Web.com 10Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

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

For the transition period from to

Commission File Number: 000-51595

Website Pros, Inc.

(Exact name of registrant as specified in its charter)

Delaware		94-3327894
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12735 Gran Bay Parkway West, Building 200, Jacksonville, FL		32258
(Address of principal executive offices)		(Zip Code)

(904) 680-6600

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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):

o Large accelerated filer

x Accelerated filer

o Non-accelerated filer

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

Common Stock, par value $0.001 per share, outstanding as of October 31, 2007: 27,250,849

Website Pros, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period ended September 30, 2007

Index

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Website Pros, Inc.

Consolidated Statements of Operations

(in thousands except per share amounts)

(unaudited)

	Three months ended					Nine months ended
	September 30, 2007			September 30, 2006		September 30, 2007			September 30, 2006
Revenue:
Subscription	$	16,820		$	11,272	$	48,006		$	31,881
License	383			442		2,095			2,531
Professional services	613			325		1,539			1,277
Total revenue	17,816			12,039		51,640			35,689

Cost of revenue (excluding depreciation and amortization shown separately below):
Subscription (a)	7,124			4,859		21,225			13,945
License	190			190		667			672
Professional services	347			333		947			1,044
Total cost of revenue	7,661			5,382		22,839			15,661
Gross profit	10,155			6,657		28,801			20,028

Operating expenses:
Sales and marketing (a)	4,202			2,972		12,413			8,651
Research and development (a)	915			479		2,637			1,468
General and administrative (a)	3,271			2,194		9,348			6,993
Restructuring charges	242			—		242			—
Depreciation and amortization	719			339		2,113			1,042
Total operating expenses	9,349			5,984		26,753			18,154
Income from operations	806			673		2,048			1,874
Interest, net	528			710		1,539			1,887
Income before income taxes	1,334			1,383		3,587			3,761
Income tax expense	(942		)	—		(2,011		)	—
Net income	$	392		$	1,383	$	1,576		$	3,761
Basic net income per common share	$	0.02		$	0.08	$	0.09		$	0.23
Diluted net income per common share	$	0.02		$	0.07	$	0.08		$	0.19
Basic weighted average common shares outstanding	17,989			16,846		17,603			16,663
Diluted weighted average common shares outstanding	19,944			19,335		19,768			19,340

(a) Stock-based compensation included above:

Subscription (cost of revenue)	$	57		$	33	$	168		$	90
Sales and marketing	175			88		508			234
Research and development	67			54		206			141
General and administrative	618			385		1,718			902
	$	917		$	560	$	2,600		$	1,367

See accompanying notes to consolidated financial statements

Website Pros, Inc.

Consolidated Balance Sheets

(in thousands)

	September 30, 2007			December 31, 2006
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	56,622		$	42,155
Restricted cash	304			—
Accounts receivable, net of allowance of $729 and $280, respectively	7,059			4,202
Other receivables	1,445			—
Inventories, net of reserves of $65 and $48, respectively	30			69
Prepaid expenses	4,398			616
Prepaid marketing fees and other current assets	1,029			986
Deferred taxes	531			531
Total current assets	71,418			48,559

Restricted cash	6,438			—
Property and equipment, net	7,460			2,337
Goodwill	109,800			31,587
Intangible assets, net	63,900			7,590
Deferred taxes	794			2,669
Other assets	771			618

Total assets	$	260,581		$	93,360

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,545		$	920
Accrued expenses	10,574			2,581
Accrued merger costs	25,911			—
Accrued restructuring costs and other reserves	13,550			—
Deferred revenue	9,215			4,594
Accrued marketing fees	647			681
Notes payable, current	2,070			95
Obligations under capital leases, current	—			52
Other liabilities	159			102
Total current liabilities	64,671			9,025

Accrued rent expense	126			158
Deferred revenue	115			—
Notes payable, long term	457			162
Obligations under capital leases, long-term	—			32
Other long-term liabilities	749			27

Total liabilities	66,118			9,404

Stockholders’ equity:
Common stock, $0.001 par value; 150,000,000 shares authorized, 27,210,405 and 17,331,626 shares issued and outstanding at September 30, 2007 and December 31, 2006	27			17
Additional paid-in capital	252,022			143,101
Accumulated deficit	(57,586		)	(59,162		)

Total stockholders’ equity	194,463			83,956

Total liabilities and stockholders’ equity	$	260,581		$	93,360

See accompanying notes to consolidated financial statements

Website Pros, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine months ended September 30,
	2007			2006
Cash flows from operating activities
Net income	$	1,576		$	3,761

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,113			1,042
Stock-based compensation expense	2,600			1,367
Restructuring costs	242			—
Deferred income tax	1,875			—
Changes in operating assets and liabilities:
Accounts receivable	(13		)	(1,335		)
Inventories	39			51
Prepaid expenses and other assets	(2		)	128
Accounts payable, accrued expenses and other liabilities	84			(942		)
Deferred revenue	341			74

Net cash provided by operating activities	8,855			4,146

Cash flows from investing activities
Business acquisitions, net of cash received	7,812			(20,008		)
Purchase of property and equipment	(3,190		)	(1,022		)
Investment in intangible assets	(102		)	—

Net cash provided by (used in) investing activities	4,520			(21,030		)

Cash flows from financing activities
Proceeds from issuance of common stock, net	—			1,122
Payments of debt obligations	(156		)	(49		)
Proceeds from exercise of stock options	1,248			271

Net cash provided by financing activities	1,092			1,344

Net increase (decrease) in cash and cash equivalents	14,467			(15,540		)
Cash and cash equivalents, beginning of period	42,155			55,746

Cash and cash equivalents, end of period	$	56,622		$	40,206

Supplemental cash flow information
Interest paid	$	13		$	—

Income taxes paid	$	199		$	—

See accompanying notes to consolidated financial statements

Website Pros, Inc.

Notes to Consolidated Financial Statements

(unaudited)

1. The Company and Summary of Significant Accounting Policies

Description of Company

Website Pros, Inc. (“the Company”) is a provider of Do-It-For-Me Web services and lead generation products that enable small and medium-sized businesses to establish, maintain, promote, and optimize their Internet presence. The Company’s primary service offerings are comprehensive performance-based packages that include Website design and publishing, Internet marketing and advertising, search engine optimization, search engine submission, lead generation, and easy-to-understand Web analytics. In addition to the Company’s primary service offerings, the Company provides a variety of premium services to customers who desire more advanced capabilities, such as e-commerce solutions and other sophisticated Internet marketing services and online lead generation.

On September 30, 2007, Website Pros completed the acquisition of Web.com. Web.com is a leader in providing simple, yet powerful solutions for websites and web services. In addition, Web.com offers do-it-yourself and professional website design, web hosting, eCommerce, web marketing and eMail.

The Company has reviewed the criteria of Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information, and has determined that the Company is comprised of only one segment, Web services and products.

Certain prior period amounts have been reclassified to conform to current year presentation.

Basis of Presentation

The accompanying consolidated balance sheet as of September 30, 2007, the consolidated statements of operations for the three and nine months ended September 30, 2007 and 2006, the consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006 and the related notes to the consolidated financial statements for the nine months ended September 30, 2007 and 2006 are unaudited. These unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2006, except that certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or excluded as permitted.

In the opinion of management, the unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of September 30, 2007, and the Company’s results of operations for the three and nine months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 30, 2007 and 2006. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission, or SEC, on March 9, 2007.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill determined to have an indefinite useful life is tested for impairment, at least annually or more frequently if indicators of impairment arise. If impairment of the carrying value based on the calculated fair value exists, the Company measures the impairment through the use of discounted cash flows. The Company completed its annual goodwill impairment test during the fourth quarter of 2006 and determined that the carrying amount of goodwill was not impaired. In addition, there were no indicators of impairment during the quarter ended September 30, 2007.

Intangible assets acquired as part of a business combination are accounted for in accordance with SFAS No. 141, Business Combinations, and are recognized apart from goodwill if the intangible arises from contractual or other legal rights or the asset is capable of being separated from the acquired enterprise. Indefinite-lived intangible assets are tested for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that the asset might be impaired in accordance with SFAS No. 142. The Company completed its annual impairment test during the fourth quarter of 2006 and determined that the carrying value of its indefinite-lived intangible assets was not impaired. In addition, there were no indicators of impairment during the quarter ended September 30, 2007.

Definite-lived intangible assets are amortized over their useful lives, which range between fourteen months and ten years.

Earnings per Share

The Company computes earnings per share in accordance with SFAS No. 128, Earnings Per Share. Basic net income attributable per common share includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income attributable per common share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring the use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 157, but does not expect it to have a material impact on its financial position, results of operations, cash flows or disclosures.

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities, as well as, certain nonfinancial instruments that are similar to financial instruments, at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is selected for an instrument, SFAS 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact of SFAS 159, but does not expect it to have a material impact on its financial position, results of operations, cash flsows or disclosures.

2. Business Combinations

Merger with Web.com

On September 30, 2007, Website Pros completed the transactions contemplated by the Agreement and Plan of Merger and Reorganization executed on June 26, 2007 (the “Merger Agreement”) by and among Website Pros, Augusta Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Website Pros (“Merger Sub”) and Web.com, Inc., a Minnesota corporation (“Web.com”) pursuant to which Web.com merged with and into Merger Sub (the “Merger”). The Merger was approved by the stockholders of Website Pros and the shareholders of Web.com on September 25, 2007. The Company believes that the Web.com merger united two market leaders to create a single company with solutions that can meet the diverse Web services needs of small and medium sized businesses. In addition, the Company expects it will be able to leverage cost savings and take advantage of cross-selling opportunities across its significantly expanded customer base.

Web.com is a leader in providing simple, yet powerful solutions for websites and web services. In addition, Web.com offers do-it-yourself and professional website design, web hosting, eCommerce, web marketing and eMail.

In consideration for the Merger, shareholders of Web.com received either (a) to the extent the shareholder made an effective cash election with respect to the shares of Web.com common stock held by such shareholder, approximately $2.36749 per share of Web.com common stock and approximately 0.43799 shares of common stock of Website Pros for each share of common stock of Web.com held by such shareholder and (b) to the extent the shareholder made an effective stock election, or made no election, with respect to the shares of Web.com common stock held by such shareholder, 0.6875 shares of common stock of Website Pros for each share of Web.com common stock held by such shareholder. In the aggregate,

Website Pros issued approximately 9.2 million shares of Website Pros stock and was obligated to pay $25 million in cash to Web.com shareholders, which is included in accrued merger costs as of September 30, 2007 and was disbursed in October 2007. In addition, under the terms of the Merger Agreement, each outstanding vested option to purchase shares of Web.com common stock converted into and became a vested option to purchase Website Pros common stock, and Website Pros assumed such option in accordance with the terms of the stock option plan or agreement under which that option was issued. The number of shares of Website Pros common stock an option holder is entitled to purchase and the price of those options was subject to an option exchange ratio calculated in accordance with the Merger Agreement. In the aggregate, Web.com option holders are now entitled to purchase an aggregate of approximately 2.4 million shares of Website Pros common stock at a weighted average exercise price of $5.61 per share.

The Merger was accounted for using the purchase method of accounting under U.S. Generally Accepted Accounting Principles. Under the purchase method of accounting, Website Pros is considered the acquirer of Web.com for accounting purposes and the total purchase price will be allocated to the assets acquired and liabilities assumed from Web.com based on their fair values as of September 30, 2007. Under the purchase method of accounting, the total consideration was approximately $132.1 million, which includes the issuance of Website Pros’ common stock valued at approximately $88.6 million, the assumption of stock options with a fair value of $16.5 million and cash payments of $25.0 million. Website Pros estimates that its transaction costs related to this merger, including legal fees, investment-banking fees, due diligence expenses, filing and printing fees, will be approximately $2 million, of which $1.1 million of those expenses have been paid by September 30, 2007. The estimated value of the common stock was calculated using the average Website Pros’ common stock price three days before and after the merger announcement. The average stock price used to calculate the purchase price was $9.68.

As of September 30, 2007, the purchase accounting for this acquisition is still subject to final adjustment primarily for amounts allocated to intangible and fixed assets based on preliminary valuation studies.

The following table summarizes the Company’s preliminary purchase price allocation based on the estimated fair values of the assets acquired and liabilities assumed on September 30, 2007 (in thousands):

Tangible current assets	$	19,928
Tangible non-current assets	9,441
Customer relationships	35,000
Developed technology	15,000
Non-compete	1,000
Trade names	6,000
Goodwill	75,310
Deferred tax assets	21,700
Current liabilities	(15,052		)
Accrued restructuring costs and other reserves	(13,308		)
Non-current liabilities	(1,208		)
Deferred tax liabilities	(21,700		)

Net assets acquired	$	132,111

There is $304 thousand and $6.4 million of restricted cash included in tangible current assets and tangible non-current assets, respectively. The restricted cash includes $4.9 million relating to merchant processing, $1.5 million as collateral on a promissory note, and $304 thousand relating to miscellaneous transactions. The intangible assets include customer relationships, developed technology, non-compete agreements, and trade names, which are being amortized over a three to ten year period, except for the trade names, which have an indefinite life. The goodwill represents business benefits the Company anticipates realizing in future periods.

The results of operations of Web.com for the period from January 1, 2007 through September 30, 2007 are not included in the Company’s consolidated statement of operations for the nine months ended September 30, 2007.

The financial information in the table below summarizes the combined results of operations of the Company and Web.com on a pro forma basis for the three and nine-month periods ended September 30, 2007, as though the acquisition had occurred at the beginning of the period. This pro forma financial information is presented for informational purposes only and is not

necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at the beginning of the nine month period set forth below. The pro forma results for the three and nine months ended September 30, 2007 include $7.1 million of Web.com non-recurring expenses, which consisted mainly of restructuring costs, legal and other merger related expenses.

	Three months ended September 30, 2007			Nine months ended September 30, 2007
Revenue	$	31,219		$	91,343
Net loss	(8,695		)	(13,546		)
Basic and diluted net loss per common share	(0.32		)	(0.51		)

	Three months ended September 30, 2006			Nine months ended September 30, 2006
Revenue	$	24,387		$	72,352
Net loss	(461		)	(11,798		)
Basic and diluted net loss per common share	(0.02		)	(0.46		)

Acquisition of Substantially All of the Assets of and Assumption of Select Liabilities from Submitawebsite, Inc.

On March 31, 2007, the Company acquired substantially all of the assets of and assumed certain liabilities from Submitawebsite, Inc. (Submitawebsite), based in Scottsdale, Arizona, which is a leader in natural Search Engine Optimization (SEO), a technology which aligns Website’s code and content with strategic keyword phrase targeting. The Company believes that the Submitawebsite acquisition will allow the Company to leverage and deepen relationships with both companies’ customer bases. Under the terms of the asset purchase agreement, the Company paid cash consideration of approximately $2.1 million and $30 thousand of transaction costs, subject to certain adjustments based on the final balance sheet of Submitawebsite as of March 31, 2007. In addition, if certain requirements are met, such as key employee retention and revenue performance, during the twelve-month periods following March 31, 2007 and 2008, the Company will pay Submitawebsite contingent consideration up to an additional $250 thousand per year, which will be recorded as goodwill upon payment.

The results of operations of Submitawebsite for the period from April 1, 2007 through September 30, 2007 are included in the Company’s consolidated statement of operations for the nine months ended September 30, 2007.

The following table summarizes the Company’s preliminary purchase price allocation as of March 31, 2007 based on the estimated fair values of the assets acquired and liabilities assumed on March 31, 2007 (in thousands):

Tangible current assets	$	444
Tangible non-current assets	32
Customer relationships	93
Non-compete	12
Trade name	258
Goodwill	1,997
Current liabilities	(756		)

Net assets acquired	$	2,080

The intangible assets include customer relationship, non-compete agreements and trade name. The non-compete and customer relationship intangible asset are being amortized over a fourteen to twenty-four month period, while the trade names has an indefinite life. The goodwill represents business benefits the Company anticipates realizing in future periods.

Acquisition of Substantially All of the Assets of and Assumption of Select Liabilities from 1ShoppingCart.com

On September 30, 2006, the Company acquired substantially all of the assets of, and assumed certain liabilities from 1ShoppingCart.com Canada Corp. and 1ShoppingCart.com Corp. (together, “1ShoppingCart.com”), a leading provider of shopping cart, Internet marketing and eCommerce/eBusiness solutions and services based in Barrie, Ontario. The Company believes that the 1ShoppingCart.com acquisition brings a strong group of private-labeled resellers and affiliates that will enable cross- and up-sell opportunities for its complementary Web services, Internet marketing and eCommerce solutions,

which are all geared to satisfying the needs of small and medium-sized businesses. Under the terms of the asset purchase agreement, the Company paid cash consideration of approximately $12.5 million and $378 thousand of transaction costs.

The following table summarizes the Company’s purchase price allocation as of September 30, 2006 based on the fair values of the assets acquired and liabilities assumed on September 30, 2006 (in thousands):

Tangible current assets	$	594
Tangible non-current assets	222
Developed technology	999
Customer relationships	2,332
Non-compete	167
Trade name	694
Goodwill	9,437
Current liabilities	(1,512		)
Non-current liabilities	(102		)

Net assets acquired	$	12,831

The intangible assets include non-compete agreements, trade name, developed technology and customer relationships which are being amortized over three to eight year periods, except for the trade name which has an indefinite life. The goodwill represents business benefits the Company anticipates realizing in future periods.

The financial information in the table below summarizes the combined results of operations of the Company and 1ShoppingCart.com on a pro forma basis for the three and nine month periods ended September 30, 2006, as though the acquisition had occurred at the beginning of the period. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at the beginning of the nine month period set forth below.

	Three months ended September 30, 2006		Nine months ended September 30, 2006
Revenue	$	13,860	$	40,581
Net income	1,561		4,109
Basic net income per common share	0.09		0.25
Diluted net income per common share	0.08		0.21

Acquisition of Substantially All of the Assets of and Assumption of Select Liabilities from Renex, Inc.

On September 30, 2006, the Company acquired substantially all of the assets of, and assumed certain liabilities from Renex, Inc. (“Renex”), an online lead generation marketplace for contractors and homeowners based in Halifax, Nova Scotia. The Company believes that the Renex acquisition will enhance its ability to provide a one-stop shop for comprehensive, affordable Website and online advertising solutions for small and medium-sized businesses and is in-line with the Company’s long-term strategic direction of providing targeted, high value solutions to customers in specific vertical markets. Under the terms of the asset purchase agreement, the Company paid cash consideration of $7.0 million plus $333 thousand in transaction costs and agreed to issue 278,922 shares of its common stock valued at approximately $3.0 million to Renex to be equally distributed on September 30, 2007 and September 30, 2008 as consideration for the acquired assets if certain compliance with representations and warranties are demonstrated. As of September 30, 2007, those conditions were met and 139,641 shares of common stock were issued on October 1, 2007. Those common shares were held in escrow until the representations and warranties period has expired. In addition, if certain requirements are met during the twelve months following September 30, 2006, the Company will pay Renex contingent consideration up to an additional $1.0 million. During the twelve-months ended September 30, 2007, the Company recorded additional goodwill of $1.0 million as a result of the continuing relationship with a certain marketing vendor, which was a contingent condition in the purchase agreement with Renex, of which $750 thousand was paid and the remaining $250 thousand was recorded as a liability at September 30, 2007 and was paid in October 2007.

Tangible current assets	$	195
Tangible non-current assets	142
Developed technology	110
Customer relationships	930
Non-compete	220
Trade name	640
Goodwill	8,406
Current liabilities	(280		)

Net assets acquired	$	10,363

The intangible assets include non-compete agreements, trade name, developed technology and customer relationships which are being amortized over a three to four year period, except for the trade name which has an indefinite life. The goodwill represents business benefits the Company anticipates realizing in future periods.

The financial information in the table below summarizes the combined results of operations of the Company and Renex on a pro forma basis for the three and nine month period ended September 30, 2006, as though the acquisition had occurred at the beginning of the period. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at the beginning of the nine month period set forth below.

	Three months ended September 30, 2006		Nine months ended September 30, 2006
Revenue	$	13,471	$	39,550
Net income	1,157		3,381
Basic net income per common share	0.07		0.20
Diluted net income per common share	0.06		0.17

3. Restructuring Costs and Other Reserves

During the quarter ended September 30, 2007, the Company executed a plan to restructure operations, which included the termination of certain employees and the closing of certain facilities (the “2007 Plan”). In accordance with the 2007 Plan, the Company closed its facilities in Los Angeles, California and Seneca Falls, New York. The closure of these locations resulted in the termination of four employees. The Company recorded facility exit costs of $15 thousand, severance costs of $77 thousand for terminated employees, and $3 thousand in asset disposals. In addition, the Company restructured other operations by terminating two employees and recorded a restructuring expense of $147 thousand. As of September 30, 2007, the Company had a $242 thousand liability remaining for these restructuring costs.

In connection with the merger with Web.com, the Company accrued, as part of its purchase price allocation, certain liabilities which represent the estimated costs of exiting Web.com facilities, relocating Web.com employees, the termination of Web.com employees and the estimated cost to settle Web.com legal matters that existed prior to the acquisition of approximately $10.4 million.

In addition, as part of the liabilities assumed in the Web.com merger, the Company has assumed $2.9 million of restructuring obligations that were previously recorded by Web.com. These costs include the exit of unused office space in which Web.com has remaining lease obligations as of September 30, 2007.

The table below summarizes the activity of accrued restructuring costs and other reserves during the nine months ended September 30, 2007 (in thousands):

	Balance as of December 31, 2006		Additions		Cash Payments		Change in Estimates		Balance as of September 30, 2007

Restructuring costs	$	—	$	3,119	$	—	$	—	$	3,119
Merger related costs	—		10,431		—		—		10,431
Balance	$	—	$	13,550	$	—	$	—	$	13,550

4. Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, or FIN 48, on January 1, 2007. The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48. The Company is subject to audit by the IRS and various states for all years since inception. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company’s policy is that it recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter ended September 30, 2007.

Prior to the fourth quarter of 2006, all deferred tax assets were fully reserved. In the fourth quarter of 2006, the Company reversed a portion of its valuation allowance related to deferred tax assets based upon its estimate of the amount that is more likely than not to be realized. Therefore, the Company recognized income tax expense in the nine months ended September 30, 2007 based upon its estimated annual effective rate. The Company’s effective rate exceeds the statutory rate primarily due to non-deductible expenses associated with incentive stock options.

5. Earnings per Share

Basic net income per common share is calculated using net income and the weighted-average number of shares outstanding during the reporting period. Diluted net income per common share includes the effect from the potential issuance of common stock, such as common stock issued pursuant to the exercise of stock options or warrants.

The following table sets forth the computation of basic and diluted net income per common share for the three and nine months ended September 30, 2007 and 2006 (in thousands except per share amounts):

	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Net income	$	392	$	1,383	$	1,576	$	3,761

Weighted average outstanding shares of common stock	17,989		16,846		17,603		16,663
Dilutive effect of stock options	1,485		2,287		1,695		2,432
Dilutive effect of warrants	193		199		192		244
Dilutive effect of escrow shares	277		3		278		1

Common stock and common stock equivalents	19,944		19,335		19,768		19,340

Net income per common share:
Basic	$	0.02	$	0.08	$	0.09	$	0.23
Diluted	$	0.02	$	0.07	$	0.08	$	0.19

For the three months ended September 30, 2007 and 2006, options to purchase approximately 2.4 million and 752 thousand shares, respectively, of common stock with exercise prices greater than the average fair value of the Company’s stock of $9.23 and $9.91, respectively, were not included in the calculation of the weighted average shares for diluted net income per common share because the effect would have been anti-dilutive. For the nine months ended September 30, 2007 and 2006, options to purchase approximately 2.4 million and 699 thousand shares, respectively, of common stock with exercise prices greater than the average fair value of the Company’s stock of $9.13 and $10.81, respectively, were not included in the calculation of the weighted average shares for diluted net income per common share because the effect would have been anti-dilutive.

6. Goodwill and Intangible Assets

The following table summarizes changes in the Company’s goodwill balances as required by SFAS No. 142 for the periods ended (in thousands):

	September 30, 2007		December 31, 2006
Goodwill balance at beginning of period	$	31,587	$	13,650
Goodwill acquired during the period	78,213		17,937
Goodwill impaired during the year	—		—

Goodwill balance at end of period	$	109,800	$	31,587

In accordance with SFAS No. 142, the Company reviews goodwill balances for indicators of impairment on an annual basis 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. Upon completion of the annual assessments, the Company determined that goodwill was not impaired. In addition, there were no indicators of impairment during the quarter ended September 30, 2007.

The Company’s intangible assets are summarized as follows (in thousands):

	September 30, 2007			December 31, 2006			Weighted-average Amortization period
Indefinite lived intangible assets:
Domain/Trade names	$	8,772		$	2,387
Definite lived intangible assets:
Non-compete agreements	2,939			1,920			36 months
Customer relationships	39,289			4,175			114 months
Developed technology	16,109			1,100			70 months
Other	87			83
Accumulated amortization	(3,296		)	(2,075		)
	$	63,900		$	7,590

The weighted-average amortization period for the amortizable intangible assets is approximately 98 months. Total amortization expense was $412 thousand and $1.2 million for the three and nine months ended September 30, 2007, respectively. Total amortization expense was $142 thousand and $497 thousand for the three and nine months ended September 30, 2006, respectively.

Other indefinite-lived intangible assets are tested for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that the asset might be impaired in accordance with SFAS No. 142. Upon completion of the annual assessments, the Company determined that its indefinite lived intangible assets were not impaired. In addition, there were no indicators of impairment during the quarter ended September 30, 2007.

As of September 30, 2007, the amortization expense for the next five years is as follows (in thousands):

2007	$	1,998
2008	7,563
2009	7,236
2010	6,737
2011	6,292
Thereafter	25,302

Total	$	55,128

7. Stock Based Compensation

Equity Incentive Plans

An Equity Incentive Plan (“1999 Plan”) was adopted by the Company’s Board of Directors and approved by its stockholders on April 5, 1999. The 1999 Plan was amended in June 1999, May 2000, May 2002 and November 2003 to increase the number of shares available for awards. The 1999 Plan as amended provides for the grant of incentive stock options, non-statutory stock options, and stock bonuses to the Company’s employees, directors and consultants. As of September 30, 2007, the Company has reserved 4,074,428 shares of common stock for issuance under this plan. Of the total reserved as of September 30, 2007, options to purchase a total of 2,575,356 shares of the Company’s common stock were held by participants under the plan, options to purchase 1,367,880 shares of common stock have been issued and exercised and options to purchase 131,192 shares of common stock were cancelled and became available under the 2005 Equity Incentive Plan (the “2005 Plan”) and are currently available for future issuance.

The Board of Directors administers the 1999 Plan and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the 1999 Plan itself. Options under the 1999 Plan have a maximum term of 10 years and vest as determined by the Board of Directors. Options granted under the 1999 Plan generally vest either over 30 or 48 months. All options granted during 2002 vest over 30 months, and in general all other options granted vest over 48 months. The exercise price of non-statutory stock options and incentive stock options granted shall not be less than 85% and 100%, respectively, of the fair market value of the stock subject to the option on the date of grant. No 10% stockholder is eligible for an incentive or non-statutory stock option unless the exercise price of the option is at least 110% of the fair market value of the stock at date of grant. The 1999 Plan terminated upon the Closing of the Company’s initial public offering in November 2005.

The Company’s Board of Directors adopted, and its stockholders approved, the 2005 Equity Incentive Plan that became effective November 2005. As of September 30, 2007, the Company had reserved 2,019,604 shares for equity incentives to be granted under the plan. The option exercise price cannot be less than the fair value of the Company’s stock on the date of grant. Options generally vest ratably over three or four years, are contingent upon continued employment, and generally expire ten years from the grant date. As of September 30, 2007, options to purchase a total of 1,304,879 shares were held by participants under the plan, 5,747 shares have been issued and exercised and options to purchase a total of 708,978 shares were available for future issuances.

The Company’s Board of Directors adopted, and its stockholders approved, the 2005 Non-Employee Directors’ Stock Option Plan (the “2005 Directors Plan”), which became effective November 2005. The 2005 Directors Plan calls for the automatic grant of nonstatutory stock options to purchase shares of common stock to nonemployee directors. The aggregate number of shares of common stock that was authorized pursuant to options and restricted stock granted under this plan is 760,000 shares. As of September 30, 2007, options to purchase a total of 402,500 shares of the Company’s common stock were held by participants under the plan, 21,250 shares of restricted stock were held by participants under the plan, no options have been exercised and 336,250 shares of common stock were available for future issuance. On May 8, 2007, the Board of Directors adopted, and its stockholders approved, an amendment to the 2005 Directors Plan to modify, among other things, the initial and annual grants to non-employee directors by providing for restricted stock grants and reducing the size of the option grants.

The Company’s Board of Directors adopted, and its stockholders approved, the 2005 Employee Stock Purchase Plan (the “ESPP”), which became effective November 2005. The ESPP authorizes the issuance of 534,603 shares of common stock pursuant to purchase rights granted to the Company’s employees or to employees of any of its affiliates. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 425 of the Internal Revenue Code. As of September 30, 2007, no shares have been issued under the ESPP.

In connection with the merger with Web.com, the company assumed five additional stock option plans, the Web.com 2006 Equity Incentive Plan (the “Web.com 2006 Plan”), the Web.com 2005 Equity Incentive Plan (the “Web.com 2005 Plan”), the Web.com 2002 Equity Incentive Plan (the “Web.com 2002 Plan”), the Web.com 2001 Equity Incentive Plan (the “Web.com 2001 Plan”) and the Web.com 1995 Stock Option Plan (the “Web.com 1995 Plan”), collectively referred to as the “Web.com Option Plans”. Options issued under the Web.com Option Plans have an option term of 10 years. Vesting periods range from 0 to 5 years. Exercise prices of options under the Web.com Option Plans are 100% of the fair market value of the Web.com common stock on the date of grant. As of September 30, 2007, the Company has reserved 2,424,558 million shares for issuance upon the exercise of outstanding options under the Web.com Option Plans. All awards outstanding under the Web.com Option Plans continue in accordance with their terms, but no further awards will be granted under those plans.

The Board of Directors, or a committee thereof, administers all of the equity incentive plans and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the stock option plans. Options have a maximum term of 10 years and vest as determined by the Board of Directors.

The fair value of each option award is estimated on the date of the grant using the Black Scholes option valuation model and the assumptions noted in the following table. Expected volatility rates are based on publicly traded industry comparables and their historical volatility on the date of the grant. The expected term of options granted represents the period of time that they are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

	Nine months ended September 30,
	2007		2006
Risk-free interest rate	4.00 – 5.18	%	4.27-5.15	%
Dividend yield	0	%	0	%
Expected life (in years)	5		5
Volatility	54-60	%	64-70	%

Stock Option Activity

The following table summarizes option activity for the nine months ended September 30, 2007 for all of the Company’s stock options:

	Shares Covered by Options		Exercise Price per Share		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balance, December 31, 2006	4,072,812		$	0.50 to 14.05	$	5.29

Granted	983,950		8.70 to 10.18		8.97
Assumed in Web.com merger	2,424,558		2.77 to 193.02		5.61
Exercised	(591,976	)	0.50 to 9.00		2.19
Forfeited	(167,137	)	2.15 to 14.05		9.83
Expired	(95,277	)	2.00 to 14.05		9.42

Balance, September 30, 2007	6,626,930		0.50 to 193.02		6.06		7.44	$	29,103

Exercisable at September 30, 2007	5,107,433		0.50 to 193.02		5.06		7.04	27,537

Compensation costs related to the Company’s stock option plans were $2.5 million and $1.4 million for the nine months ended September 30, 2007 and 2006, respectively. Compensation costs related to the Company’s stock option plans were $848 thousand and $560 thousand for the three months ended September 30, 2007 and 2006. Compensation expense is generally recognized on a straight-line basis over the vesting period of grants. As of September 30, 2007, the Company had $6.4 million of unrecognized compensation costs related to share-based payments, which the Company expects to recognize through April 2011.

The total intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was $4.3 million and $1.5 million, respectively. The weighted average grant-date fair value of options granted during the nine months ended September 30, 2007 and 2006 was $4.92, and $6.81, respectively. The fair value of shares vested during the nine months ended September 30, 2007 and 2006 was $2.5 million and $1.4 million, respectively.

The following activity occurred under the Company’s stock option plans during the nine months ended September 30, 2007:

Unvested Shares	Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2006	1,300,070		$	3.88
Granted	983,950		4.92
Vested	(597,386	)	4.21
Forfeited	(167,137	)	5.42

Unvested at September 30, 2007	1,519,497		4.25

Price ranges of outstanding and exercisable options as of September 30, 2007 are summarized below:

	Outstanding Options				Exercisable Options
Exercise Price	Number of Options	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$ 0.50	564,161	4.66	$	0.50	564,161	$	0.50
$ 2.00 – $2.99	1,115,777	5.96	2.05		1,115,777	2.05
$ 3.00 – $6.99	1,994,042	7.90	3.83		1,980,064	3.83
$ 7.00 – $9.99	2,067,891	8.43	8.87		966,826	8.79
$ 10.00 – $19.99	831,218	7.96	11.07		426,764	11.26
$ 20.00 - $193.02	53,841	3.84	44.19		53,841	44.19
	6,626,930				5,107,433

On October 22, 2007, the Board of Directors approved a grant of 33,800 of the Company’s stock options with an exercise price of $10.44, which were awarded to various employees. In addition, on October 25, 2007, the Board of Directors approved a grant of 565,750 of the Company’s stock options with an exercise price of $10.20, which were awarded to various employees. These options will vest monthly over a four year period.

On October 1, 2007, the Board of Directors approved a grant of 25,000 of the Company’s stock options with an exercise price of $10.72, which was awarded to a newly appointed director. These options will vest monthly over a three year period.

Restricted Stock Activity

The following information relates to awards of restricted stock that has been granted to non-employee directors under our 2005 Non-Employee Directors’ Stock Option Plan. The restricted stock is not transferable until vested and the restrictions lapse upon the completion of a certain time period, usually over a one-year period. The fair value of each restricted stock grant is based on the closing price of the Company’s stock on the date of grant and is amortized to compensation expense over its vesting period. At September 30, 2007, there were 17,000 shares of restricted stock outstanding.

The following activity occurred under the Company’s restricted stock plan during the nine months ended September 30, 2007:

Restricted Stock Activity	Shares		Weighted Average Grant-Date Fair Value
Restricted stock outstanding at December 31, 2006	—		$	—
Granted	21,250		8.70
Lapse of restriction	(4,250	)	8.70

Restricted stock outstanding at September 30, 2007	17,000		8.70

Compensation expense for the three and nine month periods ended September 30, 2007 was approximately $69 thousand and $95 thousand, respectively. As of September 30, 2007, there was approximately $89 thousand of total unamortized compensation cost related to the restricted stock outstanding.

On October 1, 2007, the Board of Directors approved a grant of 12,500 shares of restricted stock, which was awarded to a newly appointed director. The fair value of those shares on October 1, 2007 was $10.72. These shares will vest annually over a three-year period.

8. Debt

To finance the purchase of a domain name, www.leads.com, in August 2004, LEADS.com signed a $500 thousand non-interest bearing note agreement with the owner of the domain name. The collateral for this note is the www.leads.com domain name. The note payable is in quarterly installments over 5 years. The imputed interest rate is 5.25%. As of September 30, 2007, the principal balance remaining is $185 thousand.

At the closing of the Web.com merger on September 30, 2007, the Company assumed approximately $1.3 million in outstanding indebtedness to US Bancorp Oliver-Allen Technology. The promissory note is payable through January 2009 in monthly installments of approximately $94 thousand and bears an interest rate of 6.75%. In addition, the promissory note is collateralized by $1.5 million of cash, which is included in restricted cash. As of September 30, 2007, the principal balance remaining is $1.3 million, of which $973 thousand and $369 thousand are classified as current notes payable and long-term notes payable, respectively.

At the closing of the Web.com merger on September 30, 2007, the Company assumed approximately $998 thousand in an outstanding line of credit to Web Service Company, Inc. The line of credit bore an interest rate of 3%,

but which was subsequently paid in full in October 2007. This note is classified as current notes payable.

9. Commitments and Contingencies

There are several outstanding litigation matters that relate to our wholly-owned subsidiary, Web.com Holding Company, Inc., formerly Web.com, Inc. (“Web.com”), including the following:

On August 2, 2006, Web.com 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, seeking insurance coverage and payment of litigation expenses with respect to litigation involving Web.com pertaining to events in 2001. Web.com also has asserted claims against Rapp Collins, a division of Omnicom Media, that are pending in state court in Pennsylvania for recovery of the same litigation expenses.

On June 19, 2006, Web.com filed suit in the United States District Court for the Northern District of Georgia against The Go Daddy Group, Inc., seeking damages, a permanent injunction and attorney fees related to alleged infringement of four of Web.com’s patents.

Web.com is defending itself against claims asserted by two former owners of Communitech.Net, Inc. in state court in Missouri relating to Web.com’s acquisition of Communitech.Net, Inc. in 2002. Web.com has also sued one of those two former owners in state court in Georgia, seeking to recover amounts owed on a promissory note issued at the time of that acquisition and related claims. In the third quarter of 2007 Web.com won a motion for partial summary judgment in the Missouri litigation, dismissing all of the plaintiffs’ intentional tort claims and claims for punitive damages.

Web.com is also defending the appeals of several other cases that were resolved favorably to Web.com but none of which is material to our company.

With respect to each of the foregoing matters where parties have asserted claims against Web.com, we believe we have adequate defenses, intend to defend ourselves vigorously, and believe that the litigation will not result in any material adverse effect.

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

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

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, especially under the captions “Variability of Results” and “Factors That May Affect Future Operating Results” in this Form 10-Q. Generally, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions identify forward-looking statements. The forward-looking statements made in this Form 10-Q are made as of the filing date of this Form 10-Q with the Securities and Exchange Commission, and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements. We expressly disclaim any obligation to update or alter our forward-looking statements, whether, as a result of new information, future events or otherwise after the date of this document.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto in Item 1 above and with our financial statements and notes thereto for the year ended December 31, 2006, contained in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 9, 2007.

Overview

We believe we are a leading provider, based on our number of subscribers, of Do-It-For-Me Web services and lead generation products that enable small and medium-sized businesses to establish, maintain, promote, and optimize their Internet presence. Our primary service offerings, eWorks! XL and SmartClicks, are comprehensive performance-based packages that include Website design and publishing, Internet marketing and advertising, search engine optimization, search engine submission, lead generation and easy-to-understand Web analytics. As an application service provider, or ASP, we offer our customers a full range of Web services and products on an affordable subscription basis. In addition to our primary service offerings, we provide a variety of premium services to customers who desire more advanced capabilities; such as e-commerce solutions and other sophisticated Internet marketing services and online lead generation. The breadth and flexibility of our offerings allow us to address the Web services needs of a wide variety of customers, ranging from those just establishing their Websites to those that want to enhance their existing Internet presence with more sophisticated marketing and lead generation services. Additionally, as the Internet continues to evolve, we will refine and expand our service offerings to keep our customers at the forefront.

Through the combination of our proprietary Website publishing and management software, automated workflow processes, and specialized workforce development and management techniques, we believe that we achieve production efficiencies that enable us to offer sophisticated Web services at affordable rates. Our technology automates many aspects of creating, maintaining, enhancing, and marketing Websites on behalf of our customers. With approximately 82,000 subscribers to our eWorks! XL, SmartClicks, and premium subscription-based services as of September 30, 2007, we believe we are one of the industry’s largest providers of affordable Web services and products enabling small and medium-sized businesses to have an effective Internet presence.

We sell our Web services and products to customers identified primarily through strategic relationships with established brand name companies that have a large number of small and medium-sized business customers. We have a direct sales force based at our national sales center in Spokane, Washington, that utilizes leads generated by our strategic marketing relationships to acquire new customers. Our sales force specializes in selling to small and medium-sized businesses across a wide variety of industries throughout the United States.

To increase our revenue and take advantage of our market opportunity, we plan to expand our subscriber base as well as increase our revenue from existing subscribers. We intend to continue to invest in hiring additional personnel, particularly in sales and marketing; developing additional services and products; adding to our infrastructure to support our growth; and expanding our operational and financial systems to manage our growing business. As we have in the past, we will continue to evaluate acquisition opportunities to increase the value and breadth of our Web services and product offerings and expand our subscriber base.

Acquisitions

Web.com in a merger transaction for $25 millon in cash, 9.2 million shares of Website Pros common stock and 2.4 million of Web.com options assumed.

The descriptions below do not include any reference to Web.com’s operations as those business results are not included in the Company’s financial statements for the quarter ended September 30, 2007.

Key Business Metrics

Management periodically reviews certain key business metrics to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. These key business metrics include:

Net Subscriber Additions

We grow our subscriber base through a combination of adding new subscribers and retaining existing subscribers. We define net subscriber additions in a particular period as the gross number of new subscribers added during the period, less subscriber cancellations during the period. For this purpose, we only count as new subscribers those customers whose subscriptions have extended beyond the free trial period. Additionally, we do not treat a subscription as cancelled, even if the customer is not current in its payments, until either we have attempted to contact the subscriber twenty times or 60 days have passed since the most recent failed billing attempt, whichever is sooner. In any event, a subscriber’s account is cancelled if payment is not received within approximately 80 days.

We review this metric to evaluate whether we are performing to our business plan. An increase in net subscriber additions could signal an increase in subscription revenue, higher customer retention, and an increase in the effectiveness of our sales efforts. Similarly, a decrease in net subscriber additions could signal decreased subscription revenue, lower customer retention, and a decrease in the effectiveness of our sales efforts. Net subscriber additions above or below our business plan could have a long-term impact on our operating results due to the subscription nature of our business.

Monthly Turnover

Monthly turnover is a metric we measure each quarter, and which we define as customer cancellations in the quarter divided by the sum of the number of subscribers at the beginning of the quarter and the gross number of new subscribers added during the period, divided by three months. Customer cancellations in the quarter include cancellations from gross subscriber additions, which is why we include gross subscriber additions in the denominator. In measuring monthly turnover, we use the same conventions with respect to free trials and subscribers who are not current in their payments as described above for net subscriber additions. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan. An increase in monthly turnover may signal deterioration in the quality of our service, or it may signal a behavioral change in our subscriber base. Lower monthly turnover signals higher customer retention.

Sources of Revenue

Subscription Revenue

We derive the majority of our revenue from fees associated with our subscription services, which are generally sold through our eWorks! XL, SmartClicks, Visibility Online, Renex, 1ShoppingCart.com, and Submitawebsite offerings. A majority of our subscription contracts include the design of a five-page Website, its hosting, and several additional Web services. In the case of eWorks! XL, upon the completion and initial hosting of the Website, our subscription services are offered free of charge for a 30-day trial period during which the customer can cancel at any time. After the 30-day trial period has ended, the revenue is recognized on a daily basis over the life of the contract. No 30-day free trial period is offered to customers for our Visibility Online services, and revenue is recognized on a daily basis over the life of the contract.

The typical subscription is a monthly contract, although terms range up to 12 months. We bill a majority of our customers on a monthly basis through their credit cards, bank accounts, or business merchant accounts. For the nine months ended September 30, 2007 subscription revenue accounted for approximately 93% of our total revenue as compared to 89% for the nine months ended September 30, 2006. For the three months ended September 30, 2007 subscription revenue accounted for approximately 94% of our total revenue as compared to 94% for the three months ended September 30, 2006. The number of paying subscribers to our Web services and lead generation products drives subscription revenue as well as the subscription price that we charge for these services. The number of paying subscribers is affected both by the number of new customers we acquire in a given period and by the number of existing customers we retain during that period. We expect other sources of revenue to decline as a percentage of total revenue over time.

License Revenue

We generate license revenue from the sale of perpetual licenses to use our software products. Our software products enable customers to build Websites either for themselves or for others. License revenue consists of all fees earned from granting customers licenses to use our software products. Software may be delivered indirectly by a channel distributor, through download from our Website, or directly to end users by us. We recognize license revenue from packaged products upon shipment to end-users. We consider delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end user has been electronically provided with the licenses and software activation keys that allow the end user to take immediate possession of the software. In periods during which we release new versions of our software, our license revenue is likely to be higher than in periods during which no new releases occur.

Professional Services Revenue

We also generate professional services revenue from custom Website design, outsourced customer service and sales support, and search engine optimization services. Our custom Website design work is typically billed on a fixed price basis and over very short periods. Our outsourced customer service and sales support services are typically billed on an hourly basis. Our search engine optimization services are billed on a fixed price basis and revenue is recognized on a daily basis over the applicable service period.

Cost of Revenue

Cost of Subscription Revenue

Cost of subscription revenue primarily consists of expenses related to marketing fees we pay to companies with which we have strategic marketing relationships as well as compensation expenses related to our Web page development staff, directory listing fees, customer support costs, domain name and search engine registration fees, allocated overhead costs, billing costs, and hosting expenses. We allocate overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category. As our customer base and Web services usage grows, we intend to continue to invest additional resources in our Website development and support staff.

Cost of License Revenue

Cost of license revenue consists of costs attributable to the manufacture and distribution of the software, compensation expenses related to our quality assurance staff, as well as, allocated overhead costs.

Cost of Professional Services Revenue

Cost of professional services revenue primarily consists of compensation expenses related to our Web page development and search engine optimization staff and allocated overhead costs. We plan to add additional resources in this area to support the expected growth in our professional services and custom design functions.

Operating Expenses

Sales and Marketing Expense

Sales and marketing expenses are our largest indirect cost and consist primarily of salaries and related expenses for our sales and marketing staff. Sales and marketing expenses also include commissions, marketing programs, including advertising, events, corporate communications, other brand building and product marketing expenses, and allocated overhead costs.

We plan to continue to invest heavily in sales and marketing by increasing the number of direct sales personnel in order to add new subscription customers as well as increase sales of additional and new services and products to our existing customer base. Our investment in this area will also help us to expand our strategic marketing relationships, to build brand awareness, and to sponsor additional marketing events. We expect that, in the future, sales and marketing expenses will increase in absolute dollars and continue to be our largest indirect cost.

Research and Development Expense

Research and development expenses consist primarily of salaries and related expenses for our research and development staff, outsourced software development expenses, and allocated overhead costs. We have historically focused our research and development efforts on increasing the functionality of the technologies that enable our Web services and lead generation products. Our technology architecture enables us to provide all of our customers with a service based on a single version of the applications that serve each of our product offerings. As a result, we do not have to maintain multiple versions of our software, which enables us to have lower research and development expenses as a percentage of total revenue. We expect that, in the future, research and development expenses will increase in absolute dollars as we continue to upgrade and extend our service offerings and develop new technologies.

General and Administrative Expense

General and administrative expenses consist of salaries and related expenses for executive, finance, administration, and management information systems personnel, as well as professional fees, other corporate expenses, and allocated overhead costs. We expect that general and administrative expenses will increase in absolute dollars as we continue to add personnel to support the growth of our business.

Depreciation and Amortization Expense

Depreciation and amortization expenses relate primarily to our computer equipment, software and other intangible assets recorded due to the acquisitions we have completed.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 1 to our consolidated financial statements included in our 2006 Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 and other related generally accepted accounting principles.

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

Thus, we recognize subscription revenue on a daily basis, as services are provided. Customers are billed for the subscription on a monthly, quarterly, semi-annual, or annual basis, at the customer’s option. For all of our customers, regardless of their

billing method, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. As services are performed, we recognize subscription revenue on a daily basis over the applicable service period. When we provide a free trial period, we do not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services.

License revenue is derived from sales of software licenses directly to end-users as well as through value-added resellers and distributors. Software may be delivered indirectly by a distributor, through download from our Website, or directly to end-users by our company. We recognize revenue generated by the distribution of software licenses directly by us in the form of a boxed software product or a digital download upon sale and delivery to the end-user. End-users who purchase a software license online pay for the license at the time of order. We do not offer extended payment terms or make concessions for software license sales. We recognize revenue generated from distribution agreements where the distributor has a right of return as the distributor sells and delivers software license product to the end-user. We recognize revenue from distribution agreements where no right of return exists when a licensed software product is shipped to the distributor. In arrangements where distributors pay us upon shipment of software product to end-customers, we recognize revenue upon payment by the distributor. We are not obligated to provide technical support in connection with software licenses and do not provide technical support services to our software license customers. Our revenue recognition policies are in compliance with Statement of Position, or SOP, 97-2 (as amended by SOP 98-4 and SOP 98-9), Software Revenue Recognition.

Professional services revenue is generated from custom Website design, outsourced customer service and sales support services, and search engine optimization services. Our professional services revenue from contracts for custom Website design is recorded using a proportional performance model based on labor hours incurred. The extent of progress toward completion is measured by the labor hours incurred as a percentage of total estimated labor hours to complete. Labor hours are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input to the provision of our professional services. Our search engine optimization services are billed on a fixed price basis and revenue is recognized on a daily basis over the applicable service period.

We account for our multi-element arrangements, such as in the instances where we design a custom Website and separately offer other services such as hosting and marketing, in accordance with Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables. We identify each element in an arrangement and assign the relative fair value to each element. The additional services provided with a custom Website are recognized separately over the period for which services are performed.

Allowance for Doubtful Accounts

In accordance with our revenue recognition policy, our accounts receivable are based on customers whose payment is reasonably assured. We monitor collections from our customers and maintain an allowance for estimated credit losses based on historical experience and specific customer collection issues. While credit losses have historically been within our expectations and the provisions established in our financial statements, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because we have a large number of customers, we do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our consolidated financial position.

We also monitor failed direct debit billing transactions and customer refunds and maintain an allowance for estimated losses based upon historical experience. These provisions to our allowance are recorded as an adjustment to revenue. While losses from these items have historically been minimal, we cannot guarantee that we will continue to experience the same loss rates that we have in the past.

Accounting for Stock-Based Compensation

We record compensation expenses for our employee and director stock-based compensation plans based upon the fair value of the award in accordance with SFAS No. 123(R), Share Based Payment, which we adopted on January 1, 2006. Because we previously adopted the expense recognition provisions of SFAS No.123, Accounting for Stock-Based Compensation, the adoption of SFAS No.123(R) had no material impact on our financial statements. Stock-based compensation is amortized over the related vesting periods.

Goodwill and Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, we periodically evaluate goodwill and indefinite lived intangible assets for potential impairment. We test for the impairment of

goodwill and indefinite lived 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 or indefinite lived intangible assets below its carrying amount. Other intangible assets include, among other items, customer relationships and non-compete agreements, and they are amortized using the straight-line method over the periods benefited, which is up to ten years. Other intangible assets represent long-lived assets and are assessed for potential impairment whenever significant events or changes occur that might impact recovery of recorded costs. While we believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and our future operating results.

Accounting for Purchase Business Combinations

All of our acquisitions were accounted for as purchase transactions, and the purchase price was allocated to the assets acquired and liabilities assumed based on the fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired or net liabilities assumed, was allocated to goodwill. The fair value of amortizable intangibles, primarily consisting of customer relationships, non-compete agreements, trade/domain names, and developed technology, was determined using valuation studies performed by an independent third-party valuation expert.

Provision for Income Taxes

We recognize deferred tax assets and liabilities on differences between the book and tax basis of assets and liabilities using currently effective tax rates. Further, deferred tax assets are recognized for the expected realization of available net operating loss carry forwards. A valuation allowance is recorded to reduce a deferred tax asset to an amount that we expect to realize in the future. We review the adequacy of the valuation allowance on an ongoing basis and recognize these benefits if a reassessment indicates that it is more likely than not that these benefits will be realized. In addition, we evaluate our tax contingencies on an ongoing basis and recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

Comparison of the Results for the Three Months Ended September 30, 2007 to the Results for the Three Months Ended September 30, 2006

Revenue

	Three months ended September 30,
	2007		2006
	(unaudited)
Revenue:
Subscription	$	16,820	$	11,272
License	383		442
Professional services	613		325

Total revenue	$	17,816	$	12,039

Total revenue for the three months ended September 30, 2007 increased $5.8 million, or 48%, over the three months ended September 30, 2006.

Subscription Revenue. Subscription revenue increased 49% to $16.8 million in the three months ended September 30, 2007 from $11.3 million in the three months ended September 30, 2006. The majority of the increase in subscription revenue over the prior year was due to an increase in customer base and increases in revenue due to our most recent acquisitions. Subscription revenue increased approximately $5.6 million due to an increase in our customer base from approximately 57,000 subscribers as of September 30, 2006 to approximately 82,000 subscribers as of September 30, 2007, of which approximately 14,000 subscribers were acquired in our most recent acquisitions.

The average monthly turnover decreased to 5.2% in the three months ended September 30, 2007 from 6.2% in the three months ended September 30, 2006. The average monthly turnover for the three months ended September 30, 2007 included turnover associated with our recent acquisitions.

License Revenue. License revenue decreased 13% to $383 thousand in the three months ended September 30, 2007 from $442 thousand in the three months ended September 30, 2006. The decrease in revenue was primarily due to lower sales of our Fusion product during the three-month period ended September 30, 2007 due to the timing of the version releases and the natural life cycle of the product.

Professional Services Revenue. Professional services revenue increased 89% to $613 thousand in the three months ended September 30, 2007 from $325 thousand in the three months ended September 30, 2006. Professional services revenue increased approximately $434 thousand due to additional revenue resulting from our most recent acquisitions, which was partially offset by the attrition of two of our channel partners who previously supplied us with leads for potential customers.

Cost of Revenue

	Three months ended September 30,
	2007		2006
	(unaudited)
Cost of revenue
Subscription	$	7,124	$	4,859
License	190		190
Professional services	347		333
Total cost of revenue	$	7,661	$	5,382

Cost of Subscription Revenue. Cost of subscription revenue increased 47% to $7.1 million in the three months ended September 30, 2007 from $4.9 million in the three months ended September 30, 2006. An increase in the cost of subscription revenue of approximately $2.1 million was primarily the result of the costs associated with the increase in our subscriber base since September 30, 2006. More specifically, during the three months ended September 30, 2007, we incurred additional costs of approximately $2.0 million related to the additional subscription revenue associated with customers acquired as part of our acquisitions since September 2006. In addition, due to our increase in headcount since September 30, 2006, our employee compensation expenses increased approximately $225 thousand. Further, gross margin on subscription revenue increased to 58% for the three months ended September 30, 2007 from 57% for the three months ended September 30, 2006.

Cost of License Revenue. Cost of license revenue had no change at $190 thousand in the three months ended September 30, 2007 as compared to the three months ended September 30, 2006.

Cost of Professional Services Revenue. Cost of professional services revenue increased 4% to $347 thousand in the three months ended September 30, 2007 from $333 thousand in the three months ended September 30, 2006. The increase in the cost of professional services revenue was primarily the result of the costs associated with the outsourced call center and search engine optimization professional services acquired through our recent acquisitions, which was partially offset by the costs associated with the related decrease in revenue due to the attrition of two of our channel partners.

Operating Expenses

	Three months ended September 30,
	2007		2006
	(unaudited)
Operating expenses:
Sales and marketing	$	4,202	$	2,972
Research and development	915		479
General and administrative	3,271		2,194
Restructuring charges	242		—
Depreciation and amortization	719		339
Total operating expenses	$	9,349	$	5,984

Operating Expenses

Sales and Marketing Expenses. Sales and marketing expenses increased 41% to $4.2 million, or 24% of total revenue, during the three months ended September 30, 2007 from $3.0 million, or 25% of total revenue, during the three months ended September 30, 2006. An increase in sales and marketing expenses of $523 thousand was due to increased employee compensation and benefits expense related to an increase in headcount. In addition, increases of $476 thousand in sales and marketing expense were attributable to the addition of sales and marketing resources in connection with our September 2006 and March 2007 acquisitions.

Research and Development Expenses. Research and development expenses increased 91% to $915 thousand, or 5% of total revenue, during the three months ended September 30, 2007 from $479 thousand, or 4% of total revenue, during the three months ended September 30, 2006. The increase was primarily due to an increase of $324 thousand in additional research and development resources associated with our September 2006 and March 2007 acquisitions. In addition, an increase of $87 thousand was due to an increase in the cost of resources related to the ongoing development of Netobjects Fusion.

General and Administrative Expenses. General and administrative expenses increased 49% to $3.3 million, or 18% of total revenue, during the three months ended September 30, 2007 from $2.2 million, or 18% of total revenue, during the three months ended September 30, 2006. Due to our recent acquisitions in September 2006 and March 2007, there was an increase of approximately $719 thousand of additional general and administrative expenses over the prior period. In addition, an increase of $433 thousand was due to increased employee compensation and benefits expense. During the quarter ended September 30, 2006, the Company reduced its general and administrative expenses due to the collection of a fully reserved note receivable of $100 thousand.

Restructuring charges. During the three months ended September 30, 2007, the Company restructured its organization by terminating six employees and closing facilities in Los Angeles, California and Seneca Falls, New York. The Company accrued expenses of $242 thousand for these restructuring costs.

Depreciation and Amortization Expense. Depreciation and amortization expense increased 112% to $719 thousand, or 4% of total revenue, during the three months ended September 30, 2007 from $339 thousand, or 3% of total revenue, during the three months ended September 30, 2006. Amortization expense and depreciation expense increased $269 thousand and $110 thousand, respectively, due to increases in definite-lived intangible assets and fixed assets.

Income tax expense. Income tax expense increased to $942 thousand during the three-months ended September 30, 2007. Prior to the fourth quarter of 2006, all deferred tax assets were fully reserved. In the fourth quarter of 2006, the Company reversed a portion of its valuation allowance related to deferred tax assets based upon its estimate of the amount that is more likely than not to be realized. Therefore, the Company recognized income tax expense in the three months ended September 30, 2007 based upon its estimated annual effective rate. The Company’s effective rate exceeds the statutory rate primarily due to non-deductible expenses associated with incentive stock options.

Net Interest Income. Net interest income decreased 26% to $528 thousand, or 3% of total revenue, during the three months ended September 30, 2007 from $710 thousand, or 6% of total revenue, during the three months ended September 30, 2006. The decrease in interest income was due to the use of cash in our acquisitions in September 2006 and March 2007, therefore reducing the average cash balance available to invest in money market funds during the quarter ended September 30, 2007.

Comparison of the Results for the Nine Months Ended September 30, 2007 to the Results for the Nine Months Ended September 30, 2006

Revenue

	Nine months ended September 30,
	2007		2006
	(unaudited)
Revenue:
Subscription	$	48,006	$	31,881
License	2,095		2,531
Professional services	1,539		1,277
Total revenue	$	51,640	$	35,689

Total revenue for the nine months ended September 30, 2007 increased $16.0 million, or 45%, over the nine months ended September 30, 2006.

Subscription Revenue. Subscription revenue increased 51% to $48.0 million in the nine months ended September 30, 2007 from $31.9 million in the nine months ended September 30, 2006. The majority of the increase in subscription revenue over the prior year was due to increases in customer base and increases in revenue due to our most recent acquisitions. Subscription revenue increased approximately $14.2 million due to an increase in our customer base from approximately 57,000 subscribers as of September 30, 2006 to approximately 82,000 subscribers as of September 30, 2007, of which approximately 14,000 subscribers were acquired in our most recent acquisitions.

The average monthly turnover decreased to 5.1% in the nine months ended September 30, 2007 from 5.8% in the nine months ended September 30, 2006. The average monthly turnover for the nine months ended September 30, 2007 included turnover associated with our recent acquisitions.

License Revenue. License revenue decreased 17% to $2.1 million in the nine months ended September 30, 2007 from $2.5 million in the nine months ended September 30, 2006. The decrease in revenue was primarily due to lower sales of our Fusion product during the nine-month period ended September 30, 2007 due to the timing of version releases and the natural life cycle of the product.

Professional Services Revenue. Professional services revenue increased 21% to $1.5 million in the nine months ended September 30, 2007 from $1.3 million in the nine months ended September 30, 2006. Professional services revenue increased approximately $977 thousand due to additional revenue resulting from our most recent acquisitions, which was offset by the attrition of two of our channel partners who previously supplied us with leads for potential customers.

Cost of Revenue

	Nine months ended September 30,
	2007		2006
	(unaudited)
Cost of revenue
Subscription	$	21,225	$	13,945
License	667		672
Professional services	947		1,044
Total cost of revenue	$	22,839	$	15,661

Cost of Subscription Revenue. Cost of subscription revenue increased 52% to $21.2 million in the nine months ended September 30, 2007 from $13.9 million in the nine months ended September 30, 2006. The increase in the cost of subscription revenue of approximately $6.5 million was primarily the result of the costs associated with the increase in our subscriber base since September 30, 2006. More specifically, during the nine months ended September 30, 2007, we incurred additional costs of approximately $5.5 million related to the additional subscription revenue associated with customers acquired as part of our acquisitions since September 2006. In addition, due to our increase in headcount since September 30, 2006, our employee compensation expenses increased approximately $792 thousand. Further, gross margin remained constant on subscription revenue at 56% for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006.

Cost of License Revenue. Cost of license revenue decreased 1% to $667 thousand in the nine months ended September 30, 2007 from $672 thousand in the nine months ended September 30, 2006.

Cost of Professional Services Revenue. Cost of professional services revenue decreased 9% to $947 thousand in the nine months ended September 30, 2007 from $1.0 million in the nine months ended September 30, 2006. The decrease in the cost of professional services revenue was due to the costs associated with the related decrease in revenue due to the attrition of two of our channel partners, which was partially offset by the increase in costs associated with the outsourced call center and search engine optimization professional services acquired through our recent acquisitions.

Operating Expenses

	Nine months ended September 30,
	2007		2006
	(unaudited)
Operating expenses:
Sales and marketing	$	12,413	$	8,651
Research and development	2,637		1,468
General and administrative	9,348		6,993
Restructuring charges	242		—
Depreciation and amortization	2,113		1,042
Total operating expenses	$	26,753	$	18,154

Operating Expenses

Sales and Marketing Expenses. Sales and marketing expenses increased 43% to $12.4 million, or 24% of total revenue, during the nine months ended September 30, 2007 from $8.7 million, or 24% of total revenue, during the nine months ended September 30, 2006. Due to our recent acquisitions in September 2006 and March 2007, there was an increase of approximately $1.3 million of additional sales and marketing expenses over the prior period. In addition, an increase of $1.8 million was due to increased employee compensation and benefits expense related to an increase in headcount.

Research and Development Expenses. Research and development expenses increased 80% to $2.6 million, or 5% of total revenue, during the nine months ended September 30, 2007 from $1.5 million, or 4% of total revenue, during the nine months ended September 30, 2006. The increase was primarily due to an increase of $870 thousand in additional research and development resources associated with our September 2006 and March 2007 acquisitions. In addition, an increase of $142 thousand was due to increased employee compensation and benefits expense related to an increase in headcount an increase of $198 thousand was due to an increase in the cost of resources for the ongoing development of Netobjects Fusion.

General and Administrative Expenses. General and administrative expenses increased 34% to $9.3 million, or 18% of total revenue, during the nine months ended September 30, 2007 from $7.0 million, or 20% of total revenue, during the nine months ended September 30, 2006. Due to our recent acquisitions in September 2006 and March 2007, there was an increase of approximately $2.0 million of additional general and administrative expenses over the prior period. In addition, an increase of $564 thousand was due to increased employee compensation and benefits expense. During the quarter ended September 30, 2006, the Company reduced its general and administrative expenses due to the collection of a fully reserved note receivable of $100 thousand.

Restructuring charges. During the nine months ended September 30, 2007, the Company restructured its organization by terminating six employees and closing facilities in Los Angeles, California and Seneca Falls, New York. The Company accrued expenses of $242 thousand for these restructuring costs.

Depreciation and Amortization Expense. Depreciation and amortization expense increased 103% to $2.1 million, or 4% of total revenue, during the nine months ended September 30, 2007 from $1.0 million, or 3% of total revenue, during the nine months ended September 30, 2006. Amortization expense and depreciation expense increased $722 thousand and $349 thousand, respectively, due to the increases in definite-lived intangible assets and fixed assets.

Income tax expense. Income tax expense increased to $2.0 million during the nine-months ended September 30, 2007. Prior to the fourth quarter of 2006, all deferred tax assets were fully reserved. In the fourth quarter of 2006, the Company reversed a portion of its valuation allowance related to deferred tax assets based upon its estimate of the amount that is more likely than not to be realized. Therefore, the Company recognized income tax expense in the nine months ended September 30, 2007 based upon its estimated annual effective rate. The Company’s effective rate exceeds the statutory rate primarily due to non-deductible expenses associated with incentive stock options.

Net Interest Income. Net interest income decreased 18% to $1.5 million, or 3% of total revenue, during the nine months ended September 30, 2007 from $1.9 million, or 5% of total revenue, during the nine months ended September 30, 2006. The decrease in interest income was due to the use of cash in our acquisitions in September 2006 and March 2007, therefore reducing the average cash balance available to invest in money market funds during the quarter ended September 30, 2007.

Liquidity and Capital Resources

As of September 30, 2007, we had $56.6 million of unrestricted cash and cash equivalents and $6.7 million in working capital, as compared to $42.2 million of unrestricted cash and cash equivalents and $39.5 million in working capital as of December 31, 2006. We received approximately $11.8 million of unrestricted cash from the merger with Web.com. The significant increases in balance sheet accounts were due to the acquisition of Web.com. We acquired approximately $19.9 million in current assets, assumed $15.1 million in current liabilities and accrued $13.3 million in restructuring and other costs. In addition per the merger agreement, we accrued the cash payment of $25 million, which was paid in October 2007.

Net cash provided by operations for the nine months ended September 30, 2007 increased 114%, or $4.7 million, to $8.9 million from $4.1 million for the nine months ended September 30, 2006. This increase was principally due to a 45% increase in revenue.

Net cash provided by investing activities in the nine months ended September 30, 2007 was $4.5 million as compared to the net cash used in investing activities during the nine months ended September 30, 2006 of $21.0 million. During the nine months ended September 30, 2007, pursuant to the Web.com merger agreement, we received Web.com’s unrestricted cash and cash equivalents of $11.8 million upon completion of the merger, which was offset by $1.1 million in acquisition costs paid as of September 30, 2007. In accordance with the merger agreement, we are obligated to pay $25 million, which was included in our cash balance at September 30, 2007 and paid to Web.com shareholders in October 2007. In addition, we acquired substantially all of the assets and select liabilities of Submitawebsite, Inc. totaling approximately $2.1 million, including acquisition expenses, and we made cash payments totaling $750 thousand due to contingent conditions being fulfilled in accordance with the Renex, Inc. purchase agreement. In addition, we purchased property and equipment totaling $3.2 million, which included the purchase of a building in Spokane, Washington for $2.4 million. During the nine months ended September 30, 2006, we made cash payments to acquire substantially all of the assets and select liabilities of 1ShoppingCart.com Canada Corp. and 1ShoppingCartcom Corp., or 1ShoppingCart.com, and Renex.com, Inc., or Renex totaling approximately $20.0 million, including acquisition expenses and we purchased property and equipment totaling $1.0 million.

Net cash provided by financing activities in the nine months ended September 30, 2007 was $1.1 million as compared to $1.3 million for the nine months ended September 30, 2006. During the nine months ended September 30, 2007, we received cash proceeds of $1.2 million from the exercises of stock options. During the nine months ended September 30, 2006, we completed a secondary offering whereby selling stockholders sold 3,339,126 common shares and we sold 200,000 common shares for net proceeds to us of approximately $1.0 million, while we did not have those expenses during the nine months ended September 30, 2007.

Summary

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

• the costs involved in the expansion of our customer base;

• the costs involved with investment in our servers, storage and network capacity;

• the costs associated with the expansion of our domestic and international activities;

• the costs involved with our research and development activities to upgrade and expand our service offerings; and

• the extent to which we acquire or invest in other technologies and businesses.

We believe that our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months, including our sales and marketing expenses, research and development expenses, capital expenditures, and any acquisitions or investments in complementary businesses, services, products or technologies. As of September 30, 2007 and December 31, 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and the Canadian Dollar. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to reduce the effect of these potential fluctuations. We have not entered into any hedging contracts since exchange rate fluctuations have had little impact on our operating results and cash flows. The majority of our subscription agreements are denominated in U.S. dollars. To date, our foreign sales have been primarily in Euros. Sales to customers domiciled outside the United States were approximately 1% and 2% of our total revenue in the three months ended September 30, 2007 and 2006 and 3% and 5% of our total revenue in the nine months ended September 30, 2007 and 2006, respectively. Sales in Germany represented approximately 60% and 71% of our international revenue in the three months ended September 30, 2007 and 2006 and 64% and 73% of our international revenue in the nine months ended September 30, 2007 and 2006, respectively.

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling $56.6 million and $42.2 million at September 30, 2007 and December 31, 2006, respectively. These amounts were invested primarily in money market funds. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures.

Based on their evaluation as of September 30, 2007, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

Changes in internal controls.

There were no changes in our internal controls over financial reporting during the three months ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we may be involved in litigation relating to claims arising out of our operations. There are several outstanding litigation matters that relate to our wholly-owned subsidiary, Web.com Holding Company, Inc., formerly Web.com, Inc. (“Web.com”), including the following:

Web.com is also defending the appeals of several other cases that were resolved favorably to Web.com but none of which is material to our company.

Item 1A. Risk Factors

Factors That May Affect Future Operating Results

In addition to the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our business is subject to the risks set forth below.

We depend primarily on a small number of strategic marketing relationships—and one key strategic marketing relationship in particular—to identify prospective customers. The loss of one or more of our strategic marketing relationships, or a reduction in the referrals and leads they generate, would significantly reduce our future revenue and increase our expenses.

As a key part of our strategy, we have entered into agreements with a number of companies pursuant to which these parties provide us with access to their customer lists and allow us to use their names in marketing our Web services and products. Approximately 90% of our new customers, excluding new customers from acquisitions, in the year ended December 31, 2006, and approximately 89% in the nine months ended September 30, 2007, were identified through our strategic marketing relationships. However, when we include the new customers obtained in the nine months ended September 30, 2007 from our previous acquisitions, approximately 73% of new customers were identified through strategic marketing relationships. We believe these strategic marketing relationships are critical to our business because they enable us to penetrate our target market with a minimum expenditure of resources. If these strategic marketing relationships are terminated or otherwise fail, our revenue would likely decline significantly and we could be required to devote additional resources to the sale and marketing of our Web services and products. We have no long-term contracts with these organizations, and these

organizations are generally not restricted from working with our competitors. Accordingly, our success will depend upon the willingness of these organizations to continue these strategic marketing relationships.

To successfully execute our business plan, we must also establish new strategic marketing relationships with additional organizations that have strong relationships with small and medium-sized businesses that would enable us to identify additional prospective customers. If we are unable to diversify and extend our strategic marketing relationships, our ability to grow our business may be compromised.

Most of our Web services are sold on a month-to-month basis, and if our customers either are unable or choose not to subscribe to our Web services, our revenue may decrease.

Typically, our Web service offerings are sold pursuant to month-to-month subscription agreements, and our customers can generally cancel their subscriptions to our Web services at any time with little or no penalty.

Historically, we have experienced a high turnover rate in our customer base. For the years ended December 31, 2006 and 2005, 47% and 52%, respectively, of our subscribers who were customers at the beginning of the respective year were no longer subscribers at the end of the respective year. For the nine months ended September 30, 2007 and 2006, 38% and 41%, respectively, of our subscribers who were customers at the beginning of the respective period were no longer subscribers at the end of the period. The turnover rate calculations do not include any acquisition related customer activity.

While we cannot determine with certainty why our subscription renewal rates are not higher, we believe there are a variety of factors, which have in the past led, and may in the future lead, to a decline in our subscription renewal rates. These factors include the cessation of our customers’ businesses, the overall economic environment in the United States and its impact on small and medium-sized businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small and medium-sized businesses. If our renewal rates are low or decline for any reason, or if customers demand renewal terms less favorable to us, our revenue may decrease, which could adversely affect our stock price.

If economic or other factors negatively affect the small and medium-sized business sector, our customers may become unwilling or unable to purchase our Web services and products, which could cause our revenue to decline and impair our ability to operate profitably.

Our existing and target customers are small and medium-sized businesses. These businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. Additionally, these customers often have limited discretionary funds, which they may choose to spend on items other than our Web services and products. If small and medium-sized businesses experience economic hardship, they may be unwilling or unable to expend resources to develop their Internet presences, which would negatively affect the overall demand for our services and products and could cause our revenue to decline.

Our growth will be adversely affected if we cannot continue to successfully retain, hire, train, and manage our key employees, particularly in the telesales and customer service areas.

Our ability to successfully pursue our growth strategy will depend on our ability to attract, retain, and motivate key employees across our business. We have many key employees throughout our organization that do not have non-competition agreements and may leave to work for a competitor at any time. In particular, we are substantially dependent on our telesales and customer service employees to obtain and service new customers. Competition for such personnel and others can be intense, and there can be no assurance that we will be able to attract, integrate, or retain additional highly qualified personnel in the future. In addition, our ability to achieve significant growth in revenue will depend, in large part, on our success in effectively training sufficient personnel in these two areas. New hires require significant training and in some cases may take several months before they achieve full productivity if they ever do. Our recent hires and planned hires may not become as

productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we have our facilities. If we are not successful in retaining our existing employees, or hiring, training and integrating new employees, or if our current or future employees perform poorly, growth in the sales of our services and products may not materialize and our business will suffer.

We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders and consume resources that may be necessary to sustain our business.

One of our business strategies is to acquire complementary services, technologies or businesses. In connection with one or more of those transactions, we may:

• issue additional equity securities that would dilute our stockholders;

• use cash that we may need in the future to operate our business; and

• incur debt that could have terms unfavorable to us or that we might be unable to repay.

Business acquisitions also involve the risk of unknown liabilities associated with the acquired business. In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.

We may find it difficult to integrate recent and potential future business combinations, which could disrupt our business, dilute stockholder value, and adversely affect our operating results.

During the course of our history, we have completed several acquisitions of other businesses, and a key element of our strategy is to continue to acquire other businesses in the future. In particular, we completed the Submitawebsite, Inc. acquisition in March 2007 and the Web.com merger in September 2006. Integrating these recently acquired businesses and assets and any businesses or assets we may acquire in the future could add significant complexity to our business and additional burdens to the substantial tasks already performed by our management team. In the future, we may not be able to identify suitable acquisition candidates, and if we do, we may not be able to complete these acquisitions on acceptable terms or at all. In connection with our recent and possible future acquisitions, we may need to integrate operations that have different and unfamiliar corporate cultures. Likewise, we may need to integrate disparate technologies and Web service and product offerings, as well as multiple direct and indirect sales channels. The key personnel of the acquired company may decide not to continue to work for us. These integration efforts may not succeed or may distract our management’s attention from existing business operations. Our failure to successfully manage and integrate Submitawebsite and Web.com, or any future acquisitions could seriously harm our business.

Accounting for acquisitions under generally accepted accounting principles could adversely affect our reported financial results.

Under generally accepted accounting principles in the United States, we could be required to record charges for in-process research and development or other charges in connection with future acquisitions, which would reduce any future reported earnings or increase any future reported loss. Acquisitions could also require us to record substantial amounts of goodwill and other intangible assets. For example, in connection with our recent acquisition of Web.com, we recorded $75.3 million of goodwill and $57.0 million of intangible assets. Any future impairment of this goodwill, and the ongoing amortization of other intangible assets, could adversely affect our reported financial results.

We have only recently become profitable and may not maintain our level of profitability.

Although we generated net income since the year ended December 31, 2004, we have not historically been profitable and may not be profitable in future periods. As of September 30, 2007, we had an accumulated deficit of approximately $57.6 million. We expect that our expenses relating to the sale and marketing of our Web services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will increase in the future. Accordingly, we will need to increase our revenue to be able to maintain our profitability. We may not be able to reduce in a timely manner or maintain our expenses in response to any decrease in our revenue, and our failure to do so would adversely affect our operating results and our level of profitability.

Our operating results are difficult to predict and fluctuations in our performance may result in volatility in the market price of our common stock.

Due to our limited operating history, our evolving business model, and the unpredictability of our emerging industry, our operating results are difficult to predict. We expect to experience fluctuations in our operating and financial results due to a number of factors, such as:

• our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ requirements;

• the renewal rates for our services;

• changes in our pricing policies;

• the introduction of new services and products by us or our competitors;

• our ability to hire, train and retain members of our sales force;

• the rate of expansion and effectiveness of our sales force;

• technical difficulties or interruptions in our services;

• general economic conditions;

• additional investment in our services or operations;

• bulk licenses of our software; and

• our success in maintaining and adding strategic marketing relationships.

These factors and others all tend to make the timing and amount of our revenue unpredictable and may lead to greater period-to-period fluctuations in revenue than we have experienced historically.

As a result of these factors, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. The results of one quarter may not be relied on as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.

Our business depends in part on our ability to continue to provide value-added Web services and products, many of which we provide through agreements with third parties, and our business will be harmed if we are unable to provide these Web services and products in a cost-effective manner.

A key element of our strategy is to combine a variety of functionalities in our Web service offerings to provide our customers with comprehensive solutions to their Internet presence needs, such as Internet search optimization, local yellow pages listings, and e-commerce capability. We provide many of these services through arrangements with third parties, and our continued ability to obtain and provide these services at a low cost is central to the success of our business. For example, we currently have agreements with several service providers that enable us to provide, at a low cost, Internet yellow pages advertising. However, these agreements may be terminated on short notice, typically 60 to 90 days, and without penalty. If any of these third parties were to terminate their relationships with us, or to modify the economic terms of these arrangements, we could lose our ability to provide these services at a cost-effective price to our customers, which could cause our revenue to decline or our costs to increase.

We are vulnerable to system failures, which could harm our reputation, cause our customers to seek reimbursement for services paid for and not received, and cause our 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 our routers (devices that move information from one computer network to another) or switches could cause an interruption in the services that we provide to some or all of our 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.

Our data centers are maintained by third parties.

A substantial portion of the network services and computer servers we utilize in the provision of services to customers are housed in data centers owned by other service providers. In particular, a significant number of our servers are housed in data centers in Atlanta, Georgia and Jacksonville, Florida. We obtain 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 the owners of those data centers. We also utilize other third-party data centers in other locations. In the future, We 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 us could cause a disruption in service to our 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 we believe we have taken adequate steps to protect our business through contractual arrangements with our service providers, we 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 us, 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 our ability to support our customers or could result in a decrease in our financial performance.

We rely heavily on the reliability, security, and performance of our internally developed systems and operations, and any difficulties in maintaining these systems may result in service interruptions, decreased customer service, or increased expenditures.

The software and workflow processes that underlie our ability to deliver our Web services and products have been developed primarily by our own employees. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that result in our inability to timely deliver our Web services or products, or that materially impact the efficiency or cost with which we provide these Web services and products, would harm our reputation, profitability, and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures, and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue.

We face intense and growing competition. If we are unable to compete successfully, our business will be seriously harmed.

The market for our Web services and products is competitive and has relatively low barriers to entry. Our competitors vary in size and in the variety of services they offer. We encounter competition from a wide variety of company types, including:

• Website design and development service and software companies;

• Internet service providers and application service providers;

• Internet search engine providers;

• Local business directory providers; and

• Website domain name providers and hosting companies.

In addition, due to relatively low barriers to entry in our industry, we expect the intensity of competition to increase in the future from other established and emerging companies. Increased competition may result in price reductions, reduced gross margins, and loss of market share, any one of which could seriously harm our business. We also expect that competition will increase as a result of industry consolidations and formations of alliances among industry participants.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater brand recognition and, we believe, a larger installed base of customers. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their services and products than we can. If we fail to compete successfully against current or future competitors, our revenue could increase less than anticipated or decline, and our business could be harmed.

Our failure to build brand awareness quickly could compromise our ability to compete and to grow our business.

As a result of the anticipated increase in competition in our market, and the likelihood that some of this competition will come from companies with established brands, we believe brand name recognition and reputation will become increasingly important. Our strategy of relying significantly on third-party strategic marketing relationships to find new customers may impede our ability to build brand awareness, as our customers may wrongly believe our Web services and products are those of the parties with which we have strategic marketing relationships. If we do not continue to build brand awareness quickly, we could be placed at a competitive disadvantage to companies whose brands are more recognizable than ours.

If our security measures are breached, our services may be perceived as not being secure, and our business and reputation could suffer.

Our Web services involve the storage and transmission of our customers’ proprietary information. Although we employ data encryption processes, an intrusion detection system, and other internal control procedures to assure the security of our customers’ data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of third-party action, employee error or otherwise, and as a result our customers’ data becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.

If we cannot adapt to technological advances, our Web services and products may become obsolete and our ability to compete would be impaired.

Changes in our industry occur very rapidly, including changes in the way the Internet operates or is used by small and medium-sized businesses and their customers. As a result, our Web services and products could become obsolete quickly. The introduction of competing products employing new technologies and the evolution of new industry standards could render our existing products or services obsolete and unmarketable. To be successful, our Web services and products must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. If we are unable to develop new Web services or products, or enhancements to our Web services or products, on a timely and cost-effective basis, or if new Web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.

Providing Web services and products to small and medium-sized businesses designed to allow them to Internet-enable their businesses is a new and emerging market; if this market fails to develop, we will not be able to grow our business.

Our success depends on a significant number of small and medium-sized business outsourcing Website design, hosting, and management as well as adopting other online business solutions. The market for our Web services and products is relatively new and untested. Custom Website development has been the predominant method of Internet enablement, and small and medium-sized businesses may be slow to adopt our template-based Web services and products. Further, if small or medium-sized businesses determine that having an Internet presence is not giving their businesses an advantage, they would be less likely to purchase our Web services and products. If the market for our Web services and products fails to grow or grows more slowly than we currently anticipate, or if our Web services and products fail to achieve widespread customer acceptance, our business would be seriously harmed.

We are dependent on our executive officers, and the loss of any key member of this team may compromise our ability to successfully manage our business and pursue our growth strategy.

Our future performance depends largely on the continuing service of our executive officers and senior management team, especially those of David Brown, our Chief Executive Officer. Our executives are not contractually obligated to remain employed by us. Accordingly, any of our key employees could terminate their employment with us at any time without penalty and may go to work for one or more of our competitors after the expiration of their non-compete period. The loss of one or more of our executive officers could make it more difficult for us to pursue our business goals and could seriously harm our business.

Our growth could strain our resources and our business may suffer if we fail to implement appropriate controls and procedures to manage our growth.

We are currently experiencing a period of rapid growth in employees and operations, with our employee base increasing from 460 full-time employees as of September 30, 2006 to 632 full-time employees as of September 30, 2007, which exclude former employees of Web.com. This growth has placed, and will continue to place, a strain on our management, administrative, and sales and marketing infrastructure. If we fail to successfully manage our growth, our business could be disrupted, and our ability to operate our business profitably could suffer. We anticipate that further growth in our employee base will be required to expand our customer base and to continue to develop and enhance our Web service and product offerings. To manage the growth of our operations and personnel, we will need to enhance our operational, financial, and management controls and our reporting systems and procedures. This will require additional personnel and capital investments, which will increase our cost base. The growth in our fixed cost base may make it more difficult for us to reduce expenses in the short term to offset any shortfalls in revenue.

We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or force us to reduce our prices.

Our success depends, in part, on our ability to protect and preserve the proprietary aspects of our technology, Web services, and products. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market services and products similar to those offered by us, which could decrease demand for our Web services and products. We may be unable to prevent third parties from using our proprietary assets without our authorization. We do not currently rely on patents to protect our core intellectual property, and we have not applied for patents in any jurisdictions inside or outside of the United States. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.

If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, which could cause our stock price to fall or result in our stock being delisted.

Effective internal controls are necessary for us to provide reliable and accurate financial reports. We will need to devote significant resources and time to comply with the requirements of Sarbanes-Oxley with respect to internal control over financial reporting. In addition, Section 404 under Sarbanes-Oxley requires that we assess and our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our ability to comply with the annual internal control report requirement for our fiscal year ending on December 31, 2007, will depend on the effectiveness of our financial reporting and data systems and controls across our company and our operating subsidiaries. We expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results or cause us to fail to meet our financial reporting obligations, which could adversely affect our business and jeopardize our listing on the NASDAQ Global Market, either of which would harm our stock price.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new services and products or enhance our existing Web services, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

Provisions in our amended and restated certificate of incorporation and bylaws or under Delaware law might discourage, delay, or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

• establish a classified board of directors so that not all members of our board are elected at one time;

• provide that directors may only be removed for cause and only with the approval of 66 ²/₃ % of our stockholders;

• require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;

• authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

• prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

• provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

• establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay, or prevent a change of control of our company.

RISK FACTORS ASSOCIATED WITH THE RECENTLY COMPLETED WEB.COM MERGER

If we do not integrate our services and products, we may lose customers and fail to achieve our financial objectives.

Achieving the benefits of the merger will depend in part upon the integration of Web.com’s services and products with those offered by Website Pros in a timely and efficient manner. To provide enhanced and more valuable services and products to our customers after the merger, we also will need to integrate our sales and development organizations. This may be difficult, unpredictable, and subject to delay because our services and products have been developed, marketed and sold independently and were designed without regard to such integration. If we cannot successfully integrate our services and products and continue to provide customers with enhanced services and products in the future on a timely basis, we may lose customers and our business and results of operations may suffer.

Integrating our companies may divert management’s attention away from our operations.

Successful integration of Website Pros’ and Web.com’s operations, services, products and personnel may place a significant burden on our management and our internal resources. The diversion of management attention and any difficulties encountered in the transition and integration process could harm our business, financial condition and operating results.

We expect to incur significant additional costs integrating the companies into a single business.

We incurred substantial non-recurring costs associated with closing the transaction with Web.com. We expect to incur significant additional costs integrating Web.com’s operations, products and personnel. These costs may include costs for:

• employee redeployment, relocation or severance;

• integration of information systems;

• combining sales teams and processes; and

• reorganization or closures of facilities.

In addition, we expect to incur significant costs in connection with the consummation of the merger. We do not know whether we will be successful in these integration efforts or in consummating the merger.

We may not realize the anticipated benefits from the merger.

The merger involves the integration of two companies that have previously operated independently. Website Pros expects the acquisition of Web.com to result in financial and operational benefits, including increased revenue, cost savings and other financial and operating benefits. We can not assure you, however, that Website Pros will be able to realize increased revenue, cost savings or other benefits from the merger, or, to the extent such benefits are realized, that they are realized timely. This integration may also be difficult, unpredictable, and subject to delay because of possible cultural conflicts and different opinions on product roadmaps or other strategic matters. The companies must integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance, many of which are dissimilar. Difficulties associated with integrating Web.com’s service and product offering into that of Website Pros, or with integrating Web.com’s operations into Website Pros’, could have a material adverse effect on the combined company and the market price of Website Pros common stock.

Charges to earnings resulting from acquisitions may adversely affect Website Pros’ operating results.

Under purchase accounting, Website Pros allocates the total purchase price to an acquired company’s net tangible assets, intangible assets based on their fair values as of the date of the acquisition and record the excess of the purchase price over those fair values as goodwill. Website Pros management’s estimates of fair value are based upon assumptions believed to be reasonable but are inherently uncertain. Going forward, the following factors could result in material charges that would adversely affect Website Pros’ results:

• impairment of goodwill;

• charges for the amortization of identifiable intangible assets and for stock-based compensation;

• accrual of newly identified pre-merger contingent liabilities that are identified subsequent to the finalization of the purchase price allocation; and

• charges to income to eliminate certain Website Pros pre-merger activities that duplicate those of the acquired company or to reduce our cost structure.

Website Pros expects to incur additional costs associated with combining the operations of Web.com as well as Website Pros’ previously acquired companies, which may be substantial. Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated amortization of deferred equity compensation and severance payments, reorganization or closure of facilities, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would decrease Website Pros’ net income and earnings per share for the periods in which those adjustments are made.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

On September 25, 2007, we held a Special Meeting of Stockholders. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for, against, or abstained with respect to each matter:

1. Approval of the adoption of the Agreement and Plan of Merger and reorganization, dated as of June 26, 2007, by and among Website Pros and Augusta Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Website Pros, and Web.com was as follows:

Shares Voted
For	Against	Abstaining
12,722,806	83,769	1,500

2. Approval to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the proposed matter above:

Shares Voted
For	Against	Abstaining
12,096,509	711,066	500

Item 5. Other Information

Not applicable.

Item 6. Exhibits.

Exhibit No.		Description of Document
2.1		Agreement and Plan of Merger and Reorganization dated June 26, 2007 by and among Website Pros, Inc., Augusta Acquisition Sub, Inc. and Web.com, Inc. (1)

3.1		Amended and Restated Certificate of Incorporation of Website Pros, Inc.(2)

3.2		Amended and Restated Bylaws of Website Pros, Inc.(3)

4.1		Reference is made to Exhibits 3.1 and 3.2

4.2		Specimen Stock Certificate.(7)

4.3		Investors’ Rights Agreement dated December 10, 2003, as amended by the Omnibus Amendment Agreement dated February 14, 2005.(7)

4.4		Warrant dated December 10, 2003, exercisable for 208,405 shares of common stock.(4)(7)

4.5		Warrant dated April 27, 2004, exercisable for 72,942 shares of common stock.(5)(7)

31.1		CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1		Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).(6)

32.2		Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).(6)

(1) Filed as Exhibit 2.1 to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on June 27, 2007 and incorporated herein by reference.

(2) Filed as Exhibit 3.3 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(3) Filed as Exhibit 3.4 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(4) Filed as Exhibit 4.6 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(5) Filed as Exhibit 4.7 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(6) The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Website Pros, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

(7) Filed as the like numbered Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005 and as Exhibit 10.14 to the current report on Form 8-K (No. 000-51595), filed with the SEC on November 7, 2006, as amended, and incorporated herein by reference.

SIGNATURES

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

		Website Pros, Inc.
		(Registrant)

November 8, 2007		/s/ KEVIN M. CARNEY
Date		Kevin M. Carney Chief Financial Officer (Principal Financial and Accounting Officer)

INDEX OF EXHIBITS

Exhibit No.		Description of Document
2.1		Agreement and Plan of Merger and Reorganization dated June 26, 2007 by and among Website Pros, Inc., Augusta Acquisition Sub, Inc. and Web.com, Inc. (1)

3.1		Amended and Restated Certificate of Incorporation of Website Pros, Inc.(2)

3.2		Amended and Restated Bylaws of Website Pros, Inc.(3)

4.1		Reference is made to Exhibits 3.1 and 3.2

4.2		Specimen Stock Certificate.(7)

4.3		Investors’ Rights Agreement dated December 10, 2003, as amended by the Omnibus Amendment Agreement dated February 14, 2005.(7)

4.4		Warrant dated December 10, 2003, exercisable for 208,405 shares of common stock.(4)(7)

4.5		Warrant dated April 27, 2004, exercisable for 72,942 shares of common stock.(5)(7)

31.1		CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1		Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).(6)

32.2		Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).(6)

(1) Filed as Exhibit 2.1 to the Registrant’s current report on Form 8-K (00-51595), filed with the SEC on June 27, 2007 and incorporated herein by reference.

(2) Filed as Exhibit 3.3 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(3) Filed as Exhibit 3.4 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(4) Filed as Exhibit 4.6 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(5) Filed as Exhibit 4.7 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Good

Web.com (WEB) Inactive 10-Q2007 Q3 Quarterly report

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