.3 million in the third quarter of 2002. The goodwill was initially recorded in March 2002 in connection with the acquisition of RCOM Europe. At the time of the goodwill impairment charge in the third quarter of 2002, no income tax benefit was recorded as the goodwill impairment was not deductible for tax purposes in the country of domicile of RCOM Europe and therefore the tax benefit was not realizable. In March 2003, the Company filed an election with the IRS to include the consolidated income or loss of RCOM Europe in the Company's consolidated U.S. federal tax return starting in the year 2003. Accordingly, the goodwill that had been impaired for financial reporting purposes in the third quarter of 2002 became deductible in the U.S. over a period of approximately 14 years beginning on January 1, 2003. Based on the Company's expectation of generating future taxable income in the U.S., realization of an income tax benefit related to the tax deductibility of the goodwill is considered more likely than not and therefore a deferred income tax asset of $3.2 million should have been recorded in the first quarter of 2003 upon the change in tax status. This restatement favorably impacted the provision for income taxes and increased net income for the nine months ended September 30, 2003 by $3.2 million, and increased deferred tax assets and increased total stockholders' equity at December 31, 2003 by $3.2 million. The restatement did not affect the Company's cash flow or loss from operations for the nine months ended September 30, 2003. The error was caused by a material control weakness, which is further discussed in Item 4.

Overview

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

We began processing domain name registrations in the generic top level domains (gTLDs) .com, .net and .org in June 1999 and, as such, were the first registrar accredited by the Internet Corporation for Assigned Names and Numbers (ICANN) to compete in the domain name registration market after ICANN introduced competition in the industry. We had approximately 2.9 million active domain name registrations under management as of September 30, 2004, representing approximately 945,000 customers. Currently, we register, renew and transfer domain names in TLDs such as .com, .net, .org, .biz, .info and ..name and in over 400 country code top level domains (ccTLDs), including .de for Germany and .jp for Japan and sub domains, such as ..co.uk and .org.uk for the United Kingdom.

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

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

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

In late 2002, we began a restructuring program to address the challenges facing our business. The primary goal of our restructuring program is to introduce new systems that will enable us to operate our business more efficiently. For our Retail division, we are building a new and more flexible systems architecture which is intended to enable us to introduce new products and services more rapidly and cost effectively and to improve our operating efficiencies and reduce costs. We believe that by making our technology architecture more flexible and efficient we should be able to achieve these goals. For our Corporate Services division, we are developing a system to automate as much of the order processing and fulfillment for ccTLD registrations as we believe is possible. We anticipate that our new Corporate Services system will enable us to take sales orders and fulfill them on a more highly automated basis, thereby reducing our costs and increasing our efficiency and accuracy. The above noted enhancements for the Retail division and the Corporate Services division systems may not yield the cost savings and/or efficiencies expected.

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

Significant Accounting Policies

Use of Estimates

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

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Net Revenues

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

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

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

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

Our total domain names under management was approximately 3.1 and 2.9 million as of December 31, 2003 and September 30, 2004, respectively.

Other products and services, which primarily consist of email, domain name forwarding, web hosting, application processing fees for new gTLDs, intellectual property protection services related to the introduction of new gTLDs and software, and fees for modifying existing registrations, are sold either as one time offerings or through annual or monthly subscriptions, depending on the product or service. Revenues from our other products and services are recognized ratably over the period in which we provide such services. Revenues from processing fees for domain name applications, which may or may not result in domain name registrations, and other intellectual property protection services related to the introduction of new gTLDs, are recognized upon the provision of 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 or clicks are achieved, provided that no significant company obligation remains and collection of the resulting receivable is probable.

Cost of Revenues

Our cost of revenues consists of the costs associated with providing domain name registrations and other products and services. Cost of revenues for domain name registrations represents amortization of registry fees on a straight-line basis over the registration term, depreciation of the equipment used to process the domain name registrations, fees paid for co-location facilities housing our equipment, and fees paid to the financial institutions to process credit card payments on our

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

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

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

Operating Expenses

Our operating expenses consist of sales and marketing, technology, general and administrative (including non-cash compensation), and amortization of intangibles. Our sales and marketing expenses consist primarily of employee salaries, including customer service representatives, marketing programs such as advertising, and commissions paid to our sales representatives. Technology expenses consist primarily of employee salaries, fees for outside consultants, software licensing fees and related costs associated with the development and integration of new products and services, enhancement of existing products and services, and quality assurance. General and administrative expenses, excluding non-cash compensation, include salaries and other personnel-related expenses for executive, financial and administrative personnel, as well as professional fees, insurance premiums, potential penalties for excessive credit card chargebacks or refunds, and provisions for uncollectible receivables. Facilities costs are allocated across the various operating expense categories. We account for non-cash compensation expense in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. Non-cash compensation expense relates to grants of restricted stock, stock options and warrants to employees, directors, consultants and vendors with exercise prices below fair market value of the underlying stock on the date of grant; for grants through September 30, 2004, noncash compensation charges in future periods will be insignificant. If grants are made in future periods for which non-cash compensation expense is applicable, such noncash expense would reduce our earnings or increase our losses in future periods.

The credit card associations may impose financial penalties if our chargebacks and/or refunds exceed certain thresholds. Such potential penalties are not charged to revenues, but are classified as general and administrative expense. Because the imposition of any potential penalties is at the discretion of the association, subject to contractual limitations, generally accepted accounting principles require that we accrue amounts to cover what we estimate to be the maximum potential penalties that could be imposed under that association's rules. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess accounts previously accrued, as a reduction of general and administrative expense at that time.

If a significant percentage of customers continue to request refunds from us, or contact their bank to request that the amount we charged to their credit card be charged back to us based on claims that their credit card was used fraudulently or without their consent, our business could be materially

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adversely affected. See "Risk Factors" and Note 2 to Consolidated Financial Statements "Commitments and Contingencies — Credit Card Penalties" for additional information in connection with potential penalties that may be imposed by credit card associations and other risks associated with the Company's credit card chargebacks or refunds.

We review our 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 intangibles using estimated undiscounted cash flows. Based on the foregoing factors, if we conclude that an other-than-temporary impairment of intangibles has occurred, we record an impairment write-down.

Income Taxes

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

Net Income (Loss)

Although we were profitable for the first nine months of 2004 and the year 2003, we were not profitable for the second quarter of 2004 or the year 2002. Our net loss for year 2002 included a goodwill impairment write-down and amortization of intangibles of $17.0 million. Although we have recently taken several initiatives intended to reduce our operating expenses, we cannot assure you as to when or if these reductions will be realized. Losses at RCOM Europe and RPI Inc. (formerly RegistryPro, Inc.) contributed to a decline in our profitability. Further, we anticipate that our revenues from advertising will be materially lower in 2004 and future periods compared with prior years. We expect losses at RCOM Europe to impact our profitability negatively through the year 2004 and perhaps beyond. We sold our .pro registry in February 2004 and, accordingly, RPI Inc. should not have a significant negative impact on our profitability in 2004 or beyond. In addition, unless we lower our credit card refunds, we may continue to be potentially liable for significant penalties from credit card associations, which would continue to impact our profitability (see "Risk Factors" for additional information). From January 1, 2002 through September 30, 2004, the Company has accrued a total of $7.7 million for such potential penalties, which amount is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, the Company would reverse any excess accounts previously accrued as a reduction of general and administrative expense at that time. On October 5, 2004 we received a release of our potential liability through September 30, 2003 and accordingly we will record an expense reversal of $5.6 million in the fourth quarter of 2004. For additional information in connection with potential credit card penalties, see "Risk Factors" and Note 2 to Financial Statements, "Commitments and Contingencies – Credit Card Penalties".

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

Results of Operations

The following tables set forth selected unaudited quarterly statement of operations data, in dollar amounts and as a percentage of net revenues, for the three and nine months ended September 30, 2004 and 2003. In our opinion, this information has been prepared substantially on the same basis as

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the audited financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2003, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts set forth below to present fairly the unaudited quarterly results of operations data. The operating results in any quarter are not necessarily indicative of the results to be expected for any future period.

				Three months ended September 30,								Nine months ended September 30,
				2004				2003				2004				2003 (Restated – See Note 4)
Net revenues				$	24,573			$	25,749			$	74,910			$	79,006
Cost of revenues					7,768				7,748				23,974				24,609
Gross profit					16,805				18,001				50,936				54,397
Operating costs and expenses Sales and marketing					7,286				6,098				21,661				19,344
Technology					4,129				5,079				12,980				13,149
General and administrative (including non-cash compensation of $53, $285, $299, and $760, respectively)					4,891				4,877				14,828				22,323
Amortization of intangibles					156				137				471				406
Total operating expenses					16,462				16,191				49,940				55,222
Income (loss) from operations					343				1,810				996				(825	)
Other income, net					239				771				833				2,549
Income before provision for income taxes					582				2,581				1,829				1,724
Provision for income taxes					230				158				777				(2,938	)
Net income					352				2,423				1,052				4,662
Other comprehensive (loss) income:
Unrealized gain (loss) on marketable securities					161				(499	)			70				(839	)
Unrealized gain on foreign currency translation					27				33				31				213
Comprehensive income				$	540			$	1,957			$	1,153			$	4,036
Basic income per share				$	0.01			$	0.06			$	0.04			$	0.12
Diluted income per share				$	0.01			$	0.06			$	0.04			$	0.11
Weighted average number of shares outstanding:
Basic					23,713				37,426				23,640				39,830
Diluted					25,048				38,927				24,952				41,264

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				Three months ended September 30,								Nine months ended September 30,
				2004				2003				2004				2003 (Restated – See Note 4)
Net revenues					100	%			100	%			100	%			100	%
Cost of revenues					32				30				32				31
Gross profit					68				70				68				69
Operating costs and expenses
Sales and marketing					30				24				29				24
Technology					17				20				17				17
General and administrative (includes non-cash compensation of 0% and 0%, respectively)					20				19				20				28
Amortization of intangibles					—				—				1				1
Total operating costs and expenses					67				63				67				70
Income loss from operations					1				7				1				(1	)
Other income, net					1				3				1				3
Income before provision for income taxes					2				10				2				2
Provision for income taxes					1				1				1				(4	)
Net income					1				9				1				6
Unrealized loss on marketable securities					1				(2	)			—				(1	)
Unrealized gain on foreign currency translation					—				—				—				—
Comprehensive income					2	%			7	%			1	%			5	%

Three months ended September 30, 2004 compared to three months ended September 30, 2003

Net Revenues

Total net revenues decreased 5% to $24.3 million for the third quarter of 2004 from $25.7 million for the third quarter of 2003.

Domain name registrations.    Recognition of revenues from domain name registrations decreased 9% to $20.1 million for the third quarter of 2004 from $22.2 million for the third quarter of 2003. The decrease was due in part to a lower number of domain names under management, and in part to lower average prices per year of subscription term.

Other Products and Services.    Revenues from other products and services increased 74% to $4.1 million for the third quarter of 2004 from $2.3 million for the third quarter of 2003. The increase was due primarily to increased unit volumes of web hosting services and WebSiteNow!^TM, our template-based do-it-yourself website building tool.

At September 30, 2004, we had $90.7 million of deferred revenue compared with $89.8 million at June 30, 2004, representing an increase of $1.0 million during the third quarter of 2004. The increase was due to sales of domain name registrations in the third quarter of 2004 exceeding revenue recognition of previously recorded sales. Our deferred revenue balance is an indicator of revenue to be recognized in future periods.

Advertising.    Revenues from advertising decreased 69% to $0.4 million for the third quarter of 2004 from $1.2 million for the third quarter of 2003. From the fourth quarter of 2002 through the third quarter of 2003, our largest advertising customer, a provider of web-hosting services, accounted for approximately $1.0 million of advertising revenues per quarter. However, once we began selling web-hosting services directly to our own customers, this advertiser became a competitor and so we decided to discontinue our advertising relationship with them. We have not sold advertising to this customer since September 30, 2003 and we do not anticipate any additional revenue from this customer. Accordingly, our advertising revenue has declined by approximately $1.0 million in each of

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the past four quarters compared with the level of advertising revenue in the third quarter of 2003, and, unless we can replace these revenues with advertising sales to other customers, we expect to continue at approximately the same level of advertising revenues in the next quarter as well. Our sales of web-hosting services directly to our own customers are classified as revenues from other products and services.

Cost of Revenues

Cost of Revenues.    Total cost of revenues was $7.8 million and $7.7 million for the third quarter of 2004 and 2003, respectively.

Cost of Domain Name Registrations.    Cost recognized for domain name registrations decreased 3% to $7.1 million for the third quarter of 2004 from $7.3 million for the third quarter of 2003. The decrease was primarily due to a lower number of domain names under management and to lower data center expenses.

Cost of Other Products and Services.    Cost of other products and services increased 51% to $0.7 million for the third quarter of 2004 from $0.5 million for the third quarter of 2003. The increase was related to the higher revenue from other products and services.

Gross Profit Margin

Our gross profit margin decreased to 68% in the third quarter of 2004 from 70% in the third quarter of 2003, primarily as a result of lower advertising revenue in the third quarter of 2004, and in part due to lower average sales prices of domain name registrations in the third quarter of 2004.

Operating Expenses

Total operating expenses increased 2% to $16.5 million for the third quarter of 2004 from $16.2 million for the third quarter of 2003.

Sales and Marketing.    Sales and marketing expenses increased 19% to $7.3 million for the third quarter of 2004 from $6.1 million for the third quarter of 2003. The increase was primarily due to increases in television and radio advertisements and online media spending. We anticipate that our marketing expense may increase during the remainder of 2004.

Technology.    Technology expenses decreased 19% to $4.1 million for the third quarter of 2004 from $5.1 million for the third quarter of 2003. The decrease resulted in part from costs incurred in the third quarter of 2003 related to development of the ..pro registry, offset in part by higher costs incurred in 2004 for upgrading and improving our systems. We sold the .pro registry in February 2004, therefore no comparable development costs were incurred in the third quarter of 2004. We anticipate that technology expenses will remain high through the end of 2004 as we continue our efforts to upgrade and improve our systems.

General and Administrative.    General and administrative expenses were $4.9 million in both the third quarter of 2004 and 2003. Generally accepted accounting principles require that we accrue amounts to cover what we estimate to be the maximum potential financial penalties that could be imposed by credit card associations if our chargebacks and/or refunds exceed certain thresholds. Accordingly, our general and administrative expense included accruals of $0.5 million and $0.6 million in the third quarter of 2004 and 2003, respectively, for such potential penalties. As of September 30, 2004 our balance sheet reflected an accrued liability of $7.7 million for such potential credit card penalties. On October 5, 2004, we obtained a release from our credit card processor for any penalties which any credit card association may be entitled to impose for excessive chargebacks and refunds processed through September 30, 2003. Accordingly, in accordance with generally accepted accounting principles applicable to extinguishments of liabilities, in the fourth quarter of 2004 we will reverse the expense accruals previously recorded during the period January 1, 2002 through September 30, 2003 in the amount of $5.6 million. For additional information in connection with potential credit card penalties, see "Risk Factors" and Note 2 to Financial Statements, "Commitments and Contingencies – Credit Card Penalties".

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Other Income, Net

Other income, net, which consists of interest income, interest expense, and other items of nonoperating income and expense, decreased to $0.2 million for the third quarter of 2004 from $0.8 million for the third quarter of 2003. The decrease was due primarily to a reduction of interest income as a result of our lower cash balance, which resulted from our self-tender offer for $120 million of our common stock and warrants which was completed in September 2003.

Provision for Income Taxes

The provision for income taxes in the third quarter of 2004 was $0.2 million, representing an effective tax rate of 43% of pretax income. In the third quarter of 2003, we recorded a tax provision of $0.2 million, representing an effective rate of 6% of pretax income. The lower-than-statutory effective tax rate in the third quarter of 2003 resulted in part from our receipt of tax-free interest income from 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 the unsolicited acquisition proposals we received in early 2003, and in part from adjustments to the financial statement tax provision based on finalization of year 2002 tax returns in September 2003.

Earnings Per Share — Weighted Average Number of Shares

As a result of the completion in September 2003 of the Company's $120 million self-tender offer, in which the Company purchased 17,910,347 shares of its common stock and warrants to purchase 987,283 shares of its common stock (based on the conversion of such warrants on a cashless basis at the $6.35 per share offer price), the number of shares outstanding declined as of that date. The lower weighted average number of shares will have the effect of increasing net income (loss) per share in future periods as compared to earlier periods when the number of outstanding shares was larger. The use of $120 million of our cash to consummate the self-tender offer has reduced and will continue to reduce our future interest income because our available cash and investment balances will be lower than periods before the self-tender offer.

Nine months ended September 30, 2004 compared to nine months ended September 30, 2003

Net Revenues

Total net revenues decreased 5% to $74.9 million in the first nine months of 2004 from $79.0 million in the first nine months of 2003.

Domain name registrations.    Recognition of revenues from domain name registrations decreased 7% to $63.7 million for the first nine months of 2004 from $68.5 million for the first nine months of 2003. The decrease was due in part to a lower number of domain names under management and in part to lower average sales prices per year of subscription term.

Other Products and Services.    Revenues from other products and services increased 50% to $10.2 million for the first nine months of 2004 from $6.8 million for the first nine months of 2003. The increase was due primarily to increased unit volumes of web hosting services, WebSiteNow!, and email services, and in part to $0.3 million from non-recurring sales of .pro products and services in 2004.

At September 30, 2004, we had $90.9 million of deferred revenue compared with $86.9 million at December 31, 2003, representing an increase of $4.0 million during the first nine months of 2004. The increase was due to sales of domain name registrations in the first nine months of 2004 exceeding revenue recognition of previously recorded sales. Our deferred revenue balance is an indicator of revenue to be recognized in future periods.

Advertising.    Revenues from advertising decreased 72% to $1.0 million for the first nine months of 2004 from $3.7 million for the first nine months of 2003. From the fourth quarter of 2002 through the third quarter of 2003, our largest advertising customer, a provider of web-hosting services,

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accounted for approximately $1.0 million of advertising revenues per quarter. However, once we began selling web-hosting services directly to our own customers, this advertiser became a competitor and so we decided to discontinue our advertising relationship with them. We have not sold advertising to this advertising customer since September 30, 2003 and we do not anticipate any additional revenue from this customer. Accordingly, our advertising revenue has declined by approximately $1.0 million in each of the past four quarters compared with the level of advertising revenue in the third quarter of 2003, and, unless we can replace these revenues with advertising sales to other customers, we expect to continue at approximately the same level of advertising revenues in the next quarter as well. Our sales of web-hosting services directly to our own customers are classified as revenues from other products and services.

Cost of Revenues

Cost of Revenues.    Total cost of revenues decreased 3% to $24.0 million in the first nine months of 2004 from $24.6 million in the first nine months of 2003.

Cost of Domain Name Registrations.    Cost recognized for domain name registrations decreased 4% to $22.4 million for the first nine months of 2004 from $23.4 million for the first nine months of 2003. The decrease was due in part to a lower number of domain names under management and in part to a reduction of data center expenses.

Cost of Other Products and Services.    Cost of other products and services increased 30% to $1.5 million in the first nine months of 2004 from $1.2 million in the first nine months of 2003, related to the higher revenue from other products and services.

Gross Profit Margin

Our gross profit margin was approximately 68% for the first nine months of 2004 compared with 69% for the first nine months of 2003. The decline in gross profit margin was due to lower advertising revenues in the first nine months of 2004.

Operating Expenses

Total operating expenses decreased 10% to $49.9 million for the first nine months of 2004 from $55.2 million for the first nine months of 2003.

Sales and Marketing.    Sales and marketing expenses increased 12% to $21.7 million for the first nine months of 2004 from $19.3 million for the first nine months of 2003. The increase was primarily due to increases in television and radio advertisements and online media spending. We anticipate that our marketing expense may increase during the remainder of 2004.

Technology.    Technology expenses decreased 1% to $13.0 million for the first nine months of 2004 from $13.1 million for the first nine months of 2003. The decrease resulted primarily from costs incurred in the first nine months of 2003 related to development of the .pro registry, offset by higher costs incurred in 2004 for upgrading and improving our systems. We sold the .pro registry in February 2004, no comparable development costs were incurred in the first nine months of 2004. We anticipate that technology expenses will remain high in the coming periods as we continue our efforts to upgrade and improve our systems.

General and Administrative.    General and administrative expense decreased by $7.5 million to $14.8 million for the first nine months of 2004, from $22.3 million for the first nine months of 2003. The decrease was primarily due to the incurrence in 2003 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. Also contributing to the decrease was a reduction of $1 million in our bad debt expense in the first nine months of 2004 as a result of our collections of past due receivables. The aforementioned factors were offset in part by a $1.4 million provision for settlement of certain litigation – see Note 2 to Financial Statements for further information. Generally accepted accounting principles require that we accrue amounts to cover what we estimate to be the

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maximum potential financial penalties that could be imposed by credit card associations if our chargebacks and/or refunds exceed certain thresholds. Accordingly, our general and administrative expense included accruals of $1.5 million and $1.9 million in the first nine months of 2004 and 2003, respectively, for such potential penalties. As of September 30, 2004 our balance sheet reflected an accrued liability of $7.7 million for such potential credit card penalties. On October 5, 2004, we obtained a release from our credit card processor for any penalties which any credit card association may be entitled to impose for excessive chargebacks and refunds processed through September 30, 2003. Accordingly, in accordance with generally accepted accounting principles applicable to extinguishments of liabilities, in the fourth quarter of 2004 we will reverse the expense accruals previously recorded during the period January 1, 2002 through September 30, 2003 in the amount of $5.6 million. For additional information in connection with potential credit card penalties, see "Risk Factors" and Note 2 to Financial Statements, "Commitments and Contingencies – Credit Card Penalties".

Other Income, Net

Other income, net, which consists of interest income, interest expense, and other items of nonoperating income and expense, decreased to $0.8 million for the first nine months of 2004 from $2.5 million for the first nine months of 2003. The decrease was primarily due to a reduction of interest income as a result of our lower cash balance, which resulted from our self-tender offer for $120 million of our common stock and warrants which was completed in September 2003.

Provision for Income Taxes

The provision for income taxes in the first nine months of 2004 was $0.8 million, representing an effective tax rate of 43% of pretax income. In the first nine months of 2003 we recorded a tax benefit, net, of $2.9 million, primarily as a result of our filing of an election with the IRS to include the consolidated income or loss of RCOM Europe in our consolidated U.S. federal tax return starting in the year 2003. That election resulted in our recording a deferred tax benefit of $3.2 million in the first quarter of 2003 in connection with RCOM Europe's goodwill impairment charge of $8.3 million which had been recorded in the third quarter of 2002. See further explanation above under "Restatement of Financial Statements". Our provision for income taxes in the first nine months of 2004 and 2003 was also favorably impacted by our receipt of tax-free interest income from our investment portfolio, and in part from adjustments to the financial statement tax provision based on finalization of year 2002 tax returns in September 2003.

Liquidity and Capital Resources

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

At September 30, 2004, our cash and cash equivalents, short-term investments and marketable securities totaled $103.9 million, compared with $94.6 million at December 31, 2003, representing an increase of $9.3 million during the first nine months of 2004. During the first nine months of 2004 we generated $10.7 million of cash from operations, we incurred $2.7 million for capital expenditures, and we received $1.0 million proceeds from the sale of a property, and $0.4 million from exercises of options and warrants.

We currently expect our expenses for technology to remain at current levels during the remainder of 2004 and perhaps beyond, and we expect our sales and marketing expense to increase from 2003 levels for the full year 2004 and perhaps beyond. We believe that our current balance of cash,

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short-term investments and marketable securities together with anticipated cash to be provided from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, when compared to our financial position prior to the consummation of our $120 million self-tender offer in September 2003, we have significantly reduced our cash position and our future interest income, reduced our ability to engage in significant transactions without additional debt or equity financing, reduced our ability to cover existing contingent or other future liabilities, and potentially negatively impacted our liquidity during future periods of increased capital requirements or operating expenses.

A summary of our contractual obligations for operating leases and other commitments as of September 30, 2004 is as follows:

				Payments Due by Period
				Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
				(in thousands)
Operating lease obligations				$	5,170			$	1,228			$	2,927			$	967			$	48
Purchase obligations(1)					2,392				1,190				1,202				—				—
Total				$	7,562			$	2,418			$	4,129			$	967			$	48

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

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RISK FACTORS

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

Risks Related to Our Industry and Our Business

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

Although we were profitable for the year 2003 and the first nine months of 2004, we were not profitable for the second quarter of 2004, or the years 2002 and 2001. Our net loss for 2002 included a goodwill impairment writedown of $17.0 million and our net loss for 2001 included a $32.5 million writedown of intangibles. As of September 30, 2004 our accumulated deficit totaled $37.3 million. We expect our technology costs to continue at high levels throughout 2004 as we continue our efforts to upgrade and improve our systems and we cannot assure you when our technology costs will decrease. In addition, losses at our RCOM Europe subsidiary and RegistryPro subsidiary (now RPI Inc.) contributed to a decline in our profitability. We are expecting losses at RCOM Europe to impact our profitability negatively through the year 2004 and perhaps beyond and we cannot assure you that RCOM Europe will achieve profitability. We sold the .pro registry in February 2004 and, accordingly, RPI Inc., which has no operations, will not have a significant negative impact on our profitability in 2004 or beyond. We have also budgeted for a significant increase in our marketing expense in 2004 compared with 2003, however, we may choose not to spend all of the money budgeted for marketing and we cannot assure you that, if we do spend additional money on increased marketing, any additional marketing expenses will result in additional revenues. In addition, unless we lower the number of credit card refunds and maintain a low number of chargebacks relative to total credit card transactions processed, we may continue to be subject to significant penalties that would impact our profitability. We also anticipate that our revenues from advertising will be materially lower in future periods. Further, if we are forced to lower our prices due to increased competition in the industry and we are unable to reduce our expenses at a commensurate rate, then we may not be able to operate profitably. For all these reasons, we cannot assure you that we will be able to operate profitably or sustain or attain positive cash flow in the future.

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

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

If we fail to complete our restructuring program successfully, and in particular fail to upgrade and improve our systems in a timely and cost-effective manner, or to the extent that we had originally anticipated, our business, financial condition and results of operations could be materially adversely affected. In connection with our restructuring efforts, we have incurred, and expect to continue to incur through the remainder of 2004, significant technology expenditures as we continue to invest in systems architecture improvements, and seek to improve our business processes. However, 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

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throughout our organization and has significant execution risks. We have already experienced significant delays in various stages of these projects which has increased our anticipated costs for these projects. In addition, we cannot assure you when or if these projects will be successfully completed. Even if our new Retail systems architecture is launched successfully, we cannot assure you that it will contain all of the features and functionality that we originally planned or that it will enable us to reduce our expenses to the extent and in the time frames we originally contemplated, or to successfully launch new products or services or upgrade current ones in the time or manner that we originally contemplated. 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. The significant delays which we have experienced to date in the launch of our new systems have in turn caused delays in our ability to launch new products or services and upgrades of current ones. Our inability to meet the needs of our customers will affect our ability to effectively compete, to attract and retain customers and to market new products and services.

We cannot assure you that our 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.

Although the marketplace for new domain names has been growing, we face strong competition in the domain name registration services industry which we expect will continue to intensify and we may not be able to maintain or improve our competitive position or historical market share.

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

Although there was an increase in the marketplace for new .com and .net domain names in the first nine months of 2004, our total domain names under management has declined. The total number of .com and .net domain names in the Verisign registry increased by approximately 19% during the first nine months of 2004, whereas the total number of .com and .net domain names for which we are the registrar decreased by 3%. In addition, we experienced a decrease of approximately 6,000 in the total number of domain name registrations, renewals and transfers to us for the quarter ended September 30, 2004 (approximately 495,000) as compared with the quarter ended September 30, 2003 (approximately 501,000), and our total domain names under management declined from approximately 3.1 million as of September 30, 2003 to approximately 2.9 million as of September 30, 2004.

When we began providing online domain name registrations in the .com, .net and .org domains in June 1999, we were one of only five testbed competitive registrars accredited by ICANN to interface directly with Network Solutions' registry for .com, .net and .org domain names. After the testbed period ended ICANN began accrediting new registrars and there are currently several hundred ICANN accredited registrars to register domain names in one or more of the gTLDs, although not all of these accredited registrars are currently operational. In addition, many of these registrars offer domain name registrations and related products and services at lower prices than we do. The continued introduction of registrars and resellers into the domain name registration industry, the increased pricing pressures and the rapid growth of some who have entered the industry are making 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 under management or of our market share, our business, financial condition and results of operations could be materially adversely affected.

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

In addition to competition from other registrars, we also face competition from resellers including, among others, ISPs, web-hosting companies, Internet portals and search engines, telecommunication and cable companies, systems integrators, consulting firms and Internet professional service firms, who align themselves with accredited registrars to resell domain name

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

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

We recognized lower revenues from domain name registrations for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. The decrease was due in part to a lower number of domain names under management and in part to lower average prices per year of subscription term. We believe that increased competition and sensitivity to pricing have been the primary causes of the decline in our number of names under management. Some of our competitors offer domain name registrations at a wholesale price level minimally above the registry fees or even below the registry fees when bundling registrations with other products or services. Other competitors have lower pricing or have reduced and may continue to reduce their pricing for domain name registrations, renewals and transfers both for short-term promotions and on a permanent basis. Some of these competitors have experienced a significant increase in their registrations, suggesting that customers are becoming more price sensitive. Further, some of our competitors offer 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 to develop alternative sources of revenue, our business, financial condition and results of operations would be materially adversely affected.

Our business depends in great part on our customers' renewal of their domain name registrations through us and we cannot assure you that those customers who will renew their domain name registrations will do so through us. Although our renewal rate for paid domain name registrations for the twelve months ended September 30, 2004 was approximately 60%, our total domain name registrations under management decreased by 8% during the year ended December 31, 2003 and have declined from a peak of approximately 3.8 million as of September 30, 2001 to approximately 2.9 million as of September 30, 2004. Also, as discussed further below, our renewal rates could be adversely affected by any future modifications we may make to our SafeRenew program. If we are unable to increase the number of new domain name registrations or increase our overall renewal rate, the combination of fewer new customers, fewer customers renewing their registrations through us and the transfers of registrations to other registrars will have the cumulative effect of decreasing the number of domain name registrations under our management. Not only could this cause our revenues from domain name registrations to decrease, but we would be left with fewer domain name customers to whom we could market our other products and services. A decline in our domain name registrations or renewals could materially adversely affect our business, financial condition and results of operations.

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

As competition in the domain name industry continues to intensify, a key part of our strategy is to diversify our revenue base by offering value-added products and services in addition to domain

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name registrations. Although we have recently experienced increased sales for other products and services such as email, web hosting and website creation tools, our efforts to date have still not resulted in substantial diversification. Further, it will be more difficult to achieve substantial diversification in the near future as we continue to focus significant resources on our restructuring efforts. Our primary business, domain name registrations, renewals and transfers, generated approximately 82% of our net revenues during the quarter ended September 30, 2004. We cannot assure you that we will be able to attain the market's confidence in us as a reliable provider of products and services outside of our core business. If, over time, we fail to offer products and services that meet our customers' needs and that are competitive with those offered in the marketplace, our number of domain names under management continues to decline, or our customers elect not to purchase our products and services, our anticipated net revenues may fall below expectations. Our inability to successfully diversify our revenue base from domain name registrations, together with a reduction in our number of domain names under management, could materially adversely affect our business, financial condition and results of operations.

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

A substantial majority of our revenues originate from online credit card transactions. Under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder's signature at the time of the transaction, even though the financial institution issuing the credit card may have authorized the transaction. We are experiencing high rates of refunds to customers in excess of the contractual specified levels, which, combined with high rates of chargebacks in the past, have resulted in the assessment of financial penalties by two credit card associations for periods through December 31, 2001. If we are unable to lower our refund rates to levels defined in the credit card associations' rules, we could continue to face such penalties and may lose our rights to accept credit card payments from customers through one or more credit card associations. Under one association's rules, additional potential penalties may be imposed at the discretion of the association, and we would be contractually obligated to pay such penalties if assessed. Any such penalties would be imposed on our credit card processor by the association, and under our contract with our credit card processor, we are required to reimburse such penalties.

Because the imposition of any potential penalties is at the discretion of the association, subject to contractual limitations, generally accepted accounting principles require that we accrue charges to general and administrative expense to cover what we estimate to be the maximum potential penalties that could be imposed under that association's rules for transactions occurring during those periods. Accordingly, we accrued expense charges of $0.5 million and $1.5 million for the three and nine months ended September 30, 2004, respectively, and $0.6 million and $1.9 million for the three and nine months ended September 30, 2003, respectively.

However, in October 2004, we obtained a release from our credit card processor for any penalties which any credit card association may be entitled to impose for excessive chargebacks and refunds processed through September 30, 2003. Accordingly, in accordance with generally accepted accounting principles applicable to extinguishments of liabilities, in the fourth quarter of 2004 we will reverse the expense accruals previously recorded during the period January 1, 2002 through September 30, 2003 in the amount of $5.6 million. That expense reversal will be recorded as a reduction of general and administrative expense. We are continuing to have discussions and correspondence with our credit card processor regarding these potential penalties and based on these discussions and correspondence, we believe that it is likely that we will not be required to pay the full amount accrued to date, or perhaps any amount at all. However our credit card processor will not confirm that the credit card association will not exercise its contractual rights to assess penalties for periods after September 30, 2003. Accordingly, we are required to continue to accrue for such potential penalties. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no

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penalties will be imposed, we would reverse any excess accounts previously accrued as a reduction of general and administrative expense at that time.

On the other hand, if we cannot reduce our refund and/or chargeback rates to levels that are acceptable to the credit card associations, and maintain acceptable levels, we will continue to face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

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

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

We face certain risks as a result of numerous recent changes to our management team and challenges in retaining 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 and in the first nine months of 2004, we have experienced a significant number of changes to the members of our management team and average voluntary turnover rates among our employees which are significantly higher than the average voluntary turnover rates published by the Bureau of Labor Statistics. As a result, many of our managers are still learning about our company and our industry. In addition, many of our employees have not worked with one another for long periods of time and may not be able to develop effective working relationships. If we cannot master the details of our business and our market or work together effectively to solve the operational challenges that exist in our business, then our business will be harmed, and we will incur additional costs in seeking and retaining new management personnel.

In particular, the success of our current restructuring goals and the development of our systems architecture are highly dependent upon the work of our technology team. In April 2004, our Chief Technology Officer resigned, although we do not believe that the departure of this individual has significantly impacted the success of the implementation of our new systems architecture, because we appointed a person who has been with the company for two years and had been responsible for managing significant components of our systems architecture as our new Chief Information Officer and this person is now in charge of the development of our systems architecture, as well as our technology team. However, the departure of our Chief Technology Officer and others within our technology team may have caused delays in the development of our new systems architecture. In

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addition, we compete with other technology and Internet companies, as well as companies in other industries, in hiring and retaining highly trained personnel and the competition for such individuals has increased in the past year. Accordingly, if we experience additional departures and vacancies in our technology team, we may incur additional costs in seeking and retaining new personnel. Although we do not believe that the departure of any one individual would significantly impact the timing or success of the implementation of our new system, the loss of a group of individuals from our technology team could significantly impact the development of our new systems and could have a material adverse effect on our business.

In addition, in October 2004, we entered into a Separation Agreement with our General Manager, Corporate Services. However, we also, at the same time, hired a new Vice President of Sales and restructured our Corporate Services division to create another new management position which we immediately filled with a person who has been with the company for almost three years. Accordingly, we do not believe that the departure of our General Manager will significantly impact our sales or the success of this division. However, our restructuring process has also resulted in significant organizational changes and morale challenges which, together with the additional recent changes within our Corporate Services division, continue to put our company at risk for high turnover this year. Although we have implemented several new programs in order to retain employees and keep them focused on our goals, morale challenges may persist, particularly in our RCOM Europe office and our Corporate Services division, and we continue to face the challenge of keeping our employees motivated and focused on our strategies and goals. We have moved some of our operations from our RCOM Europe office to our Canadian facility, causing some uncertainty among the remaining employees there, and recently several individuals have left our RCOM Europe office. The loss or demotivation of our employees, particularly from our sales, operations or technology teams, could harm our business and if we continue to experience departures and morale challenges, it could significantly impact our ability to operate our RCOM Europe office and, accordingly, the success of our Corporate Services division and the company as a whole.

We have made, and continue to make, significant efforts and expenditures in order to comply with recently enacted Sarbanes Oxley and Public Company Accounting Oversight Board ("PCAOB") regulations, but we may not be able to conclude that our internal control over financial reporting is effective.

In response to recently enacted changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes Oxley Act of 2002 and regulations issued by the PCAOB, we continue to devote significant resources and time to comply with these new requirements. We are currently in the process of documenting and testing our internal control over financial reporting to provide the basis for management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004. During the documentation process, we have identified a number of control design deficiencies, including insufficient controls by the Company over transactions processed by outside service organizations, and in addition, preliminary tests have identified control weaknesses relating to, among other things, pricing and other billing discrepancies with a number of our Corporate Services customers. The process of documentation and testing is continuing and we anticipate that the process will be completed by the end of the current fiscal year. Additional testing may identify additional weaknesses in our internal control over financial reporting. After completing the documentation and testing, we may conclude that the identified control weaknesses rise to the level of significant deficiencies or material weaknesses in internal control over financial reporting.

We are working to design and implement appropriate control procedures in order to remediate the weaknesses that have been identified to date in our internal control over financial reporting. Completing the documentation, performing the testing and implementing remediations has required significant expenditures and will continue to require significant expenditures in the future. In addition to such expenditures, compliance with these new rules has also required significant time and attention by our management, which has caused disruptions to normal business operations. However, despite the expense, time and effort being expended on these activities, with respect to the control weaknesses relating to pricing and other billing discrepancies with a number of our Corporate Services customers,

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notwithstanding our ongoing work to remediate these issues, we will not be able to remediate these control weaknesses by December 31, 2004, and these control weaknesses will likely represent significant deficiencies or material weaknesses. Also, we cannot assure you that we will be successful in our efforts to remediate all of the other control weaknesses by December 31, 2004. Accordingly, it is likely that we will not be able to conclude that our internal control over financial reporting is effective as of December 31, 2004. We are not certain of the consequences of an inability to conclude that our internal control over financial reporting is effective, although possible consequences could include actions by regulatory authorities such as the SEC or the Nasdaq National Market, and a decline in the trading price of our common stock.

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

From the fourth quarter of 2002 through the third quarter of 2003, our largest advertising customer, a provider of web hosting services, accounted for a significant portion of our advertising revenue. In the third quarter of 2003, revenues from this advertiser represented approximately 80% of our overall advertising revenue. However, once we began to offer web-hosting services to our customers, this advertiser became a competitor and so we decided to discontinue or advertising relationship with them. Accordingly, we did not sell advertising to this advertising customer during the fourth quarter of 2003 or the first nine months of 2004 and we do not anticipate any additional revenue from this advertising customer in the future. This decision was part of a broader strategic decision to discontinue pursuing advertising revenue from partners who sell products and services that are potentially competitive with the Company's products and services. We cannot assure you that we will be able to replace these lost revenues with other advertising revenue or with revenues from sales of web hosting services and other value added 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.

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

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

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

•	diversion of management attention from running our existing business;

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

•	high employee turnover amongst the employees of the acquired company, which we have experienced in particular in our RCOM Europe Corporate Services office;

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

•	potential exposure to additional liabilities;

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

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

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

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

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

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

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

•	sufficiency of qualified labor pool in international markets;

•	political and economic instability in some international markets;

•	high employee turnover rates;

•	competition with foreign companies;

•	legal uncertainty regarding liability and compliance with foreign laws;

•	currency fluctuations and exchange rates;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We currently work with hundreds of country code registries operating hundreds of country code top level domains (ccTLDs) throughout the world. Country code registries may be administered by the host country, entrepreneurs or other third parties. Different country code registries require registrars to comply with specific regulations. Many of these regulations vary from ccTLD to ccTLD. If we fail to comply with the regulations imposed by country code registries, these registries will likely prohibit us from registering or continuing to register domain names in their ccTLDs. Further, in most cases, our rights to provide ccTLD domain name registration services are not governed by written

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contract. In the case of our existing written contracts, there is uncertainty as to which country's law may govern. As a result, we cannot be certain that we will continue to be able to register domain names in the ccTLDs we currently offer. If these registry businesses cease operations or otherwise fail to process domain name registrations or the related information in ccTLDs, we would be unable to honor the subscriptions of registrants who have registered, or are in the process of registering, domain names in the applicable ccTLD. In addition, the process for registering domain names with many of the ccTLD registries necessitates significant manual efforts to process numerous paper documents, resulting in high labor costs and an increased potential for clerical errors. The rules, requirements and processes of the registries are also subject to change, and each time a registry makes a change, we must make corresponding changes to our systems or processes. If we are unable to keep up with these administrative burdens or to honor a substantial number of subscriptions for our customers or if the ccTLD registries fail to process our customers' domain name registrations in a timely and accurate fashion, we could face claims of loss from our registrants and our business, financial condition and results of operations could be materially adversely affected.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Our Technology and the Internet

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

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

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

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

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

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

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

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

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

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

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

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any significant damage to our systems or disruption in our ability to provide our services would have a material adverse effect on our business, financial condition and results of operations.

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

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

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

We do not develop and maintain all of the products and services that we offer. In addition, we outsource parts of operations to third parties, including the back office operations for a part of our business. Accordingly, we are dependent, in part, on the services of other third-party service providers. We offer certain of our services to our customers through various third-party service providers engaged to perform these services on our behalf. In the event that these service providers fail to maintain adequate levels of support or if they discontinue their lines of business or cease or reduce operations, our business and operations may be impacted negatively and we may be required to pursue replacement third-party relationships, which we may not be able to obtain on as favorable terms or at all. Although we continually evaluate our relationships with our third-party service providers and plan for contingencies if a problem should arise with a provider, transitioning services and data from one provider to another can often be a complicated and time consuming process and we cannot assure that if we need to switch a provider we would be able to do so on a completely seamless basis, or at all. If we were unable to complete a transition to a new provider on a timely basis, or at all, we could be forced to either temporarily or permanently discontinue certain services. Any failure to provide services would have a negative impact on our revenues. In addition, certain of our services are provided by non-U.S. based companies and to the extent that we encounter difficulties with our non-U.S. based suppliers, we may encounter difficulties enforcing agreements with entities located outside of the United States.

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

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

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

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

•	to enhance our existing products and services;

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

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

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

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

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

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

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

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

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

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

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

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

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

•	user privacy and security issues;

•	the expansion of intellectual property rights;

•	pricing controls;

•	characteristics and quality of products and services;

•	consumer protection;

•	cross-border commerce;

•	libel and defamation;

•	copyright, trademark and patent infringement;

•	pornography; and

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

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

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

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

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

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

Investment Risks

Our stock price is highly volatile.

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

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

•	limited availability of our shares on the open market;

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

•	our actual or anticipated net cash inflow or outflows from operations, capital expenditures or financing-related items;

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

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•	industry conditions and trends; and

•	interest in the Company by potential acquirors.

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

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

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

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

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

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

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

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

As of November 3, 2004, our executive officers and directors beneficially owned approximately 15.2% of our common stock. Accordingly, these stockholders could have significant influence over the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations or a sale of all or substantially all of our assets. The interests of these stockholders may differ from the interests of our other stockholders. In addition, third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership.

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

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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk is primarily related to interest rate 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

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having a maturity of not more than two years, with a majority having a maturity of less than 90 days. Accordingly, we estimate that 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, 2004 the fair value of our investments in publicly traded stocks was $0.1 million. We did not have any foreign currency hedging or derivative instruments at September 30, 2004.

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, 2004 we had no long-term debt.

Our consolidated financial statements are denominated in U.S. dollars. We derived 10% of our net revenues in the third quarter of 2004 from operations outside of the United States. We face foreign currency risks in part because our European subsidiaries receive revenues and incur most of their expenses in local currencies, and in part because the expenses of our Canadian customer service center are paid in Canadian dollars. Our foreign currency risk related to European revenues received in local currencies is offset in part by the fact that our European subsidiaries incur most of their expenses in their local currencies. Our European subsidiaries use the local currency as their functional currency. Because the financial results of our foreign subsidiaries are translated into U.S. dollars for consolidation, as exchange rates vary, such financial results may vary from expectations and may adversely impact our operating results and our net income (loss).

Item 4.    Controls and Procedures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met and cannot detect all deviations. Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the Company have been detected. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of September 30, 2004, that subject to the foregoing, our disclosure controls and procedures are effective at the reasonable assurance level 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. While management is aware of the control weaknesses in internal control over financial reporting described below, we believe that the Company has implemented compensating controls and procedures designed to ensure that the disclosures in this report, including the financial statements and other financial information, are accurate in all material respects.

Under Securities and Exchange Commission rules adopted as required by Section 404 of the Sarbanes Oxley Act of 2002, our management must assess the effectiveness of our internal control over financial reporting as of December 31, 2004 and include in our annual report to shareholders management's assessment as to whether the company's internal control over financial reporting is effective. In addition, our independent registered public accountants must attest to and report on management's assessment. We are currently in the process of documenting and testing our internal control over financial reporting to provide the basis for management's assessment. During the documentation process, we have identified a number of control design deficiencies, including insufficient controls over transactions processed by certain outside service organizations, and in addition, preliminary tests have identified control weaknesses relating to, among other things, pricing and other billing discrepancies with a number of our Corporate Services customers. The process of documentation and testing is continuing and we anticipate that the process will be completed by the end of the current fiscal year. Additional testing may identify additional weaknesses in our internal control over financial reporting. After completing the documentation and testing, we may conclude that the identified control weaknesses rise to the level of significant deficiencies or material

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weaknesses in internal control over financial reporting. We are working to design and implement appropriate control procedures in order to remediate the weaknesses that have been identified to date in our internal control over financial reporting. With respect to the control weaknesses relating to pricing and other billing discrepancies with a number of our Corporate Services customers, notwithstanding our ongoing work to remediate these issues, we will not be able to remediate these control weaknesses by December 31, 2004, and these control weaknesses will likely represent significant deficiencies or material weaknesses. Also, we cannot assure you that we will be successful in our efforts to remediate all of the other control weaknesses by December 31, 2004. Accordingly, it is likely that we will not be able to conclude that our internal control over financial reporting is effective as of December 31, 2004.

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

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

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

Prior to the initial filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2003, the Company completed an evaluation under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2003 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. However, as a result of the Company's decision to restate its financial statements, the Company completed in early November 2004, prior to filing this report, a second evaluation under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003. Based on this second evaluation, the Company's principal executive officer and principal financial officer concluded that, solely as result of the material weakness referred to above, the Company's disclosure controls and procedures were not effective as of December 31, 2003. However, as a result of the analysis and calculations discussed above and the remediation of the material weakness,

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management believes that the financial statements included in this report fairly present in all material respects the Company's financial condition, results of operations and cash flows for the fiscal periods presented.

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings.

In November 2001, the Company, its former Chairman, President and Chief Executive Officer Richard D. Forman and its former Vice President of Finance and Accounting, Alan G. Breitman (the "Individual Defendants"), and Goldman Sachs & Co. and Lehman Brothers, Inc., two of the underwriters in the syndicate for our March 3, 2000 initial public offering, were named as defendants in a class action complaint alleging violations of the federal securities laws in the United States District Court, Southern District of New York. Goldman Sachs & Co. and Lehman Brothers, Inc. distributed 172,500 of the 5,750,000 shares in the initial public offering. A Consolidated Amended Complaint captioned In re: Register.com, Inc. Initial Public Offering Securities Litigation (which is now the operative complaint), was filed on April 19, 2002. The Consolidated Amended Complaint seeks unspecified damages as a result of various alleged securities law violations arising from activities purportedly engaged in by the underwriters in connection with our initial public offering. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company's initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for the Company's initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies before one judge in the U.S. District Court for the Southern District of New York. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based on Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against the Company. The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the plaintiff class and the vast majority of the other approximately 300 defendants. Among other provisions, the settlement agreement provides for a release of the Company and the individual defendants for the conduct alleged in the action to be wrongful. The Company would also agree to take certain actions, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the settlement agreement 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 settlement agreement has not yet been executed and will be subject to approval by the court, which approval cannot be assured. We cannot predict whether or when a settlement will occur or be finalized.

Register.com was named as a defendant in a purported class action lawsuit filed by Brian Wornow, on behalf of himself and all others similarly situated, in the Supreme Court of the State of New York on May 2, 2002, which alleged that our SafeRenew program violates New York law. Our SafeRenew program was implemented in January 2001 on an "opt-out basis" to .com, ..net and .org registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of our services agreement, at the time a covered registration comes up for renewal, we attempt to charge a registrant's on-file credit card a one year renewal fee and, if the charge is successful, to renew the registration for that additional one-year period. Register.com believes that the SafeRenew program was properly adopted as an effort to protect our customers' online identities. Plaintiff sought a declaratory judgment that the SafeRenew program violates New York General Obligations Law Section 5-903, and also asserted claims for breach of contract, money had and received, and unjust enrichment. Plaintiff further sought to enjoin Register.com from automatically renewing domain name registrations, an award of compensatory damages, restitution, disgorgement of profits (plus interest), cost and expenses,

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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 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 February 19, 2004, Register.com's motion to dismiss the first, fourth and a fifth causes of action of Plaintiff's amended complaint was granted. Plaintiff has perfected an appeal from this ruling and on June 8, 2004 the Appellate Division, First Department affirmed the dismissal of all five counts. Register.com and the Plaintiff have agreed upon a settlement, the terms of which remain subject to approval by the Court. A fairness hearing has been scheduled for December 2, 2004. In the second quarter of 2004, the Company recorded a provision of $1.4 million for the settlement which it estimates to be its probable exposure net of contributions to be made by its insurance carrier.

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 alleged 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 (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) was unjustly enriched. In August 2001, the Court granted Register.com's motion to dismiss Plaintiff's claims for failure to state a claim upon which relief may be granted. Plaintiff appealed the dismissal and in April 2003 the Appellate Division, First Department affirmed the dismissal of the unjust enrichment cause of action, but reinstated the causes of action for breach of an implied covenant of good faith and fair dealing and deceptive trade practices. Thereafter, Register.com and Plaintiff agreed upon a settlement which, following notice to the proposed settlement class, was approved by the Court on November 3, 2003. In accordance with the settlement, Register.com has provided each member of the putative class with a coupon for a five dollar discount off of future purchases of Register.com's fees for domain name registrations and renewals and has paid attorney's fees in the amount awarded by the Court to class counsel. These coupons expired in October 2004 and the case has been dismissed.

On or about August 7, 2003 and August 8, 2003, purported stockholders of the Company filed two separate complaints in the Court of Chancery of Delaware against the Company and certain current and past individual members of the Company's Board of Directors. The first complaint was styled as McBride v. Register.com, Inc., et al (C.A. No. 20470) and the second complaint was styled as DeMatte v. Register.com, Inc., et al (C.A. No. 20474). On November 3, 2003, the two cases were consolidated (C.A. No. 20470) and on November 5, 2003, an amended complaint was filed. The complaint alleged, 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 was an attempt by the individual defendants to entrench their positions in the Company. The complaint sought, among other things, the court's certification as a class action lawsuit, unspecified damages and rescission of the self tender. On December 5, 2003 Register.com filed a motion to dismiss for failure to state a claim upon which relief can be granted and failure to comply with the requirements of Rule 23.1 and on February 26, 2004 Register.com filed a brief in support of such motion. On August 23, 2004, the court granted the plaintiff's notice of dismissal and the action was dismissed without prejudice.

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.

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Item 6.    Exhibits.

Exhibits

Number				Description
31.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350.
32.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350.

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SIGNATURES

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

				REGISTER.COM, INC.
Date: November 9, 2004				By:				/s/ Jonathan Stern
								Name:  Jonathan Stern
								Title:   Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

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EXHIBIT INDEX

Number				Description
31.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
31.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
32.1				Certification of Peter A. Forman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350.
32.2				Certification of Jonathan Stern, Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350.

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