others similarly situated, 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 the Company's 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. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Company's case. The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers' settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of the Company to plaintiffs under the settlement agreement and related agreements will be covered by existing insurance. The Company is currently not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from the Company's insurance carriers. To the Company's knowledge, the Company's insurance carriers are solvent, and the Company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, the Company does not expect that the settlement will involve any payment by the Company. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Company's insurance carriers should arise, the Company's maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the court's opinion and are in the process of obtaining approval from those issuer defendants that are not in bankruptcy. At this point, all but one of the issuer defendants that are not in bankruptcy have approved the revised settlement agreement, which has been submitted to the court. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the court will grant final approval to the settlement. If the settlement agreement is not approved and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company's insurance coverage, and

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whether such damages would have a material impact on the Company's results of operations or financial condition in any future period.

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, 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. On July 30, 2004, Register.com and the Plaintiff entered into a settlement agreement, the terms of which were subject to approval by the Court. In the second quarter of 2004, the Company recorded a provision of $1.4 million for the settlement which it estimated to be its probable exposure net of contributions to be made by its insurance carrier. The Court granted final approval of the settlement agreement on January 24, 2005. Pursuant to the settlement agreement, Register.com agreed to set up a fund of $2.0 million to be used to pay all properly submitted refund claims to settlement class members as well as Court-approved attorneys' fees and litigation expenses incurred by class counsel. As anticipated, Register.com's contribution to the fund, net of contributions made by its insurance carrier, will be approximately $1.4 million.

In 2005, Register.com together with other parties was named as a defendant in an employment related lawsuit. The proceeding is currently in preliminary stages. The Company cannot reasonably estimate the possible loss to the Company.

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 be material to the Company and will not have a material adverse effect on the Company's financial position, results of operations or liquidity.

Potential Credit Card Penalties

The Company is experiencing high rates of refunds to customers in excess of the contractually specified levels agreed to with the credit card associations, 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 could continue to be subject to such penalties. 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

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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. 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 2004 the Company reversed the penalty accruals previously recorded during the period from January 1, 2002 through September 30, 2003 in the amount of $5.6 million. This expense reversal was recorded as a reduction of general and administrative expense in October 2004.

In February 2005 and March 2005, the Company received additional releases from its credit card processor for any penalties which may have been imposed for transactions processed from October 1 through December 31, 2003, and from January 1, 2004 through February 29, 2004, respectively. As a result, in the first quarter of 2005, the Company reversed $0.5 million and $0.4 million of expense accruals previously recorded during the fourth quarter of 2003 and the first two months of 2004, respectively.

The net expense (reversal of expense) accrued by the Company during the first quarter of 2005 and the first quarter of 2004 were $(0.4) million and $0.5 million, respectively. As of March 31, 2005 the Company has a remaining accrued liability of $2.2 million for such potential penalties (covering the period from March 1, 2004 to March 31, 2005), which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet.

The Company has had discussions and correspondence with its credit card processor regarding these potential penalties. 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 to date, or perhaps any amount at all for periods after February 29, 2004. 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 February 29, 2004 or otherwise provide the Company with a release for these potential liabilities. Accordingly, the Company is required to continue to accrue for such potential penalties for periods after February 29, 2004. 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.

Visa has instituted a mandatory compliance program that requires merchants and others who store or transmit cardholder data on behalf of the merchant to adhere to the Payment Card Industry (PCI) Data Security Standards starting June 30, 2005. These standards are intended to ensure that cardholder data is appropriately protected at all points within the course of a transaction. We have engaged the services of a third-party expert to review our cardholder data security standards and, based on this review, we have identified certain areas in which we would not meet the new PCI Data Security Standards. We are in the process of addressing the areas of potential non-compliance. We do not believe we will be in compliance with the PCI Data Security Standards as of June 30, 2005, but we currently anticipate we will be in compliance by September 30, 2005. If we are not in compliance with the standards by June 30, 2005, we may be subject to certain penalties, including (i) fines starting at $50,000 per month and increasing thereafter and (ii) fines up to $500,000 per incident if our existing cardholder data security systems are breached before we are able to achieve compliance with the new standards. Furthermore, even if we are in compliance with the standards but our systems nevertheless experience (i) a suspected or confirmed loss or theft of any Visa transaction information, and we fail to notify VISA, we would be subject to a penalty of $100,000 per incident or (ii) a violation that presents immediate and substantial risks to Visa and its members, we would be subject to additional

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fines in amounts that have not been announced. Most other major credit card companies have instituted similar compliance programs. However, with the exception of MasterCard, no other credit card association has announced any penalties for non-compliance. Although we are not currently in compliance with MasterCard's data security standards, the maximum penalties applicable under MasterCard's compliance program for non-compliance prior to September 30, 2005 are not material in amount.

Note 3— Restatement of Financial Statements

The Company has restated its previously issued consolidated financial statements, including those for the three months ended March 31, 2004. The restatement for the three months ended March 31, 2004 relates to the timing of the recognition of revenue, deferred revenue, and associated cost of revenue amounts relating to domain name transactions, the correction of the provision for income taxes, and the correction of pro forma stock-based compensation expense disclosures required under Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation.

The Company's systems, processes and controls were originally established to record, process, summarize and report transactions in accordance with a full-month revenue recognition convention which the Company has historically applied in the determination of revenue recognition with respect to initial and renewed domain name registrations. The Company has concluded, based on a review of its customers' registration activity, that the use of a mid-month revenue recognition convention is necessary to record revenue under generally accepted accounting principles in that the mid-month revenue recognition convention does not materially differ from the use of a daily recognition method. In addition, the Company has found errors in its systems that resulted in errors in the timing of revenue and associated cost of revenue recognition for domain name transactions such as subscriptions renewed prior to their scheduled expiration dates, domain names transferred in from other registrars and domain names transferred out to other registrars.

Also, the Company corrected the provision for income taxes to reflect the tax impact of the above noted changes to revenue and associated cost of revenue recognition to adjust certain tax credits, to adjust recorded amounts of the tax benefits related to stock-based compensation and the related windfall tax benefits as additional paid-in capital, to adjust amounts excluded from taxable income for tax free interest and to adjust deferred taxes for changes in state and local tax rates.

A summary of the aggregate effects of these restatements on the Company's Consolidated Statements of Operations for the three months ended March 31, 2004 is shown below.

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				Three Months Ended March 31, 2004
				As Reported				As Restated
				(in thousands, except per share data)
Changes to Consolidated Statement of Operations
Net revenues				$	25,917			$	26,308
Cost of revenues				$	8,411			$	8,522
Gross profit				$	17,506			$	17,786
Sales and marketing expense				$	7,305			$	7,291
Technology expense				$	4,174			$	4,202
General and administrative expense				$	4,614			$	4,600
Total operating expenses				$	16,251			$	16,251
Income from operations				$	1,255			$	1,535
Income before provision (benefit) for income taxes				$	1,614			$	1,894
Provision for income taxes				$	529			$	674
Net income				$	1,085			$	1,220
Basic income per share				$	0.05			$	0.05
Diluted income per share				$	0.04			$	0.05
Weighted average number of shares outstanding − Basic					23,560				23,560
Weighted average number of shares outstanding − Diluted					24,909				24,909

The Company also restated the Pro Forma Stock-Based Compensation table as set forth in Note 1 to reflect the tax effect of the adjustments to reported pro forma net income and to correct assumptions used in computing stock-based compensation expense under the fair value based method. A comparison of the restated amounts, with the amounts as originally reported for the quarter ended March 31, 2004 is shown below:

				Three months ended March 31, 2004
				As reported				As restated
				(in thousands, except per share data)
Net income:
As reported				$	1,085			$	1,220
Add: Stock-based compensation included in reported net income (net of taxes in the "As restated" column)					167				97
Deduct: stock-based compensation expense determined under the fair value based method (net of taxes in the "As restated" column)					(714	)			(806	)
Pro forma net income				$	538			$	511
Net income per share:
As reported — basic				$	0.05			$	0.05
Pro forma — basic				$	0.02			$	0.02
As reported — diluted				$	0.04			$	0.05
Pro forma — diluted				$	0.02			$	0.02

Note 4 — Warrants

In the three months ended March 31, 2005, warrants to purchase 470,148 shares of common stock at a price of $0.97 per share were exercised. The exercise price was paid by tendering 72,006 shares of common stock already owned by the warrant holders. Such shares were valued at the closing price of the Company's common stock on Nasdaq on the date of exercise. As a result, a total of 398,142 net shares of common stock were issued to the exercising warrant holders and no cash proceeds were received by the Company.

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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 although not all forward-looking statements contain such identifying words. Actual results could differ materially from those anticipated in such forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof. It is routine for our internal projections and expectations to change as the year or each quarter in the year progress, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, our company policy is generally to provide our expectations only once per quarter, so we may not inform you of any changes 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 and Reclassification of Financial Statements

We have restated our previously issued Consolidated Financial Statements, including those for the three months ended March 31, 2004. The restatement for the three months ended March 31, 2004 relates to the timing of the recognition of revenue, deferred revenue, and associated cost of revenue amounts relating to domain name transactions, the correction of the provision for income taxes and the related balance sheet accounts, and the correction of pro forma stock based compensation expense disclosures required under Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation.

Our systems, processes and controls were originally established to record, process, summarize and report transactions in accordance with a full-month revenue recognition convention which we have historically applied in the determination of revenue recognition with respect to initial and renewed domain name registrations. We have concluded, based on a review of our customers' registration activity, that the use of a mid-month revenue recognition convention is necessary to record revenue under generally accepted accounting principles in that the mid-month revenue recognition convention does not materially differ from the use of a daily recognition method. In addition, we have found errors in our systems that resulted in errors in the timing of revenue and associated cost of revenue recognition for domain name transactions such as subscriptions renewed prior to their scheduled expiration dates, domain names transferred in from other registrars and domain names transferred out to other registrars.

Also, we corrected the provision for income taxes to reflect the tax impact of the above noted changes to our revenue and associated cost of revenue recognition, to adjust certain tax credits, to adjust recorded amounts of the tax benefits related to stock-based compensation and the related windfall tax benefits as additional paid-in capital, to adjust amounts excluded from taxable income for tax free interest and to adjust deferred taxes for changes in state and local tax rates.

The impact of these restatements for the three months ended March 31, 2004 was to increase net income by $135,000, and to increase income per share $0.01 per share (diluted); there was no impact on income per share (basic). For a more detailed description of the effects of the restatement on the Consolidated Statements of Operations for the three months ended March 31, 2004 see Note 3 to our Consolidated Financial Statements.

We also restated the Pro Forma Stock Based Compensation table as set forth in Note 1 to the Consolidated Financial Statements to reflect the tax effect of the adjustments to reported pro forma net income (loss) and to correct assumptions used in computing stock-based compensation expense under the fair value based method.

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Our financial statements also reflect the reclassifications of auction rate securities and restricted cash. As discussed in Note 1 to our Consolidated Financial Statements, we reclassified certain investment securities known as "auction rate securities" that had contractual maturity dates greater than 90 days but interest reset dates of less than 90 days, as "short-term investments". Previously we classified such investment securities as cash and cash equivalents. Accordingly, we have presented the purchases and sales of these securities within the investing section of the Consolidated Statements of Cash Flows for all periods presented. These reclassifications increased cash flows from investing activities for the three months ended March 31, 2004 by $3.5 million.

Overview

We are a provider of global domain name registration, website, web hosting, 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.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 1 to our Consolidated Financial Statements includes a summary of the critical accounting policies and methods used in the preparation of our Consolidated Financial Statements. The preparation of our financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the notes accompanying the financial statements. We regularly evaluate our estimates and assumptions on an on-going basis and adjust them as necessary to accurately reflect current conditions. These estimates are based on current and historical experience, on information from third party professionals and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates. Our most critical accounting estimates are discussed in the following paragraphs.

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. 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. Accordingly, domain name registration revenues are deferred at the time of the registration and are recognized ratably over the term of the registration period, or in the case of transferred-in registrations, over the period from the transfer-in date (which is generally earlier than the start date of the next paid registration period) through the end of the paid registration period. In the event a registration is transferred out to another registrar prior to the end of the subscription term, we recognize any remaining unamortized deferred revenue related to that registration immediately on the transfer-out date.

We experienced a decrease in our total domain names under management to approximately 3.0 million as of March 31, 2005 from approximately 3.1 million as of March 31, 2004.

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 channel provides a diversified range of generally higher-priced services and also extends volume-based discounts for domain name registrations and transfers. Revenues from processing fees for domain name applications, which may or may not result

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in domain name registrations, and other intellectual property protection services related to the introduction of new gTLDs, are recognized upon the provision of services.

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 from our standard registration fee.

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 fees for modifying existing registrations, are sold either as one time offerings or through annual or monthly subscriptions, depending on the product or service. We recognize revenue over the period during which services are provided, which may be immediate or over the term of the agreement with the customer. When we refer to "products and services," we are referring to our various types of bundled products and services that are referred to as products and services in our marketing activities. We do not sell any tangible products.

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 is achieved, provided that no significant company obligation remains and collection of the resulting receivable is probable.

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. For many of our customers who register domain names through our Corporate Services channel, for certain of the participants in our Global Partner Network, and for our advertising customers, we establish lines of credit based on credit worthiness. Critical accounting estimate: We record a provision for estimated uncollectible accounts receivable from our customers for whom we have established lines of credit. The provision is accounted for as a reduction of revenues. We rely on prior experience to estimate the amount of cash which will ultimately be collected from the receivables, and the resulting amount of accounts receivable which will be uncollectible. Such amounts cannot be known with certainty at the financial statement date. Understating the amounts of potentially uncollectible receivables may cause revenue recognition and the realizable value of accounts receivable to be overstated, and vice versa.

For customers who have elected our auto-renew option available through the Corporate Services channel, we may renew registrations in advance of the scheduled renewal dates. This procedure is based on our historical practices which have been informally accepted by customers but are not specified by contract. If a customer failed to timely notify us of its cancellation of the auto-renew option for specific domain names, we may need to issue credits. Critical accounting estimate: We record a provision for amounts that we estimate may be refunded or credited back to customers who may notify us within four days after the scheduled renewal date that they do not want specific domain names renewed. Historical experience is used to develop the aforementioned estimates. Underestimating the amounts of potential refunds may cause revenue recognition and the realizable value of accounts receivable to be overstated, and vice versa.

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. Critical accounting estimates: We must estimate the amount of credit card chargebacks we will receive in the future related to credit card sales in the current period so that we can record a provision for estimated chargebacks initiated by credit card customers through their banks. We also estimate the amount of refunds we will issue to our customers who request refunds directly from our customer service center. These provisions are reflected as a reduction of revenues. In determining our estimates, on a monthly basis we review historical rates of credit card chargebacks and refunds, current economic trends and changes in acceptance of our products and services. Underestimating the amounts of potential chargebacks and refunds may cause revenue recognition to be overstated, and vice versa.

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Cost of Revenues

Our cost of revenues consists of the costs associated with providing domain name registrations and other products and services. Cost of revenues for domain name registrations represents amortization of registry fees on a straight-line basis over the registration term, depreciation of the equipment used to process the domain name registrations, fees paid for co-location facilities housing our equipment, and fees paid to the financial institutions to process credit card payments on our behalf. Cost of revenues does not include penalties for excessive credit card chargebacks and refunds; such penalties are classified as general and administrative expense. We pay registry fees for gTLDs ranging from $5.30 per year for each .biz domain name registration to $6 per year for each .info, .com, .net and .org domain name registration. We pay registry fees ranging from $6 to $5,000 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 related registrations, as described above under "Net Revenues".

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 products and 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 related 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 stock-based 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 services, and quality assurance. General and administrative expenses include salaries and other personnel-related expenses for executive, financial and administrative personnel, as well as professional fees, insurance premiums, and penalties for excessive credit card chargebacks and refunds.

Facilities costs are allocated across the various operating expense categories.

We currently account for stock-based compensation expense in accordance with Accounting Principles Board Opinion No. 25 ("APB 25") and related authoritative accounting pronouncements. Under APB 25, stock-based compensation expense relates to grants of restricted stock, stock options and warrants to employees and directors with exercise prices below fair market value of the underlying stock on the date of grant, and all such grants to consultants and vendors. With respect to grants made through December 31, 2004 and grants which may be made during the year ended December 31, 2005, stock-based compensation expense, will continue to be accounted for under APB 25 through December 31, 2005. As of January 1, 2006 we will adopt Statement of Financial Accounting Standards 123R "Share Based Payment" ("SFAS 123R") under which stock-based compensation expense will be recorded for the unvested portions of option grants through December 31, 2005, as well as for all future grants, based on the fair value of the options or warrants or restricted stock as of their grant dates. Such stock-based compensation expense will reduce our earnings or increase our losses in future periods. Critical accounting estimate: Our assumptions of

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future volatility, estimated life of options, and future employee turnover would have a significant impact on stock-based compensation expense to be recorded under SFAS 123R. If our assumptions of volatility, option life and employee turnover are too low, our stock-based compensation expense would be understated, and vice versa.

Credit card penalties .    The credit card associations may impose financial penalties if our chargebacks and/or refunds exceed certain thresholds. Such penalties are not charged to revenues, but are classified as general and administrative expense. We are experiencing high rates of refunds to customers in excess of the contractually specified levels agreed to with the credit card associations, 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 be subject to such penalties. Critical accounting estimate: Because the imposition of any potential penalties is at the discretion of the associations, subject to contractual limitations, generally accepted accounting principles require that we accrue expense to cover what we estimate to be the maximum potential penalties that could be imposed. In October 2004, we obtained a release for any penalties which could be imposed for excessive chargebacks and refunds processed through September 30, 2003 and, accordingly, in accordance with generally accepted accounting principles applicable to extinguishments of liabilities, in October 2004 we reversed the expense accruals previously recorded during the period from January 1, 2002 through September 30, 2003. On February 14, 2005 and March 24, 2005 we received additional releases from any penalties which may have been imposed for transactions processed from October 1, 2003 through December 31, 2003, and from January 1, 2004 through February 29, 2004. As a result in the first quarter of 2005 we reversed expense accruals previously recorded during the fourth quarter of 2003 and the first two months of 2004, respectively. Based on discussions and correspondence with our credit card processor regarding potential penalties accrued after February 29, 2004, we believe that it is likely that we will not be required to pay the full amount accrued, or perhaps any amount at all for periods after such date. However we are required to continue to accrue for such potential penalties for periods after February 29, 2004 until we obtain a release or it is determined that no penalties will be imposed or penalties are actually assessed. If the penalties ultimately imposed are less than the maximum contractual amount, or if it is determined that no penalties will be imposed, we would reverse any excess amounts previously accrued as a reduction of general and administrative expense at that time. Accordingly, our general and administrative expense may vary significantly from period to period as a result of accruals for potential credit card penalties and reversals thereof.

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

Asset Impairment.     We review our assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. We assess the recoverability of intangibles using estimated undiscounted cash flows, and by estimating the current fair value of the asset in an arms-length sale transaction. Critical accounting estimate: Based on the foregoing factors, if we conclude that an impairment of an asset has occurred, we record an impairment write-down. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount, and when the estimated fair value of the asset in an arms-length sale transaction is lower than the carrying value. If such assets are considered impaired, the amount of the impairment loss is measured as the amount by which the carrying value of the asset exceeds the estimated fair value of the asset. Estimated undiscounted future cash flows are based on projections and the estimated fair value is based to an extent on management's judgment and/or independent appraisals. Overestimating the

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future cash flows or estimated fair value may lead to overstating the recoverable value of the assets, or in the failure to identify an impairment loss.

Litigation .    There are various claims, lawsuits and pending actions against the Company as more fully described under "Litigation" in Note 2 to our Consolidated Financial Statements. Critical accounting estimate: We estimate our probable exposure, net of anticipated insurance proceeds, for each of these matters, and if we believe a loss is probable and we can reasonably estimate the amount of loss, we record an expense provision. If our estimates are understated, our reported income from operations would be overstated.

Income Taxes

In preparing our financial statements, we make estimates of our tax obligations based on estimates of timing differences for reporting items for financial statement and tax purposes and items of income or expense that are excluded from net income for financial reporting purposes or taxable income for tax return purposes. The most significant differences include deferred revenue, tax exempt interest income and deduction for stock compensation and goodwill. 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. Critical accounting estimate: 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. Although we reported a pre-tax loss in 2002, we estimate that it is more likely than not that we will realize the carrying value of our deferred tax asset. However, if our estimate is incorrect, revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period and could result in our inability to fully realize the carrying value of the deferred tax asset.

Net Income (Loss)

Although we were profitable for the three months ended March 31, 2005, the year 2004 and the year 2003, we were not profitable for the year 2002. Our net loss for 2002 included a goodwill impairment write-down and amortization of intangibles of $17.0 million. Although we have recently taken several initiatives intended to reduce our operating expenses, we cannot assure you as to when or if these reductions will be realized. We expect our technology costs to continue at high levels throughout 2005 albeit lower than 2004 as we continue our efforts to upgrade and improve our systems and we cannot assure you whether our efforts to upgrade and improve our systems will be completed in a timely manner or will be successful. Losses at RCOM Europe and RPI Inc. (formerly RegistryPro, Inc.), prior to the sale of the core assets of RPI Inc. in February 2004, have contributed to a decline in our profitability. We expect losses at RCOM Europe to impact our profitability negatively through the year 2005 and perhaps beyond. We have also budgeted for an increase in our marketing expense in 2005 compared with 2004, however, we may choose not to spend all of the money budgeted for marketing and we cannot assure you that, if we do, such additional marketing expenses will result in additional revenues. Further, our advertising revenues were materially lower in 2004 compared with prior periods, and we anticipate that our revenues from advertising will continue to be materially lower in 2005 and perhaps beyond compared with periods prior to the fourth quarter of 2003. In addition, unless we lower our credit card refunds and maintain a low number of chargebacks relative to total credit card transactions processed, 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). As of March 31, 2005, we have accrued a net total of $2.2 million for such potential penalties (net of reversals in the fourth quarter of 2004 and the first quarter of 2005 of potential penalties recorded in prior periods), which amount is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet as of March 31, 2005. 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

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as a reduction of general and administrative expense at that time. We also anticipate incurring substantial costs related to remediating the material weaknesses in our internal controls and other compliance matters related to Section 404 of the Sarbanes-Oxley Act of 2002.

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

Results of Operations

The following table sets forth selected unaudited quarterly statement of operations data for the three months ended March 31, 2005 and 2004. In our opinion, this information has been prepared substantially on the same basis as the audited financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2004, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts set forth below to state fairly the unaudited quarterly results of operations data. The operating results in any quarter are not necessarily indicative of the results to be expected for any future period.

				Three months ended March 31,
				2005				2004 (Restated)
				(in thousands)
Net revenues				$	25,404			$	26,308
Cost of revenues					8,081				8,522
Gross profit					17,323				17,786
Operating costs and expenses
Sales and marketing					7,916				7,291
Technology					4,044				4,202
General and administrative (includes non-cash compensation of $9, and $167, respectively)					4,281				4,600
Amortization of intangible assets					104				158
Total operating costs and expenses					16,345				16,251
Income from operations					978				1,535
Other income, net					374				359
Income before provision for income taxes					1,352				1,894
Provision for income taxes					366				674
Net income				$	986			$	1,220

Three months ended March 31, 2005 compared to three months ended March 31, 2004

Net Revenues

Total net revenues decreased 3% to $25.4 million for the first quarter of 2005 from $26.3 million for the first quarter of 2004.

Domain name registrations.    Recognition of revenues from domain name registrations decreased 12% to $20.3 million for the first quarter of 2005 from $23.1 million for the first quarter of 2004. The decrease was due in part to a lower number of domain names registered and lower average prices per year of subscription term. The average number of names under management during the first quarter of 2005 was 3.0 million, down from 3.1 million during the first quarter of 2004. We expect to face continued pricing pressure in the future, which would adversely impact our revenues and profitability.

Other Products and Services.    Revenues from other products and services increased 63% to $4.7 million in the first quarter of 2005 from $2.9 million in the first quarter of 2004. The increase was due primarily to increased revenues from web hosting, WebSiteNow! and email services.

At March 31, 2005, our deferred revenue balance was $102.2 million, compared with $98.6 million at December 31, 2004, representing a increase of $3.6 million for the first quarter of 2005. Our deferred revenue balance is an indicator of revenue to be recognized in future periods.

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Advertising.    Revenues from advertising increased 35% to $0.4 million for the first quarter of 2005 from $0.3 million for the first quarter of 2004 primarily as a result of additional advertising page placements during the first quarter of 2005 for new and existing advertisers.

Cost of Revenues

Cost of Revenues.    Total cost of revenues decreased 5% to $8.1 million in the first quarter of 2005 from $8.5 million in the first quarter of 2004.

Cost of Domain Name Registrations.    Costs recognized for domain name registrations decreased 10% to $7.3 million in the first quarter of 2005 from $8.1 million in the first quarter of 2004. The decrease resulted primarily from a lower number of domain names under management.

Cost of Other Products and Services.    Cost of other products and services increased 105% to $0.8 million in the first quarter of 2005, from $0.4 million in the first quarter of 2004. The increase was related to higher revenues from other products and services, primarily web hosting.

Gross Profit Margin

Our gross profit margin increased to 68.2% in the first quarter of 2005 from 67.6% in the first quarter of 2004, primarily as a result of increased revenues from other products and services, which have a higher gross profit margin than domain name registration services.

Operating Expenses

Total operating expenses were approximately $16.3 million in both the first quarter of 2005 and 2004.

Sales and Marketing.    Sales and marketing expenses increased 9% to $7.9 million in the first quarter of 2005 from $7.3 million in the first quarter of 2004. The increase resulted primarily from an increase in media spending.

Technology.    Technology expenses decreased 4% to $4.0 million in the first quarter of 2005 from $4.2 million in the first quarter of 2004. The decrease resulted from lower costs for salaries and benefits because of a reduction in the number of employees, offset in part by increased expenses for software consultants. We anticipate that technology expenses will continue at high levels in 2005 (albeit lower than 2004), and perhaps beyond, as we continue our efforts to upgrade and improve our systems.

General and Administrative.    General and administrative expenses decreased 7% to $4.3 million in the first quarter of 2005 from $4.6 million in the first quarter of 2004. The decrease resulted primarily from the reversal of $0.9 million of potential credit card penalties which had been recorded from October 1, 2003 through February 29, 2004, offset in part by higher professional fees. These potential credit card penalties were reversed in accordance with generally accepted accounting principles applicable to extinguishments of liabilities following our receipt of releases in February 2005 and March 2005 from our credit card processor for any penalties which may have been imposed for excessive chargebacks and refunds processed from October 1, 2003 through February 29, 2004.

Other Income, Net

Other income, net, which consists primarily of interest income, realized gains (losses) on sales of securities, net of bank fees charges, was approximately the same in the first quarter of 2005 as in the first quarter of 2004. Our interest income was higher by $0.1 million in the first quarter of 2005 because of higher prevailing interest rates compared with the first quarter of 2004, however that increase was offset by $0.1 million of realized gains on sales of securities in the first quarter of 2004 which did not recur in the first quarter of 2005.

Provision for Income Taxes

The provision for income taxes in the first quarter of 2005 was $0.4 million, representing an effective rate of 27% of pretax income. This effective rate is lower than the statutory effective tax rate

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(34%) and resulted from our tax-exempt interest income, offset in part by the effect of state income taxes. The provision for income taxes in the first quarter of 2004 was $0.7 million, representing an effective rate of 36% of pretax income. The 2004 effective rate was higher than the statutory effective rate (34%) as the result of state and local income taxes offset by tax-exempt interest. The decrease in the effective tax from 2004 to 2005 was the result of greater tax-exempt interest in proportion to taxable income in 2005.

Recent accounting pronouncements

SFAS 123R "Share-Based Payment" was issued in December 2004, and becomes effective for the Company on January l, 2006. In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107) to defer the effective date of SFAS 123R until January 1, 2006 and provide guidance on implementation of SFAS 123R. This statement will require that the Company record stock-based compensation expense for the unvested portions of stock options and warrants granted through December 31, 2005 and for all grants on or after January 1, 2006 of stock options, warrants, and restricted stock, in all cases based on their fair value on the respective grant dates. This statement will also require that our Employee Stock Purchase Plan be treated as a compensatory plan for which stock-based compensation expense will be recorded starting January 1, 2006. Management has not determined the impact that adoption of SFAS 123R will have on the Company's financial statements, however based on options outstanding as of December 31, 2004 it is currently estimated that the impact would be to increase operating expense and reduce net income for the year ended December 31, 2006, however management is unable at this time to precisely estimate the impact.

Liquidity and Capital Resources

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

At March 31, 2005, our cash and cash equivalents, short-term investments and noncurrent marketable securities totaled $108.0 million, compared with $108.3 million at December 31, 2004, representing a decrease of $0.3 million for the first quarter of 2005. During the first quarter of 2005 we generated $0.1 million of net cash provided from operating activities and we used $0.3 million for capital expenditures, compared with $3.1 million of net cash provided from operating activities and $1.1 million of capital expenditures in the first quarter of 2004.

Net cash provided by operating activities decreased by $3.0 million in the first quarter of 2005 compared with the first quarter of 2004. This decrease was due primarily to lower collections of accounts receivable in the first quarter of 2005 compared with the first quarter of 2004, and to higher professional fee payments in the first quarter of 2005 for Sarbanes-Oxley compliance and the restatement of our prior years' financial statements. Our recent reduction in sales prices and our anticipated lower revenues from advertising and continuing professional fees related to compliance with the Sarbanes-Oxley Act and remediation of our material control weaknesses may adversely impact our cash provided by operating activities in future periods.

We currently expect our expenses for technology to decline during 2005 compared with 2004; however as a result of delays in the implementation of our new systems in connection with our restructuring program, we cannot assure you that we will be successful in reducing our technology expenses. We expect our sales and marketing expense to increase in 2005 compared with 2004. We believe that our current balance of cash, short-term investments and noncurrent 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.

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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. Our noncurrent marketable securities totaling $5.9 million as of March 31, 2005 represent publicly traded debt securities with stated maturities greater than twelve months, however such securities are readily saleable. Although they are available for sale and readily marketable, management does not expect to use the proceeds from these investments to fund operations over the next twelve months.

A summary of our contractual obligations for operating leases and other commitments as of March 31, 2005 is as follows:

				Total payments due in each of the periods shown below
				Total				Less than 1 year				2-3 years				4-5 years				More than 5 years
Operating lease obligations				$	4,709			$	1,027			$	2,080			$	1,526			$	76
Purchase obligations (1)					1,244				488				756				—				—
Total				$	5,953			$	1,515			$	2,836			$	1,526			$	76

(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.

We have no off-balance sheet arrangements.

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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 Business and Our Industry

We have material weaknesses in our internal control over financial reporting which could cause investors to lose confidence in our reported financial results and could have a negative impact on our stock price.

Management has identified a number of material weaknesses in our internal control over financial reporting (see "Item 4. Controls and Procedures"). Some of these weaknesses resulted in errors in our historical financial statements, which in turn resulted in a restatement of our financial statements for certain prior periods. Although we are currently in the process of implementing remediation measures to correct these material weaknesses, we can provide no assurance that we will be successful in these efforts or that the remediation measures will result in our having adequate internal controls in the future. In addition, we cannot assure you that we will not in the future identify further deficiencies or weaknesses in our internal control over financial reporting. If we are unable to adequately remediate our material weaknesses and maintain an effective system of internal controls, our ability to timely and accurately report financial results may be adversely affected, which could cause investors to lose confidence in our reported financial results and could have a negative impact on our stock price. In addition, we will incur substantial costs in connection with these remediation measures and the implementation of such measures may distract management from its ordinary business functions.

Nasdaq has informed us that our common stock may be delisted, and any such delisting could materially impair the ability of investors to trade in our common stock and could have a material adverse effect on our stock price.

On May 18, 2005, we received a written notice from the staff of Nasdaq indicating that we failed to comply with Marketplace Rule 4310(c)(14) due to the fact that we did not file this Quarterly Report on Form 10-Q with the SEC by May 10, 2005. Beginning at the opening of business on May 20, 2005, Nasdaq changed our trading symbol to "RCOME," appending the fifth character "E" to our trading symbol to indicate that we had not timely filed this report. We have requested an oral hearing before a Nasdaq Listing Qualifications Panel (the "Panel"), to appeal the Nasdaq staff's determination. The hearing request has stayed the delisting of our common stock pending the Panel's decision. Although we believe that our filing of this Quarterly Report on Form 10-Q will result in the restoration of our trading symbol to "RCOM" and the continued listing of our common stock, we can provide no assurances that the Panel will restore our trading symbol or grant our request for continued listing. We went through a similar process in connection with the late filing of our Form 10-K.

In addition, our remediation of certain material weaknesses in our internal controls will require extensive and time consuming manual processing, which may, in the future, delay completion of our quarterly financial statements. This may prevent us from timely filing our quarterly reports on Form 10-Q, including our Report on Form 10-Q for the quarter ended June 30, 2005, which would also be a violation of Nasdaq Marketplace Rule 4310(c)(14), and would subject us to potential delisting in the future. If our common stock were to be delisted as a result of the Panel denying our request for continued listing or our failure to timely file a future quarterly report on Form 10-Q, the ability of our investors to buy and sell shares could be materially impaired which could negatively impact our stock price.

In addition to a potential delisting of our common stock, any delay in the future filing of our required SEC reports could have other material adverse effects on our business.

As mentioned above, the remediation of the material weaknesses to our internal control over financial reporting may delay the timely filing of our future quarterly reports on Form 10-Q. In

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addition to possible delisting, any future late filing of a Form 10-Q would prevent the timely disclosure to the market of our quarterly financial results which could negatively impact our stock price. Also, a future late filing of a Form 10-Q would cause us not to be in compliance with applicable federal securities laws which could result in action against us by the SEC.

As a result of our failure to timely file this Report on Form 10-Q, we will not be eligible to register offerings of our securities on a short form registration statement for one year after the date hereof which could increase the cost of such offerings (if any) and/or delay their completion. A late filing of a future Form 10-Q would extend this ineligibility period until one year after the delinquent filing.

We have incurred losses in the past and cannot assure you that we will be able to operate profitably or sustain and/or attain positive cash flow in future periods.

Although we were profitable for the quarter ended March 31, 2005 and the years ended December 31, 2004 and 2003, we were not profitable for the years ended December 31, 2002 and 2001. Our net loss for 2002 included a goodwill impairment write-down and amortization of intangibles of $17.0 million and our net loss for 2001 included a $32.5 million write-down of intangibles. As of March 31, 2005 our accumulated deficit totaled $38.4 million. We expect our technology costs to continue at high levels throughout 2005 albeit lower than 2004 as we continue our efforts to upgrade and improve our systems and we cannot assure you whether our efforts to upgrade and improve our systems will be completed in a timely manner or will be successful. In addition, losses at our RCOM Europe subsidiary and RPI Inc. (formerly RegistryPro, Inc.), prior to the sale of the core assets of RPI Inc. in February 2004, have contributed to a decline in our profitability. We are expecting losses at RCOM Europe to impact our profitability negatively through the year 2005 and perhaps beyond and we cannot assure you that RCOM Europe will ever achieve profitability. We have also budgeted for an increase in our marketing expense in 2005 compared with 2004, however, we may choose not to spend all of the money budgeted for marketing and we cannot assure you that, if we do, such 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 potentially liable for significant penalties from credit card associations, which would continue to impact our profitability. Our advertising revenues were materially lower in 2004 compared with prior periods, and we anticipate that our revenues from advertising will continue to be materially lower in 2005 and perhaps beyond compared with periods prior to the fourth quarter of 2003. Further, we have made some decreases in the prices for certain of our services, however, if we are forced to lower our prices further due to increased competition in the industry and we are unable to reduce our expenses at a commensurate rate or we are not able to grow our sales at a commensurate rate, we may not be able to operate profitably or generate positive cash flow. We also anticipate incurring substantial costs related to remediating the material weaknesses to our internal controls and other compliance matters related to Section 404 of the Sarbanes – Oxley Act of 2002. For all these reasons, we cannot assure you that we will be able to operate profitably or sustain and/or attain positive cash flow in the future.

If our restructuring program is not completed or 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 focuses of this program are our efforts to build a new and more flexible systems architecture for our Retail channel, which is intended to enable us to introduce new products and services more rapidly and cost-effectively, and a new systems architecture for our Corporate Services channel, which is intended to enable us to reduce our costs of taking and fulfilling sales orders and to improve the accuracy of the invoices we render to Corporate Services customers. 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 successful, timely and cost-effective manner, or to the extent that we are

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currently anticipating, our business, financial condition and results of operations could be materially adversely affected. In connection with our restructuring efforts, we have incurred expenditures throughout the year ended December 31, 2004 and the quarter ended March 31, 2005 on the design and launch of our new global systems for both our Corporate Services channel and our Retail channel. Most customers purchasing our services through our Corporate Services channel were migrated to the new systems as of January 2005. However, we expect to incur additional expenditures in connection with continuing data validation, debugging and process improvements through the third quarter of 2005. Our new Retail channel system was released in its initial Beta version in October 2004 and became available for new customers in February 2005. We expect the migration of customers onto this system and the dedication of resources related to such migration and system implementation to continue through 2005 and perhaps beyond. We cannot assure you that any process improvements and data migration will be completed or will be successful or that our restructuring program will achieve the goals or timelines we have set for it. The implementation of new systems is a complex process that requires communication and coordination throughout our organization and has significant execution risks. In addition, the expected migration of our customers to the new system may temporarily impair our ability to service our customers as planned. We have already experienced significant delays in various stages of these projects which have increased our anticipated costs, delayed the anticipated benefits for these projects and have caused delays in our ability to launch new products and services and upgrade current ones. In addition, we cannot assure you when or if these projects will be successfully completed. Even if our new systems architecture for our Retail channel 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 and 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 and marketing new products and services to meet the needs of our customers and to better compete in the marketplace. 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.

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 during the twelve months ended March 31, 2005, our total number of domain names under management has declined. The total number of .com and .net domain names in the Verisign registry increased by approximately 27% during the twelve months ended March 31, 2005, whereas the total number of .com and .net domain names for which we are the registrar decreased by 4%. We experienced a decrease of approximately 39,000 in the total number of domain name registrations, renewals and transfers to us for the quarter ended March 31, 2005 (approximately 541,000) compared with the quarter ended March 31, 2004 (approximately 580,000). As a result, our total domain names under management declined from approximately 3.1 million as of March 31, 2004 to approximately 3.0 million as of March 31, 2005.

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 that 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 substantially lower prices than we do.

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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. Our competitive position could be further damaged if the market place for domain names were to decrease in the future. 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 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 further reduce our prices for our core products and services, which would negatively impact our results of operations.

We recognized lower revenues from domain name registrations for the quarter ended March 31, 2005 ($20.3 million) compared to the quarter ended March 31, 2004 ($23.1 million). 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. 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. We have made some decreases in the prices for certain of our services and in response to increasing competition in the domain name registration industry, we may be required, by marketplace factors or otherwise, to reduce further, 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 March 31, 2005 was approximately 58%, our total domain name registrations under management decreased by 5% during the twelve months ended March 31, 2005 and have declined from a peak of approximately 3.8 million as of September 30, 2001 to approximately 3.0

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million as of March 31, 2005. 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 continuing 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 current 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 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% and 88% of our net revenues during the quarters ended March 31, 2005 and 2004, respectively. 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 revenues may decline below current levels. 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 contractually specified levels agreed to with the credit card associations, 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.

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Accordingly, we accrued expenses of $0.5 million for the first quarter of 2005, $2.0 million for the year ended December 31, 2004 and $2.4 million for the year ended December 31, 2003.

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 reversed the expense accruals previously recorded during the period from January 1, 2002 through September 30, 2003 in the amount of $5.6 million. That expense reversal was recorded as a reduction of general and administrative expense in October 2004. In February and March 2005 we received additional releases from any penalties that any credit card association may be entitled to impose for excessive chargebacks and refunds processed from October 1, 2003 through February 29, 2004. As a result, in the first quarter of 2005 we reversed an additional $0.9 million of expense accruals previously recorded during the fourth quarter of 2003 and the first two months of 2004. We are continuing to have discussions and correspondence with our credit card processor regarding potential penalties accrued after February 29, 2004 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 has not issued releases for periods after February 29, 2004 and has not confirmed that the credit card association will not exercise its contractual rights to assess penalties for periods after February 29, 2004 or otherwise provided us with a further release. 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 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.

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We face certain risks as a result of changes to our management team, including our President and Chief Executive Officer, who has informed us that he will not seek to renew the term of his employment, set to expire in June 2005.

Our success depends in large part on the contributions of our management team. Over the past few years, we have experienced a significant number of changes to the members of our management team and we have experienced a high voluntary employee turnover rate. For example, the following executives terminated their relationships with the company: our Vice President of Human Resources in February 2005, our General Manager of Corporate Services in October 2004 and our Chief Technology Officer in April 2004. Each role has since been filled. Although we do not believe that the departure of any one of these individuals will have a significant negative impact on our business, we face operational challenges as a result of this turnover because some members of our management team are still learning about our company and the industry and may not have had sufficient time to develop effective working relationships with the other members of our management team. We anticipate these challenges to continue in the near future, as our President and Chief Executive Officer informed us in February 2005 that he will not seek to renew his current employment agreement which is set to expire in June 2005. We expect to incur costs in seeking a qualified candidate to succeed our current President and Chief Executive Officer and we can provide no assurance that we will be able to identify and retain a qualified candidate on terms acceptable to us or at all. If we do not succeed in solving the operational challenges we face in connection with the changes to our management team, especially replacing our President and Chief Executive Officer, we could suffer a significant adverse impact on the development of our business.

We outsource certain operations which exposes us to risks related to our third-party vendors.

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. We offer certain of our services to our customers through various third-party service providers engaged to perform these services on our behalf. In addition, we outsource parts of our operations to third-parties and may continue to explore opportunities to outsource others. Accordingly, we are dependent, in part, on the services of third-party service providers, which may raise concerns by our resellers and customers regarding our ability to control the services we offer them if certain elements are managed by another company. In the event that these service providers fail to maintain adequate levels of support, do not provide high quality service or discontinue their lines of business or cease or reduce operations, our business, operations and customer relations 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 from a provider we would be able to do so without significant disruptions, 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 which may disrupt services to our customers. 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 providers, we may experience difficulty enforcing agreements with such providers.

In addition, some of the domain names that we register resolve to name servers that are owned and controlled by third-parties. 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.

Inadequate internal controls of any of our third-party service providers could negatively impact our operations and our internal control over financial reporting.

We outsource certain operations, including payroll, customer credit card payment processing and certain other back office operations, to third-party service providers on whom we depend for accurate

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financial information. If any of these third-party service providers fails to maintain adequate internal controls, our internal control over financial reporting could be negatively impacted which could result in a misstatement in our financial statements.

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

From the fourth quarter of 2002 through the third quarter of 2003, our largest advertising customer, a provider of web hosting services, accounted for a significant portion of our advertising revenue. In the third quarter of 2003, revenues from this advertiser represented approximately 80% of our overall advertising revenue. However, once we began to offer web hosting services to our customers, this advertiser became a competitor and so we decided to discontinue our advertising relationship with it. Accordingly, we have not sold advertising to this advertising customer since the third quarter of 2003 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 our 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.

For example, we acquired RCOM Europe in March 2002 and, after selling its hosting division in May 2002, are still 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 channel to those we acquired through RCOM Europe have 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 in the future as we make efforts to improve our Corporate Services systems and processes and further integrate the business of RCOM Europe. RCOM Europe has incurred pre-tax losses of $10.8 million in 2002 (including a goodwill impairment charge of $8.3 million), $2.0 million in 2003 and $1.1 million for 2004 and $0.4 million for the first quarter of 2005. We are currently projecting a net loss for RCOM Europe for 2005 and we may not be able to increase revenues or cut expenses sufficiently to make it profitable in the future.

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;

•	possible additional material weaknesses in internal control over financial reporting;

•	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;

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•	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 and other intangible assets associated with acquisitions;

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

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

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

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, to the extent material;

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

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

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

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

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

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

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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 ITU, the UN or the European Union (EU), may gain increased influence over the management and regulation of the domain name registration system, leading to increased regulation in areas such as taxation and privacy.

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

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

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

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

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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 material 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, requiring us to revise our transfer processes, which we are in the process of implementing. Pursuant to these new policies, we will no longer be able to use certain safeguards that we had in place to acknowledge transfer requests, which could increase the risk of unauthorized or fraudulent transfers. Such transfers could increase claims of loss or subject us to negative publicity, which could have a material adverse effect on our business, financial condition and results of operations.

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

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

In addition, the Federal Trade Commission and certain 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

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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, patent 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 were issued a patent by the United States Patent and Trademark Office on April 12, 2005, which protects our domain manager technology. While we typically enter into confidentiality agreements with our employees, consultants and Corporate Services 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 are 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 typically conduct comprehensive searches to determine whether our technology infringes the intellectual property of 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 royalty or license agreements with the third-parties making these claims. Such royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, if at all. If a successful claim of infringement is brought against us and we fail to develop non-infringing technology or to license the infringed or similar technology on a timely basis, it could materially adversely affect our business, financial condition and results of operations.

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

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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.

If we are not able to comply with newly instituted security standards for credit cardholder data, we may be subject to 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.

Visa has instituted a mandatory compliance program that requires merchants and others who store or transmit cardholder data on behalf of the merchant to adhere to the Payment Card Industry (PCI) Data Security Standards starting June 30, 2005. These standards are intended to ensure that cardholder data is appropriately protected at all points within the course of a transaction.

We have engaged the services of a third-party expert to review our cardholder data security standards and, based on this review, we have identified certain areas in which we would not meet the new PCI Data Security Standards. We are in the process of addressing the areas of potential non-compliance, which efforts may increase our costs and distract time and energy from our operations. We do not believe we will be in compliance with the PCI Data Security Standards as of June 30, 2005, but we currently anticipate we will be in compliance by September 30, 2005. We can provide no assurance, however, that we will be in compliance with such standards by such date. If we

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are not in compliance with the standards by June 30, 2005, we may be subject to certain penalties, including (i) fines starting at $50,000 per month and increasing thereafter and (ii) fines up to $500,000 per incident and the possible revocation of our merchant credentials if our existing cardholder data security systems are breached before we are able to achieve compliance with the new standards. Furthermore, even if we are in compliance with the standards but our systems nevertheless experience (i) a suspected or confirmed loss or theft of any Visa transaction information, and we fail to notify Visa, we would be subject to a penalty of $100,000 per incident or (ii) a violation that presents immediate and substantial risks to Visa and its members, we would be subject to additional fines in amounts that have not been announced.

Most other major credit card companies have instituted similar compliance programs. However, with the exception of MasterCard, no other credit card association has announced any penalties for non-compliance. Although we are not currently in compliance with MasterCard's data security standards, the maximum penalties applicable under MasterCard's compliance program for non-compliance prior to September 30, 2005 are not material in amount. We cannot assure you that we will achieve compliance in a timely manner or prior to deadlines that may be set by the credit card companies, which may subject us to penalties established or to be established by the credit card companies. The accrual of penalties could, and the loss of our merchant credentials from any of the major credit card companies would, have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Technology and the Internet

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

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

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

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.

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.

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.

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

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

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

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

If our customers turn to other registrars for their registration needs for new TLDs, our business, financial condition and results of operations could suffer.

In April 2005, ICANN announced the designation of two new sponsored TLDs: .jobs and .travel. The registry for .travel is expected to launch in late 2005, and the registry for .jobs is expected to launch in late summer or early fall 2005. Intervening factors may result in delays in the launches for the new TLDs. We cannot assure you that we will successfully market our capabilities with respect to new TLDs or that customers will rely on us to provide registration services within these domains. Although we expect the overall number of registrations in each new TLD will be significantly lower than for .com registrations, our business, financial condition and results of operations could suffer if substantial numbers of our customers turn to other registrars for their new TLD registration needs.

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

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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;

•	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

•	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;

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•	cross-border commerce;

•	libel and defamation;

•	copyright, trademark and patent infringement;

•	pornography; and

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

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

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

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

On December 3, 2004, the president signed into law an extension of 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 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, if any, would be subject to this directive. If it were determined that one or more of our products and services are subject to this directive, we would not be 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 products and services 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 were to pass along the VAT to our customers, or could reduce our profit margin if we were 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;

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•	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;

•	industry conditions and trends;

•	interest in the Company by potential acquirors;

•	our restatement of previously issued financial statements;

•	the delay in our filing of this Quarterly Report on Form 10-Q and any potential delay in future SEC filings caused by additional manual controls and procedures being implemented in connection with the remediation of the material weaknesses in our internal controls (and any delisting of our common stock as a result of any such delay); and

•	management's identification of any material weaknesses or significant deficiencies in our internal control over financial reporting.

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.

We may be required to set the date for our 2005 annual meeting of stockholders on or after July 20, 2005 which, under our bylaws would allow stockholders subject to satisfaction of the other conditions imposed by our bylaws to nominate an alternate slate of directors to replace some or all of our existing directors at our 2005 annual meeting.

On February 8, 2005 we entered into an agreement with Barington Companies Equity Partners, L.P. ("Barington"), one of our stockholders, whereby we agreed to certain target dates to appoint two new directors and a new Chief Executive Officer. Although our nominating committee conducted a search for new director candidates, it did not satisfy the initial target date for appointing a new director by February 15, 2005. As a result, to the extent not otherwise modified, this agreement now requires us to set the date of our 2005 annual meeting of stockholders on or after July 20, 2005. This date requirement for the annual meeting has the practical effect of, among other things, allowing

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Barington, or any other stockholder subject to satisfaction of the other conditions imposed by our bylaws, to nominate an alternate slate of directors to replace some or all of our existing directors at our 2005 annual meeting, which, if successful, could result in a change in control or change in management or both. In addition, this agreement increased (from 8% to 15%) a standstill limitation previously agreed to by Barington (and certain related stockholders) on ownership of our common stock. James A. Mitarotonda, one of our current directors, is the Chairman of the Board, President and Chief Executive Officer of Barington and is the managing member of the general partner of Barington. Any contested election could distract management from its focus on operating our business and will result in significant fees and expenses.

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

As of May 23, 2005, our executive officers and directors beneficially owned approximately 16% 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 having a maturity of not more than two years, with a majority having a maturity of less than one year. Accordingly, the fair value of our investment portfolio would not be significantly impacted by a 100 basis point increase or decrease in interest rates. From time to time we also invest in publicly traded stocks, and we are subject to market price risk with respect to such investments. At March 31, 2005, we had no investments in publicly traded stocks.

We generally do not enter into financial instruments for trading or speculative purposes or to hedge exposure. We do not currently utilize derivative financial instruments and we have no present intention of utilizing derivative financial instruments in the future, however it is possible that we may enter into such transactions or similar transactions in the future. At March 31, 2005 we had no long-term debt or foreign currency hedging or derivative instruments.

Our consolidated financial statements are denominated in U.S. dollars. We derived 8% of our net revenues in the first quarter of 2005 from operations outside of the United States. We face foreign currency risks in part because our European subsidiaries receive revenues and pay expenses in local currencies, and in part because the expenses of our customer service and operations center in Canada are paid in Canadian dollars. Our European subsidiaries incur most of their expenses in their local

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currencies, which in part offsets our foreign currency risk related to European revenues received in local currencies. In the first quarter of 2005 we estimate that the net adverse impact on our consolidated operating results of the weaker dollar in the first quarter of 2005 versus 2004 against the Euro and British Pound was insignificant. Our European subsidiaries use their 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 fluctuate such financial results may vary from expectations and may adversely impact our operating results and our net income (loss). The US-dollar equivalent cost of operating our Canadian customer service and operations center was adversely impacted by the weakening of the US dollar against the Canadian dollar in the first quarter of 2005; we estimate the adverse impact on our consolidated operating results in the first quarter of 2005 versus 2004 was approximately $0.2 million.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2004 (the "2004 Form 10-K") our disclosure controls and procedures were not effective as of March 31, 2005. In light of the material weaknesses, we performed additional analyses and other post-closing procedures to ensure that our financial statements included in this report were prepared in accordance with generally accepted accounting principles and present fairly in all material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting and Management's Remediation Initiatives

Management has continued to enhance internal controls and increase the oversight over those affected controls. During management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, we identified a number of material weaknesses, which are described in Item 9A of our 2004 Form 10-K. We are currently addressing the identified material weaknesses through a number of initiatives, including those specifically set forth below. The audit committee and management will continue to monitor the effectiveness of our internal control over financial reporting on an ongoing basis and will take further action, as appropriate.

To address the material weakness relating to our historical application of a full month revenue recognition convention, we have switched to a mid-month revenue recognition convention for periods through the first quarter of 2005 and plan to make the necessary system, process and control modifications to record, process, summarize and report transactions in accordance with this mid-month revenue recognition convention or using a daily recognition method. To address the material weakness relating to application errors in our systems that resulted in errors in the timing of revenue and related expense recognition related to domain name subscriptions renewed prior to their respective scheduled expiration dates, domain names transferred in from other registrars, domain names transferred out to other registrars and customer credits, we intend to make the program changes necessary to ensure that all transaction types are properly identified and appropriately processed in the systems so that all transactions requiring deferral and amortization of revenue recognition over a period of time are accounted for in the proper periods. We have not estimated the costs that will be incurred to fully implement these changes, however such costs could be significant and could include costs for additional computer hardware to provide faster processing capability and greater data storage capacity, costs for software development and modifications, and costs for additional personnel. We

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intend to complete the implementation of our remediation plan for this material weakness by the end of the third quarter of 2005 although we cannot provide any assurances that we will be successful in these efforts. As a temporary measure, we have implemented manual controls and procedures to ensure that the amortization of deferred revenue and related prepaid expense transactions are calculated in accordance with generally accepted accounting principles, which controls and procedures will remain in effect until we have completed the system implementation of the remediation plan for this material weakness. However, these temporary manual controls and procedures are very time consuming, and there is no assurance that we will be able to complete all of the required procedures in sufficient time to enable us to meet the required due dates for filing reports with the Securities and Exchange Commission.

To address the material weakness related to our invoicing and transaction processing and procedures, by the end of the third quarter of 2005 we intend to (i) have our Corporate Services channel customers agree in writing or electronically to current product prices, (ii) have prices and domain name registration expiration dates correctly reflected in the systems, and (iii) enhance our systems to, among other things, provide the required invoice formats, although we cannot provide any assurances that we will be successful in remediating these issues by such time or at all. As a temporary measure, we have instituted manual controls and procedures to ensure that the recognition of revenue is calculated in accordance with generally accepted accounting principles, which controls and procedures will remain in effect until we have completed the implementation of the required systems changes. However, these temporary manual controls and procedures are very time consuming, and there is no assurance that we will be able to complete all of the required procedures in sufficient time to enable us to meet the required due dates for filing reports with the Securities and Exchange Commission.

To address the material weakness related to the determination of our provision for income taxes and the related balance sheet accounts, we have implemented new control procedures that require us to calculate the financial statement tax provision and send it to outside tax advisors for review at the end of each quarter starting with the fourth quarter of 2004. We believe the new control procedures will remediate this material weakness although sufficient time has not passed to allow for a determination that this weakness has been remediated. We can provide no assurances that we will be successful in operating these control procedures.

To address the material weakness related to the calculation of our pro forma stock-based compensation expense, we implemented new procedures to train the relevant personnel to properly input the required assumptions of volatility, interest rates and estimated option life into the computer system that performs the calculations of pro forma stock-based compensation expense. The new control procedures adopted in the first quarter of 2005 also include a review by our Chief Financial Officer for reasonableness of the results of the calculations produced by the computer system. We believe the new control procedures will adequately remediate this material weakness, although sufficient time has not passed to allow for a determination that this weakness has been remediated. We can provide no assurances that we will be successful in operating these control procedures.

To address the material weakness related to systems access, we began implementing controls to require quarterly updates of all user access lists to all financial applications at the end of the fourth quarter of 2004. At the end of the first quarter of 2005, these controls had not yet been fully implemented. We can provide no assurances that we will be successful in operating these control procedures.

Other than the remediation measures described above and the new system implementation discussed below, there have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In the first quarter of 2005, the Company implemented a new order entry and billing system for certain customers within the Corporate Services channel which affects accounts receivable, deferred revenue and related prepaid costs, revenue and associated cost of revenue. As anticipated in connection with this system change, on a temporary basis the Company will use manual procedures to

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calculate the amortization of deferred revenue and related prepaid expenses for the affected customers, whereas those calculations had previously been automated. This system change did not result in an adjustment to the financial statements for the quarter ending March 31, 2005. We intend to implement automated calculations of amortization of deferred revenues and related prepaid expenses before the end of the third quarter of 2005.

The statements contained in Exhibit 31.1 and 31.2 should be considered in light of, and read together with, the information set forth in this Item 4.

PART II.    OTHER INFORMATION

Item 1. Legal Proceedings.

On November 15, 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 the Company's March 3, 2000 initial public offering, were named as defendants in a class action complaint filed by Stafford Perkins, on behalf of himself and all others similarly situated, 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 the Company's 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. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Company's case. The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers' settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of the Company to plaintiffs under the settlement agreement and related agreements will be covered by existing insurance. The Company is currently not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from the Company's insurance carriers. To the Company's knowledge, the Company's insurance carriers are solvent, and the Company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, the

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Company does not expect that the settlement will involve any payment by the Company. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Company's insurance carriers should arise, the Company's maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the court's opinion and are in the process of obtaining approval from those issuer defendants that are not in bankruptcy. At this point, all but one of the issuer defendants that are not in bankruptcy have approved the revised settlement agreement, which has been submitted to the court. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the court will grant final approval to the settlement. If the settlement agreement is not approved and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company's insurance coverage, and whether such damages would have a material impact on the Company's results of operations or financial condition in any future period.

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, 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. On July 30, 2004, Register.com and the Plaintiff entered into a settlement agreement, the terms of which were subject to approval by the Court. In the second quarter of 2004, the Company recorded a provision of $1.4 million for the settlement which it estimated to be its probable exposure net of contributions to be made by its insurance carrier. The Court granted final approval of the settlement agreement on January 24, 2005. Pursuant to the settlement agreement, Register.com agreed to set up a fund of $2.0 million to be used to pay all properly submitted refund claims to settlement class members as well as Court-approved attorneys' fees and litigation expenses incurred by class counsel. As anticipated, Register.com's contribution to the fund, net of contributions made by its insurance carrier, will be approximately $1.4 million.

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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 be material to the Company and will not have a material adverse effect on the Company's financial position, results of operations or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On February 7, 2005 we issued 393,050 shares of our common stock to Richard D. Forman upon exercise of an outstanding warrant. The exercise price ($381,258 or $0.97 per share) was paid to us by Mr. R. Forman's tender of 60,041 shares of our common stock. The tendered shares were valued at $6.35 per share (the fair market value) in accordance with the terms of the warrant.

On February 24, 2005 we issued 77,098 shares of our common stock to a warrant holder upon exercise of an outstanding warrant. The exercise price ($74,785 or $0.97 per share) was paid to us by the warrant holder's tender of 11,965 shares of our common stock. The tendered shares were valued at $6.25 per share (the fair market value) in accordance with the terms of the warrant.

The shares issued in the transactions described above were issued in reliance on the exemption from registration provided in Section 3(a)(9) of the Securities Act of 1933, as amended, as such shares were issued for an exchange with existing security holders in transactions in which no commissions or underwriting discounts were paid. The shares tendered in the transactions described above have been cancelled and are no longer outstanding.

Issuer Purchases of Equity Securities

The information in the table below reflects the delivery to us of certain shares of our common stock as payment of the exercise price under certain warrants previously outstanding. The shares delivered were not purchased by us under any plan or program and such shares have been cancelled and are no longer outstanding. We currently have no plan or program to repurchase any of our securities.

Period

Total Number of Shares (or Units) Purchased

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs

February 1, 2005 – February 28, 2005

72,006 (1)

$6.33 (2)

N/A

N/A

(1)	Represents (i) 60,041 shares of our common stock tendered as payment of the exercise price of warrants exercised on February 7, 2005 and (ii) 11,965 shares of our common stock tendered as payment of the exercise price of warrants exercised on February 24, 2005.

(2)	The shares of common stock tendered as payment of the exercise price of warrants were valued at fair market value on the exercise date, or (i) $6.35 per share with respect to the 60,041 shares tendered on February 7, 2005 and (ii) $6.25 per share with respect to the 11,965 shares tendered on February 24, 2005.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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

Not applicable.

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Item 5. Other Information.

The information disclosed under "Unregistered Sales of Equity Securities" in Part II, Item 2 of this report on Form 10-Q is incorporated by reference herein.

Item 6. 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: May 27, 2005                                                    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, 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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