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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period

ended June 30, 2000

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|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period

from ________________________ to ____________________________

Commission file number: 0-29739

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(Exact name of registrant as specified in its charter)

Delaware 11-3239091

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

incorporation or organization)

575 Eighth Avenue, 11th Floor, New York, New York 10018

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(Address of principal executive offices) (Zip Code)

(212) 798-9100

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(Registrant's telephone number, including area code)

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(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports

required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of

1934 during the preceding 12 months (or for such shorter period that the

registrant was required to file such reports), and (2) has been subject to such

filing requirements for the past 90 days. |X| Yes |_| No

As of August 9, 2000, there were 31,991,411 shares of the registrant's

common stock outstanding.

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FORM 10-Q

INDEX

PART I: FINANCIAL INFORMATION Page Number

Item 1. Financial Statements 3

Balance Sheets at December 31, 1999 and

June 30, 2000 (unaudited) 3

Statements of Operations for the three months and

six months ended June 30, 1999 and 2000 (unaudited) 4

Unaudited Statements of Cash Flows for the six

months ended June 30, 1999 and 2000 (unaudited) 5

Notes to Unaudited Financial Statements 6

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operation 8

Item 3. Quantitative and Qualitative Disclosure about Market Risk 36

PART II: OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds 37

Item 6. Exhibits and Reports on Form 8-K 37

Item 7. Signatures 38

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheet

December 31, June 30,

---------------- ---------------

1999 2000

---------------- ---------------

(Unaudited)

Assets

Current assets

Cash and cash equivalents ......................................... $ 40,944,122 $ 148,332,164

Short-term investments ............................................ 4,723,050 26,912,789

Accounts receivable, less allowance of $314,516 and

$804,576 (unaudited), respectively .............................. 2,516,186 6,259,784

Prepaid domain name registry fees ................................. 4,954,730 14,307,860

Deferred tax asset ................................................ 8,578,045 21,995,762

Prepaid income taxes .............................................. -- 1,608,000

Deferred offering costs ........................................... 390,000 --

Other current assets .............................................. 195,196 1,667,597

------------- -------------

Total current assets ........................................... 62,301,329 221,083,956

Fixed assets, net .................................................. 2,458,386 7,296,257

Prepaid domain name registry fees, net of current portion .......... 3,576,331 5,476,523

Investments ........................................................ -- 2,500,000

Goodwill and other intangibles, net ................................ -- 11,341,302

Other assets ....................................................... -- --

------------- -------------

Total assets ................................................... $ 68,336,046 $ 247,698,038

============= =============

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable and accrued expenses ............................. $ 8,513,079 $ 11,777,790

Income taxes payable .............................................. 5,608,198 --

Deferred revenue, net ............................................. 18,193,871 63,509,292

Capital lease obligations, current portion ........................ 5,967 --

Notes payable ..................................................... -- --

Other current liabilities ......................................... 166,857 927,430

------------- -------------

Total current liabilities ...................................... 32,487,972 76,214,512

------------- -------------

Deferred revenue, net of current portion ........................... 13,907,361 24,029,534

Capital lease obligations, net of current portion .................. 27,858 --

------------- -------------

Total liabilities .............................................. 46,423,191 100,244,046

------------- -------------

Commitments and contingencies

Stockholders' equity

Preferred stock -- $.0001 par value, 5,000,000 shares authorized;

Series A convertible preferred; 4,694,333 issued and outstanding

at December 31, 1999 and none issued and outstanding at June

30, 2000 (liquidation preference of $16,094,844) ................ 469 --

Common stock -- $.0001 par value, 200,000,000 shares

authorized; 21,065,047 shares issued and outstanding at December

31, 1999, and 31,990,420 issued and outstanding at June 30, 2000. 2,106 3,199

Additional paid-in capital ........................................ 36,709,821 167,212,811

Unearned compensation ............................................. (2,647,770) (5,627,223)

Accumulated deficit ............................................... (12,151,771) (14,134,795)

------------- -------------

Total stockholders' equity ..................................... 21,912,855 147,453,992

------------- -------------

Total liabilities and stockholders' equity ..................... $ 68,336,046 $ 247,698,038

============= =============

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

Statement of Operations

Three Months Six Months

Ended June 30, Ended June 30,

--------------------------------- ----------------------------------

1999 2000 1999 2000

--------------- --------------- --------------- ----------------

(unaudited) (unaudited)

Net revenues .................. $ 1,521,762 $ 20,249,886 $ 2,269,062 $ 32,667,756

Cost of revenues .............. 232,665 5,286,689 324,783 9,387,700

------------ ------------ ------------ ------------

Gross profit ............... 1,289,097 14,963,197 1,944,279 23,280,056

------------ ------------ ------------ ------------

Operating costs and expenses

Sales and marketing .......... 998,064 14,980,181 1,717,763 22,153,387

Research and development ..... 356,606 1,236,329 623,552 1,954,097

General and administrative

(exclusive of non-cash

compensation) .............. 199,732 1,644,058 402,325 3,342,079

Non-cash compensation ........ 3,945,248 458,320 4,530,815 1,290,093

Amortization of goodwill

and other intangibles ...... -- 298,455 -- 298,455

------------ ------------ ------------ ------------

Total operating cost and

expenses .................. 5,499,650 18,617,343 7,274,455 29,038,111

------------ ------------ ------------ ------------

Loss from operations .......... (4,210,553) (3,654,146) (5,330,176) (5,758,055)

Other income (expenses), net 70,552 2,662,014 83,173 3,775,031

------------ ------------ ------------ ------------

Net loss ................... $ (4,140,001) $ (992,132) $ (5,247,003) $ (1,983,024)

============ ============ ============ ============

Basic and diluted net loss

per share ................. $ (.23) $ (.03) $ (.30) $ (.07)

============ ============ ============ ============

Weighted average

common shares used in

basic and diluted net

loss per share ............ 18,193,318 31,623,494 17,747,079 27,901,444

============ ============ ============ ============

Pro forma basic and diluted

net loss per share

(unaudited) .................. $ (.03) $ (.07)

============ ============

Weighted average common

shares used in pro forma

basic and diluted net loss

per share (unaudited) ........ 31,623,494 29,526,406

============ ============

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

Statement of Cash Flows

Six Months Ended

June 30,

--------------------------------

1999 2000

-------------- ----------------

(unaudited)

Cash flows from operating activities

Net loss .............................. $ (5,247,003) $ (1,983,024)

Adjustments to reconcile net loss

to net cash provided by (used

in) operating activities

Deferred revenues .................. 2,655,896 55,437,594

Depreciation and

amortization ..................... (3,314) 849,675

Compensatory stock options

and warrants expense ............. 4,530,815 1,290,093

Deferred income taxes .............. -- (13,417,717)

Changes in assets and liabilities

affecting operating cash flows

Accounts receivable ................. (1,195,679) (3,743,598)

Prepaid domain name registry

fees ............................... (1,820,584) (11,253,322)

Prepaid income taxes ................ -- (1,608,000)

Other current assets ................ (18,958) (1,472,401)

Other assets ........................ (852) --

Accounts payable and accrued

expenses ........................... 525,352 3,264,711

Accrued registry fees ............... -- --

Accrued advertising ................. -- --

Income taxes payable ................ -- (5,608,198)

Other current liabilities ........... -- 760,573

------------ -------------

Net cash provided by (used

in) operating activities ......... (574,327) 22,516,386

------------ -------------

Cash flows from investing activities

Purchases of fixed assets ............. (961,790) (5,389,091)

Deferred offering costs ............... -- 390,000

Purchases of investments .............. -- (24,689,739)

Acquisition of Inabox, net ............ -- (1,091,083)

------------ -------------

Net cash used in investing

activities ....................... (961,790) (30,779,913)

------------ -------------

Cash flows from financing activities

Proceeds from notes payable ........... -- --

Repayment of notes payable ............ -- --

Net proceeds from issuance of

common stock and warrants ........... 6,693,497 115,685,394

Net proceeds from issuance of

preferred stock and warrants ........ 13,030,500 --

Principal payments on capital

lease obligations ................... (3,135) (33,825)

------------ -------------

Net cash provided by

financing activities ............. 19,720,862 115,651,569

------------ -------------

Net increase in cash and cash

equivalents ........................... 18,184,745 107,388,042

Cash and cash equivalents at

beginning of period ................... 1,284,648 40,944,122

------------ -------------

Cash and cash equivalents at end of

period ................................ $ 19,469,393 $ 148,332,164

============ =============

Supplemental disclosure of cash

flow information

Cash paid for interest ................ $ 2,689 $ 15,493

Cash paid for income taxes ............ $ -- $ 20,687,509

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

Notes to Unaudited Financial Statements

1. Nature of Business and Organization

Nature of Business

domain name registration and other online services such as web-hosting, email,

domain name forwarding and advertising. The Company has also marketed software

for creation of Internet websites.

In April 1999, the Company was selected as one of the initial five

testbed registrars by the Internet Corporation for Assigned Names and Numbers

("ICANN"), an independent non-profit organization selected by the Department of

Commerce to manage and oversee the system for generic top level domain name

registration. In June 1999, the Company commenced online registration as an

ICANN-accredited registrar of .com, .net and .org domains.

Organization

The Company originally operated as Forman Interactive Corp. ("Forman"),

a New York Corporation that was formed in November 1994. Pursuant to a Merger

Agreement dated June 23, 1999 by and among Register.com, a Delaware Corporation

formed in May 1999 specifically for the purpose of this merger, and Forman, the

stockholders of Forman exchanged their shares for an equivalent number of shares

of Register.com. References herein to the operations and historical financial

information of the "Company" prior to the date of the merger refer to the

operations and historical financial information of Forman.

Stock Split

In January 2000, the Company effected a 3.5 to 1 stock split. All

common and preferred shares, options, warrants and related per-share data

reflected in the accompanying financial statements and notes thereto have been

adjusted to give retroactive effect to the stock split.

2. Summary of Significant Accounting Policies

Interim Financial Statements

The interim financial statements have been prepared by Register.com

without audit, pursuant to the rules and regulations of the Securities and

Exchange Commission ("SEC"). In the opinion of management, financial statements

included in this report reflect all normal recurring adjustments which

operations for the interim periods covered and of the financial position of

footnote disclosures normally included in the annual financial statements

prepared in accordance with generally accepted accounting principles have been

condensed or omitted pursuant to such rules and regulations. However,

information presented. The operating results for interim periods are not

necessarily indicative of the operating results for the entire year. These

interim financial statements should be read in conjunction with Register.com's

December 31, 1999 audited financial statements and notes thereto included in

Revenue Recognition

The Company's revenues are primarily derived from domain name

registration fees, advertising and online products and services.

Domain name registration fees

Registration fees charged to end-users for registration services are

recognized on a straight-line basis over the life of the registration term.

Substantially all end-user subscribers pay for services with major credit cards

for which the Company receives daily remittances from the credit card carriers.

A provision for chargebacks from the credit card carriers is included in

accounts payable and accrued expenses. Such amounts are separately recorded and

deducted from gross registration fees in determining net revenues. Referral

commissions earned by our private label and co-brand partners are deducted from

gross registration fees in determining net revenues.

Online products and services

Revenue from online products and services is recognized over the period

in which services are provided, generally monthly. Payments received in advance

of services being provided are included in deferred revenue.

Advertising

Advertising revenues are derived principally from short-term

advertising contracts in which the Company typically guarantees a minimum number

of impressions or pages to be delivered to users over a specified period of time

for a fixed fee. Advertising revenues are recognized ratably in the period in

which the advertisement is displayed, provided that no significant obligations

remain, at the lesser of the ratio of impressions delivered over total

guaranteed impressions or the straight line basis over the term of the contract.

To the extent that minimum guaranteed impressions are not met, the Company

defers recognition of the corresponding revenues until the guaranteed

impressions are achieved.

3. Initial Public Offering

In March 2000, Register.com sold 5,222,279 shares of common stock

through its initial public offering including 222,279 shares through an over

allotment clause. Net proceeds from the offering and over allotment were

approximately $115.3 million, after deducting the discount granted to the

underwriters and other offering expenses. At the time of the initial public

offering, all of Register.com's preferred stock automatically converted into

4,694,333 shares of common stock.

4. Investment

In February 2000, the Company purchased 476,784 shares of Series A

Convertible Preferred Stock and warrants to acquire an additional 95,357 shares

of Series A Convertible Preferred Stock of Great Domains.com, Inc ("Great

Domains"), representing approximately 10% of the outstanding voting stock of

Great Domains, for $2,500,000.

5. Acquisitions

In June 2000, the Company, through a newly formed wholly owned

subsidiary, acquired all of the outstanding capital stock of Inabox, Inc. for $1

million cash and 280,019 shares of the Company's common stock. Upon meeting

certain criteria, the Company may be required to issue an additional 20,000

shares of its common stock to the previous shareholders of Inabox, Inc. The

total value of the transaction was approximately $11.7 million. The acquisition

has been accounted for using the purchase method of accounting, and accordingly

the purchase price has been allocated to assets acquired and liabilities assumed

based on their respective fair values. Intangible assets, representing the

unallocated excess of purchase price, plus transaction expenses, over the net

assets acquired and liabilities assumed based on their respective fair values.

Intangible assets, representing the unallocated excess of purchase price, plus

transaction expenses, over the net assets acquired, or approximately $11.6

million has been preliminarily allocated to goodwill and other intangibles and

is being amortized on a straight-line basis over a period of 39 months. The June

30, 2000 financial statements of the Company include the accounts of the Company

and its wholly owned subsidiary. All significant intercompany transactions have

been eliminated in consolidation.

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

Results of Operations

This quarterly report on Form 10-Q contains forward-looking statements.

For this purpose, any statements contained herein that are not statements of

historical fact may be deemed to be forward-looking statements. Statements

regarding the intent, belief or current expectations of Register.com are

intended to be forward-looking statements which may involve risk and

uncertainty. There are a number of factors that could cause Register.com's

actual results to differ materially from those indicated by such forward-looking

statements, including, but not limited to, those discussed in our final

prospectus, as filed with the SEC on March 3, 2000. In addition, "Risk Factors"

is a further discussion of certain of those risks as they relate to the period

covered by this report, Register.com's near term outlook with respect thereto,

and the forward-looking statements set forth herein; however, the absence in

this quarterly report of a complete recitation of or update to all risk factors

identified in our final prospectus should not be interpreted as modifying or

superseding any such risk factors, except to the extent set forth below.

Overview

We are a provider of Internet domain name registration services

worldwide. Domain names serve as part of the infrastructure for Internet

communications and registering a domain name is one of the first steps for

individuals and businesses seeking to establish an online identity. We believe

that we offer a quick and user-friendly registration process and responsive and

reliable customer support. We also offer a suite of value-added products and

services targeted to assist our customers in developing and maintaining their

online identities, including:

Products and Services Products and Services

Provided by Us Provided by Others

o domain name forwarding o email

o real-time domain name management o web hosting

o website-creation tools under the name FirstStepSite o submission of domain names to up

to 400 search engines

o trademark monitoring under the

name Trademark Guardian

Our goal is to become a one-stop resource through which our customers will

establish, maintain and enhance their presence on the Internet.

We are the successor by merger to Forman Interactive Corp. Forman

Interactive commenced operations in 1994 as a developer of electronic commerce

software, and began offering web-hosting and related products and services in

1997. In February 1998, we began to distribute domain names either for free or,

to a lesser extent, were paid commissions for the domain names we distributed

for international registrars and registries. In April 1999, we commenced

offering registration services for country code domains and in June 1999, we

began offering registrations in the .com, .net and .org domains.

In June 2000, we acquired all of the outstanding capital stock of Inabox,

Inc. through a merger for $1.0 million in cash and 280,019 shares of our common

stock. In the event contracts are signed with identified prospects, we may be

required to issue an additional 20,000 shares of our common stock to the

previous stockholders of Inabox. This transaction was accounted for using the

purchase method of accounting. As a result, Inabox's financial results are

consolidated with our financial results from the date of acquisition.

Net Revenues

We derive our net revenues from domain name registrations, online

products and services and advertising. Net revenues from domain name

registrations consist of fees paid by registrants over the course of the

registration period reduced by referral commissions and a provision for credit

card chargebacks. We currently earn registration fees in connection with new,

renewal, extended and transferred registrations. From June 1999 until January

14, 2000, we offered two-year registration periods for the initial domain name

registration in the .com, .net and .org domains with annual renewals and either

one- or two-year registration periods for domain names in the country code

domains. As of January 15, 2000, we have supplemented our registration period

offerings to include one-, five- and ten-year registration periods for both

initial and renewal domain name registrations in the .com, .net and .org

domains. Renewal and extension registration periods can be from one to ten

years. For our .com, .net and .org domain names, we currently charge $35 per

year and offer registration terms of one, two, five and ten years. For our

country code domains, we currently charge, on our website, approximately $40 to

$299 for one- or two-year registrations. We intend to charge the same rates for

renewals as we do for corresponding initial registration periods. Because we

only began operating as a registrar in April 1999, we have processed a limited

amount of registration renewals. We anticipate that registration renewals will

contribute to our net revenues as our customers' initial registrations reach the

end of their terms.

In addition to our standard registration fees, we have a number of

different fee structures for our domain registration services. Our Corporate

Services department delivers a diversified range of higher-priced services for

our corporate customers. We pay referral commissions based on a percentage of

the net registration revenues derived from registrations processed through the

participants in our network of co-brand websites and those we process though our

www.register.com website referred to us by participants in our affiliate

network. Participants in our network of private label websites pay us a fee per

registration, discounted off of our standard registration fee. We recently added

product and service offerings to expand into different

segments of the domain name registration market we did not previously serve.

These include registrations offered at a substantial discount to our standard

registration fees targeted for bulk customers and the use of domain names for

consumers at no charge, limited to one name per customer as identified by a

unique email address for a duration of one year. Each of these new offerings

includes a reduced level of customer service and limited value-added products or

services. As a result of expanding into these new segments, we anticipate that

in the short-tem our overall gross margin will be negatively impacted, but will

improve over the long-term as we sell higher margin products and services to

these customers.

Domain name registration revenues are deferred at the time of the

registration and are recognized ratably over the term of the registration

period. Under this subscription-based model, we recognize revenue when we

provide the registration services, including customer service and maintenance of

the individual domain name records. ICANN requires us to have reasonable

assurance of payment in order to register a domain name. Therefore, we require

prepayment via credit card for all online domain name registration sales, which

provides us with the full cash fee at the beginning of the registration period

while recognizing the revenues over the registration period. For some of our

customers who register domain names through our Corporate Services department,

we establish lines of credit based on credit worthiness, thereby reasonably

assuring payment.

Online products and services, which primarily consist of email, domain

name forwarding, web hosting and software, are sold either as annual or monthly

subscriptions, depending on the product or service offering. These revenues are

recognized ratably over the period in which we provide our services. Our

software revenues consist solely of software sales by our Inabox subsidiary. To

date, these software revenues have not been material and we do not expect these

revenues to be material for the foreseeable future. We offer web-hosting through

our own servers and through web-hosting services provided by third parties. In

1999, we shifted our business model, and have chosen to direct our resources,

toward our domain name registration business and not toward our own web-hosting

business. As such, while we continue to offer our own web-hosting services, we

do not actively promote this service and, therefore, do not anticipate

significant revenue growth from our own web-hosting service in future periods.

We intend, however, to continue actively promoting web-hosting services provided

by third parties.

Advertising revenues are derived from the sale of sponsorships and

banner advertisements under short-term contracts that range from one month to

one year in duration. We recognize these revenues ratably over the period in

which the advertisements are displayed provided that no significant company

obligation remains and collection of the resulting receivable is probable.

Cost of Revenues

Our cost of revenues consists of the costs associated with providing

domain name registrations and online products and services. Cost of revenues for

domain name registrations primarily consists of registry fees, depreciation on

the equipment used to process the domain name registrations, the fees paid to

the co-location facilities maintaining our equipment and fees paid to the

financial institutions to process credit card payments on our behalf. Through

January 14, 2000, we paid a $9 per year registry fee for each .com, .net and

.org domain name registration. This fee was reduced to $6 per year effective

January 15, 2000. We currently pay registry fees of approximately $5 to $150

for, direct, one- or two-year country code domain name registrations. The

largest component of our cost of revenues is the registry fees which, while paid

in full at the time that the domain name is registered, are recorded as a

prepaid expense and recognized ratably over the term of the registration.

Cost of revenues for our online products and services consists of fees

paid to third party service providers, depreciation on the equipment used to

deliver the services, fees paid to the co-location facilities maintaining our

equipment and fees paid to the financial institutions to process credit card

payments on our behalf.

There are no material costs associated with our software revenues.

While we have no direct cost of revenues associated with our

advertising revenue, we do incur operational costs including salaries and

commissions, which are classified as operating expenses. We have no incremental

cost of revenues associated with advertising since we use the same equipment to

deliver the advertisements as we use for our domain name registration services.

Operating Expenses

Our operating expenses consist of sales and marketing, research and

development, general and administrative, non-cash compensation expenses, and

amortization of goodwill and other intangible assets. Our sales and marketing

expenses consist primarily of employee salaries, marketing programs such as

advertising and, to a lesser extent, commissions paid to our sales

representatives. Research and development expenses consist primarily of employee

salaries, fees for outside consultants and related costs associated with the

development and integration of new products and services, the enhancement of

existing products and services and quality assurance. General and administrative

expenses consist primarily of employee salaries and other personnel related

expenses for executive, financial and administrative personnel, as well as

professional services fees and bad debt accruals. Non-cash compensation expenses

are related to grants of common stock, stock options and warrants made to

employees, directors, consultants and vendors. Facilities expenses are allocated

across our different operating expense categories. In addition to the $4.9

million non-cash compensation charge taken in 1999, we recorded a non-cash

compensation charge of $1.3 million for the six months ended June 30, 2000, and

will record approximately $5.6 million in additional non-cash compensation

charges through 2004 as follows: $900,000 for the remainder of 2000, $1.8

million in each of 2001 and 2002, and $714,000 in 2003 and $359,000 in 20004.

These charges primarily relate to the issuance through June 2000 of employee

stock options having exercise prices below fair market value on the date of

grant. The amortization of goodwill and other intangible assets is associated

with our acquisition of Inabox Inc. in June 2000. The transaction was valued at

approximately $11.7 million of which approximately $11.6 million has been

preliminarily allocated to goodwill and other intangible items. This amount is

being amortized on a straight-line basis over 39 months.

Net Losses

We have incurred annual and quarterly losses from our operations since

our inception, and we expect to incur operating losses on both an annual and

quarterly basis for the foreseeable future. We have incurred significant net

losses in the past and expect these losses to continue to increase from current

levels as we grow our business by hiring additional employees, increasing our

marketing expenses to build our brand and increasing our capital expenditures.

We incurred net losses of $992,000 and $2.0 million for the three and six months

ended June 30, 2000, respectively, $8.8 million for the year ended December 31,

1999, $4.1 million and $5.2 million for the three and six months ended June 30,

1999, respectively, and $1.2 million for the year ended December 31, 1998. We

intend to spend more than $25.0 million in the second half of 2000 and more than

$70.0 million in 2001 on sales and marketing, and over $7.0 million in the

second half of 2000 and more than $20.0 million in 2001 in capital expenditures.

Furthermore, given the rapidly evolving nature of our business and our limited

operating history as a competitive registrar, our operating results are

difficult to forecast, and period-to-period comparisons of our operating results

will not be meaningful and should not be relied upon as an indication of future

performance. Due to these and other factors, many of which are outside our

control, quarterly operating results may fluctuate significantly in the future.

Results of Operations

Because we began operating as a domain name registrar only in the

second quarter of 1999 and generated only limited revenues from domain name

registration services prior to this time, we believe that second quarter and

first semester comparisons of 1999 against 2000 are not meaningful and you

should not rely upon them as indications of our future performance.

We anticipate that in future periods net revenues from domain name

registrations will be the largest component of our net revenues and cost of

domain name registrations will be the largest component of our cost of revenues.

The following table presents selected statement of operations data for

the periods indicated as a percentage of net revenues. The operating results in

any quarter are not necessarily indicative of the results to be expected for any

future period.

Three months ended June 30, Six months ended June 30,

1999 2000 1999 2000

---- ---- ---- ----

Net revenues 100% 100% 100% 100%

Cost of revenues 15 26 14 29

----- ----- ----- -----

Gross Profit 85 74 86 71

----- ----- ----- -----

Operating expenses

Sales & marketing 66 82 76 68

Research & development 23 6 27 6

General & administrative 13 8 18 10

Non-cash compensation 259 2 200 4

Amortization of Goodwill and

other intangibles 0 1 0 1

----- ----- ----- -----

Total operating expenses 361 99 321 89

----- ----- ----- -----

Loss from operations (277) (25) (235) (18)

Other income (expenses), net 5 13 4 12

----- ----- ----- -----

Net income (loss) (272)% (12)% (231)% (6)%

===== ===== ===== =====

Six months ended June 30, 1999 and 2000

Net Revenues

Total net revenues increased from $2.3 million for the six months ended

June 30, 1999 to $32.7 million for the six months ended June 30, 2000.

Domain Name Registrations. Revenues from domain name registrations

increased from $376,000 for the six months ended June 30, 1999 to $25.6 million

for the six months ended June 30, 2000. This increase was primarily from the

shift in our business from serving as a distributor of domain names to serving

as a generic top level domain name registrar in June 1999. Additionally, we had

$2.4 million of deferred revenue, net from domain name registrations at June 30,

1999, while deferred revenue, net was $86.4 million at June 30, 2000. We

anticipate that revenues from domain name registrations will increase in

absolute dollars in future periods as a result of recognition of deferred

revenues, growth in the market for domain name registrations, renewals and

transfers and the implementation of our business strategy. For the three months

ended December 31, 1999, we registered 308,000 domain names in the .com, .net

and .org domains, in the three months ended March 31, 2000, we registered

908,000 domain names in these domains, and in the three months ended June 30,

2000, we registered 678,000 domain names in these domains. We believe that the

number of domain name registrations for the first quarter of this year was

unusually high for various reasons which we believe include heightened awareness

of the opportunity to register domain names and the absence of significant

competition for domain name registrations other than from Network Solutions. We

believe that the growth experienced in domain name registrations in the first

quarter of this year is not an indication of anticipated future growth.

Online Products and Services. Revenues from online products and services

increased 45.9% from $1.0 million for the six months ended June 30, 1999 to

$1.5 million for the six months ended June 30, 2000 primarily from increased

sales of email and domain name forwarding services. We anticipate that revenues

from online products and services will remain relatively flat in the near term

as we begin to introduce new online products and services and no longer

actively promote our own web-hosting services. We anticipate that these

revenues will increase over the long term as we expand our online product and

service offerings.

Advertising. Revenues from advertising increased from $879,000 for the six

months ended June 30, 1999 to $5.7 million for the six months ended June 30,

2000 primarily from the increased number of page views and the volume of

advertising and sponsorships sold on our www.register.com, FirstStepSite, and

FutureSite websites. We anticipate that revenues from advertising in future

periods will increase in absolute dollars primarily for the same reasons.

Cost of Revenues

Total cost of revenues increased from $325,000 for the six months ended

June 30, 1999 to $9.4 million for the six months ended June 30, 2000.

Cost of Domain Name Registrations. Cost of domain name registrations

increased from $183,000 for the six months ended June 30, 1999 to $9.3 million

for the six months ended June 30, 2000. The increase was primarily from the

shift in our business from serving as a distributor of domain names to serving

as a generic top level domain name registrar in June 1999. As a distributor, we

generally passed through registry costs to the applicable registry or

registrar. We anticipate that cost of revenues for domain name registrations

will increase in absolute dollars primarily as a result of growth in our domain

name registrations and renewals.

Cost of Online Products and Services. Cost of online products and services

decreased from $142,000 for the six months ended June 30, 1999 to $104,000 for

the six months ended June 30, 2000. During the first quarter of 2000, there was

an increase in cost of online products and services primarily due to the

additional depreciation expense associated with the equipment dedicated to our

operations to support our growing online product and services offerings. During

the second quarter of 2000, we had renegotiations with vendors which resulted

in lower costs of sales and a one time adjustment to expenses. The decrease in

the cost of online products and services for the six months ended June 30, 1999

as compared to the six months ended June 30, 2000 was primarily a result of the

aforementioned negotiations with vendors. We anticipate that these costs will

increase in absolute dollars as we expand our online products and services

offerings.

Operating Expenses

Total operating expenses increased from $7.3 million for the six months

ended June 30, 1999 to $29.0 million for the six months ended June 30, 2000.

Sales and Marketing. Sales and marketing expenses increased from $1.7

million for the six months ended June 30, 1999 to $22.2 million for the six

months ended June 30, 2000. The increase was primarily from the costs

associated with our radio, print media and television advertising campaigns.

The radio and print campaign was launched in September 1999, while the

television campaign was launched in May 2000. The increase is also due to the

increase in salaries associated with newly hired sales, marketing and customer

service professionals. We anticipate that sales and marketing expenses will

increase substantially in absolute dollars as we expand our domestic and

international marketing programs. Additionally, we anticipate increasing our

customer service staff and domain name registration sales force to support both

the demands of our customers as well as to further our direct and indirect

sales strategy for domain name registrations.

Research and Development. Research and development expenses increased from

$624,000 for the six months ended June 30, 1999 to $2.0 million for the six

months ended June 30, 2000. The increase resulted primarily from salaries

associated with newly hired technology personnel to support our growth. We

anticipate that research and development expenses will continue to increase in

absolute dollars as we continue to invest in developing and modifying our

systems to grow our business.

General and Administrative. General and administrative expenses increased

from $402,000 for the six months ended June 30, 1999 to $3.3 million for the

six months ended June 30, 2000. The increase was primarily from salaries

associated with newly hired personnel and related costs required to manage our

growth and facilities expansion. We expect that our general and administrative

expenses will increase in absolute dollars to support our overall growth

including increased expenses relating to our new responsibilities as a public

company.

Non-cash Compensation. Non-cash compensation expenses decreased from $4.5

million for the six months ended June 30, 1999 to $1.3 million for the six

months ended June 30, 2000. For the six months ended June 30, 1999, the

non-cash compensation was primarily associated with the modification of

warrants previously granted to some of our stockholders and issuance of

warrants in connection with a financial consulting agreement, and a minimal

portion of the expense was the result of the amortization of deferred

compensation related to employee stock options. For the six months ended June

30, 2000, the non-cash compensation was primarily attributable to the

amortization of deferred compensation related to employee stock options.

Amortization of Goodwill and Other Intangibles. Amortization of goodwill

and other intangible items was $298,000 for the six months ended June 30, 2000

and related to the goodwill and intangible items associated with our

acquisition of Inabox. We had no amortization of goodwill for the six months

ended June 30, 1999.

Other Income (Expenses), Net.

Other income, net consists primarily of interest income net of interest

expense. Other income, net increased from $83,000 for the six months ended June

30, 1999 to $3.8 million for the six months ended June 30, 2000. The increase

was primarily from interest earned on our cash balance as a result of our

equity financings, including our initial public offering and cash provided by

operations.

Net Loss

Net loss decreased $3.2 million to $2.0 million in the six months ended

June 30, 2000 from $5.2 million in the six months ended June 30, 1999.

Three months ended June 30, 1999 and 2000

Net Revenues

Total revenues increased from $1.5 million for the three months ended

June 30, 1999 to $20.2 million for the three months ended June 30, 2000.

Domain Name Registrations. Revenues from domain name registrations

increased from $291,000 for the three months ended June 30, 1999 to $16.1

million for the three months ended June 30, 2000. This increase was primarily

from the shift in our business from serving as a distributor of domain names to

serving as a generic top level domain name registrar in June 1999. Additionally,

our deferred revenue, net from domain name registrations at June 30, 1999, was

$2.4 million, while deferred revenue, net was $86.4 million at June 30, 2000. We

anticipate that revenues from domain name registrations will increase in

absolute dollars in future periods as a result of recognition of deferred

revenues, growth in the market for domain name registrations, renewals and

transfers and the implementation of our business strategy. For the three months

ended December 31, 1999, we registered 308,000 domain names in the .com, .net

and .org domains, and in the three months ended March 31, 2000, we registered