UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

Web.com, Inc.

Minnesota		41-1404301
(State or other jurisdiction		(IRS Employer
of incorporation or organization)		Identification No.)

303 Peachtree Center Avenue, Suite 500, Atlanta, GA 30303
(Address, including Zip Code, of principal executive offices)

(404) 260-2477
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

Aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006 based upon the closing price was approximately $90 million.

The number of outstanding shares of the registrant’s Common Stock on February 28, 2007 was 16,784,108.

Portions of the Proxy Statement for the registrant’s 2007 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

PART I
ITEM 1. Business			3
ITEM 1A. Risk Factors			8
ITEM 1B. Unresolved Staff Comments			15
ITEM 2. Properties			15
ITEM 3. Legal Proceedings			15
ITEM 4. Submission Of Matters To A Vote Of Security Holders			17
PART II
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and issuer purchases of equity securities			17
ITEM 6. Selected Financial Data			19
ITEM 7. Management’s Discussion And Analysis Of Financial Condition and Results Of Operations			19
ITEM 7A. Quantitative and Qualitative disclosures about market risk			31
ITEM 8. Financial Statements and Supplementary Data			33
Index To consolidated Financial Statements			33
ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure			66
ITEM 9A. Controls And Procedures			66
ITEM 9B. Other Information			67
PART III
Item 10. Directors, Executive Officers and corporate governance			68
Item 11. Executive Compensation			68
Item 12. Security Ownership Of Certain Beneficial Owners And Management			68
Item 13. Certain Relationships And Related Transactions and Director Independence			68
Item 14. Principal Accountant Fees And Services			68
PART IV
ITEM 15. Exhibits and Financial Statement Schedules			E-1
EX-21.01 SUBSIDIARIES OF THE REGISTRANT
EX-23.01 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-24.01 POWER OF ATTORNEY
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

PART I

ITEM 1. Business

Statements contained in this Form 10-K that are not purely historical are forward-looking statements and are being provided in reliance upon the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify forward-looking statements. These forward-looking statements include but are not limited to statements regarding Web.com’s expectations of the Company’s future liquidity needs, its expectations regarding its future operating results including its planned increase in its revenue levels and the actions the Company expects to take in order to maintain its existing customers and expand its operations and customer base. All forward-looking statements are made as of the date hereof and are based on current management expectations and information available to the Company as of such date. The Company assumes no obligation to update any forward-looking statement. It is important to note that actual results could differ materially from historical results or those contemplated in the forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and include risks associated with our target markets and risks pertaining to competition, other trend information and the Company’s ability to successfully enhance its operations. Factors that could cause actual results to differ materially include, but are not limited to, those identified in “Item 1A. Risk Factors” and in other Company filings with the Securities and Exchange Commission. All references to “Web.com” or the “Company” in this Annual Report on Form 10-K mean Web.com, Inc., a Minnesota corporation, and all entities owned or controlled by Web.com, Inc., except where it is made clear that the term only means the parent company. The Company was formerly known as Interland, Inc., and any references to Interland are for historical purposes only and refer to the same entity. All tabular amounts are stated in thousands.

Overview

Web.com, Inc. (NASDAQ: WWWW), formerly Interland, Inc. (NASDAQ: INLD), is a leading provider of websites and web services focused on helping small and medium-sized businesses (“SMBs”) achieve success online. Web.com offers a wide selection of online services, including Web hosting, eMail, eCommerce, application hosting, website development, online marketing and optimization tools. The current web hosting business was formed through several company and account acquisitions that occurred from October 2001 through June 2006. The Company’s revenue is primarily derived from recurring monthly charges to its customers supplemented by, among other things, setup fees, domain name acquisition and renewal fees, and excess data communications charges.

In August 2005 the Company hired Jeffrey M. Stibel as Chief Executive Officer and appointed him to its Board of Directors. In addition to Mr. Stibel, the Company added Seymour Holtzman as its Chairman and Alex Kazerani and Efrem Gerszberg to its Board. Also in August 2005, the Company announced that it sold its dedicated server assets to Peer 1 Network for $14 million in cash. This transaction was a key step in its turnaround plan and allowed the Company to invest in its core lines of business — providing websites and online services to small and medium-sized businesses.

On March 20, 2006, Interland, Inc. announced that it had changed the company’s name to Web.com, Inc. (“Web.com”). The Company’s common stock is currently listed on the NASDAQ Global Market under the trading symbol “WWWW.” Prior to the change in name from Interland to Web.com, the Company traded on the NASDAQ National Market under the trading symbol “INLD.” The Company’s principal executive offices are located at 303 Peachtree Center Avenue, Suite 500, Atlanta, Georgia 30303. The Company’s telephone number is (404) 260-2477 and its website is located at www.web.com. Through this website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available free of charge as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. The information contained on the Company’s website is not included in, or incorporated by reference into, this Annual Report on Form 10-K.

On October 17, 2005, the Board of Directors approved a change in fiscal year end from August 31 to December 31, effective as of December 31, 2005. As a result, the financial periods presented and discussed in this Annual Report on Form 10-K will be defined as follows: (i) year ended December 31, 2006 represents the twelve months ended December 31, 2006; (ii) four-month transition period ended December 31, 2005 represents the four months ended December 31, 2005; (iii) year ended August 31, 2005 represents the twelve months ended August 31, 2005; and (iv) year ended August 31, 2004 represents the twelve months ended August 31, 2004.

Acquisition and Impairment of WebSource Media, LLC

On May 19, 2006 the Company acquired WebSource Media, LLC (“WebSource Media”) a privately held web services provider for small and medium-sized businesses. Except for assumed liabilities and debt payments, the acquisition was structured principally as an earn-out in which the owners of WebSource Media would earn payments based on reaching revenue and profitability goals. The majority of these payments were scheduled to occur only if the aforementioned goals were achieved over a three-year period. At closing the Company paid off approximately $2.5 million in debt, and $0.6 million in initial earn outs, incurred closing costs of $0.1 million and advanced $0.3 million to WebSource Media for working capital. Kaufman Bros, L.P. acted as exclusive financial advisor to WebSource Media, LLC on this transaction.

On June 12, 2006, approximately one month following the closing of the acquisition, the Federal Trade Commission (“FTC”) filed a sealed complaint in the U.S. District Court for the Southern District of Texas (the “FTC Litigation”) alleging that WebSource Media, among other defendants, had engaged in unfair and deceptive trade practices. Included among other defendants were the four former principals of WebSource Media, Marc Smith, Keith Hendrick, Steve Kennedy and Kathleen Smalley (collectively, the “Smith Defendants”), each of whom were alleged by the FTC to have engaged in a common enterprise with WebSource Media and other corporate defendants (not affiliated with the Company) to engage in unfair and deceptive trade practices. In addition, on June 12, 2006, the FTC sought and obtained from the Court, an ex parte, Temporary Restraining Order and Order Appointing a Receiver over the assets of WebSource Media, its subsidiaries, the Smith Defendants, and the other corporate and individual defendants in that case. The FTC served its Complaint and the Court’s June 12^th orders on WebSource Media and the Smith Defendants on June 13, 2006.

On June 21, 2006 the Court in the FTC litigation entered an Agreed Preliminary Injunction Order in which the Court vacated and superseded certain of its earlier orders and in which the court appointed a Receiver over the assets of WebSource Media, its subsidiaries, the Smith Defendants and the other corporate and individual defendants in the FTC Litigation. In addition, the Court authorized the Receiver to appoint the Company as the Receiver’s agent to take certain steps in managing the WebSource Media business.

In addition, on June 21, 2006, the Company filed suit against WebSource Media, the Smith Defendants and others, alleging breach of contract and other claims, and seeking to rescind the Company’s May 19, 2006 acquisition of WebSource Media.

The WebSource Media business was placed under the general control and supervision of the Court-appointed Receiver, and its business and operations have been substantially restricted. While the Company was, from time to time, requested by the Receiver to perform specific acts as part of the Receiver’s duty in managing the business, the Company did not have control over the WebSource Media assets or business activities. Since the WebSource Media business was placed under the general control and supervision of a Court-appointed Receiver and its business and operations had been substantially restricted, the Company deconsolidated the investment and recorded the investment in the second quarter of 2006 under the cost method as required by Accounting Research Bulletin No. 51 (“Consolidated Financial Statements”). Since the Receiver took over control of the business, the account base has deteriorated significantly due to a combination of events such as the cancellation of billing services by some local exchange carriers (“LEC”), normal cancellation rates without corresponding sales and the possible invalidation of a number of accounts. Based on the Company’s analysis of WebSource Media’s customer base, it was determined that an impairment of the entire value of the investment and advances was required. This impairment in the amount of $3.5 million was recorded to the income statement in the second quarter of 2006.

On March 12, 2007 the U.S. District Court for the Sourthern District of Texas, in the litigation Federal Trade Commission v. WebSource Media, et al., formally adopted the final report of the temporary receiver, thereby terminating the receivership over WebSource Media. WebSource Media remains a defendant in the litigation initiated by the Federal Trade Commission and remains subject to the court’s Second Modified Preliminary Injunction Order, which imposes substantial limitations on WebSource Media’s ability to market and sell its products, manage its business and dispose of its assets. Web.com has previously impaired its entire investment in WebSource Media and continues to believe it has little or no value. There can be no assurance that WebSource Media will be able to continue as a going concern.

Products and Services

Web.com understands that small business owners want to use the Internet to grow their business, but don’t typically have the time, resources or technical expertise to develop an online presence that attracts prospects and converts them into customers. Even fewer have a clear understanding of how the Internet can be a central business tool to manage and serve those customers. Web.com offers a variety of integrated online tools and services including website design and publishing, hosting, eMail, domain registration, online marketing tools and merchant services specifically designed for small business owners.

Web.com’s core products are standardized, scalable managed hosting services that place numerous customers on a single shared server – a cost benefit that is passed along to the customer. Starter packages are designed for websites with relatively low volumes of traffic and allow customers to establish an online presence at minimal cost. Web.com’s managed hosting services feature easy-to-use control panels and extensive online documentation that allow customers to control their own applications. Furthermore, customers who purchase entry-level plans can easily upgrade to more full-featured services as their needs evolve.

Web.com’s hosting services are sold stand-alone or bundled with a suite of website tools and services. The Company recognizes revenues as these services are provided. Web.com’s do-it-yourself Site Builder tool enables even non-technical small to medium size customers to design, publish and manage a professional website easily and at a fraction of the time and cost compared to custom-designed sites built by designers or web development firms. Additionally, Web.com offers custom website design services for customers who prefer to outsource website design and maintenance, but who want a more cost-effective alternative to traditional web design firms. Packaged together with a comprehensive variety of eCommerce, marketing and promotional tools, Web.com’s website offerings provide small to medium-sized businesses a turn-key solution to establishing and promoting their businesses online.

Strategic Vendor Relationships

Web.com has established and intends to continue to develop relationships with leading technology providers, including major software, hardware, development and Internet marketing organizations, to enhance the design and sales of its products and services. Relationships with companies such as Google, Microsoft, Yahoo!, Miva and others enable the Company to quickly gain access to innovative technologies and provide more creative solutions for its customers. The Company is also able to build upon the research, development and additional expertise of these companies in developing and launching new products. The Company believes that these relationships will enable it to continue to provide its customers with the necessary tools to create, host and maintain a successful Web presence and to have access to sophisticated eCommerce and applications solutions.

Sales and Marketing

Web.com’s sales and marketing strategy focuses on providing demonstrable benefits to small to medium-sized business. The Company has identified target market segments and seeks to match each segment’s particular needs with a specific subset of the Company’s offered products, pricing, and selling initiatives. The Company sells products through traditional and online marketing, as well as through a number of distribution partners.

Distribution Relationships

Web.com’s products are sold directly to customers as well as through distribution partnerships. Web.com offers a number of products across its channels of distribution. The Company’s distribution partners now include telecommunications companies, yellow pages publishers, retail partners, as well as resellers. Included among these relationships are:

	•		Enterprise Development Partners deliver Web.com hosting products and services through a robust, highly-scalable private label solution. These partners offer a customized mix of the company’s software, infrastructure, and support.
	•		Licensed Partners sell our Trellix® Site Builder software over their hosting infrastructure.
	•		Resellers may sell Web.com’s products under the partner’s or Web.com’s brand name. Most often these companies offer services or products of their own such as small business services, website design, or provide and install personal computers. Our patented technology, competitive pricing, and world-class customer support allow resellers to create and grow reliable, scalable and profitable businesses.
	•		Retail Partners such as Office Depot, OfficeMax, and Target offer our hosting and site building solutions in a pre-packaged software kit.

Customers

As of December 31, 2006, Web.com had approximately 155,000 paid hosting subscribers compared to approximately 137,000 subscribers as of December 31, 2005. This increase was mostly due to net organic growth of approximately thirteen thousand accounts in addition to a few smaller acquisitions.

Network Infrastructure, Technology and Operations

Prior to August 31, 2005, Web.com maintained three data centers, comprising a total of almost 116,000 square feet located in Atlanta, Georgia (36,210 sq. ft.), Miami, Florida (64,174 sq. ft.) and Fremont, California (15,229 sq. ft.). On August 31, 2005, the Company entered into an Asset Purchase Agreement with Peer 1 Acquisition Corp. (“Peer 1 Acquisition”) and Peer 1 Network Enterprises, Inc. (“Peer 1”) pursuant to which the Company sold its dedicated server assets, including its interests in the three data centers.

As part of the Peer 1 transaction, Web.com entered into a series of agreements with Peer 1 to provide for a transition of key services and vendor relationships and to provide for the ongoing colocation of Web.com’s remaining server assets and operations. The agreements are renewed annually.

Data Centers

As of December 31, 2006, the Company does not own any data centers. The Company has servers colocated in both Peer 1 and Level 3 data centers where Web.com’s network infrastructure is supported by these outside vendors.

Network Operations Center

Web.com continuously monitors its network operations across our Windows and Linux operating platforms. The network operations center personnel monitor our equipment, including routers, switches and servers, as well as our Internet and communications connections. The network operations centers are designed to allow our engineers, administrators, and support staff to continually monitor all systems and to be promptly alerted to abnormalities. The Company has procedures in place designed to rapidly resolve technical problems that may arise.

Proprietary Technology

Many of the products Web.com sells to customers rely on hardware and software technologies provided to Web.com by third parties under license. Certain Web.com products and services combine these third party technologies with technologies that are proprietary to Web.com. Web.com proprietary technology may be protected by patent law, copyright law, trade secret law and other forms of intellectual property protection. The Web.com proprietary technology includes technologies that enable the Company to automate a number of back-end functions and technologies that allow customers to order, change and manage their web hosting accounts easily online without technical expertise. Some Web.com proprietary technologies are unique and may not legally be utilized by competitors without a license from the Company. Although the Company believes that its suite of proprietary technologies offers customers significant benefits, the Company does not believe that its proprietary technologies are sufficient to deter competitors from providing competing products and services.

International Revenues

Web.com’s international revenues totaled $3.0 million for the year ended December 31, 2006, $1.1 million for the four months ended December 31, 2005, $10.8 million for the year ended August 31, 2005 and $11.6 million for the year ended August 31, 2004. This large decline in international revenue is mostly due to the sale of the dedicated accounts to Peer 1 as previously described. International revenues are denominated and paid in U.S. dollars and represent revenues from international customers generated and supported in the U.S. The Company has no operations outside of the United States.

Competition

Web.com believes that the primary competitive factors in the technical aspects of its business are usability, reliability, technical support and price. Although the market is intensely competitive, the Company believes that it compares favorably with its competition on these factors. In the small to medium-sized business market, the Company believes that the critical success factor is the ability to enable business owners to use their website to attract potential clients, make sales, and service their clients.

Pricing in the hosting segment is subject to heavy competitive pressure and competitors have offered such services at a dramatically reduced price, or even for free, as a means of acquiring market share and fostering market awareness. The Company believes that promotional pricing by competitors will continue, however, the costs of providing reliable service and effective technical and customer support will ultimately be reflected in market prices. Nonetheless, relatively low prices are likely to continue to be available for very basic service, and customers who only require a minimal web presence can be expected to often be lost to competitors whose cost structures and prices are based on providing rudimentary service.

The small to medium-sized business hosting market is highly fragmented with a large number of competitors, most of which have market share of less than 1%. A number of these companies offer Web hosting in addition to their core products and services. Current and potential competitors in this market include Web hosting service providers, applications hosting providers, Internet service

providers, telecommunications companies, large information technology firms that provide a wide array of information technology services, computer hardware suppliers and Internet-centric companies. Some of the Company’s most prominent competitors include Yahoo!, EarthLink, NTT/Verio, United Online, Inc., 1&1 Internet, Inc. Website Pros, Inc., GoDaddy and Affinity Internet, Inc.

Intellectual Property

Web.com relies on a combination of laws (including patent, copyright, trademark, service mark and trade secret laws) and contractual restrictions to establish and protect proprietary rights in its services. As of December 31, 2006, the Company owned 19 issued U.S. patents.

The Company also has several additional patent applications pending but not yet issued.

In July 2006, the Company entered into a non-exclusive license agreement with Hostopia.com, Inc (“Hostopia”) that grants Hostopia rights to two of Web.com’s patents over five years on a non-transferable basis. The license agreement states that Hostopia will pay Web.com a royalty equal to 10% of Hostopia’s gross US retail revenues for five years (estimated using a trailing run rate). The royalty was due in full at signing. The companies have also agreed to a mutual covenant not to sue for patent infringement that will continue until the expiration of the last to expire of either party’s patents, including patents issued in response to the pending patent applications of either party.

The Company is in discussions with other companies with regard to the licensing of its patents. However, there can be no guarantee that any of these discussions will result in future revenues.

Web.com has entered into confidentiality and other agreements with its employees and contractors, including agreements in which the employees and contractors assign their rights in inventions to the Company. Web.com has also entered into nondisclosure agreements with its suppliers, distributors and some customers in order to limit access to and disclosure of its proprietary information. Nonetheless, neither the intellectual property laws nor contractual arrangements, nor any of the other steps the Company has taken to protect its intellectual property can ensure that others will not use its technology, or that others will not develop similar technologies.

Web.com licenses, or leases from others, many technologies used in its services. The Company expects that it and its customers could be subject to third-party infringement claims as the number of websites and third party service providers for Web-based businesses grows. Although the Company does not believe that its technologies or services infringe the proprietary rights of any third parties, the Company cannot ensure that third parties will not assert claims against it in the future or that these claims will not be successful.

Although it has discontinued operations as a manufacturer of personal computers in the electronics industry, the Company is nonetheless subject to litigation arising from its past activities. It is not uncommon in the electronics industry for patent, trademark and other intellectual property rights claims to be asserted against companies, including component suppliers and personal computer manufacturers.

Periodically, the Company is made aware that technology it has used in these discontinued operations may have infringed intellectual property rights held by others. The Company has evaluated all such claims and, if necessary and appropriate, sought to obtain licenses for the use of such technology. If the Company or its suppliers were unable to obtain licenses necessary to use intellectual property in its discontinued operations’ products or processes, it may be legally liable to the owner of such intellectual property. Moreover, even in those instances where the Company is justified in denying claims that it has infringed on the intellectual property rights of others, it may nonetheless be forced to defend or settle legal actions taken against the Company relating to allegedly protected technology, and such legal actions may require the Company to expend substantial funds. See “Item 1A Risk Factors — Impairment of Web.com’s intellectual property rights could negatively affect its business or could allow competitors to minimize any advantage that Web.com’s proprietary technology may give it.”

Government Regulation

Web.com is not currently subject to direct federal, state, or local government regulation, other than regulations that apply to publicly registered businesses generally. This could change in the future – see “Item 1A Risk Factors – Web.com’s business operates in an uncertain legal environment where future government regulation and lawsuits could restrict Web.com’s business or cause unexpected losses.”

Employees

The Company employed approximately 285 individuals, including approximately 26 contractors as of December 31, 2006 compared to approximately 294 individuals, including 21 contractors as of December 31, 2005. All of the Company’s employees are located in

the United States and none are represented by a labor organization with respect to employment by the Company. As of December 31, 2006, the Company has never had an organized work stoppage, and it considers its employee relations to be satisfactory.

Environmental Regulations

Some risks of costs and liabilities related to environmental matters were inherent in the Company’s discontinued operations, as with many similar businesses, and its operations are subject to certain federal, state, and local environmental regulatory requirements relating to environmental and waste management. In connection with the Company’s discontinued operations, it periodically generated and handled limited amounts of materials that were considered hazardous waste under applicable law. The Company contracted for the off-site disposal of these materials. The Company believes it has operated in compliance with applicable environmental regulations related to these materials prior to December 31, 2006.

ITEM 1a. risk factors

You should carefully consider the following factors and all other information contained in this Form 10-K before you make any investment decisions with respect to the Company’s securities. The risks and uncertainties described below may not be the only risks the Company faces.

Web.com has incurred losses since inception and could incur losses in the future.

Web.com has incurred net losses and losses from operations for all but one of each quarterly period from its inception through December 31, 2006. A number of factors could increase its operating expenses, such as:

	•		Adapting network infrastructure and administrative resources to accommodate additional customers and future growth;
	•		Developing products, distribution, marketing, and management for the broadest-possible market;
	•		Broadening customer technical support capabilities;
	•		Developing or acquiring new products and associated technical infrastructure;
	•		Developing additional indirect distribution partners;
	•		Increased costs from third party service providers;
	•		Improving network security features; and
	•		Legal fees and settlements associated with litigation and contingencies.

To the extent that increases in operating expenses are not offset by increases in revenues, operating losses will increase.

Web.com’s management and Board of Directors may be unable to execute their plans to turn around the Company, grow its revenues and achieve profitability and positive cash flows.

In August 2005, the previous CEO was replaced by Jeffrey M. Stibel as Chief Executive Officer. At approximately the same time, the Company added three new Directors to its Board of Directors and since December 2005 it has also added several key executives to its management team. If the Company’s new Chief Executive Officer is unable to attract and retain management to execute the Company’s plans, or if management and the Board of Directors are unable to execute those plans, then the Company may fail to grow the Company’s revenues, contain costs and achieve profitability and positive cash flows.

Ours is a recurring-revenue subscriber business and as such the effects of a net loss of monthly recurring revenue is magnified.

A large majority of our revenue is derived from monthly recurring charges. Accordingly, the termination of a single account will affect revenue every month in the future. The loss of such a customer at the beginning of a fiscal year will result in a twelve-fold reduction in revenue for that fiscal year. Absent the addition of customers through acquisitions, Web.com had previously incurred a net loss in monthly recurring charges, and this situation may continue with material negative effects on reported revenue and net income. Although reductions in monthly recurring charges may be offset for a time by increases in revenue derived from one-time or non-recurring charges, the compounding effect of monthly recurring charges losses will likely result in a meaningful reduction of reported revenue over time. Moreover, because of Web.com’s relatively low percentage of variable costs, significant revenue loss can result in a loss of net income. There can be no assurance that Web.com’s continuing efforts to stabilize or increase its monthly recurring charges and revenue will be successful. If revenue declines, the Company may eventually require additional capital, which may not be available on suitable terms. Although the Company can reduce spending to some degree, there can be no assurance in such an event that the Company would be able to continue as a going concern.

Unfavorable results of existing litigation may cause Web.com to have additional expenses or operating losses that exceed the Company’s ability to pay.

The Company is defending a number of matters in active litigation (See Note 21 to the Consolidated Financial Statements). The cost of defending lawsuits, regardless of their merit, can be substantial. Although the Company has favorably resolved a number of lawsuits through rulings, verdicts, and settlements, and although the Company may be successful in defending ongoing litigation, the costs of defense cannot be expected to be avoided. The Company believes it has appropriately established reserves for the contingency of adverse verdicts in accordance with Generally Accepted Accounting Principles (“GAAP”). In order for a loss contingency to be reserved for in the financial statements, GAAP requires that the information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss and the amount of loss can be reasonably estimated. Therefore, the Company has not reserved for all of its pending lawsuits. Consequently, lawsuits for which there is no reserve pose a risk of substantial loss which could have a material effect on the Company’s results and financial position. Additionally, even in those cases where a reserve has been established, the amount of the reserve is necessarily an estimate and the actual result may differ materially. Reserves are established only for the damages that may be assessed, and do not take into account the costs of litigation. Even in those instances where Web.com may ultimately prevail on appeal, an adverse verdict in a substantial amount may damage the reputation of the Company, may require the Company to post an appeal bond in an amount which deprives the Company of cash, and require additional expenditures for the cost of appeal. The outcome of litigation is unpredictable, and an adverse final verdict could exceed the Company’s ability to pay.

Because Web.com’s historical financial information is not representative of its future results, investors and analysts will have difficulty analyzing Web.com’s future earnings potential.

Because the Company has grown through acquisition and its past operating results reflect the costs of integrating these acquisitions, as well as revenues from operations which have now been sold, historical results are not representative of future expected operating results. The Company has recognized very sizeable charges and expenditures in the past for impairment charges, restructuring costs and network enhancements. Because these items are not necessarily recurring, it is more difficult for investors to predict future results.

Web.com has a limited operating history and its business model is still evolving, which makes it difficult to evaluate its prospects.

Web.com’s limited operating history makes evaluating its business operations and prospects difficult. Web.com has changed from being primarily a seller of personal computers and related accessories to being primarily a provider of web hosting and web services to consumers and small and medium-sized businesses. Because some of its services are new, the market for them is uncertain. As a result, the revenues and income potential of its business, as well as the potential benefits of its acquisitions, may be difficult to evaluate.

Quarterly and annual operating results may fluctuate, which could cause Web.com’s stock price to be volatile.

Past operating results have fluctuated significantly on a quarterly and an annual basis. Quarterly and annual operating results may continue to fluctuate due to a wide variety of factors. Because of these fluctuations, comparing operating results from period to period is not necessarily meaningful, and it would not be meaningful to rely upon such comparisons as an indicator of future performance. Factors that may cause its operating results to fluctuate include, but are not limited to the following:

	•		Demand for and market acceptance of the Company’s services and products;
	•		Introduction of new services or enhancements by Web.com or its competitors;
	•		Costs of implementing new network security features, CRM systems, and billing modules;
	•		Technical difficulties or system downtime affecting the Internet generally or its hosting operations specifically;
	•		Customer retention;
	•		Increased competition and consolidation within the web hosting and applications hosting markets;
	•		Changes in its pricing policies and the pricing policies of its competitors;
	•		Gains or losses of key strategic partner relationships;
	•		Impairment charges;
	•		Restructuring charges;
	•		Merger and integration costs;
	•		Litigation expenses;
	•		Insurance expenses; and
	•		Marketing expenses.

Web.com cannot provide any assurances that it will succeed in its plans to increase the size of its customer base, the amount of services it offers, or its revenues during the next fiscal year and beyond. In addition, relatively large portions of its expenses are fixed

in the short term, and therefore its results of operations are particularly sensitive to fluctuations in revenues. Also, if it cannot continue using third-party products in its service offerings, its service development costs could increase significantly.

Web.com operates in a new and evolving market with uncertain prospects for growth and may not be able to generate and sustain growth in its customer base.

Web.com operates in a new and evolving market with uncertain prospects for growth and may not be able to achieve and sustain growth in its subscriber base, maintain its average revenue per user or subscriber acquisition costs. The market for web hosting and applications-hosting services for small and medium-sized businesses, and the consumer market, have only recently begun to develop and are evolving rapidly. The market for Web.com’s services may not develop further, customers may not widely adopt its services, and significant numbers of businesses or organizations may not use, or may discontinue the use of, the Internet for commerce and communication. If this market fails to develop further or develops more slowly than expected, or if Web.com’s services do not achieve broader market acceptance, Web.com will not be able to retain and grow its customer base. In addition, Web.com must be able to differentiate itself from its competition through its service offerings and brand recognition. These activities may be more expensive than Web.com anticipates, and Web.com may not succeed in differentiating itself from its competitors, achieving market acceptance of its services, or selling additional services to its existing customer base.

Because Web.com’s target markets are volatile, the Company may face a loss of customers or a high level of non-collectible accounts.

The Company intends to continue to concentrate on serving the small and medium-sized business market. This market contains many businesses that may not be successful, and consequently present a substantially greater risk for non-collectible accounts receivable and for non-renewal. Moreover, a significant portion of this target market is highly sensitive to price, and may be lost to a competitor with a lower pricing structure. Because few businesses in this target market employ trained technologists, they tend to generate a high number of customer service and technical support calls. The expense of responding to these calls is considerable, and the call volume is likely to increase in direct proportion to revenue, potentially limiting the scalability of the business. Additionally, if the customer becomes dissatisfied with the Company’s response to such calls, cancellation, non-payment, or non-renewal becomes more likely. Web.com’s strategy for minimizing the negative aspects of its target market includes:

	•		Capitalizing on infrastructure efficiencies to become a profitable provider at the lowest sustainable price;
	•		Automating customer care and technical support to reduce the cost per call, and to minimize the time spent by Company personnel;
	•		Intensive training and supervision of customer care and technical support personnel to maximize customer satisfaction; and,
	•		Increasing the number and breadth of services to differentiate the Company from competition.

The Company can give no assurance, however, that any of these measures will be successful, and the Company’s failure to manage these risks could decrease revenues and increase losses.

Web.com could incur liabilities in the future relating to its discontinued PC Systems business, which could cause additional operating losses.

Web.com could incur liabilities relating to its discontinued PC Systems business and from the sale of the PC Systems business to GTG PC (“Gores”). According to the terms of the agreement with Gores, Web.com retained liabilities relating to the operation of the PC systems business prior to the closing of the transaction. Web.com also agreed to indemnify Gores and its affiliates for any breach of its representations and warranties contained in the agreement for a period of two years, or for the applicable statute of limitations for matters related to taxes. Its indemnification obligation is capped at $10.0 million. Except for claims for fraud or injunctive relief, this indemnity is the exclusive remedy for any breach of Web.com’s representations, warranties, and covenants contained in the agreement with Gores. Accordingly, Web.com could be required in the future to make payments to Gores and its affiliates in accordance with the agreement, which could adversely affect its future results of operations and cash flows. Web.com believes it is unlikely that it will have any obligation to indemnify Gores because the applicable statute of limitations has passed for most applicable matters. If Web.com were obligated to indemnify Gores, such obligation could adversely affect its future results of operations and cash flows.

Because Web.com faces intense competition, it may not be able to operate profitably in its markets.

The web hosting and applications hosting markets are highly competitive, which could hinder Web.com’s ability to successfully market its products and services. The Company may not have the resources, expertise, or other competitive factors to compete successfully in the future. Because there are few substantial barriers to entry, the Company expects that it will face additional competition from existing competitors and new market entrants in the future. Many of Web.com’s current and potential competitors

have greater name recognition and more established relationships in the industry and greater resources. As a result, these competitors may be able to:

	•		Develop and expand their network infrastructures and service offerings more rapidly;
	•		Adapt to new or emerging technologies and changes in customer requirements more quickly;
	•		Devote greater resources to the marketing and sale of their services; and,
	•		Adopt more aggressive pricing policies than the Company can develop.

Current and potential competitors in the market include web hosting service providers, applications hosting providers, Internet service providers, telecommunications companies, large information technology firms, and computer hardware suppliers. These competitors may operate in one or more of these areas and include companies such as Yahoo!, Hostopia, Affinity Internet, Website Pros, and EarthLink.

Impairment of Web.com’s intellectual property rights could negatively affect its business or could allow competitors to minimize any advantage that Web.com’s proprietary technology may give it.

Although the Company has a number of patents that it believes should preclude competitors from practicing certain technologies, the Company currently has no patented technology that necessarily would preclude or inhibit competitors from entering the web hosting market generally. It is the Company’s practice to enter into agreements with all employees and with some of its customers and suppliers to prohibit or restrict the disclosure of proprietary information. Nevertheless, the Company cannot be sure that these contractual arrangements or the other steps taken by the Company to protect its proprietary rights will prove sufficient to prevent illegal use of its proprietary rights or to deter independent, third-party development of similar proprietary assets.

In addition, the Company may find the cost of enforcing its patent and other intellectual property rights to be high and the cost of prosecuting patent infringement cases could negatively affect the Company’s attempts to become profitable.

Effective copyright, trademark, trade secret, and patent protection may not be available in every country in which the Company’s products and services are offered. Web.com sometimes is, and in the future may be, involved in legal disputes relating to the validity or alleged infringement of its intellectual property rights or those of a third party. Intellectual property litigation is typically extremely costly and can be disruptive to business operations by diverting the attention and energies of management and key technical personnel. In addition, any adverse decisions could subject it to significant liabilities, require it to seek licenses from others, prevent it from using, licensing or selling certain of its products and services, or cause severe disruptions to operations or the markets in which it competes which could decrease profitability.

Periodically, the Company is made aware of claims, or potential claims, that technology it used in its discontinued operations may have infringed on intellectual property rights held by others. The Company has accrued a liability and charged operations for the estimated costs of settlement or adjudication of several asserted and unasserted claims for alleged infringement relating to its discontinued operations prior to the balance sheet date. Resolution of these claims could be costly and decrease profitability.

If Web.com is unable to attract and retain key personnel, it may not be able to compete effectively in its market.

The future success of Web.com will depend, in part, on its ability to attract and retain key management, technical, and sales and marketing personnel. The Company attempts to enhance its management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas. The Company experiences strong competition for such personnel in the web hosting industry. The Company’s inability to retain employees and attract and retain sufficient additional employees, information technology, engineering, and technical support resources could adversely affect its ability to remain competitive in its markets. The Company has and may continue to face the loss of key personnel, which could limit the ability of the Company to develop and market its products and services.

Web.com depends on its reseller sales channel to market and sell many of its services. Web.com does not control its resellers, and if it fails to develop or maintain good relations with resellers, it may not achieve the growth in customers and revenues that it expects.

An element of the strategy for the Company’s growth is to further develop the use of third parties that resell or recommend its services. Many of these resellers are web development or web consulting companies that also sell Web.com’s web hosting services, but that generally do not have established customer bases to which they can market these services. The Company is not currently dependent on any one reseller to generate a significant level of business, but it has benefited and continues to significantly benefit from business generated by the reseller channel. Although Web.com attempts to provide its resellers with incentives such as price discounts on its services that the resellers seek to resell at a profit, the failure of its services to be commercially accepted in some markets, whether as a result of a reseller’s performance or otherwise, could cause its current resellers to discontinue their relationships

with the Company. The Company also is developing relationships with larger distribution partners, and although the percentage of the Company’s current revenues generated by any of these relationships is currently small, if the Company’s strategy is successful, future revenue growth will be dependent on the success and maintenance of these relationships.

Web.com is vulnerable to system failures, which could harm its reputation, cause its customers to seek reimbursement for services paid for and not received, and cause its customers to seek another provider for services.

The Company must be able to operate the systems that manage its network around the clock without interruption. Its operations will depend upon its ability to protect its network infrastructure, equipment, and customer files against damage from human error, fire, earthquakes, hurricanes, floods, power loss, telecommunications failures, sabotage, intentional acts of vandalism and similar events. The Company’s networks are currently subject to various points of failure. For example, a problem with one of its routers (devices that move information from one computer network to another) or switches could cause an interruption in the services the Company provides to a portion of its customers. In the past, the Company has experienced periodic interruptions in service. The Company has also experienced, and in the future it may continue to experience, delays or interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees, or others. Any future interruptions could:

	•		Cause customers or end users to seek damages for losses incurred;
	•		Require the Company to replace existing equipment or add redundant facilities;
	•		Damage the Company’s reputation for reliable service;
	•		Cause existing customers to cancel their contracts; or
	•		Make it more difficult for the Company to attract new customers.

Web.com’s data centers are maintained by third parties.

Substantially all of the network services and computer servers utilized by Web.com in its provision of services to customers are housed in data centers owned by other service providers. In particular, a significant number of Web.com’s servers are housed in the data center in Atlanta, Georgia that Web.com sold to Peer 1 Networks on August 31, 2005. Web.com obtains Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through Peer 1 Networks. Web.com also utilizes other third-party data centers, including those at other Peer 1 and Level 3 locations. In the future, Web.com may house other servers and hardware items in facilities owned or operated by other service providers.

A disruption in the ability of one of these service providers to provide service to Web.com could cause a disruption in service to Web.com’s customers. A service provider could be disrupted in its operations through a number of contingencies, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, and other extreme conditions. Although Web.com believes it has taken adequate steps to protect itself through its contractual arrangements with its service providers, Web.com cannot eliminate the risk of a disruption in service resulting from the accidental or intentional disruption in service by a service provider. Any significant disruption could cause significant harm to Web.com, including a significant loss of customers. In addition, a service provider could raise its prices or otherwise change its terms and conditions in a way that adversely affects the Company’s ability to support its customers or financial performance.

Data centers and communications networks are vulnerable to security breaches that could cause disruptions in service, liability to third parties, or loss of customers.

A significant barrier to electronic commerce and communications is the need for secure transmission of confidential information over public networks. Some of the Company’s services rely on security technology licensed from third parties that provides the encryption and authentication necessary to effect the secure transmission of confidential information. Despite the design and implementation of a variety of network security measures by the Company, unauthorized access, computer viruses, accidental or intentional actions and other disruptions could occur. In addition, inappropriate use of the network by third parties could also potentially jeopardize the security of confidential information, such as credit card and bank account numbers stored in the Company’s computer systems. These security problems could result in the Company’s liability and could also cause the loss of existing customers and potential customers.

Although the Company continues to implement industry-standard security measures, third parties may be able to overcome any measures that it implements. The costs required to eliminate computer viruses and alleviate other security problems could be prohibitively expensive and the efforts to address such problems could result in interruptions, delays, or cessation of service to customers, and harm the Company’s reputation and growth. Concerns over the security of Internet transactions and the privacy of users may also inhibit the growth of the Internet, especially as a means of conducting commercial transactions.

Disruption of Web.com’s services caused by unknown software or hardware defects could harm its business and reputation.

The Company’s service offerings depend on complex software and hardware, including proprietary software tools and software licensed from third parties. Complex software and hardware may contain defects, particularly when first introduced or when new versions are released. The Company may not discover software or hardware defects that affect its new or current services or enhancements until after they are deployed. Although Web.com has not experienced any material software or hardware defects to date, it is possible that defects may exist or occur in the future. These defects could cause service interruptions, which could damage its reputation or increase its service costs, cause it to lose revenue, delay market acceptance or divert its development resources.

Providing services to customers with critical websites and web services could potentially expose Web.com to lawsuits for customers’ lost profits or other damages.

Because the Company’s web hosting and applications hosting services are critical to many of its customers’ businesses, any significant interruption in those services could result in lost profits or other indirect or consequential damages to its customers as well as negative publicity and additional expenditures for it to correct the problem. Although the standard terms and conditions of the Company’s customer contracts disclaim liability for any such damages, a customer could still bring a lawsuit against it claiming lost profits or other consequential damages as the result of a service interruption or other website or application problems that the customer may ascribe to it. A court might not enforce any limitations on Web.com’s liability, and the outcome of any lawsuit would depend on the specific facts of the case and legal and policy considerations even if the Company believes it would have meritorious defenses to any such claims. In such cases, it could be liable for substantial damage awards. Such damage awards might exceed its liability insurance by unknown but significant amounts, which would seriously harm its business.

Web.com could face liability for information distributed through its network.

The law relating to the liability of online services companies for information carried on or distributed through their networks is currently unsettled. Online services companies could be subject to claims under both United States and foreign law for defamation, negligence, copyright or trademark infringement, violation of securities laws or other theories based on the nature and content of the materials distributed through their networks. Several private lawsuits seeking to impose such liability upon other entities are currently pending against other companies. In addition, organizations and individuals have sent unsolicited commercial eMails from servers hosted by service providers to massive numbers of people, typically to advertise products or services. This practice, known as “spamming,” can lead to complaints against service providers that enable such activities, particularly where recipients view the materials received as offensive. The Company may, in the future, receive letters from recipients of information transmitted by its customers objecting to such transmission. Although the Company prohibits its customers by contract from spamming, it cannot provide assurances that its customers will not engage in this practice, which could subject it to claims for damages. In addition, the Company may become subject to proposed legislation that would impose liability for or prohibit the transmission over the Internet of some types of information. Other countries may also enact legislation or take action that could impose liability on the Company or cause it not to be able to operate in those countries. The imposition upon the Company and other online services of potential liability for information carried on or distributed through its systems could require it to implement measures to reduce its exposure to this liability, which may require it to expend substantial resources, or to discontinue service offerings. The increased attention focused upon liability issues as a result of these lawsuits and legislative proposals also could affect the rate of growth of Internet use.

Web.com’s business operates in an uncertain legal environment where future government regulation and lawsuits could restrict Web.com’s business or cause unexpected losses.

Due to the increasing popularity and use of the Internet, laws and regulations with respect to the Internet may be adopted at federal, state, and local levels. Potential laws might cover issues such as user privacy, freedom of expression, pricing, characteristics, quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. The Company cannot fully predict the nature of future legislation and the manner in which government authorities may interpret and enforce such legislation. As a result, Web.com and its customers could be subject to potential liability under future legislation, which in turn could have a material adverse effect on the Company’s business. The adoption of any such laws or regulations might decrease the growth of the Internet which in turn could decrease the demand for the Company’s services, or increase the cost of doing business. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. These laws generally pre-date the advent of the Internet and related technologies and, as a result, do not consider or address the unique issues of the Internet and related technologies.

Web.com’s stock price may be volatile which could cause an investment in its common stock to decrease significantly.

The market price of Web.com’s common stock has experienced significant volatility. The price has been and is likely to continue to be highly volatile. The following are examples of factors or developments that would likely cause the Company’s stock price to continue to be volatile:

	•		Variations in operating results and analyst earnings estimates;
	•		The volatility of stock in the sectors within which it conducts business;
	•		Announcements by Web.com or its competitors regarding introduction of new services;
	•		General changes in economic conditions;
	•		Changes in the volume of trading in its common stock; and
	•		The Company’s inability to reduce the rate of account cancellations, or to increase the rate of account additions, or both.

During the 52 weeks ended December 31, 2006 the high and low closing price for Web.com common stock on NASDAQ was $6.45 and $3.63, respectively.

Web.com could face liability and expense in connection with its acquisition of WebSource Media and related litigation.

On May 19, 2006, Web.com acquired WebSource Media which was merged into a wholly owned subsidiary of Web.com. On June 12, 2006, the Federal Trade Commission filed a complaint under seal in federal court in Texas alleging that WebSource Media, together with its former owners and other defendants, engaged in unfair and deceptive trade practices in connection with the marketing and sale of WebSource Media’s products. All WebSource Media telemarketing activities and sales to new customers were halted on or about June 13, 2006. On June 21, 2006 the federal court entered an order that froze the assets of WebSource Media and appointed a Receiver over WebSource Media. Pursuant to that order, Web.com was appointed as an agent of the Receiver to perform certain services with respect to WebSource Media. Web.com is not a party to the FTC litigation, however there can be no assurance that the FTC will not include Web.com at a future date.

On June 21, 2006, Web.com sued the former owners of WebSource Media in federal court in Georgia, claiming fraud and breach of contract in connection with the WebSource Media acquisition and seeking to rescind the acquisition and recover damages from the defendants. Subsequently certain of the former principals of WebSource Media sued Web.com in state court in Texas seeking payment of earn-out compensation under the merger agreement.

Web.com could face liability and expense in connection with these matters. Web.com cannot determine at this time what liability, if any, WebSource Media may have as a result of the FTC litigation. WebSource Media may also face liability to third parties in connection with the acts and practices alleged by the FTC in that litigation. Even if WebSource Media is ultimately determined to have no liability for the acts and practices alleged by the FTC, we expect that there will be little or no value after the Receiver returns control of the business to the Company.

WebSource Media was engaged in LEC billing, a practice Web.com had limited experience with. There could be liability associated with these billing practices outside of what is currently known. Web.com may incur expense and experience inconvenience and distraction in connection with its involvement in the matter through its role as the agent of the Receiver and as the owner of WebSource Media. In addition, although Web.com has sued the former owners of WebSource Media and is seeking to recover damages from those defendants, there can be no guarantee that Web.com will prevail in that litigation or, if it prevails, that the defendants will have sufficient resources to pay Web.com’s damages.

Substantial future sales of shares by shareholders could negatively affect Web.com’s stock price.

A number of groups of investors hold substantial numbers of Web.com’s shares, including current employees, the former shareholders of acquired companies, and hedge funds reported to have investment styles that lead to short-term holdings. Substantial sales by these holders may adversely affect Web.com’s stock price.

Web.com could lose its ability to process credit card transactions

A substantial portion of Web.com’s revenues are collected by credit card payments and Web.com requires a valid credit card to be on file for nearly all of its retail customers. Credit card fraud occurs when an Internet user attempts to open an account at Web.com using an invalid credit card. Although Web.com has controls in place intended to reduce or mitigate the impact of credit card fraud, Web.com cannot prevent all credit card fraud. Significant amounts of credit card fraud may introduce error into Web.com’s reported revenues. In addition, when Web.com uncovers subscriber accounts that were created with invalid credit cards, Web.com routinely cancels those accounts. Such cancellations can result in charge-backs to the owner of the credit card and excessive charge-backs and other negative experience resulting from credit card fraud could lead credit card companies to deny Web.com the ability to process credit card transactions or could result in Web.com paying higher fees to credit card companies.

ITEM 1B. Unresolved Staff Comments

The Company has not received any written comments from the Securities and Exchange Commission on its periodic reports that remain unresolved.

ITEM 2. Properties

As of December 31, 2006 Web.com had leases on several facilities, including 107,005 square feet (of which 34,250 sq. ft. was subleased) in Atlanta, Georgia; 45,000 square feet (of which 18,704 sq. ft. was subleased) in Tukwila, Washington; and 2,789 square feet in Concord, Massachusetts.

Pursuant to the Asset Purchase Agreement with Peer 1 Acquisition Corp. and Peer 1 Network Enterprises (“Peer 1”), Web.com was relieved of its obligation with respect to 36,210 square feet of data center space in Atlanta, Georgia and all of the facility in Miami, Florida. In addition, Peer 1 assumed all of Web.com’s obligations under the lease for data center space in Fremont, California, although the landlord for that lease has not relieved Web.com of its obligations under the lease in the event Peer 1 defaults in its obligations to the landlord. Web.com and Peer 1 entered into the Rental Fund Escrow Agreement under which Peer 1 is obligated to pay $30,000 per month, from September 2005 through July 2008, into an escrow account to serve as collateral for Peer 1’s obligations under the Fremont lease. Subject to the Rental Fund Escrow Agreement, under certain conditions Web.com has recourse to the escrow fund to satisfy obligations owed to the landlord in the event Peer 1 fails to satisfy those obligations directly.

ITEM 3. Legal Proceedings

The Company is a party to several litigation matters outside of the ordinary course of business.

On August 2, 2006 the company filed suit in the United States District Court for the Western District of Pennsylvania against Federal Insurance Company and Chubb Insurance Company of New Jersey. The suit seeks, among other things, a declaratory judgment that the two insurance companies owe the Company a defense and indemnification for costs associated with the Pair Networks Litigation (see below). The suit also seeks recovery against the insurance companies for breach of contract, insurance company bad faith and breach of fiduciary duty.

On June 19, 2006, the Company filed suit in the United States District Court for the Northern District of Georgia against The Go Daddy Group, Inc. The Company is seeking damages, a permanent injunction, and attorney fees related to infringement of four of the Company’s patents. There can be no assurance that the Company will be able to recover the amounts claimed in this case.

On June 12, 2006, the FTC filed a sealed action in the United States District Court for the Southern District of Texas against WebSource Media, LLC, n/k/a WebSource Media, certain of its former members, Telsource International (a telemarketing firm that provided telemarketing services to WebSource Media) and certain of the principals of Telsource International. In addition, the FTC obtained a Temporary Restraining Order and Order Appointing a Temporary Receiver which, among other things, froze the assets of all of the defendants and appointed a receiver for WebSource Media and the other corporate defendants. In its complaint, the FTC alleged that WebSource Media and the other defendants were operated as a “common enterprise” for the purpose of inducing consumers to purchase websites from WebSource Media using “unfair and deceptive” trade practices sometimes known as “cramming.” On June 21, the Court issued an Agreed Preliminary Injunction Order appointing the Company as an agent for the Receiver. Pursuant to this Order, the Company has acted on behalf of the Receiver in certain respects with respect to the WebSource Media business. Discovery and other proceedings in this FTC litigation have been stayed temporarily during the receivership period. (See “Acquisition and Impairment of WebSource Media.”)

Web.com is not a defendant in the FTC litigation. Prior to learning of the FTC litigation, Web.com was not aware of any pending FTC investigation into WebSource Media and was not aware of the allegations of unfair and deceptive business practices that were made in the FTC litigation. At this time Web.com is unable to determine what liability, if any, WebSource Media will have in connection with the FTC litigation. Because Web.com is not a party to the FTC litigation, Web.com does not believe that it will have any material liability in connection with the FTC litigation against WebSource Media.

The Company has commenced arbitration against the former members of WebSource Media, seeking damages for fraud, fraudulent inducement, and breach of contract. The outcome of arbitration cannot be assured and there can be no guarantee that the Company will be able to recover the amounts claimed in this case. The former members of WebSource Media have denied liability and asserted counterclaims against Web.com in the arbitration. They argue, among other things, that their employment was terminated without cause and that such termination entitles them to an accelerated payment of the earn-out consideration at issue in the May 19, 2006 merger agreement of up to approximately $7 million in cash, 1.325 million shares of Web.com stock and warrants for the purchase of up to 750,000 shares of Web.com stock at a purchase price of $6 per share. Any accelerated earn-out consideration is subject to certain limitations, deductions, off-sets and adjustments as further provided in the merger agreement. The former members of WebSource Media have also filed suit against Web.com and that suit is now pending in the U.S. District Court for the Southern District of Texas. The civil suit makes many of the same claims as were asserted in the arbitration described above. Web.com will assert counterclaims in the civil suit that are substantially identical to those asserted in the arbitration described above.

In December 2005, Vincent Salazar sued the Company in state court in California, claiming that he was entitled to compensation in connection with the Company’s acquisition of web hosting accounts from AT&T in January 2002. In March 2006 the court dismissed all claims against the Company. Salazar has appealed the court’s dismissal of the case and that appeal has now been briefed to the California Court of Appeals.

In or around March, 2006, a former employee, Randy Nein, also sued the Company in state court in California claiming that he was due compensation in connection with the Company’s acquisition of web hosting accounts from AT&T in January 2002. The Company is now defending that case.

In January 2007, the Company entered into a settlement agreement and mutual release of claims with Certain Underwriters at Lloyd’s of London (the “Underwriters”) to resolve the Company’s suit against the Underwriters pending in state court in Idaho. The Company had filed suit in 2005 to recover its attorneys’ fees and amounts paid in settlement in an earlier case (the “Smith Litigation”) in which a putative class of former employees had claimed to be owed amounts representing unpaid overtime and other wages. The Underwriters had issued an insurance policy in 2000 that the Company contended should have provided indemnification and a defense in the Smith Litigation. Pursuant to the settlement, the Company received a payment of $6 million from the Underwriters, resulting in net proceeds of approximately $3.6 million after the deduction of legal fees and other expenses.

The Company is defending a case tried in the United States District Court for the Southern District of Florida. This dispute arose out of the management of a colocated server by the Company’s predecessor, Worldwide Internet Publishing Corporation. The Company was ordered to pay damages of $1.00 in response to the Company’s pre-trial and post-trial motions. The case is on appeal.

In May 2004, Net Global Marketing filed suit against the Company and its predecessor, Dialtone, in state court in Los Angeles, California asserting claims for lost data. The Company had cancelled Net Global’s web hosting accounts in October 2002 and again in January 2003 as a result of complaints that the servers were being used to send spam, and has asserted counterclaims arising from these incidents. The Company removed the case to federal court and filed a motion to dismiss in favor of arbitration which was denied, a decision the Company appealed to the Ninth Circuit Court of Appeals. In January 2007 the Ninth Circuit denied the Company’s appeal and the Company expects the case will now proceed in state court. The Company believes that it has adequate defenses including provisions in the contract with the plaintiff that shield Dialtone from damages for “erasure” and “loss of data” and generally prohibit recovery of the kind of damages sought by plaintiff.

The Company has filed suit in Cobb County, Georgia against Gabriel Murphy, one of the former principals of Communitech.Net, Inc. (“Communitech”) which was acquired by the Company in February 2002. In the litigation, the Company contends that Murphy violated various covenants under his employment agreement and related contracts with the Company, defamed the Company, violated fiduciary duties he owed the Company, violated his duty of loyalty to the Company and committed fraud against the Company. In particular, in motions filed in this litigation the Company contends that Murphy assisted a former employee named Jason Park in creating a competing web hosting company called Bent Axis, LLC using Company equipment and facilities that was operated out of the Communitech data center in Kansas City, Missouri. In those motions the Company also contends that Murphy signed a putative contract on behalf of Interland with a company formed by Murphy for the purpose of billing the Company for Internet advertising and later had his wife use an assumed name in an effort to collect invoices arising under that putative contract. In this litigation the Company also seeks to recover payment of a promissory note signed by Murphy in February 2002 in the approximate amount of $735,000, representing a cash advance the Company made to Murphy at the time of the closing of the Communitech acquisition. Murphy has asserted various counterclaims in response.

In February 2003, Mr. Bryan Heitman, also a former principal of Web.com’s subsidiary Communitech, and Mr. Murphy filed a lawsuit against the Company, its former Chief Executive Officer, Mr. Joel Kocher, and Communitech, in Jackson County, Missouri claiming, among other things, that the Company fraudulently induced Murphy and Heitman to enter into the Merger Agreement by making inaccurate or incomplete disclosures and, in the alternative, breached the Merger Agreement by failing to have the Form S-3 registration statement for their stock declared effective by the SEC on a timely basis. The complaint seeks compensatory and punitive damages in an unspecified amount. The court has set a trial date in June 2007.

In late 2001, Pair Networks, a competing web services company, attempted to mount a class action against the Company under the Telephone Consumer Protection Act after Pair Networks allegedly received a one-page fax from the Company. In February 2007 the court in Allegheny County, Pennsylvania, denied the motion of the plaintiffs to certify a class in a case styled Pair Networks et al. v. Interland et al (the “Pair Networks Litigation”). This ruling means that the three named plaintiffs in the case may only proceed with individual claims against the Company which can amount to not more than $1,500 each. While the plaintiffs are expected to appeal the court’s February 2007 decision dismissing the class action, the Company plans to defend that appeal and believes that no material adverse effect on the Company will occur as a result of this litigation.

The Company is also a defendant in a number of other lawsuits seeking lesser amounts and which the Company regards as unlikely to result in any material payment.

Periodically, the Company is made aware that technology it has used may have infringed on intellectual property rights held by others. The Company evaluates all such claims and, if necessary and appropriate, obtains licenses for the use of such technology. If the Company or its suppliers are unable to obtain licenses necessary to use intellectual property in the applicable products or processes, it may be forced to defend legal actions taken against it relating to allegedly protected technology. The Company evaluates all such claims and accrues a liability for the estimated costs of settlement or adjudication of claims when appropriate.

With respect to each of the foregoing matters where parties have asserted claims against the Company, the Company believes it has adequate defenses, intends to defend itself vigorously, and believes the litigation will not result in any material adverse effect to the Company.

The outcome of litigation may not be assured, and despite management’s views of the merits of any litigation, or the reasonableness of its estimates and reserves, the Company’s cash balances could nonetheless be materially affected by an adverse judgment. In accordance with SFAS No. 5 “Accounting for Contingencies,” the Company believes it has adequately reserved for the contingencies arising from the above legal matters where an unfavorable outcome is deemed to be probable and the loss amount can be reasonably estimated. As such, the Company does not believe that the anticipated outcome of the aforementioned proceedings will have a materially adverse impact on its results of operations, its financial condition, or its cash flows.

ITEM 4. Submission Of Matters To A Vote Of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2006.

PART II

ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and issuer purchases of equity securities

Web.com’s common stock trades on the NASDAQ Global Market under the symbol “WWWW.” The following table shows the high and low close prices for the Company’s common stock, as reported by the NASDAQ Global Market:

Quarter Ended		High				Low
December 31, 2006		$	4.28			$	3.63
September 30, 2006		$	5.98			$	3.96
June 30, 2006		$	6.45			$	5.25
March 31, 2006		$	6.02			$	3.90
December 31, 2005		$	4.94			$	2.79
November 30, 2005		$	4.03			$	2.50
August 31, 2005		$	2.70			$	1.90
May 31, 2005		$	2.53			$	1.86
February 28, 2005		$	3.27			$	2.56
November 30, 2004		$	3.94			$	3.12

The following graph compares the cumulative total shareholder return on the Company’s common stock for the period August 31, 2001 through December 31, 2006 with the cumulative total return for the same period as (i) the NASDAQ Computer Index, (ii) the NASDAQ US Index and (iii) a peer group selected by the Company’s management. Each of these indices is prepared by a third party and is publicly available.

Note: Management cautions that the stock price performance information shown in the graph below may not be indicative of current stock price levels or future stock price performance.

Compensation of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2006

Authorized shares of common stock

At the Annual Meeting of Shareholders on March 31, 2006, the Shareholders of the Company approved the proposal of the Board of Directors to increase the number of the Company’s authorized shares by five million (5,000,000) shares from twenty one million (21,000,000) shares to twenty six million (26,000,000) shares.

Shareholder Rights Plan

In August 2006 the Board of Directors adopted a shareholder rights plan. The primary purpose of the shareholder rights plan is to preserve the Company’s net operating loss carryforwards, or “NOLs,” for federal income tax purposes. NOLs are past losses that a corporation can use to reduce future taxable income. As of the beginning of 2006, the Company had NOLs of approximately $317 million.

Until the Company’s market capitalization increases, Web.com’s future use of these NOLs could be substantially limited or eliminated in the event of an “ownership change,” as defined under Section 382 of the Internal Revenue Code. In general, a company would experience an ownership change for this purpose if holders of at least 5% of the outstanding shares of common stock increase their aggregate ownership interest in the company over a three-year testing period by more than 50%.

As part of the adoption of the rights plan, the Company’s Board of Directors declared a dividend of one right for each share of Common Stock held of record as of the close of business on August 15, 2006. The rights may cause substantial dilution to a person or group that attempts to acquire 5% or greater of Web.com’s Common Stock on terms not approved by the Board of Directors. Acquisitions of the Company’s Common Stock that would otherwise trigger the rights under the terms of the plan are permitted where the Board of Directors has determined, prior to consummation, that the transaction is fair to and in the best interests of the Company’s shareholders.

On March 7, 2007, Web.com’s Board of Directors approved an amendment to its Shareholder Rights Plan to accelerate its expiration date from July 23, 2007 to March 13, 2007. The Company had adopted the Shareholder Rights Plan in July 2006 to protect its approximately $317 million in net operating loss carry-forwards (NOLs). Since that date, the composition of the Company’s shareholders has changed so that there is less of a risk of a change in ownership that could jeopardize the NOLs under applicable tax laws.

Holders Of Record

On February 1, 2007, the closing price of Web.com’s common stock as reported on the NASDAQ Global Market was $4.55 per share and there were approximately 1,065 shareholders of record. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Dividends

The Company has not declared or paid any cash dividend and does not foresee paying any cash dividends in the foreseeable future.

ITEM 6. Selected Financial Data

We derived the following selected financial data from our audited consolidated financial statements.

In August 2005, the Company sold its dedicated hosting accounts and related assets, resulting in reduced revenues as reflected in the table below. During the fiscal year ended August 31, 2003, the Company acquired a Web and applications hosting company and a developer of software-based website solutions. During the fiscal year ended August 31, 2002, the Company acquired three Web and applications hosting companies, as well as Web hosting accounts from Interliant, Inc., Burlee and AT&T.

The information contained in the table below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Results of operations for the periods presented are not necessarily indicative of results of operations for future periods.

						Four
		Year				Months
		Ended				Ended
		Dec. 31,				Dec. 31,				Years Ended August 31,
(In thousands, except per share amounts)		2006				2005				2005				2004				2003				2002
Statements of operations data:
Revenues		$	49,140			$	16,292			$	88,608			$	102,745			$	106,638			$	101,628
Goodwill impairments			—				—				—				66,587				89,928				—
Asset impairments			—				—				—				7,009				13,868				—
Income (loss) from continuing operations			(13,269	)			(2,894	)			(19,450	)			(102,959	)			(178,791	)			(5,272	)
Net Income (loss)			(13,724	)			(3,040	)			(19,889	)			(104,663	)			(173,879	)			(11,293	)
Earnings (loss) per share, continuing operations
Basic and Diluted			(0.80	)			(0.18	)			(1.21	)			(6.40	)			(12.19	)			(0.38	)
Net Income (loss) per share
Basic and Diluted			(0.83	)			(0.19	)			(1.24	)			(6.50	)			(11.85	)			(0.82	)
Balance sheet data:
Total assets			38,428				51,124				56,559				84,912				207,042				395,278
Total debt			3,674				5,543				3,369				5,744				12,499				31,166
Shareholders’ equity			20,956				28,222				29,943				48,899				152,658				297,730

The above per share amounts have been adjusted to reflect the Company’s 1-for-10 reverse stock split, which became effective on August 1, 2003.

ITEM 7. Management’s Discussion And Analysis Of Financial Condition and Results Of Operations

On October 17, 2005, the Board of Directors approved a change in fiscal year end from August 31 to December 31, effective as of December 31, 2005. As a result, the financial periods presented and discussed below will be defined as follows: (i) year ended December 31, 2006 represents the twelve months ended December 31, 2006; (ii) four-month transition period ended December 31, 2005 represents the four months ended December 31, 2005; (iii) year ended August 31, 2005 represents the twelve months ended August 31, 2005; and (iv) year ended August 31, 2004 represents the twelve months ended August 31, 2004. All tabular dollar amounts are stated in thousands, except per share amounts.

Overview

Web.com, Inc. (NASDAQ: WWWW) is a leading destination for simple yet powerful solutions for websites and web services. The Company offers do-it-yourself and professional website design, website hosting, eCommerce, web marketing, and eMail. Since 1995,

Web.com has been helping individuals and small businesses leverage the power of the Internet to build a web presence. In fact, more than four million websites have been built or hosted using Web.com proprietary tools, services and patented technology.

Web.com understands that people want to leverage the power of the Internet to express themselves or to grow their business, but typically don’t have the time, resources or technical know-how to create, manage and promote a successful website. To address the market’s growing demands, Web.com offers a virtual one-stop-shop of simple, feature-rich web tools and services including do-it-yourself and professional website design, website hosting, eCommerce, web marketing, and eMail. As one of the longest-standing leaders in the website hosting industry, Web.com offers powerful, proprietary, point-and-click technologies and expert support professionals to ensure simplicity and ease-of-use at every step of the process.

The Board of Directors recruited Jeff Stibel to join the company as President and Chief Executive Officer in August 2005. In addition to Mr. Stibel, the Company added Seymour Holtzman as its Chairman and Alex Kazerani and Efrem Gerszberg to its Board. Subsequent to August 2005, the company’s senior management team developed a three-pronged business strategy for the company, consisting of stabilization, diversification, and growth. One of the first steps in implementing this strategy was the Company’s decision to focus on offering products and services utilizing shared hosting only (multiple users sharing a server) and ceasing to offer the products and services requiring dedicated hosting (one user on one server). Consequently, in August 2005, the Company sold the dedicated server assets to an unrelated third party.

By shifting to a business that requires minimal incremental capital expenditures for the addition of new customers (shared hosting), from a business that requires significant incremental expense for each new customer (dedicated hosting), the Company should be able to recognize significant cost savings over time and rationalize the existing infrastructure in a cost-efficient way. A major goal of the Company is to create a scalable web services business model that is customer-focused and drives revenue growth.

The current Web hosting business was formed through several company and account acquisitions that occurred from October 2001 through June 2006.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operations has been prepared by management based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its critical accounting policies and estimates, including those related to revenue recognition, advertising, valuation of accounts receivable, property, plant and equipment, long-lived assets, intangible assets, and contingencies. Estimates are based on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The Company considers the following accounting policies important in understanding the operating results and financial conditions of Web.com. These judgments and estimates affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting periods.

	•		Revenue Recognition – Revenues from continuing operations through August 2005 were primarily generated from shared and dedicated Internet Web hosting, managed services, eCommerce services, applications hosting, domain name registrations, and website development services. After August 31, 2005, the Company no longer provided dedicated web hosting product services. Revenues are recognized as the services are provided. Hosting contracts generally are for service periods ranging from one to twenty-four months and sometimes require up-front set-up fees, which are deferred and recognized ratably over the customers’ expected service period. Deferred revenues represent the liability for advance billings to customers for services not yet provided. The Company may permit an early termination of a term contract subject to penalties.
	•		Stock-Based Compensation – Effective September 1, 2005 the Company records stock-based compensation in accordance with Statement of financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”), which requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. The Company applies the Black-Scholes option pricing model and recognizes compensation cost on a straight-line basis over the vesting periods for the awards. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield.

			While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility, forfeiture rate and option life assumptions require a greater level of judgment which make them critical accounting estimates. The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which is obtained from public data sources. With regard to the weighted-average option life and forfeiture rate assumptions, the Company considers the behavior of past grants and in accordance with Staff Accounting Bulletin No. 107 (“SAB 107”), uses the safe-harbor calculations recommended when the Company’s historic trends of exercises are limited.
	•		Valuation of Accounts Receivable — Judgment is required when the Company assesses the likelihood of ultimate realization of recorded accounts receivable, including assessing the likelihood of collection and the credit-worthiness of customers. If the financial condition of the Company’s customers were to deteriorate or their operating climate were to change, resulting in an impairment of either their ability or willingness to make payments, an increase in the allowance for doubtful accounts would be required. Similarly, a change in the payment behavior of customers generally may require an adjustment in the calculation of an appropriate allowance. Each month management reviews customer payment patterns, historical credit card charge-backs, customer cancellation trends, and comparative aged receivables balances in order to determine the appropriate amount of allowance for doubtful accounts receivable to record. The majority of customer payments are made by credit card and all trade receivable balances over 60 days are fully reserved. Additionally, all trade balances 60 days or less are reserved based on historical data. The Company believes that the current allowance for doubtful accounts receivable is adequate to cover a reasonably expected level of uncollectible accounts receivable as of the balance sheet date.
	•		Property, Plant, Equipment and Long Lived Assets - The Company utilizes significant amounts of property, plant and equipment in providing service to its customers. For financial statement reporting purposes, the Company uses straight-line depreciation for property, equipment, and leasehold improvements over its estimate of their useful lives. The Company uses estimated useful lives of two to five years for equipment and software. Changes in technology or changes in the intended use of property, plant, and equipment may cause the estimated period of use or the value of these assets to change. The Company periodically confirms the appropriateness of estimated economic useful lives for each category of property, plant, and equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
	•		Goodwill and Intangible Assets - In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS 142), the Company periodically evaluates goodwill and intangible assets for potential impairment. The Company tests for the impairment of goodwill and intangible assets annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount by determining whether the Company’s carrying value exceeds its fair value. Fair value is ascertained by using quoted values of the Company’s stock and by using discounted values of expected future cash flows. If impairment of carrying value based on estimated future cash flows exists, the Company measures the impairment through the use of discounted cash flows. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions, and operational considerations. Future events could cause the Company to conclude that impairment indicators exist and that other intangible assets associated with acquired businesses are impaired. Management retained valuation specialists to assist in the valuation of its intangible assets for purposes of determining the implied fair value of goodwill at May 31, 2004. Upon completion of the annual assessment, the Company recorded a non-cash impairment charge of $66.6 million to remove the remainder of the carrying value of goodwill existing at that date. In addition, the company recorded an impairment charge of $7.0 million for its other intangible assets. Other intangible assets are amortized over an estimate of their period of economic benefit.
	•		Contingencies — The Company is subject to proceedings, lawsuits and other claims related to lawsuits and other legal and regulatory proceedings that arise in the ordinary course of business. The Company is required to assess the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. A determination of the amount of the loss accrual required, if any, for these contingencies, is made after careful analysis of each individual issue. The Company consults with legal counsel and other experts where necessary to assess any contingencies. The required accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Key Metrics

As of December 31, 2006 the Company had approximately 155,000 paid hosting subscribers compared to approximately 137,000 subscribers as of December 31, 2005. There were 137,000 paid hosting subscribers as of August 31, 2005. Net organic growth of approximately thirteen thousand accounts was the main reason for this growth. Other subscriber growth was the result of acquisitions. In addition to these hosting paid accounts, the Company also builds hundreds of thousands of more basic websites under plans formerly marketed by Trellix through Internet portals and other companies, such as Verizon, EarthLink, Lycos, and others.

Average Monthly Customer Churn (“Churn”) was 2.3%, 1.9%, 2.1%, and 2.4% for the year ended December 31, 2006, four months ended December 31, 2005, year ended August 31, 2005, and year ended August 31, 2004, respectively. Churn is calculated as the number of subscribers cancelled during the period divided by the sum of the number of subscribers at the beginning of the period plus the gross number of subscribers added during the period, divided by the number of months in the period.

Subscriber Acquisition Cost (“SAC”) was $96, $116, and $178 for the year ended December 31, 2006, four months ended December 31, 2005, and year ended August 31, 2005 respectively. Subscriber Acquisition Cost is calculated as the cost of advertising and marketing expenditures, divided by gross subscriber additions other than through acquisitions during the period.

The Company’s Average Revenue Per User (“ARPU”) was $26.07, $27.70, $26.86, and $27.14 for the year ended December 31, 2006, four months ended December 31, 2005, year ended August 31, 2005, and year ended August 31, 2004 respectively. ARPU is expressed in a monthly equivalent basis and it is calculated using the GAAP Hosting revenue for the year reported divided by the average number of subscribers for the year, divided by the number of months in the period.

In the Asset Purchase Agreement dated August 31, 2005 between the Company and Peer 1 Acquisition Corp. and Peer 1 Network Enterprises, Inc., Web.com sold approximately 8,300 dedicated servers and the customer accounts to which those servers related, together with its three data center facilities and other assets for approximately $14 million in cash.

The Company’s consolidated financial information presents the net effect of discontinued operations separate from the results of the Company’s continuing operations.

Discontinued Operations

PC Systems

In the fiscal year ended August 31, 2001 the Company discontinued the operations of its PC Systems business segment, which was accounted for as discontinued operations in accordance with Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” The Company retained all liabilities of the PC Systems business not assumed by GTG PC (“Gores”), including, for example, liabilities for taxes arising prior to the closing of the transaction, employee termination and related expenses, and any contingent liabilities arising prior to the closing date.

Through May 31, 2003, or for the applicable statute of limitations with respect to taxes and government contracts, the Company is obligated to indemnify the purchaser and affiliated entities for any breaches of the representations and warranties contained in the agreement. In addition, the Company is obligated for an indefinite period of time to indemnify the purchaser and affiliated entities for any breaches in covenants. The agreement provides that the maximum aggregate liability of the Company for indemnification under the agreement is $10.0 million. To date the Company has not made any indemnification payments. Web.com believes it is unlikely that it will have any obligation to indemnify Gores because the applicable statute of limitations has also passed for most applicable matters

During the current year ended December 31, 2006, the Company recognized a loss of $0.5 million from discontinued operations. This loss consisted primarily of $0.7 million in legal expenses, offset by a $0.2 million reduction in previously accrued liabilities. During the four months ended December 31, 2005, the Company recognized a loss of $0.1 million from discontinued operations. In the fiscal year ended August 31, 2005, the Company recognized a loss of $0.4 million from discontinued operations. This loss consisted primarily of required legal fees and reserves in defense and settlement of Micron PC legal matters offset by a reduction to a previously recorded sales tax reserve of $0.8 million. In the fiscal year ended August 31, 2004, the Company recognized a loss of $1.7 million from discontinued operations. This loss consisted primarily of required legal fees and reserves in defense and settlement of Micron PC legal matters. Most of the Company’s Micron litigation has been settled and the company does not expect to incur any substantial discontinued expenses in the foreseeable future.

Sale of Accounts

Hostcentric Shared Accounts and Related Assets

On May 5, 2005, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Caird Corporation (the “Buyer”), pursuant to which the Buyer purchased from the Company approximately 32,000 shared web hosting customer accounts, together with related equipment, trademarks, domain names, and miscellaneous assets. The Company decided that these customers were unlikely purchasers of the Company’s marketing-oriented services and products, but rather were interested in obtaining mere technical hosting – a service which the Company believes Caird provided more efficiently. In particular, the shared hosting accounts sold consisted of both shared hosting accounts that were part of the Hostcentric acquisition in June 2003 as well as accounts for customers who purchased shared hosting services under the Hostcentric brand thereafter (collectively, the “Accounts”). Many of the accounts were acquired by Hostcentric pre-merger pursuant to a reseller plan which, after an initial payment, offered additional accounts at a deeply discounted price.

Substantially all of the sold accounts were serviced through the Company’s leased facility in Orlando, Florida and were never integrated into the Company’s ticketing and hosting platform due to the different billing structure and processes of these accounts. The Company determined that the migration of these accounts into its billing and hosting platforms could result in significant breakage and a corresponding decline in customer satisfaction. The Company closed the Orlando facility in the quarter ended August 31, 2005 and terminated 32 employees in connection with that closure.

The total selling price for the Accounts was $3.4 million, which was received at closing, less commissions and deferred revenue adjustments. As a result of the sale, the Company recognized a net gain of $1.4 million, net of transaction costs in connection with the sale, which was recorded as a gain on sale of accounts in the Consolidated Statement of Operations. The carrying amounts of assets and liabilities disposed of in relation to this sale totaled approximately $1.3 million, consisting of $1.2 million of intangibles, net of amortization and $0.5 million of other assets, offset by $0.4 million of deferred revenue.

As an offset to the loss of revenue, the Company was paid a “carrying cost” per customer by the buyer during the transition period. The Company received carrying costs payments through the month of July 2005 of $0.4 million, at which point, all sold customers were successfully migrated to the buyer.

Dedicated Accounts and Related Assets

On August 31, 2005 the Company sold substantially all of its dedicated server assets and the customer accounts associated with those assets to Peer 1 Acquisition Corp. (“Peer 1 Acquisition”). As part of that transaction, Peer 1 Acquisition acquired the Company’s three data centers in Atlanta, Georgia, Fremont, California, and Miami, Florida. The Company entered into several agreements with Peer 1 Network Enterprises, Inc. (“Peer 1), the parent corporation of Peer 1 Acquisition, under which Peer 1 agreed to provide colocation, network connectivity, and related services to the Company. The sale of assets, and the accompanying assignment of lease obligations for the Atlanta, Miami and Fremont data centers, together with the transfer and termination of approximately 139 employees no longer required for the operation of the dedicated server assets allowed the Company to focus on its web hosting business and decrease the Company’s fixed costs.

As a result of the sale, the Company recognized a loss of $0.2 million in the quarter ended August 31, 2005. The total sales price for the Assets was $14.0 million in cash, plus a working capital adjustment of $0.6 million, less transaction costs of $1.2 million and disposal of assets and liabilities of $13.6 million. Of the total sales price, $2.8 million was held in escrow pursuant to an Escrow Agreement signed at closing to secure Web.com’s indemnification obligations under the Asset Purchase Agreement. The amount of $2.4 million was released from the escrow account in September 2006, with $2.2 million released to the Company and $0.2 million to Peer 1. The remaining balance of $0.4 million will be released when all pending claims have been settled.

Results of Continuing Operations

The Company’s consolidated financial information presents the net effect of discontinued operations separate from the results of the Company’s continuing operations. Historical financial information has been reclassified to consistently separate and present the results of discontinued operations, and the discussion and analysis that follow generally focuses on continuing operations. The following table sets forth, for the periods indicated, certain data derived from the Company’s consolidated statements of operations as a percentage of revenues.

Due to the Company’s change in its fiscal year end, certain unaudited periods are presented to facilitate a meaningful comparison of financial results between periods.

		Year Ended								Four Months Ended December 31,																Years Ended August 31,
		December 31, 2006								2005								2004								2005								2004
		(Unaudited)
Revenues		$	49,140				100.0	%		$	16,292				100.0	%		$	30,573				100.0	%		$	88,608				100.0	%		$	102,745				100.0	%
Operating costs and expenses:
Network operating costs			9,010				18.3	%			2,963				18.2	%			7,474				24.4	%			22,903				25.8	%			28,254				27.5	%
Sales and marketing			14,054				28.6	%			3,411				20.9	%			5,264				17.2	%			18,503				20.9	%			19,948				19.4	%
Technical support			6,811				13.9	%			2,348				14.4	%			5,050				16.5	%			13,084				14.8	%			17,965				17.5	%
General and administrative			24,684				50.2	%			7,204				44.2	%			9,847				32.2	%			30,489				34.4	%			30,835				30.0	%
Bad debt expense			1,134				2.3	%			373				2.3	%			632				2.1	%			1,761				2.0	%			3,690				3.6	%
Depreciation and amortization			5,415				11.0	%			1,750				10.7	%			7,705				25.2	%			21,239				24.0	%			30,650				29.8	%
Restructuring costs			—				0.0	%			1,626				10.0	%			—				0.0	%			2,616				3.0	%			756				0.7	%
Impairment of investment in and advances to WebSource Media			3,488				7.1	%			—				0.0	%			—				0.0	%			—				0.0	%			—				0.0	%
Goodwill impairment			—				0.0	%			—				0.0	%			—				0.0	%			—				0.0	%			66,587				64.8	%
Asset impairment			—				0.0	%			—				0.0	%			—				0.0	%			—				0.0	%			7,009				6.8	%
(Gain) Loss on sale of accounts			(14	)			0.0	%			—				0.0	%			—				0.0	%			(1,210	)			-1.4	%			—				0.0	%
Other expense (income), net			61				0.0	%			(165	)			-1.0	%			(14	)			0.0	%			(41	)			0.0	%			(192	)			-0.2	%
Total operating costs and expenses			64,643				131.5	%			19,510				119.8	%			35,958				117.6	%			109,344				123.4	%			205,502				200.0	%
Operating loss			(15,503	)			-31.5	%			(3,218	)			-19.8	%			(5,385	)			-17.6	%			(20,736	)			-23.4	%			(102,757	)			-100.0	%
Interest income (expense), net			982				2.0	%			324				2.0	%			95				0.3	%			436				0.5	%			(202	)			-0.2	%
Loss from continuing operations before income taxes			(14,521	)			-29.6	%			(2,894	)			-17.8	%			(5,290	)			-17.3	%			(20,300	)			-22.9	%			(102,959	)			-100.2	%
Income tax benefit			1,252				2.5	%			—				0.0	%			—				0.0	%			850				1.0	%			—				0.0	%
Loss from continuing operations			(13,269	)			-27.0	%			(2,894	)			-17.8	%			(5,290	)			-17.3	%			(19,450	)			-22.0	%			(102,959	)			-100.2	%
Net loss per share from continuing operations		$	(0.80	)						$	(0.18	)						$	(0.33	)						$	(1.21	)						$	(6.40	)

The loss from continuing operations for the year ended December 31, 2006 was $13.3 million, or negative $0.80 per share basic and diluted, on revenues of $49.1 million. This compares to a loss from continuing operations for the year ended August 31, 2005 of $19.4 million, or negative $1.21 per share basic and diluted, on revenues of $88.6 million. Further comparison is to a loss from continuing operations for the year ended August 31, 2004 of $103.0 million, or negative $6.40 per share basic and diluted, on revenues of $102.7 million. The loss from continuing operations for the four months ended December 31, 2005 was $2.9 million or negative $0.18 per share basic and diluted, on revenues of $16.3 million compared to a loss from continuing operations for the same period in 2004 of $5.3 million or negative $0.33 per share on revenues of $30.6 million.

The results of continuing operations for the year ended December 31, 2006, the four-month period ended December 31, 2005, the four-month period ended December 31, 2004, the fiscal years ended August 31, 2005 and 2004 include all operating activities of the Company’s acquisitions.

Revenues

		Year Ended				Four Months Ended
		December 31,				December 31,				December 31,				Years ended August 31,
(In thousands)		2006				2005				2004				2005				2004
										(Unaudited)
Hosting revenue		$	45,567			$	15,172			$	29,053			$	83,937			$	97,601
Other revenue			3,573				1,120				1,520				4,671				5,144
Total revenue		$	49,140			$	16,292			$	30,573			$	88,608			$	102,745

Year-Ended December 31, 2006 Compared to Year Ended August 31, 2005

Total revenues decreased $39.5 million, or 44.5%, to $49.1 million for the year ended December 31, 2006 from $88.6 million for the year ended August 31, 2005. When compared to the year ended August 31, 2005, hosting revenues decreased $38.4 million, or 45.7%, for the year ended December 31, 2006. Hosting revenues are comprised of shared and dedicated hosting services and domain name registrations. The significant decline in hosting revenues is primarily attributable to the sale of the dedicated hosting line of business to Peer 1 Networks in August 2005. Additionally the Company sold approximately 7,200 dedicated web server accounts to an unrelated buyer. The Company also sold approximately 32,000 shared hosting accounts as well as accounts for customers who purchased shared hosting services under the Hostcentric brand. The combined sales of accounts and account cancellations, net of new customers obtained through sales and marketing activities, resulted in the decrease mentioned above. Account cancellations occur as

a result of: a) customer action; b) termination by the Company for non-payment; or c) termination by the Company as a result of a decision to no longer provide a particular service.

Other revenues decreased $1.1 million, or 23.5%, for the year ended December 31, 2006, when compared to the year ended August 31, 2005. Other revenues are primarily comprised of consulting services, licensing fees and royalties. The decrease in other revenues is primarily attributable to the sales of dedicated hosting accounts and the related non-hosting revenues such as consulting and bandwidth transfer overage billings offset by a $0.7 million increase in license fees.

Network Operating Costs

Network operating costs were $9.0 million compared to $22.9 million for the year ended December 31, 2006 and August 31, 2005, respectively. This decrease of $13.9 million is attributable primarily to the cost savings and operational efficiencies achieved from the sale of the dedicated hosting assets and the outsourcing of some activities. It included a $6.6 million reduction in labor and benefit costs, a $3.8 million reduction in bandwidth connectivity costs, a $2.8 million reduction in software costs, a $0.9 million reduction in rent and utilities, and a $0.8 million reduction in maintenance contracts. These reductions were primarily attributable to the sale of the Hostcentric accounts and the dedicated hosting assets sold to Peer 1 in August 2005. Partially offsetting these decreases was an increase of $1.3 million in outsourced service fees.

Sales and Marketing

Sales and marketing expenses were $14.0 million compared to $18.5 million for the year ended December 31, 2006 and August 31, 2005, respectively. This decrease of $4.5 million is primarily due to the sale of dedicated hosting accounts in the year ended August 31, 2005, with the resulting reduction of $3.7 million in advertising costs and a $0.8 million decrease in salaries and payroll related expenses and commissions.

Technical Support

Technical support expenses were $6.8 million compared to $13.1 million for the year ended December 31, 2006 and August 31, 2005, respectively. The overall decrease of $6.3 million is primarily related to the cost savings realized by the sale of the dedicated hosting line of business. In the year ended August 31, 2005, the Company began outsourcing initiatives as well as a continued focus on reducing customer call volume and contacts, and reducing customer contacts through increased first call resolution rates. These efforts have yielded savings of $6.5 million in payroll and fringe benefit costs, $1.0 million in facilities overhead and $0.5 million in utility expenses. These savings are partially offset by an increase of $1.7 million in outsourcing fees.

General and Administrative

General and administrative expenses were $24.7 million compared to $30.5 million for the year ended December 31, 2006 and August 31, 2005, respectively. This decrease of $5.8 million is primarily attributable to a $4.1 million decrease in labor and labor related expenses, $2.1 million decrease in legal fees, $1.4 million decrease in professional fees, $1.2 million decrease in occupancy costs, $0.6 million in property and sales taxes, $0.8 million decrease in credit card fees, $0.6 million decrease in insurance expenses and $0.4 million of other office expenses. These decreases were partially offset by a $5.7 million increase in stock based compensation expenses.

Included within general and administrative are expenses related to the Company’s executives, human resources, finance, and accounting, legal, information technologies, product development, and quality assurance teams.

Bad Debt Expense

Bad debt expenses were $1.1 million compared to $1.8 million for the year ended December 31, 2006 and August 31, 2005 respectively. The decrease in bad debt expense is attributable to the reduced customer base after the sale of accounts in the year ended August 31, 2005.

Depreciation and Amortization

Depreciation and amortization expenses were $5.4 million for the year ended December 31, 2006 compared to $21.2 million for the year ended August 31, 2005. The decrease in depreciation expense is a result of the disposition of assets related to the sale of the dedicated accounts in August 2005.

Impairment of Investment in and Advances to WebSource Media

The Company recorded a charge of $3.5 million as an impairment of investment in and advances to WebSource Media for the year ended December 31, 2006. For details see note 5, “Acquisitions—WebSource Media, LLC”.

Gain on Sale of Accounts

There was a gain on sale of accounts of less than $0.1 million dollars for fiscal year ended December 31, 2006, compared to a $1.2 million gain for fiscal year ended August 31, 2005, attributable to a $1.4 million gain in the sale of the Hostcentric accounts and a $0.2 million loss on the sale of the dedicated accounts.

Interest Income (Expense), net

Interest income (expense), net was $1.0 million compared to $0.4 million for the year ended December 31, 2006 and August 31, 2005, respectively. Interest income (expense), net consists of interest income earned on the Company’s combined cash and cash equivalents, short-term investments, and restricted investments less interest expense on debt, primarily notes payable.

Income Tax Benefit

During the fiscal year ended December 31, 2006 the Company reached final resolutions with several federal and state taxing authorities regarding income taxes. The Company recorded a $1.3 million benefit in connection with the release of payables and reserves that were on its books. As of December 31, 2006 the Company had approximately $0.1 million reserved for income taxes.

Loss From Discontinued Operations

In fiscal 2001 the Company discontinued the operations of its PC Systems business segment, which was accounted for as discontinued operations in accordance with Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”

The loss from discontinued operations was $0.5 million and $0.4 million for the year ended December 31, 2006 and August 31, 2005, respectively. The loss is primarily attributable to legal fees in defense and settlement of Micron PC legal matters.

The Company has less than $0.1 million in accrued legal fees related to the disposal of discontinued operations that are included in accrued liabilities on the Company’s consolidated balance sheet as of December 31, 2006.

Four-Month Period Ended December 31, 2005 Compared to the unaudited Four Months Ended December 31, 2004

The loss from continuing operations decreased $2.4 million, or 45.3% to $2.9 million for the four months ended December 31, 2005 from $5.3 million for the four months ended December 31, 2004. The basic and diluted loss per share from continuing operations decreased $0.15 per share, or 45.4% for the four months ended December 31, 2005 when compared to the same period of the prior fiscal year.

Revenues

Total revenues decreased $14.3 million, or 46.7%, to $16.3 million for the four months ended December 31, 2005 from $30.6 million for the four months ended December 31, 2004.

When compared to the same period of the prior fiscal year, hosting revenues decreased $13.9 million, or 47.8%, for the four months ended December 31, 2005. Hosting revenues are comprised of shared hosting services and domain name registrations. The significant decline in hosting revenues is primarily attributable to the sale in May 2005 of 32,000 shared hosting accounts as well as accounts for customers who purchased shared hosting services under the Hostcentric brand. Additionally, in August 2005, the Company sold approximately 7,200 dedicated web server accounts to an unrelated buyer. The combined sales of accounts and account cancellations, net of new customers obtained through sales and marketing activities, resulted in the decrease mentioned

above. Account cancellations occur as a result of: a) customer action; b) termination by the Company for non-payment; or c) termination by the Company as a result of a decision to no longer provide a particular service.

Other revenues decreased $0.4 million, or 26.3%, for the four months ended December 31, 2005, when compared to the same period of the prior fiscal year. Other revenues are primarily comprised of consulting, bandwidth transfer overage billings, colocation services, and Web-based business solution services. The decline in other revenues is primarily attributable to the sales of dedicated hosting accounts and the related non-hosting revenues such as bandwidth transfer overage billings.

Network Operating Costs

Network operating costs were $3.0 million and $7.5 million for the four months ended December 31, 2005 and 2004, respectively. This decrease of $4.5 million is attributable primarily to a $1.2 million reduction in bandwidth connectivity costs, a $2.0 million reduction in labor costs, and a $1.0 million reduction in software costs primarily attributable to the sale of the Hostcentric accounts and the dedicated hosting assets sold to Peer 1 in August 2005.

Sales and Marketing

Sales and marketing expenses were $3.4 million for the four months ended December 31, 2005 compared to $5.3 million for the four months ended December 31, 2004, respectively. This decrease of $1.9 million is primarily due to the sale of accounts in fiscal 2005, a decrease in advertising costs related to functional centralization, greater use of efficient advertising and sales practices, and a reduction in reliance on more expensive advertising.

Technical Support

Technical support expenses were $2.3 million and $5.1 million for the four months ended December 31, 2005 and 2004, respectively. The overall decrease of $2.8 million is primarily related to the Company’s continued reduction in customer call volume and contacts. This reduction has occurred largely in part to outsourcing initiatives which began in fiscal year 2005, as well as a continued focus on reducing customer contacts through increased first call resolution rates. These operational efficiencies yielded decreases of $0.4 million in contract labor and consultants, $0.1 million in telephone expenses, $0.7 million in facilities overhead and $2.2 million in salaries and benefits, partially offset by an increase of $0.8 million in outsourcing fees.

General and Administrative

General and administrative expenses were $7.2 million and $9.8 million for the four months ended December 31, 2005 and 2004, respectively. This decrease of $2.6 million is primarily attributable to a $0.8 million decrease in legal expenses, $0.6 million decrease in professional fees, and a decrease in legal reserves of $0.8 million due to a favorable court ruling. Additional decreases are due to the sale of accounts in fiscal 2005, resulting in $0.5 million decrease in salary and benefit related expenses, $0.3 million decrease in credit card fees, and $0.2 million decrease in insurance expenses. Partially offsetting these reductions were increases in contract labor expense of $0.4 million and $0.5 million of stock based compensation.

Included within general and administrative are expenses related to the Company’s executives, human resources, finance, and accounting, legal, information technologies, product development, and quality assurance teams.

Bad Debt Expense

Bad debt expenses were $0.4 million and $0.6 million for the four months ended December 31, 2005 and 2004 respectively. The decrease in bad debt expense is attributable to the reduced customer base after the sale of accounts in fiscal 2005.

Depreciation and Amortization

Depreciation and amortization expenses were $1.8 million and $7.7 million for the four months ended December 31, 2005 and 2004, respectively. The decrease in depreciation expense is a result of the disposition of assets related to the sale of the dedicated accounts in August 2005.

Restructuring Costs

Restructuring costs were $1.6 million for the four months ended December 31, 2005 with no comparative charge for the same period in the prior fiscal year. The $1.6 million expense relates to $0.8 million of termination benefits paid to employees, and $1.0 million of exit costs for vacating a portion of the office space leased by the company, partially offset by a $0.2 million reduction of a bandwidth termination reserve.

Interest Income (Expense), net

Interest income (expense), net was $0.3 million for the four months ended December 31, 2005, compared to less than $0.1 million for the four months ended December 31, 2004. Interest income (expense), net consists of interest income earned on the Company’s combined cash and cash equivalents, short-term investments, and restricted investments less interest expense on debt, primarily capital leases.

Loss from Discontinued Operations

For the four months ended December 31, 2005 a loss of $0.1 million was recognized compared to a gain of $0.6 million for the four months ended December 31, 2004. The loss is primarily attributable to legal fees in defense and settlement of Micron PC legal matters. The gain in 2004 consisted of a reduction to a previously recorded sales tax reserve of $0.8 million, offset by $0.2 million of required legal fees in defense and settlement of Micron PC legal matters.

The Company has sales and use tax assessments and audit reserves of $0.2 million, $0.7 million in contingent liabilities, and $0.4 million for other liabilities related to the disposal of discontinued operations that are included in accrued liabilities on the Company’s consolidated balance sheet as of December 31, 2005.

Year Ended August 31, 2005 Compared to Year Ended August 31, 2004

Revenues

Total revenues decreased 13.8% to $88.6 million during the year ended August 31, 2005 from $102.7 million during the year ended August 31, 2004. Hosting revenues decreased to $83.9 million during the year ended December 31, 2005 from $97.6 million in fiscal 2004. Hosting revenues are comprised of shared, dedicated, application hosting services and domain name registrations. Account cancellations occur as a result of: a) customer action; b) termination by the Company for non-payment; or c) termination by the Company as a result of a decision to no longer provide a particular service.

The $13.7 million, or 14.0%, decline in hosting revenue from 2004 to 2005 is primarily attributable to customer attrition and the sale of the Hostcentric accounts in May 2005.

In May 2005, the Company sold 32,000 shared hosting accounts that were part of the June 2003 Hostcentric acquisition as well as accounts for customers who purchased shared hosting services under the Hostcentric brand thereafter. These accounts produced approximately $4.2 million in revenue during the year ended August 31, 2005 prior to the sale. In August 2005, the Company sold approximately 7,200 dedicated web server accounts to an unrelated buyer. For the year ended August 31, 2005 these accounts produced approximately $33 million in revenues.

Network Operating Costs

Network operating costs decreased to $22.9 million in the year ended August 31, 2005 from $28.3 million in the year ended August 31, 2004. The Company’s network operating costs as a percentage of revenues decreased to 25.8% during year ended August 31, 2005 from 27.5% in the year ended August 31, 2004. This $5.4 million, or 18.9%, decrease from 2004 to 2005 is most directly related to the data center consolidation, which was a critical part of the Company’s restructuring and integration initiative. The continued reductions in bandwidth connectivity costs had a direct impact of $1.6 million reduction. In addition the Company reduced operating lease costs by $0.1 million as a result of purchasing the underlying leased equipment, a $0.6 decrease in software costs, a $0.2 million decrease in repair and maintenance costs along with a $2.2 million decrease in employee related costs.

Sales and Marketing

Sales and marketing expenses decreased to $18.5 million in fiscal 2005 from $19.9 million in fiscal 2004. The Company’s sales and marketing expenses as a percentage of revenues increased to 20.9% during 2005 from 19.4% in fiscal 2004.

This $1.4 million decrease from 2004 to 2005 is directly attributable to functional centralization and much greater use of on-line advertising and customer initiated on-line sales and a reduction in reliance on more expensive print advertising and direct mail. The continued reduction in employee related expenses had a direct impact of $2.1 million and is a result of the overall reduction of mainstream marketing personnel because of the outsourcing of web design functions. In addition, the Company reduced technical and professional fees of $0.2 million, telephone expenses of $0.1 million offset by an increase of $0.5 million in outsourcing fees and $0.7 million in advertising costs.

Technical Support

Technical support expenses decreased to $13.1 million in the year ended August 31, 2005 from $18.0 million in the year ended August 31, 2004 The Company’s technical support expenses as a percentage of revenues decreased to 14.8% during year ended August 31, 2005 from 17.5% in the year ended August 31, 2004. This decrease of $4.9 million, or 27.2% decrease from 2004 to 2005 is primarily attributable to outsourcing initiatives which began in the April timeframe, as well as a continued focus on reducing customer contacts through increased first call resolution rates. This reduction has occurred largely in part to movement of off hour and weekend support to an offshore partner, additional training, an increase in first call resolution and improved data center stability. These operational efficiencies yielded a $4.7 million decrease in salaries and benefits, a $0.5 million decrease in facility overheads, telephone expense decrease of $0.3 million offset by an increase of $0.6 million in service agreement fees.

General and Administrative

General and administrative expenses decreased to $30.5 million during year ended August 31, 2005 from $30.8 million in the year ended August 31, 2004. The Company’s general and administrative expenses as a percentage of revenues increased to 34.4% during year ended August 31, 2005 from 30.0% in the year ended August 31, 2004. This $0.3 million or 1.1% decrease from 2004 to 2005 is directly related to a decrease of $2.2 million employee related costs, a $0.3 million decrease in credit card fees, a $0.2 million decrease in investor relations costs, and a $0.8 million decrease in insurance and tax related expenses. Partially offsetting these decreases was a $1.9 million increase in legal fees, a $0.9 million increase in professional fees, and a $0.9 million increase in occupancy costs associated with office consolidation.

Bad Debt Expense

Bad debt expense decreased to $1.8 million during the year ended August 31, 2005 from $3.7 million in the year ended August 31, 2004. The Company’s bad debt expense as a percentage of revenues decreased to 2.0% during the year ended August 31, 2005 from 3.6% in the year ended August 31, 2004. This $1.9 million or 52.3% decrease from 2004 to 2005 is directly attributable to the implementation of more aggressive collection strategies and more stringent termination and deactivation policies for non-paying accounts.

Depreciation and Amortization

Depreciation and amortization expenses decreased to $21.2 million during the year ended August 31, 2005 from $30.6 million in the year ended August 31, 2004. The Company’s depreciation and amortization expenses as a percentage of revenues decreased to 24.0% during year ended August 31, 2005 from 29.8% in the year ended August 31, 2004. The $9.4 million or 30.7% decrease from 2004 to 2005 is due to continued decline in capital expenditures, the expiration of capital leases during the year ended August 31, 2005 and the $7.0 million write off of intangible assets during the year ended August 31, 2004.

Restructuring Costs

Restructuring expense increased to $2.6 million in the year ended August 31, 2005 from $0.8 million in the year ended August 31, 2004.

Goodwill Impairment

As of May 31, 2004 in accordance with the requirements of SFAS 142, the Company completed its goodwill impairment test which entailed comparing the aggregate market value of the company’s outstanding securities plus its liabilities to the aggregate carrying value of the Company’s assets, including goodwill and other indefinite life intangible assets. Upon completion of the annual assessment, the Company recorded a non-cash impairment charge of $66.6 million in the year ended August 31, 2004 to write off the remaining balance of the carrying value of goodwill.

Intangible Asset Impairment

During the quarter ending May 31, 2004, the Company determined that the related discounted present value of future cash flows from its Interliant, AT&T and Burlee customer account acquisitions, as well as customer relationship intangible assets from its CommuniTech.Net, iNNERHOST and Dialtone acquisitions were materially less than previously estimated, due primarily to customer cancellations and company-initiated account terminations. As a result of this assessment, the Company determined that these identifiable intangible assets were worth less than their carrying value, and the Company consequently recorded a non-cash impairment charge of $4.8 million to reduce the asset value to the new assessed value and a $2.2 million charge for disposal of software. There was no impairment charge recorded during the year ended August 31, 2005.

Interest Income (Expense), Net

Interest income increased to $0.4 million in the year ended August 31, 2005 from $(0.2) million in the year ended August 31, 2004. Interest income (expense), net consists of interest income earned on the Company’s combined cash and cash equivalents, short-term investments and restricted investments less interest expense on debt, primarily capital leases. The cause for the change in net interest expense is primarily due to the reduction in interest expense relating to the maturing and termination of debt and leases for capital equipment during year ended August 31, 2005.

Liquidity and Capital Resources

						Four months ended
		December 31,				December 31,
		2006				2005
Cash and cash equivalents			13,288				17,370
Restricted cash			7,828				9,291
Total cash, cash equivalents and marketable debt securities		$	21,116			$	26,661
Cash (used in) provided by operating activities		$	(422	)		$	(7,790	)
Cash (used in) provided by investing activities			(1,487	)			10,405
Cash used in financing activities			(1,334	)			(1,090	)
Net (decrease) increase in cash		$	(3,243	)		$	1,525

During the fiscal year ended December 31, 2006, the Company funded its liquidity requirements through a combination of cash resources and the release of an escrow account related to the sale of the dedicated accounts.

As of December 31, 2006, the Company had $13.3 million in cash and cash equivalents, a reduction of $4.1 million from the $17.4 million balance as of December 31, 2005.

Cash used in operating activities during the year ended December 31, 2006 was $0.4 million. Cash used in investing activities was $1.5 million, including $3.3 million spent in the acquisition of WebSource Media and $1.9 million in capital expenditures. This cash use was offset by the release of $2.2 million from an escrow account and the sale of $1.5 million in restricted investments. Cash used in financing activities was $1.3 million resulting from $1.9 million in debt payments offset by $0.5 million in proceeds from the sale of stock. Additionally, the Company spent $0.8 million in discontinued operations.

During the four months ended December 31, 2005, the Company funded its liquidity requirements with internal resources and the sale of the dedicated accounts.

As of December 31, 2005, the Company had $17.4 million in cash and cash equivalents, an increase of $0.5 million from the $16.9 million balance as of August 31, 2005.

Cash used in operations during the four months ended December 31, 2005 was $7.8 million, mostly due to changes in working capital. Cash provided by investing activities was $10.4 million, comprised of $11.3 million received from the sale of dedicated accounts mentioned above, the sale of $0.2 million of restricted investments, net of $1.1 million in capital expenditures. Cash used in financing activities was $1.1 million in debt payments; furthermore, the Company spent $1.0 million in discontinued operations.

Total cash position, which includes cash and cash equivalents, restricted cash and short-term investments, was $21.1 million, as of December 31, 2006, a reduction of $5.6 million from the $26.7 million total cash position as of December 31, 2005.

In January 2007, the Company settled a lawsuit in its favor which resulted in a net cash settlement of $3.6 million. This influx of cash will improve the Company’s cash position in 2007.

In February 2004, the Company executed a five-year promissory note with US Bancorp Oliver-Allen Technology Leasing for $4.8 million. As of December 31, 2006, the principal balance on the promissory note was $2.1 million. The Company has pledged $5.0 million as collateral for this promissory note; this amount will gradually decrease until the agreement terminates in February 2009. As of December 31, 2006, the amount of collateral is $2.3 million. The collateral requirement under the agreement prevents the Company from utilizing the related cash and cash equivalents until all of its obligations under the note are satisfied. The promissory note bears an interest rate of 6.75% and requires monthly payments of approximately $94,000 through February 2009.

At the closing of the Web Internet, LLC acquisition in December 2005, Web.com assumed approximately $2.3 million in outstanding indebtedness of WILLC to Web Service Company, Inc. (“Web Service”). That indebtedness was amended and restated in that certain Amended and Restated Line of Credit Note and Loan Agreement (the “Web Service Note”) issued by Web.com and its wholly-owned subsidiary WDC Holdco, Inc. in favor of Web Service. The Web Service Note bears interest at the rate of 3% per year and is to be repaid in equal monthly installments of approximately $68,000 beginning on January 1, 2006 with a final payment of any remaining principal and interest due on December 1, 2008. As of December 31, 2006, the principal balance on the indebtedness was $1.6 million.

Contractual Obligations

The following table discloses aggregate information about the Company’s contractual obligations, excluding interest, as of December 31, 2006 and the periods in which payments are due:

Contractual Obligations (in thousands)		Total				1 year				2-3 years				4-5 years
Real Property Leases		$	9,648			$	2,701			$	5,547			$	1,399
Long-term Debt		$	3,874				1,844				1,937				93
Contractual Obligations		$	55				55				—				—
Operating Leases		$	73				25				36				12
Total Commitments		$	13,650			$	4,625			$	7,520			$	1,504

The Company’s Web hosting business has historically incurred net losses and losses from operations. The Company’s future operation is dependent upon its ability to achieve and sustain positive cash flow prior to the depletion of cash resources. The Company has reduced its level of cash requirements through a decrease in capital purchases with the sale of its dedicated accounts

and related assets and by improving sales and reducing churn. The Company has also reduced cash outlays for payments associated with prior integration and discontinued operation liabilities and has reduced debt payments because of the buyout of capital lease obligations during 2004. The Company expects to continue to have negative cash flows as it continues to execute on its business plan. There can be no assurance that Web.com’s continuing efforts to stabilize or increase its revenue will be successful and the Company will be able to continue as a going concern. If the Company is unable to successfully execute its business plan, it may require additional capital, which may not be available on suitable terms. Nonetheless, management believes it has adequate cash and liquid resources to fund operations and planned capital expenditures through the next 12 months.

Recently Issued Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurements,” (“FAS 157”). This statement defines fair value and expands disclosure about fair value measurements. These methods will apply to other accounting standards which use fair value measurements and may change the application of certain measurements used in current practice. The effective date for the Company is the beginning of 2008. The Company is currently reviewing the impact of this new standard and has not determined the potential effect on the financial statements.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006 and will be followed by the Company for the year beginning January 1, 2007. The Company is in the process of evaluating the impact of FIN 48 on its financials and does not expect the interpretation will have a material impact on its results from operations or on its financial position.

Off-Balance Sheet Arrangements

The Company is not currently engaged in the use of off-balance sheet derivative financial instruments, to hedge or partially hedge interest rate exposure nor do we maintain any other off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, or other financial or investment purposes.

Directors & Officers Insurance

In 2004, the Company determined that issuers of directors and officers’ insurance coverage have become more likely to refuse to defend and pay claims than in the past, and have been aggressively interpreting policy language in an attempt to avoid claims. The Company also recognized that lawsuits brought against public companies have the potential to result in defense costs, settlement, or judgments that may exceed the ability of companies to fulfill their customary indemnification obligations to directors and officers. Consequently, individual officers and directors of the Company would face exposure to personal liability for the costs of litigation to determine coverage, to defend claims, and to satisfy judgments or settlements, unless supplemental insurance coverage was obtained.

In order to insure this exposure, during the fourth quarter of 2004 the Company entered into contracts with two insurers, which together are designed to provide further assurance that the Company’s indemnification obligations will be satisfied. The Company purchased a policy of directors and officers insurance, which, in the event of the Company’s inability to pay, will provide broad coverage to individual officers and directors in these circumstances (customarily referred to as “Side A” coverage). The Company paid approximately $750,000 for a three-year period of coverage beginning on August 1, 2004 for which the associated expense is recognized ratably over the coverage period. Additionally, the Company paid approximately $400,000 in August 2004, which was expensed in 2004, to cover prior claims and certain potential claims, and delivered $2.8 million to the insurer to secure the retained exposure. These held funds are recorded as Other Assets, and, to the extent they are not exhausted, will be re-delivered to the Company when exposure to such claims is extinguished by final resolution of such claims. In each case these policies do not include most customary exclusions, although no director or officer is provided coverage for fraudulent or illegal acts. As reported in ITEM 3 — “Legal Proceedings,” the Company has not recorded any reserve for any such claims, consistent with the application of SFAS 5, “Accounting for Contingencies.”

ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk

Substantially all of the Company’s liquid investments and a majority of its debt are at fixed interest rates, and therefore the fair value of these instruments is not affected by changes in market interest rates. As of December 31, 2006, approximately 97.7% of the Company’s liquid investments mature within three months and 2.2% mature within one year. The majority of the Company’s long-term debt is comprised of fixed-rate capital leases used to finance equipment purchases. In this regard the underlying debt instruments are not marketable and, therefore, there is no associated market risk. As of December 31, 2006, management believes the

reported amounts of liquid investments and debt to be reasonable approximations of their fair values. Generally, the fair market value of fixed interest rate investment securities will increase as interest rates fall and decrease as interest rates rise. The Company does not use derivative financial instruments in its investment portfolio. The portfolio has been primarily comprised of commercial paper rated A1/P1, bank certificates rated AA or better, and corporate medium-term notes rated AA or better. At December 31, 2006, the Company’s investment portfolio included fixed rate securities with an estimated fair value of $19.5 million. The interest rate changes affect the fair market values but do not affect earnings or cash flows. The fair market value of long-term fixed interest rate debt is also subject to interest rate risk. Generally, the fair market of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company’s long-term debt at December 31, 2006 was $3.7 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index To consolidated Financial Statements

		Page
Report of Independent Registered Public Accounting Firm			34
Consolidated Financial Statements:
Consolidated Statements of Operations for the Year Ended December 31, 2006, the Four-Month Period Ended December 31, 2005 and the Years Ended August 31, 2005 and 2004			36
Consolidated Balance Sheets as of December 31, 2006 and 2005			37
Consolidated Statements of Shareholders’ Equity for the Year Ended December 31, 2006, the Four-Month Period Ended December 31, 2005 and the Years Ended August 31, 2005 and 2004			38
Consolidated Statements of Cash Flows for the Year Ended December 31, 2006, the Four-Month Period Ended December 31, 2005 and the Years Ended August 31, 2005 and 2004			39
Notes to Consolidated Financial Statements			40
Quarterly Financial Information (Unaudited)			65

Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Directors
Web.com, Inc.

We have completed integrated audits of the consolidated financial statements of Web.com, Inc. (formerly known as Interland, Inc.) for the year ended December 31, 2006 and for the year ended August 31, 2005 and of its internal control over financial reporting as of December 31, 2006, and audits of its four month period ended December 31, 2005 and year ended August 31, 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Web.com, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for the year ended December 31, 2006, the four month period ended December 31, 2005, and each of the two years in the period ended August 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation effective September 1, 2005.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s report in internal control over financial reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Atlanta, Georgia
March 16, 2007

Web.com, Inc.

		Year Ended				Four Months Ended				Years Ended August 31,
		December 31, 2006				December 31, 2005				2005				2004
Revenues		$	49,140			$	16,292			$	88,608			$	102,745
Operating costs and expenses:
Network operating costs,exclusive of depreciation and amortization (1)			9,010				2,963				22,903				28,254
Sales and marketing			14,054				3,411				18,503				19,948
Technical support			6,811				2,348				13,084				17,965
General and administrative			24,684				7,204				30,489				30,835
Bad debt expense			1,134				373				1,761				3,690
Depreciation and amortization			5,415				1,750				21,239				30,650
Restructuring costs			—				1,626				2,616				756
Impairment of investment in and advances to WebSource Media			3,488				—				—				—
Goodwill impairment			—				—				—				66,587
Asset impairment			—				—				—				7,009
Gain on sale of accounts			(14	)			—				(1,210	)			—
Other expense (income), net			61				(165	)			(41	)			(192	)
Total operating costs and expenses			64,643				19,510				109,344				205,502
Operating loss			(15,503	)			(3,218	)			(20,736	)			(102,757	)
Interest income (expense), net			982				324				436				(202	)
Loss from continuing operations before income taxes			(14,521	)			(2,894	)			(20,300	)			(102,959	)
Income tax benefit			1,252				—				850				—
Loss from continuing operations			(13,269	)			(2,894	)			(19,450	)			(102,959	)
Income (loss) from discontinued operations, net of tax			(455	)			(146	)			(439	)			(1,704	)
Net loss		$	(13,724	)		$	(3,040	)		$	(19,889	)		$	(104,663	)
Net loss per share, basic and diluted:
Continuing operations		$	(0.80	)		$	(0.18	)		$	(1.21	)		$	(6.40	)
Discontinued operations			(0.03	)			(0.01	)			(0.03	)			(0.10	)
		$	(0.83	)		$	(0.19	)		$	(1.24	)		$	(6.50	)
Number of shares used in per share calculation:
Basic and diluted			16,537				16,272				16,044				16,096
(1)   Excludes depreciation and amortization as follows:
Network operating costs		$	4,129			$	820			$	11,853			$	25,021

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

Web.com, Inc.

		As of December 31,
		2006				2005
Assets
Current assets
Cash and cash equivalents		$	13,288			$	17,370
Trade receivables, net of allowance of $160 and $83, respectively			2,074				1,812
Other receivables			525				1,180
Prepaids and other current assets			1,154				2,026
Restricted investments			162				276
Total current assets			17,203				22,664
Restricted investments			7,666				9,015
Securities, held-to-maturity			—				53
Property plant and equipment, net			4,128				6,303
Goodwill			1,003				921
Intangibles, net			5,233				6,568
Other assets			3,195				5,600
Total assets		$	38,428			$	51,124
Liabilities and shareholders’ equity
Current liabilities
Accounts payable		$	1,623			$	934
Accrued expenses			4,709				6,232
Accrued restructuring charges			2,345				4,416
Current portion of long-term debt and capital lease obligations			1,703				1,693
Deferred revenue			4,687				4,637
Total current liabilities			15,067				17,912
Long-term debt and capital lease obligations			1,971				3,850
Deferred revenue, long-term			314				206
Other liabilities			120				934
Total liabilities			17,472				22,902
Commitments and contingencies (notes 20 & 21)
Shareholders’ equity
Common stock, $.01 par value, authorized 26 and 21 million shares, issued and outstanding 16.8 and 16.6 million shares, respectively			168				166
Additional capital			331,949				325,493
Warrants			2,128				2,128
Note receivable from shareholder			(735	)			(735	)
Accumulated deficit			(312,554	)			(298,830	)
Total shareholders’ equity			20,956				28,222
Total liabilities and shareholders’ equity		$	38,428			$	51,124

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

Web.com, Inc.

																						Note
																						Receivable								Total
		Common Stock								Additional								Deferred				From				Accumulated				Shareholders’
		Shares				Amount				Capital				Warrants				Compensation				Shareholder				Deficit				Equity
Balance, August 31, 2003			16,322			$	164			$	322,523			$	4,990			$	(1,046	)		$	(2,735	)		$	(171,238	)		$	152,658
Stock sold			47				—				226				—				—				—				—				226
Repurchase and retirement of stock and note receivable			(273	)			(3	)			(1,997	)			—				—				2,000				—				—
Retirement of warrants											387				(387	)			—				—				—				—
Amortization of deferred compensation			—				—				(48	)			—				726				—				—				678
Net loss			—				—				—				—				—				—				(104,663	)			(104,663	)
Balance, August 31, 2004			16,096			$	161			$	321,091			$	4,603			$	(320	)		$	(735	)		$	(275,901	)		$	48,899
Stock sold			266				3				610				—				—				—				—				613
Amortization of deferred compensation			—				—				—				—				320				—				—				320
Retirement of warrants			—				—				1,797				(1,797	)			—				—				—				—
Net loss			—				—				—				—				—				—				(19,889	)			(19,889	)
Balance, August 31, 2005			16,362			$	164			$	323,498			$	2,806			$	—			$	(735	)		$	(295,790	)		$	29,943
Stock sold			7				—				25				—				—				—				—				25
Acquisition of WILLC, Inc.			187				2				755				—				—				—				—				757
Amortization of stock based compensation			—				—				537				—				—				—				—				537
Retirement of warrants			—				—				678				(678	)			—				—				—				—
Net loss			—				—				—				—				—				—				(3,040	)			(3,040	)
Balance, December 31, 2005			16,556			$	166			$	325,493			$	2,128			$	—			$	(735	)		$	(298,830	)		$	28,222
Stock sold			220				2				532				—				—				—				—				534
Amortization of stock based compensation			—				—				5,924				—				—				—				—				5,924
Net loss			—				—				—				—				—				—				(13,724	)			(13,724	)
Balance, December 31, 2006			16,776			$	168			$	331,949			$	2,128			$	—			$	(735	)		$	(312,554	)		$	20,956

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

Web.com, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Year Ended				Four Months Ended				Years Ended
		December 31,				December 31,				August 31,
		2006				2005				2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(13,724	)		$	(3,040	)		$	(19,889	)		$	(104,663	)
Adjustments to reconcile net loss to net cash provided by(used in) operating activities from continuing operations:
Loss from discontinued operations			455				146				439				1,704
Depreciation and amortization			5,415				1,750				21,239				30,650
Bad debt expense			1,134				373				1,761				3,690
Loss (Gain) on sale of assets			61				—				(41	)			(159	)
Goodwill and asset impairment			—				—				—				73,596
Impairment of investment in and advances to WebSource Media			3,488				—				—				—
(Gain) / losses on sale of accounts			(14	)			—				(1,210	)			—
Stock-based compensation			5,924				537				320				678
Restructuring costs			—				1,626				2,616				756
Deferred income taxes			(41	)			—				—				—
Changes in operating assets and liabilities net of effect of acquisitions and dispositions:
Receivables			(741	)			(1,765	)			(837	)			(1,514	)
Income tax recoverable			—				—				—				612
Other current assets			807				692				271				(206	)
Accounts payable, accrued expenses and deferred revenue			(3,186	)			(8,109	)			(6,613	)			(9,203	)
Cash (used in) provided by operating activities of continuing operations			(422	)			(7,790	)			(1,944	)			(4,059	)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant, and equipment			(1,900	)			(1,110	)			(9,392	)			(11,892	)
Payment for purchase of WebSource Media			(3,261	)			—				—				—
Cash received from sale of dedicated assets			—				11,267
Release of funds from escrow account from sale of accounts			2,247				—				—				—
Net proceeds from sale of accounts			—				—				2,517				—
Payment of fees on sale of dedicated accounts			—				—				(338	)			—
Purchase of held-to-maturity investment securities			—				(3	)			(50	)			—
Proceeds from held-to-maturity investment securities			53				—				—				1,500
Purchases of auction rate securities			—				—				(8,000	)			(7,500	)
Proceeds from auction rate securities			—				—				20,525				22,800
Deposits of restricted cash and other deposits			—				—				—				(2,800	)
Net change in restricted investments			1,461				266				1,335				7,734
Acquisitions, net of cash acquired			(87	)			(15	)			—				242
Cash (used in) provided by investing activities of continuing operations			(1,487	)			10,405				6,597				10,084
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of debt and capital lease obligations			(1,868	)			(1,115	)			(2,375	)			(11,536	)
Proceeds from issuance of common stock			534				25				613				226
Cash used in financing activities of continuing operations			(1,334	)			(1,090	)			(1,762	)			(11,310	)
Net cash (used in) provided by continuing operations			(3,243	)			1,525				2,891				(5,285	)
Net cash used in discontinued operations (Revised — See note 2)
Operating cash flows			(839	)			(1,046	)			(1,203	)			(1,742	)
Investing cash flows			—				—				—				—
Financing cash flows			—				—				—				—
Total cash flows used in discontinued operations			(839	)			(1,046	)			(1,203	)			(1,742	)
Net (decrease) increase in cash and cash equivalents			(4,082	)			479				1,688				(7,027	)
Cash and cash equivalents at beginning of period			17,370				16,891				15,203				22,230
Cash and cash equivalents at end of period		$	13,288			$	17,370			$	16,891			$	15,203
Interest paid, net of amounts capitalized			177				77				305				927
Non-cash investing and financing activities:
Stock issued for WILLC acquisition			—				757				—				—