UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K








(mark
one)


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




For
the fiscal year ended December 31, 2009




or




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









Web.com
Group, 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.)




12808 Gran Bay Parkway,
      West, Jacksonville, FL
                32258(Address
      of principal executive offices)
                (Zip
      Code)




Registrant’s
telephone number, including area code: (904) 680-6600




Securities
registered pursuant to Section 12(b) of the Act: None.




Securities
registered pursuant to section 12(g) of the Act:




Common
Stock, $0.001 par value


(Title
of class)









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




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




Indicate
by checkmark 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o   Yes    o  No





Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.    x




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




Large
      accelerated filer o
              Accelerated
      filer x
              Non-accelerated
      filer o
              Smaller
      Reporting Company o(Do
      not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company
(as defined in Rule 12b2 of the Act).    o  Yes    x  No




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $100,729,827 as of
June 30, 2009, based upon the closing sale price of the common stock as
quoted by the NASDAQ Global Market reported for such date. Shares of common
stock held by each executive officer and each director and by each person who is
known by the registrant to own 5% or more of the outstanding common stock have
been excluded from this calculation as such persons may be deemed affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.




As of
February 26, 2010, the registrant had 26,577,977 shares of common stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Parts of
the Proxy Statement for the registrant’s 2010 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K, are incorporated by reference in Part III of this Form
10-K.





TABLE
OF CONTENTS




PagePART
      IItem
      1.
                  Business
                  3Item
      1A.
                  Risk
      Factors
                  15Item
      1B.
                  Unresolved
      Staff Comments
                  22Item
      2.
                  Properties
                  22Item
      3.
                  Legal
      Proceedings
                  24Item
      4.
                  (Removed
      and Reserved)
                  24PART
      IIItem
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
      Purchases of Equity Securities
                  25Item
      6.
                  Selected
      Financial Data
                  25Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  26Item
      7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  38Item
      8.
                  Financial
      Statements and Supplementary Data
                  38Item
      9.
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                  39Item
      9A.
                  Controls
      and Procedures
                  39Item
      9B.
                  Other
      Information
                  41PART
      IIIItem
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  42Item
      11.
                  Executive
      Compensation
                  42Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  42Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  42Item
      14.
                  Principal
      Accounting Fees and Services
                  42PART
      IVItem
      15.
                  Exhibits,
      Financial Statement Schedules
                  43


2


PART
I




Item 1.
Business.




This
Form 10-K and the documents incorporated herein by reference contain
forward-looking statements that involve risks and uncertainties. Actual results
may differ materially from those expressed in forward-looking statements. See
Item 1A of Part I—“Risk Factors.”




Web.com
Group, Inc.  (“we,” “us,” “our” or the “Company”) is a provider of
Do-It-For-Me and Do-It-Yourself website building tools, online marketing, lead
generation, eCommerce, and technology solutions that enable small and
medium-sized businesses to build and maintain an effective online presence. The
Company offers a full range of Web services, including online marketing and
advertising, local search, search engine marketing, search engine optimization,
e-mail, lead generation, home contractor specific leads, website design and
publishing, logo and brand development and eCommerce solutions meeting the needs
of a business anywhere along its lifecycle.





Our
primary service offerings, eWorks! XL and SmartClicks, are comprehensive
performance-based packages that include website design and publishing, online
marketing and advertising, search engine optimization, search engine submission,
lead generation, hosting and email solutions, 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 eCommerce
solutions and other sophisticated online 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 online
presence with more sophisticated marketing and lead generation services.
Additionally, as the Internet continues to evolve, we plan to 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 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
semi-custom websites on behalf of our customers. With approximately 275,000
subscribers to our eWorks! XL, SmartClicks, and subscription-based services as
of December 31, 2009, we are one of the industry’s largest providers of
affordable Web services and products that enable small and medium-sized
businesses to have an effective online presence.




We
traditionally have sold our Web services and products to customers identified
primarily through strategic marketing relationships with established brand name
companies that have large numbers of small and medium-sized business customers.
We have a direct sales force that utilizes leads generated by our strategic
marketing relationships and  leads acquired directly to acquire new
customers at our sales centers in Spokane, Washington; Jacksonville, Florida;
Manassas, Virginia; Shavertown, Pennsylvania; Barrie, Ontario; and Scottsdale,
Arizona. Our sales force specializes in selling to small and medium-sized
businesses across a wide variety of industries throughout the United
States.




We also
acquire a large number of customers directly through online and affiliate
marketing activities that target small and medium-sized businesses that want to
establish or enhance their online presence.





Our
Approach and Solution




We have
built our business around a subscription-based ASP model that allows small and
medium-sized businesses to affordably outsource their Web services needs to us.
The key elements of our business model and approach are:




Providing Comprehensive Solutions
for Small and Medium-Sized Businesses. Our goal is to enable small
and medium-sized businesses to outsource their Web services needs to us. Our
experience is that many small and medium-sized businesses do not have the
in-house expertise to effectively design an online presence that will generate
adequate traffic to their websites and increase direct consumer interaction. As
a result, our customers look to us to provide these services. Our Web services
include, among other features, a full range of Web services, including website
design and publishing, online marketing and advertising, search engine
optimization, lead generation, home contractor specific leads, logo and brand
development and eCommerce solutions.  We believe this combination
provides our customers with a comprehensive solution to their Web services
needs.




Offering Affordable
Subscription-Based Solutions. Because our customer base is
value-driven, we provide our Web services on an affordable subscription
basis.


3





·
            eWorks!
      XL and SmartClicks customers typically pay a recurring monthly fee ranging
      from approximately $70 to over $100, depending on which services and
      products they purchase.


·
            Premium
      Search Engine Marketing service targeted at businesses with significant
      spending on local print yellow page advertising. This service is priced at
      an average of approximately $300 per month, which we believe is
      significantly less than the typical cost of traditional campaigns such as
      half-page or full-page print yellow page
  advertisements.


·
            Do-It-Yourself
      Site Builder targets businesses to design, publish and manage a
      professional website on a recurring monthly fee ranging from approximately
      $12 to $90 per month.


·
            1ShoppingCart.com
      eCommerce and online marketing solutions typically on a recurring monthly
      fee ranging from approximately $29 to $99 per
  month.


·
            Lead
      Generation memberships, specifically targeted to contractors in the home
      services business market, ranging in price from $50 to $150, based on the
      specific trade vertical and geographic
area.


·
            Search Engine Optimizing solution
      packages, ranging in price from $500 to $5,000 per
      month.




Streamlining Operations for Customer
Acquisition, Fulfillment, and Support. We utilize proprietary
workflow processes and customer relationship management systems, together with a
combination of integrated template-driven and specialized website design tools,
to sell, design, and support our Web services and products. We believe this
integrated infrastructure has enabled us to significantly reduce the time from
initial customer contact to site completion. Our goal is to design a website and
have it complete and visible on the Internet within 72 hours from the time we
receive initial information from the customer. Additionally, we have extensive
experience promoting, selling, and supporting our web services and products to
small and medium-sized businesses.




Forming and Enhancing Strategic
Marketing Relationships. We focus on forming strategic marketing
relationships with companies that have large customer bases of small and
medium-sized businesses. These companies generate leads for us by providing
lists of their customers, conducting e-mail marketing campaigns about our Web
services and products, advertising our Web services and products on the
Internet, and using other forms of both direct and indirect solicitation. These
companies filter the customer lists they provide to us using a number of
criteria that we believe indicate when a small or medium-sized business is
likely to understand the value of our Web services and products.





We also
develop relationships with leading technology providers, including major
software, hardware, development and online marketing organizations, to enhance
the design and sales of our products and services.  Relationships with
these companies allow us to quickly gain access to innovative technologies and
provide more creative solutions to our customers.





Our
Premium Search Engine Marketing,1ShoppingCart.com eCommerce, Lead Generation,
Search Engine Optimization and Logo Design services provide additional sales
channels for our core Web services products. Premium Search Engine Marketing and
1ShoppingCart.com eCommerce utilizes a network of affiliate and private-label
resellers that are prospects for our other services and that can be leveraged to
offer our services to their customers. Our Lead Generation network of home
services contractors is also a source of prospective customers for website and
online promotional services.  Logo Design customers are also prospects for
online marketing and web design services.





Up-selling or cross-selling
additional services to existing customers. Customers acquired through
traditional and online marketing programs that target hosting or Do-It-Yourself
website design services provide significant opportunities for up-selling and
cross-selling additional online marketing, lead generation and search
optimization products.  Additionally, some of these customers are also
prospects for our Do-It-For-Me services.




Our
Strategy




Our
objective is to enhance our position as a leading provider of Web services and
products for small to medium-sized businesses. Key elements of our strategy
include:




Continuing to Target the Small and
Medium-Sized Business Market Segment. We believe the small and
medium-sized business market offers us the best opportunity to continue building
a leading national Web services company. We believe this is an attractive market
because it is large and because these businesses need a comprehensive,
affordable solution to their Web services requirements. Our Web services meet
critical business needs of these businesses that they often do not have the
time, resources, or technical skills to fulfill themselves.




Developing or Acquiring
Complementary Services and Technologies. We sell Web services and
products that are essential to an effective online presence such as local and
regional lead generation, search engine optimization, website search tools,
affiliate marketing networks, and Web analytics. While we currently provide many
of these services through our relationships and agreements with other vendors,
we will seek opportunities either to internally develop some or all of these
services and products or acquire businesses that provide them. Additionally, we
may seek to acquire companies with existing customer bases in our target market
into which we can cross-sell our Web services and products.


4




Expanding our Distribution
Channels. To sell our Web services and products cost efficiently, we
capitalize on the connection those organizations, with which we have strategic
marketing relationships, have with their small and medium-sized business
customers. We plan both to expand the scope of our current strategic marketing
relationships, as well as to develop additional strategic marketing
relationships with organizations that have strong brand recognition with small
and medium-sized businesses. We also expect to increase our marketing and sales
activities so that a larger proportion of our customers are acquired through
increased direct sales and new reseller programs. 1ShoppingCart.com eCommerce
and Lead Generation also provide additional opportunities to expand and
diversify our distribution channels.




Selling Additional Services and
Products to Existing Customers. As of December 31, 2009, we had
approximately 275,000 subscribers to our eWorks! XL, SmartClicks, and other
subscription-based services. As customers build their online presence, we
believe that we can demonstrate the value of the additional premium services and
products we offer, which can increase our average revenue per customer and
improve our revenue growth. For example, we can provide paid search and
eCommerce capabilities to our current customers’ websites, enabling additional
sources of revenue for them while also contributing to a measurable return on
their investment.




Strengthening Customer
Retention. We are dedicated to enhancing customer retention and
building lasting relationships with our customers. We believe it is critical to
customer retention to target small and medium-sized businesses that already
understand the value of the Internet to their success. Improving customer
retention also requires maximizing customer loyalty. Therefore, we are focused
on customer satisfaction, consistent communication, Web service and product
enhancements, and high quality customer service. Additionally, we believe that
by educating our existing and prospective customers about the value of our
services to their businesses, we can build lasting customer
relationships.




Extending Our Position as an
Affordable ASP. Through the combination of our operational scale and
geographical locations, we believe that we have been able to minimize the cost
of delivering our Web services and products. Our template-driven processes
enable us to handle orders efficiently. We have strategically located our
primary sales and fulfillment facilities in the lower-cost areas of
Jacksonville, Florida and Spokane, Washington, which helps us to better manage
our cost of operations even as we expand. In the future, we may look to new
international labor markets to further reduce the cost of providing our Web
services and products.




Our
Services and Products




Our goal
is to provide a broad range of Web services and products that enable small and
medium-sized businesses to establish, maintain, promote, and optimize their
online presence. By providing a comprehensive performance-based offering, we are
able to sell to customers whether or not they have already established an online
presence. Our Web services and products can be categorized into the following
offerings:




eWorks!
XL Subscription-Based Services




Using our
proprietary software and workflow enabled processes, we develop and support
subscription Web service packages that include a 5, 10, 20, or 40 page
semi-custom website and related services. These comprehensive packages include
the tools and functionality necessary for a business to create, maintain,
enhance, and market a successful and effective online presence. We build, test,
and publish the websites and provide related services for our customers. We also
provide tutorials and tools for customers to edit and manage their sites.
Alternatively, customers can select from one of several levels of support
programs for ongoing management and maintenance of their websites.




Our
primary subscription offering is eWorks! XL, a comprehensive website design and
publishing package targeted at getting small and medium-sized businesses online
quickly, effectively, and affordably when they have no online presence, or a
limited one. The package includes a five-page semi-custom website built on our
proprietary self-editing tool, which allows for easy maintenance by the
customer. By using our comprehensive, performance-based package of services,
customers eliminate the need to buy, install, or maintain hardware or software
to manage their online presence. This offering includes a broad set of
configuration and customization options using a Web browser.




We build
the initial website for the customer using the content and design information
the customer provides. Our goal is to have a customer’s website visible on the
Internet within 72 hours from the time we receive initial information from the
customer.


5


eWorks!
XL includes:




•
            Initial Site
      Design. One of our design specialists begins the process by
      interviewing the customer and collecting data about the customer’s
      business. We then create a unique website tailored to the customer’s
      specific needs using one of our templates. Every site we build goes
      through an extensive quality review and assurance process prior to being
      published on the Internet. Additionally, every site undergoes a thorough
      website optimization process to enhance search engine
      placement.




•
            Online
      Marketing. We offer our customers online marketing
      capabilities that cost-effectively promote their websites on a local and
      national basis. The package includes initial submission and ongoing
      submissions on a regular basis of the customers’ websites to many popular
      national and local search engines. Additionally, eWorks! XL includes
      listings in online yellow page directories, search engine optimization
      tools, and educational guides targeted to small
  businesses.




•
            Performance
      Scorecard. Customers receive a detailed report of their
      website traffic, including visitors generated through the online marketing
      and advertising services provided in their eWorks! XL
    package.




•
            Unique 800 Telephone
      Number. Customers receive a unique 800 number that is forwarded to
      their business telephone line. Information about the calls received
      through the 800 number are tracked and reported on the Performance
      Scorecard.




•
            E-mail
      Marketing. We provide an e-mail marketing tool that enables
      our customers to easily communicate with their customers and prospects. To
      assist our customers in collecting e-mail addresses, every website
      includes a subscription sign-up box for site visitors to provide their
      e-mail information.




•
            Webmail. Every
      customer receives unlimited e-mail boxes tied to its domain name. Webmail
      is compatible with Microsoft Outlook and features advanced filtering and
      search capabilities and automatic mail forwarding and
      responding.




•
            Online Web
      Tools. eWorks! XL includes advanced online tools such as a
      forms manager, polling and survey capabilities, a guest book, and site
      search features that offer interactive website management
      capabilities.




•
            Modifications and Redesign
      Service. Customers can choose between several different levels
      of support, which range from having us make ongoing changes to using the
      self-edit tools we provide. The basic service included with eWorks! XL
      includes 60 minutes per month of free modification and phone consultation
      with one of our Web designers.




•
            Domain Name
      Registration. We obtain, purchase, and register a domain name
      appropriate for the business selected by the
  customer.




•
            Hosting and Technical
      Support. Our hosting platform offers technology and security
      designed to ensure the reliable daily operation of a customer’s website.
      Our secure Web hosting includes disk storage, daily backups, and a monthly
      data transfer allotment. We also offer technical support, including
      services to our customers to provide the information and consultation they
      need to build and manage an effective online
  presence.





•
            Mobile Website.eWorks!
      XL includes a version of the customer’s website built specifically for
      mobile devices.





SmartClicks
Subscription-Based Services




SmartClicks
is a performance-based service with a higher subscription fee than our eWorks!
XL offering. Our SmartClicks offering is targeted to customers that want
additional online advertising in their local service areas. SmartClicks includes
all of the benefits provided in the eWorks! XL bundle and the added benefit of
guaranteed pay-per-click advertising in Google and other major search
engines.




An added
value of the SmartClicks package is the advertising management function the
Company performs for these customers. We create the pay-per-click ads, buy
appropriate keywords, monitor the program’s performance and report results to
customers as part of the customer’s subscription.




Premium
Subscription-Based Services




In
addition to our eWorks! XL and SmartClicks subscription-based Web services, we
offer a number of premium subscription-based services and functionalities for an
additional fee. These premium subscription-based services are available to our
eWorks! XL customers, to customers of our custom website design services and, in
most cases, to customers for whom we have not built a website but who otherwise
require these Web services. These premium subscription-based services
include:


6




•
            eCommerce
      Solutions. We offer a comprehensive set of services that
      enable businesses to sell their services and products online. Our service
      offering includes creating the online store catalog and secure shopping
      cart, establishing an online merchant account and assisting in setting up
      online payment and order
processing.




•
            Power Marketing
      Bundles. Our Power Marketing package is an array of services
      and products we sell to customers that want increased local or national
      exposure on the Internet. Options include additional online yellow page
      listings and search engine submission
tools.




•
            Visibility
      Online. We bundle a number of different services contained in
      our eWorks! XL package into our Visibility Online offering, which is
      designed to enhance the effectiveness of an online marketing program for
      our non-eWorks! XL customers. These services include initial search engine
      optimization, search engine inclusion, Yahoo! Site Match paid inclusion,
      listing in online yellow page directories and site submission to many
      popular search engines and search submission
  tools.




•
            Internet Yellow
      Pages. We work with customers to design an advertising program
      using several Internet yellow page directories. This provides our
      customers the ability to target specific buyers for their own services and
      products locally, regionally, or
nationally.




•
            Search Engine
      Optimization.We provide search engine optimization tools and consultation to customers
      that want greater visibility and performance from their online
      presence.  Our search engine optimization products and services are
      designed to help improve search engine rankings and to increase qualified
      traffic and lead
generation.





•
            Custom Design
      Extras. We offer several custom design features and services,
      including map and directions pages, external links pages, the ability to
      increase the number of products listed on a customer’s website, more
      advanced website statistics, database applications, password security,
      expanded e-mail services, and premium hosting
  services.




Do-It-Yourself
Websites





We offer
a variety of Do-It-Yourself website building and marketing solutions for small
and medium-sized businesses that are more technically savvy and intend to build
their own websites or enhance their websites with online marketing.  These
solutions include hosting services, an easy-to-use web building
tool, eCommerce capabilities and online marketing. Potential customers
are identified through traditional and online marketing as well as through a
number of distribution partners, resellers and affiliates.





Hosting
Services





We offer
core products that are standardized, scalable managed hosting services that
place numerous customers on a single shared server – a cost benefit that is
passed along to the customer.  Starter packages are designed for websites
with relatively low volumes of traffic and allow our customers to establish an
online presence at minimal cost. Our hosting services feature easy-to-use
control panels and extensive online documentation that allow customers to
control their own applications.  These hosting services are sold
stand-alone or bundled with a suite of website tools and services.





Custom
Web Design




We offer
complete custom website design services that provide sophisticated functionality
and interactivity beyond those available under eWorks! XL and SmartClicks. These
sites are typically built for larger, more established customers that have had
an online presence in the past, or that are designing their first website with
unique specifications. Customers work directly with our experienced Web
designers to build a fully customized website. Additionally, we are able to sell
any of our subscription-based Web services and products to our custom Web design
customers.




Our team
of custom design professionals includes experienced Web designers, programmers,
copywriters, and search engine optimization experts who work together to ensure
that the customer’s online business objectives are met. Custom sites are built
with sophisticated design tools that provide the flexibility and functionality
to meet advanced business needs. Custom sites can include flash, animation,
eCommerce solutions, sophisticated interactivity and database
functionality.


7




Online
Business Automation




Through
1ShoppingCart.com and Solid Cactus, we offer a robust set of sales and marketing
tools for businesses selling products and services online. 1ShoppingCart.com and
Solid Cactus offer an ASP, subscription-based shopping cart solution with add-on
modules that allow small and medium-sized businesses to create, promote and
manage their online presence. Services include a comprehensive affiliate
management program, e-mail marketing, auto-responders and ad
trackers.




Lead
Generation




We offer
targeted lead generation services for various business categories. We provide a
competitive marketplace that matches homeowners in need of remodeling services
with qualified contractors (such as plumbers, landscapers, roofers and painters)
in their local area. Through a subscription-based membership model and per lead
acquisitions, contractors purchase these leads, giving them the opportunity to
bid on the homeowner’s project.




Search
Engine Marketing





We offer
search engine marketing services that provide fully customizable solutions based
on our customers’ goals and business plans.  Some of these services include
search engine optimization, link building, pay-per-click advertising management,
public relations and press release distributions.





Logo
Design and Brand Building





We are a
leading provider of do-it-yourself logos and other premium design products to
small businesses around the world through our LogoYes products. Our LogoYes
do-it-yourself logo creation tools provide professional, affordable design
products that equip small businesses to compete with large ones. LogoYes
products and services help build a company’s brand value by presenting a strong,
unified image. We also provide the LogoYes design and brand building tools to
our Do-It-For-Me web services customers.





eCommerce
website design and development





We
provide a comprehensive set of products and services that enable eCommerce
merchants to sell more on the Internet.  By coordinating and integrating
eCommerce website design and development, Internet marketing, customer service
and back-end order management, we can enable eCommerce merchants to have a
complete online store solution by providing support and development on multiple
eCommerce platforms including Solid Cactus eCommerce, Yahoo! Store, eBay
Prostores and Webstore by Amazon.  Customers work directly with store
development project managers, designers and programmers to build high-end custom
eCommerce stores.  Dedicated Internet marketing managers coordinate
Internet marketing spend to maximize natural and paid traffic, thereby
increasing end-customer sales through their eCommerce store.  As
end-customer sales increase, our eCommerce call center provides end-customer
sales and customer support for our eCommerce merchants, freeing up time and
resources for eCommerce merchants to focus on growing their
business.





Operations




We have
invested significant time and capital resources in a set of internal processes
and proprietary technologies designed to enable high-scale, high-quality mass
customization of our Web services.




eWorks!
XL and SmartClicks




The
workflow of our sales and fulfillment process for eWorks! XL and SmartClicks is
illustrated below.


8










Utilizing
leads provided by our strategic marketing relationships, as well as leads
acquired directly, we identify potential customers through a combination of our
outbound and inbound telesales programs. Once our sales specialists have
determined that a lead is a potential customer, the customer call is transferred
directly to a Web services consultant. In most cases, this transfer takes place
immediately so that customer contact is not interrupted. The Web services
consultant conducts a Web design interview during which we collect information
about the customer, request customer-specific content, and proactively help the
customer design an effective online presence based on the goals for 
business. Several discrete quality checks on each sale help us maximize the
quality of the sale.




Using our
proprietary workflow process and customer relationship management software, the
interview notes and content gathered by our Web services consultants are then
transmitted to our national design center. At this point, our design specialists
use the notes and content collected, our proprietary design tool and one of
hundreds of design templates that can be modified using a wide variety of color
themes and graphics to design a semi-custom website for the customer. After
completion of the website, a separate quality assurance process is automatically
triggered by our proprietary workflow process and customer relationship
management software. This quality assurance process includes testing of the
website, reviewing notes and customer-supplied content, confirming
appropriateness of styles used, and generally ensuring that the quality of the
resulting online presence is consistent with our high standards. Following
quality assurance, the website is published and hosted, and the customer is
notified that the website is complete.




By
utilizing our proprietary workflow process and customer relationship management
software, specialized design tools, a large database of design templates, and
several years of experience, we have been able to decrease the time of
development and increase the utilization rate of our sales, design, and support
staff. Our goal is to complete this process, from customer call to initial
website deployment, within 72 hours. After the website is available on the
Internet, we help our customers maintain, modify, and upgrade their online
presence.




For all
of our customers, we also provide periodic newsletters and other informational
items to increase our number of customer contact events. We actively seek to
interact with our customers at a variety of times during the customer life cycle
through different media. Through experience and testing, we have found increased
contact with customers helps to improve customer loyalty and enhance their
understanding of the value of our services and products. We have also initiated
several programs to foster customer loyalty, including numerous customer surveys
that measure the quality of our service and the effectiveness of our products, a
dedicated customer satisfaction team that follows up telephonically with every
customer responding negatively to any of our surveys, segmented design experts
for handling design changes quickly and professionally, and the introduction of
an intensive training curriculum required for all customer care
agents.




We
maintain five data centers located in Jacksonville, Florida; Atlanta, Georgia;
Spokane, Washington; and Ontario, Canada for most of our internal operations.
Servers that provide our customers’ website data to the Internet are located
within third-party co-location facilities located in Jacksonville, Florida and
Atlanta, Georgia. These co-location facilities have a secured network
infrastructure including intrusion detection at the router level. Our contract
obligates our co-location provider to provide us a secured space within their
overall data center. The facilities are secured through card-key numeric entry
and biometric access. Infrared detectors are used throughout the facility. In
addition, the co-location facilities are staffed 24 hours a day, 7 days a week,
with experts to manage and monitor the carrier networks and network access. The
co-location facilities’ staff provides 24-hour security through
camera-controlled views of our equipment. The co-location facilities provide
multiple Internet carriers to help ensure bandwidth availability to our
customers. The availability of electric power at the co-location facilities are
provided through multiple uninterruptible power supply and generator systems
should power supplied by the Jacksonville Electric Authority or Georgia Power
fail.


9


Customer
data is redundant through the use of multiple application and Web servers.
Customer data is backed up to other disk arrays with fail-over to help ensure
high availability. Customer data is also maintained at our national design
center and can be republished from archival data at any time through our Oracle
9i database system. Currently, this process could take approximately 24 hours.
Our financial system reporting also uses our redundant Oracle systems and can be
reconstituted in approximately 12 hours.




We are
currently working with our co-location provider to establish a disaster recovery
backup operation at one of the provider’s alternative locations. This would
provide a working fail-over site to prevent a disruption of our customers’
websites should the Jacksonville co-location site become unavailable. The
facilities are connected by fiber-optic rings to our co-location provider’s
other centers.





Search
Engine Marketing Packages




Potential
customers for our search engine marketing packages are identified primarily
using outbound telesales programs based in Manassas, Virginia. This program
targets businesses with established traditional print yellow pages advertising
campaigns. Customers who purchase our online marketing package offering are
interviewed and advertising information is entered into our proprietary
publishing system. Local advertisements are then customized for several
distribution platforms, such as Yahoo! Yellow Pages and Google search, and then
published to these platforms. Customers receive a monthly report that tracks the
number of impressions, clicks, and calls generated by each advertisement that we
place on their behalf. In addition to selling online marketing packages, we sell
website and search engine optimization services to this customer
base.




1ShoppingCart.com
and Solid Cactus Integrated eCommerce Solutions




Prospects
for our 1ShoppingCart.com and Solid Cactus eCommerce products are typically
small business customers that are interested in establishing an online business.
Our eCommerce engine integrates a variety of marketing and advertising modules
that can be purchased as a bundle, or sold individually. In addition to
establishing their business online, our customers can market their services
through our e-mail marketing system and auto-responders, track the effectiveness
of their advertising and marketing efforts and establish, manage and maintain a
robust affiliate program.




Potential
customers can also test our services through a paid or free online trial. Once a
customer downloads the trial of our software, we contact them through a series
of direct outbound calls, e-mail communications and auto-responders to encourage
conversion of the trial to a paid subscription and to upsell other
services.




Our
customer data is stored on systems that are compliant and certified to meet Visa
International’s Payment Card Industry Data Standards. We have a highly available
redundant infrastructure, which provides disaster recovery backup to prevent a
disruption of our customers’ eCommerce presence.




Merchant
Services





We offer
a suite of merchant processing solutions to 1ShoppingCart.com, Do-It-For-Me,
Do-It-Yourself, and Renex customers that help customers save money on processing
credit and debit card transactions.   These services are offered
through strategic partnerships with merchant services providers who analyze our
customers’ existing processing fees to determine potential cost savings for
existing processors and establish new merchant services accounts for customers
who need to begin taking credit cards.  In addition to savings on
processing fees, this service offers fraud detection and card security
compliance features.





Merchant
services are sold primarily through online and email marketing campaigns
targeting our customers that accept credit and debit cards.  Once a
prospect is identified through these channels, they receive a call from our
payment processing processors to complete a cost analysis and close the
sale.





Lead
Generation Services




We market
our Lead Generation services to homeowners through online advertising and
identify contractors primarily using an outbound telesales programs based in
Manassas, Virginia and Jacksonville, Florida. Homeowners complete an online
project questionnaire which describes their home remodeling project. We receive
the online lead and send it to local contractors in our database. Some qualified
contractors that respond are provided the homeowner’s full contact information
and then the contractor works directly with the homeowner to scope the project
and to provide cost estimates to the homeowner. We also offer lead generation
products through our outbound telesales efforts to small businesses in a variety
of industries including home services.




In
addition, we offer a Customer Relationship Lead Management system (CRM system)
to contractors, that allow them to manage all of their leads and projects in a
comprehensive, easy-to-use system.


10




Web.com
Search Agency





Based in
Scottsdale, Arizona, Web.com Search Agency (formerly Submitawebsite.com) offers
search engine optimization and placement services to customers that want to
improve their natural search rankings in popular search engines.  These
services are marketed to small and medium-sized businesses through organic
search and online marketing. Additionally, these services are cross-sold to our
customers through our outbound and inbound telesales teams.





Web.com
Search Agency services align customers’ website code and content with strategic
keyword phrase targeting, ultimately assisting a search engine algorithm in
understanding and recognizing a website’s keyword focus.   We also
sell and manage link building and blogging campaigns for customers as additional
strategies to improve search engine rankings and website
performance.





LogoYes
Logo Design and Brand Building





LogoYes
services are purchased directly from the LogoYes.com website where customers can
build a custom, professional logo for their business as part of their
brand-building efforts.  Customers can also extend their brand identity by
ordering business cards through the LogoYes site.





Web.com’s
Do-It-Yourself customers can purchase LogoYes brand-building services directly
through their account control panel.  Additionally, we build logos for our
Do-It-For-Me customers using the LogoYes technology.





Solid Cactus Call
Center





Solid
Cactus Call Center services help eliminate for our customers the guess work and
costly overhead associated with hiring in-house customer service employees for
our customers.





Sale
of NetObjects Fusion





On May
26, 2009, we sold our NetObjects Fusion software business for an aggregate
of $4.0 million. We no longer consider the NetObjects Fusion license
software product core to our predominantly subscription business model. The
NetObjects Fusion software business enabled customers to build websites either
for themselves or for others. We have received a partial payment of
one million dollars in connection with the NetObjects Fusion sale. The remaining
$3.0 million of proceeds is expected to be paid over the next several years with
payments to us being based upon a formula based on estimated revenue, and we
expect the entire balance to be paid by May 26, 2013.





Technology




Our
hardware and software infrastructure provides an advanced set of integrated
tools for design, service, modifications, and billing. MatrixBuilder enables
website design, end user modification and administration, and includes a variety
of other tools accessible by our customers. Our Oracle-based proprietary
workflow processes and customer relationship management software, which we
developed internally, help ensure that our production staff provides timely and
efficient design services and helps us to efficiently and cost-effectively
manage our customer base.




Our
proprietary workflow processes and customer relationship management software
enable us to build, maintain, and track large numbers of customer websites. The
configuration of software and hardware includes six key modules:




•
            Account
      Management. The account management module facilitates the
      creation and maintenance of a customer account and the consolidation,
      either manually or electronically through external submission, of
      pertinent customer demographics, product specifics, and billing
      information. We track critical aspects of customer activity, which allows
      customer service representatives to have immediate access to a customer’s
      complete account history.




•
            Design Tool. Our
      design tool, MatrixBuilder, is browser-based, supports major Web services
      standards, and can be easily co-branded or private labeled for an
      organization with which we have a strategic relationship. MatrixBuilder is
      template-based, yet can provide thousands of different website styles by
      using hundreds of design templates that can be modified using a wide
      variety of color themes and graphics. The design tool generates the HTML
      code, so that manual coding is not required, and facilitates the
      generation of domain name registration, an eCommerce storefront, and a
      number of other extended and value added services that our customers can
      access from any Web browser.


11




•
            Workflow
      Module. The workflow module expedites service and product
      delivery by automatically determining the required production path, such
      as design, quality control, or submission to search engines, based on the
      specific attributes of the customer or service. The workflow module also
      controls production flow through our organization, enabling our design and
      customer support staff to individually service our website customers
      either by routing their work automatically to the correct department or
      handling the request themselves.




•
            Billing
      Module. The billing module enables us to bill our subscription
      and custom design customers directly or to bill a third party in the
      aggregate for its end users. The billing module is integrated with a
      number of transaction processing tools enabling support for many different
      payment types.




•
            Search Engine Marketing and
      Tracking System. We operate a proprietary publishing and
      tracking system that allows the automated building, publishing, and
      tracking of advertisement campaigns. These campaigns currently are
      published on Yahoo!, Google, SuperMedia.com (formerly Idearc and Verizon
      Superpages), Switchboard, Looksmart and other sites affiliated with these
      providers.




•
            Lead Generation. Our
      proprietary software application enables us to systematically manage the
      relationships and interactions with homeowners and contractors in our
      database, enhancing the efficiency and productivity of our sales and
      account management teams.




The
Web.com proprietary technology includes technologies that enable the company to
automate a number of back-end functions and technologies that allow customers to
order, change and manage their web hosting accounts easily online without
technical expertise.





Sales
Channels




Sales
of Subscription Services




Our sales
organization for our subscription Web services and products comprises several
distinct sales channels, including:




Outbound and Inbound
Telesales. The organizations with which we have strategic marketing
relationships provide us with lists of their small and medium-sized business
clients who meet a broad set of criteria. We also acquire lead lists directly
from other third parties. We analyze these customer lists to determine which of
these customers best match our criteria for long-term clients. Our sales
specialists call these prospective customers during regular business hours to
discuss their Web services needs. We believe the brand and affinity relationship
these prospective customers have with the parties with which we have strategic
marketing relationships enhances our ability to reach a decision maker, make a
presentation, have our offer considered, and close the sale during the initial
call. In addition, we maintain a separate team of sales specialists specifically
focused on responding to inbound inquiries generated by programs initiated by us
and the organizations with which we have strategic marketing relationships. We
and these organizations employ a mix of e-mail, direct mail, website, and other
marketing efforts to help promote our services to prospective
clients.





As of
December 31, 2009, we had 199 employees in our outbound and inbound
telesales units located in our sales centers in Spokane, Washington; Manassas,
Virginia; Jacksonville, Florida; Atlanta, Georgia; Scottsdale, Arizona; Barrie,
Ontario; Halifax, Nova Scotia; and Shavertown, Pennsylvania. With the benefit of
having conducted several years of outbound and inbound telesales activities, we
have significant management, business process, training, and product expertise
within our sales team. Additionally, we employ practices designed to optimize
the management of our employees and increase their sales
performance.




Reseller
Program. Several of the parties with which we have strategic
marketing relationships have their own direct sales organizations. We have
worked closely with these resellers to develop sales support and fulfillment
processes that integrate with the resellers’ sales, service, support, and
billing practices. Additionally, we provide these resellers with training and
sales materials to support the Web services being offered.




Online Channel. We promote
our services through the Web.com, Leads.com, RenovationExperts.com,
1ShoppingCart.com, Solidcactus.com, Submitawebsite.com, Logoyes.com and
Globenetix.com websites. To drive prospects to our sites, we engage in online
marketing and advertising campaigns, conduct targeted television campaigns to
reach homeowners for Renex and participate in seminars targeting small
businesses that wish to sell their services online. Our partners also promote
our services by including our products on their websites and by including our
services in their ongoing marketing and promotional efforts with their
customers.


12




Affiliate Network and Private Label
Partners. We sell our shopping cart and business automation solutions
through direct online channels and through approximately 3,000 affiliate and
private-label partners that market our services on our behalf. These partners
are provided with ongoing marketing and technical support to ensure a positive
customer experience for their end customers. Through Web.com, we have
approximately 5,000 affiliate partners that have the ability to sell our
Do-It-Yourself services.  We also have a network of direct resellers for
our hosting products.  We believe that these affiliate partners and
resellers provide additional opportunities to upsell and cross-sell our
Do-It-For-Me services.





Strategic
Marketing Relationships




A key
part of our sales strategy is to leverage the brand and distribution of
organizations with which we have strategic marketing relationships to sell our
Web services and products. We have developed strategic marketing relationships
with well-known, brand name companies. We create sales material with each of
these organizations, highlighting our Web services and products while also
leveraging their brand. Then, on behalf of these companies, we initiate programs
where our sales representatives directly contact their small and medium-sized
business customers using telesales solicitation, direct mail, and online
contact.





We offer
a number of benefits to the companies with whom we have established strategic
marketing relationships. First, they are able to increase their revenue through
the marketing fees paid by us. Second, we allow these companies to offer a
comprehensive solution for delivering Web services to their small and
medium-sized business customers. This can result in increased loyalty of their
customer base and an overall strengthening of their customer relationships.
Third, by providing our Web services to their customers through us, we enable
them to differentiate their offering from that of their
competitors.




Marketing




We engage
in a variety of marketing activities to increase awareness of our services and
products, to sell additional services and products to our existing customer
base, and to enhance the value we provide to small and medium-sized business
entities. Our marketing activities include:




•
            Targeted
      e-mail and direct response campaigns to prospects and
      customers;




•
            Search
      engine and other online
advertising;




•
            Electronic
      customer newsletters;




•
            Websites:
      Web.com, Leads.com, 1ShoppingCart.com,
      Renovationexperts.com,SolidCactus.com, Logoyes.com; Submitawebsite.com and
      Globenetix.com ;




•
            Online
      customer tutorials; and




•
            Affiliate
      programs.




Customers




We
generally target small and medium-sized businesses having fewer than 100
employees. These customers normally are focused on regional or local markets. We
seek to create long-term relationships with our customers, who cover a diverse
set of industries and geographies in the United States. As of December 31,
2009, we had approximately 275,000 subscribers to our eWorks! XL, SmartClicks,
and other subscription-based services.




We also
target small and medium-sized businesses with significant monthly spending on
local print yellow pages advertising. We seek to create long-term relationships
with these businesses by helping them locate new customers at a significantly
lower cost per lead compared to traditional print yellow pages marketing
campaigns.




Third-Party
Providers




We offer
some of our services to our customers through third-party technology vendors,
which helps us to expand our services and create additional revenue
opportunities.





We do not
have long-term contracts with any of these third parties. Accordingly, we or any
of these providers can terminate the relationship at any time, for any reason or
no reason, on short notice, often as little as 30 days. If any of these
relationships terminate, we may need to seek an alternative provider of services
or develop the covered services independently.


13




Competition




The
market for Web services is highly competitive and evolving. We expect
competition to increase from existing competitors as well as new market
entrants. Most existing competitors typically offer a limited number of
specialized solutions and services, but may provide a more comprehensive set of
services in the future. These competitors include, among others, website
designers, Internet service providers, Internet search engine providers, local
business directory providers, website domain name registrars, eCommerce service
providers, lead generation companies and hosting companies. These competitors
may have greater resources, more brand recognition, and larger installed bases
of customers than we do, and we cannot ensure that we will be able to compete
favorably against them.




We
believe the principal competitive factors in the small and medium-sized business
segment of the Web services and online marketing and lead generation industry
include:




•
            Ability
      to reference strategic partners;




•
            Value
      and flexibility of the service
offerings;




•
            Brand
      name and reputation;




•
            Price;




•
            Quality
      of customer support;




•
            Speed
      of customer service;




•
            Ease
      of implementation, use, and maintenance;
and




•
            Industry
      expertise and focus.




Intellectual
Property




Our
success and ability to compete is dependent in significant part on our ability
to develop and maintain the proprietary aspects of our technology and operate
without infringing upon the proprietary rights of others. We currently rely
primarily on a combination of copyright, trade secret and trademark laws,
confidentiality procedures, contractual provisions, and other similar measures
to protect our proprietary information. As of December 31, 2009, we owned
21 issued U.S. patents. We also have several additional patent applications
pending but not yet issued. Due to the rapidly changing nature of applicable
technologies, we believe that the improvement of existing offerings, reliance
upon trade secrets and unpatented proprietary know-how and development of new
offerings generally will continue to be our principal source of proprietary
protection. While we have hired third party contractors to help develop our
software and to design websites, we own the intellectual property created by
these contractors. Our software is not substantially dependent on any third
party software, although our software does utilize open source code.
Notwithstanding the use of this open source code, we do not believe our usage
requires public disclosure of our own source code nor do we believe the use of
open source code is material to our business.




We also
have an ongoing service mark and trademark registration program pursuant to
which we register some of our product names, slogans and logos in the United
States and in some foreign countries. License agreements for our software
include restrictions intended to protect our intellectual property. These
licenses are generally non-transferable and are perpetual. In addition, we
require all of our employees, contractors and many of those with whom we have
business relationships to sign non-disclosure and confidentiality agreements and
to assign to us in writing all inventions created while working for us. Some of
our products also include third-party software that we obtain the rights to use
through license agreements. In such cases, we have the right to distribute or
sublicense the third-party software with our products.




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




We
license, or lease from others, many technologies used in our services. We expect
that we and our customers could be subject to third-party infringement claims as
the number of websites and third party service providers for Web-based
businesses grows. Although we do not believe that our technologies or services
infringe the proprietary rights of any third parties, we cannot ensure that
third parties will not assert claims against us in the future or that these
claims will not be successful.


14





Employees




As of
December 31, 2009, we had a total of 788 employees.  None of our
employees are represented by unions. We consider the relationship with our
employees to be good and have not experienced interruptions of operations due to
labor disagreements.




Corporate
Information




Web.com
Group, Inc. was incorporated under the General Corporate Law of the State of
Delaware on March 2, 1999. Our principal offices are located at 12808 Gran
Bay Parkway West, Jacksonville, Florida 32258. Our telephone number is
(904) 680-6600 and our website is located at www.web.com. Our website and
the information contained therein or connected thereto shall not be deemed to be
incorporated into this Form 10-K.




We make
available free of charge on or through our Internet website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities Exchange
Commission (SEC).




You may
read and copy this Form 10-K at the SEC’s public reference room at 450 Fifth
Street, NW, Washington D.C. 20549. Information on the operation of the public
reference room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements and other information regarding our filings at
www.sec.gov.





Item 1A.
Risk Factors.




Depressed general economic conditions
or adverse changes in general economic conditions could adversely affect our
operating results. 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.




As our
business has grown, we have become increasingly subject to the risks arising
from adverse changes in domestic and global economic conditions. Uncertainty
about future economic conditions makes it difficult for us to forecast operating
results and to make decisions about future investments. For example, the
direction and relative strength of the global economy has recently been
increasingly uncertain due to softness in the residential real estate and
mortgage markets, volatility in fuel and other energy costs, difficulties in the
financial services sector and credit markets, continuing geopolitical
uncertainties and other macroeconomic factors affecting spending behavior. If
economic growth in the United States is slowed, or if other adverse general
economic changes occur or continue, many customers may delay or reduce
technology purchases or marketing spending. This could result in reductions in
sales of our Web services and products, longer sales cycles, and increased price
competition.





Our
existing and target customers are small and medium-sized businesses. We believe
these businesses are more likely to be significantly affected by economic
downturns than larger, more established businesses. For instance, the current
global financial crisis affecting the banking system and financial markets and
the possibility that financial institutions may consolidate or go out of
business have resulted in a tightening in the credit markets, which could limit
our customers’ access to credit. 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, or if they behave more conservatively in light of the general
economic environment, they may be unwilling or unable to expend resources to
develop their online presences, which would negatively affect the overall demand
for our services and products and could cause our revenue to
decline.





Most
of our Web services are sold on a month-to-month basis, and if our customers 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, 2009 and 2008, 35% and 46%, 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. The turnover rate
calculations do not include any acquisition related customer
activity.


15





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.





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-compete
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 Solid Cactus
acquisition in April 2009. Integrating this recently acquired business 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 these current acquisitions, or any future acquisitions could
seriously harm our business.


16


We
may not realize the anticipated benefits from an acquisition.





Acquisitions
involve the integration of companies that have previously operated
independently. We expect that acquisitions may result in financial and
operational benefits, including increased revenue, cost savings and other
financial and operating benefits. We cannot be certain, however, that we will be
able to realize increased revenue, cost savings or other benefits from any
acquisition, or, to the extent such benefits are realized, that they are
realized timely. 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. We may 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 may be dissimilar. Difficulties
associated with integrating an acquisition’s service and product offering into
ours, or with integrating an acquisition’s operations into ours, could have a
material adverse effect on the combined company and the market price of our
common stock.





Charges
to earnings resulting from acquisitions may adversely affect our operating
results.





Under
purchase accounting, we allocate 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. Our 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 our 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 of our pre-merger activities that duplicate
      those of the acquired company or to reduce our cost
    structure.





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 our net income and earnings per share for the
periods in which those adjustments are made.




Though
we were profitable for the years ended December 31, 2005, 2006, 2007 and 2009,
we were not profitable for the year ended December 31, 2008 and we may not
become or stay profitable in the future.




Although
we generated net income for the years ended December 31, 2005, 2006, 2007, and
2009, we have not historically been profitable, were not profitable for the year
ended December 31, 2008, and may not be profitable in future
periods.  As of December 31, 2009, we had an accumulated deficit of
approximately $151.4 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 again achieve and, if
achieved, to later maintain 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.




We
depend on our strategic marketing relationships to identify prospective
customers. The loss of several 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 10% of our new customers in the year ended December 31, 2009
and approximately 18% of our new customers in the year ended December 31,
2008, were identified through our 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.


17




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;





•
            ability
      to successfully integrate acquired businesses and technologies;
      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, and in light of current global and U.S. economic
conditions, 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
online presence needs, such as Internet search optimization, local yellow pages
listings, and eCommerce 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.


18


We
have a risk of system and Internet 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.





We must
be able to operate the systems that manage our network around the clock without
interruption. Its operations will depend upon our 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. Our 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, we have experienced periodic
interruptions in service. We have also experienced, and in the future we 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, Jacksonville, Florida, and Ontario, Canada.
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;


19




•
            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 online 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.


20




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.




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




Growth in
our business may 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. Growth in our employee base may be required to expand our customer
base and to continue to develop and enhance our Web service and product
offerings. To manage growth of our operations and personnel, we would need to
enhance our operational, financial, and management controls and our reporting
systems and procedures. This would require additional personnel and capital
investments, which would 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. While we do rely on patents acquired from the Web.com
acquisition, we do not currently rely on patents to protect all of our core
intellectual property. 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, 2009 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.


21


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.Financial market disruption and general
economic conditions in which the credit markets are severely constrained and the
depressed equity markets may make it difficult for us to obtain additional financing on terms
favorable to us, if at all. 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. 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
      662/3%
      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.




Item 1B.
Unresolved Staff Comments.




None.




Item 2.
Properties.




The
Company owns a 32,780 square foot building in Spokane, Washington, in which
a Web services sales center is located.  In addition, we lease the
following principal facilities:





Location
                                                
                                                Square
                                                  Feet
                                                
                                                Lease ExpirationHeadquarters
      and principal administrative, finance, and marketing
      operations
                                                
                                                Jacksonville, FL
                                                
                                                
                                                112,306
                                                
                                                July
      2019Sales
      center
                                                
                                                Manassas,
      VA
                                                
                                                
                                                6,000
                                                
                                                September 2010Sales
      center
                                                
                                                Norton,
      VA
                                                
                                                
                                                5,467
                                                
                                                November
      2010Sales
      center
                                                
                                                Barrie,
      Ontario,
                                                  Canada
                                                
                                                
                                                8,301
                                                
                                                May
      2012Lead
      Generation operations center
                                                
                                                Halifax, Nova Scotia,
                                                  Canada
                                                
                                                
                                                1,240
                                                
                                                September
      2010Search
      Engine Optimization operations center
                                                
                                                Scottsdale,
      AZ
                                                
                                                
                                                8,280
                                                
                                                March
      2011DIY
      and Hosting operations center
                                                
                                                Atlanta,
      GA
                                                
                                                
                                                27,482
                                                
                                                July
      2010DIFM
      operations center
                                                
                                                Houston,
      TX
                                                
                                                
                                                2,251
                                                
                                                April
      2010eCommerce operations
      center
                                                
                                                Shavertown,
      PA
                                                
                                                
                                                15,641
                                                
                                                March
      2013Sales
      center
                                                
                                                Wilkes
      Barre, PA
                                                
                                                
                                                5,587
                                                
                                                March
      2010


22





Item 201
(e). Performance Graph.





The
following graph shows the total stockholder return as of the dates indicated of
an investment of $100 in cash on November 2, 2005 (the date the Company’s common
stock was first publicly traded) for (i) the Company’s common stock, (ii) the
Nasdaq Composite Index and (iii) the RDG Internet Composite Index. All values
assume reinvestment of the full amount of any dividends, however, no dividends
have been declared on our common stock to date. The stock price performance on
the graph below is not necessarily indicative of future
performance.




COMPARISON
OF 4 YEAR CUMULATIVE TOTAL RETURN*
 Among
Web.com Group, Inc., The NASDAQ Composite Index
 And The
RDG Internet Composite Index









*$100
invested on 11/2/05 in stock or 10/31/05 in index, including reinvestment of
dividends.


Fiscal
year ending December 31.





(1) This
Section is not “soliciting material,” is not deemed “filed” with the SEC and is
not to be incorporated by reference in any filing of the Company under the 1933
Act or the 1934 Act whether made before or after the date hereof and
irrespective of any general incorporation language in any such
filing.





(2) This
table dates back to November 2, 2005, the first date on which the Company’s
stock was publicly


23





Item 3.
Legal Proceedings.




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




On
August 2, 2006, Web.com Holding 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
Holding pertaining to events in 2001. Web.com Holding 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. These
actions were consolidated in state court in Pennsylvania on September 30, 2008.
On October 1, 2009, the parties entered into a confidential settlement agreement
which resolved the lawsuit.  The settlement did not have a material impact
to the Consolidated Financial Statements.




On June
19, 2006, Web.com Holding 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 Holdings’ patents. On January 8, 2009, the parties entered into a
confidential settlement and patent cross-licensing agreement, which resolved the
lawsuit. The revenue derived from the sale of the patent license is reflected in
other revenue for the year ended December 31, 2009.





The
outcome of any litigation cannot be assured, and despite management’s views of
the merits of any litigation, or the reasonableness of the Company’s estimates
and reserves, the Company’s cash balances could nonetheless be materially
affected by an adverse judgment. In accordance with ASC 450, Contingencies, the Company
believes it has adequately reserved for the contingencies arising from the
current legal matters where an outcome was deemed to be probable and the loss
amount could be reasonably estimated. As such, the Company does not believe that
the anticipated outcome of any current litigation will have a materially adverse
impact on its financial condition, cash flows, or results of
operations.




Item 4.
(Removed and Reserved).


24




PART
II




Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.




Market
Information




Since
October 27, 2008, our common stock has been listed on the NASDAQ Global Market
under the symbol “WWWW”. Prior to such time, since November 1, 2005, our
common stock has been listed on the NASDAQ Global Market under the symbol
“WSPI”. Prior to November 1, 2005, there was no public market for our common
stock. The following table sets forth the high and low stock prices of our
common stock for the last two fiscal years as reported on the NASDAQ Global
Market.




2009
                        
                        
                        2008High
                        
                        
                        Low
                        
                        
                        High
                        
                        
                        LowFirst
      Quarter
                        
                        $
                        4.07
                        
                        
                        $
                        2.30
                        
                        
                        $
                        12.00
                        
                        
                        $
                        8.75Second
      Quarter
                        
                        $
                        5.88
                        
                        
                        $
                        3.10
                        
                        
                        $
                        10.39
                        
                        
                        $
                        7.35Third
      Quarter
                        
                        $
                        7.93
                        
                        
                        $
                        5.15
                        
                        
                        $
                        8.30
                        
                        
                        $
                        4.91Fourth
      Quarter
                        
                        $
                        7.89
                        
                        
                        $
                        5.60
                        
                        
                        $
                        5.51
                        
                        
                        $
                        2.05




The
closing price for our common stock as reported by the NASDAQ Global Market on
February 26, 2010 was $4.76 per share. As of February 26, 2010, there
were approximately 538 stockholders of record of our common stock, not including
those shares held in street or nominee name.




Dividend
Policy




We have
never declared or paid any cash dividends on our capital stock. We currently
intend to retain any future earnings to fund the development and expansion of
our business, and therefore we do not anticipate paying cash dividends on our
common stock in the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors. None of our
outstanding capital stock is entitled to any dividends.




Issuer
Purchases of Equity Securities




On
September 4, 2008, we announced that our Board of Directors authorized the
repurchase of up to $20 million of the Company’s outstanding common shares over
the next eighteen months. On March 3, 2010, the Board of Directors extended the
repurchase program for an additional twelve months. The timing, price and volume
of repurchases will be based on market conditions, liquidity, relevant
securities laws and other factors.  The Company may terminate the
repurchase program at any time without notice.




The
Company did not repurchase any outstanding common shares during the three months
ended December 31, 2009. The remaining maximum dollar value that may be
purchased under the plan is $7.8 million.





Item 6.
Selected Financial Data.




Year Ended
      December 31,2009(1)(2)
                      
                      
                      2008(1)(3)
                      
                      
                      2007(1)
                      
                      
                      2006(2)
                      
                      
                      2005(in
      thousands, except per share data)Consolidated
      Statement of Operations Data:Revenues
                      
                      $
                      106,489
                      
                      
                      $
                      120,114
                      
                      
                      $
                      80,084
                      
                      
                      $
                      48,456
                      
                      
                      $
                      33,912(Loss)
      income from operations
                      
                      
                      (93
                      )
                      
                      
                      (97,077
                      )
                      
                      
                      1,618
                      
                      
                      
                      1,482
                      
                      
                      
                      (350
                      )Net
      income (loss) from continuing operations
                      
                      
                      1,569
                      
                      
                      
                      (96,380
                      )
                      
                      
                      1,479
                      
                      
                      
                      7,082
                      
                      
                      
                      (1,104
                      )Net
      income (loss) from discontinued operations
                      
                      
                      1,040
                      
                      
                      
                      170
                      
                      
                      
                      (121
                      )
                      
                      
                      1,515
                      
                      
                      
                      775Net
      income (loss) attributable to common stockholders
                      
                      
                      2,609
                      
                      
                      
                      (96,210
                      )
                      
                      
                      1,358
                      
                      
                      
                      8,597
                      
                      
                      
                      (329
                      )Basic
      net income (loss) from continuing operations attributable per common
      share
                      
                      $
                      0.06
                      
                      
                      $
                      (3.52
                      )
                      
                      $
                      0.08
                      
                      
                      $
                      0.42
                      
                      
                      $
                      (0.18
                      )Basic
      net income (loss) from discontinued operations attributable per common
      share
                      
                      $
                      0.04
                      
                      
                      $
                      0.01
                      
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.09
                      
                      
                      $
                      0.13Basic
      net income (loss) attributable per common share
                      
                      $
                      0.10
                      
                      
                      $
                      (3.51
                      )
                      
                      $
                      0.07
                      
                      
                      $
                      0.51
                      
                      
                      $
                      (0.05
                      )Diluted
      net income (loss) from continuing operations attributable per common
      share
                      
                      $
                      0.06
                      
                      
                      $
                      (3.52
                      )
                      
                      $
                      0.07
                      
                      
                      $
                      0.36
                      
                      
                      $
                      (0.18
                      )Diluted
      net income (loss) from discontinued operations attributable per common
      share
                      
                      $
                      0.04
                      
                      
                      $
                      0.01
                      
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.08
                      
                      
                      $
                      0.13Diluted
      net income (loss) attributable per common share
                      
                      $
                      0.10
                      
                      
                      $
                      (3.51
                      )
                      
                      $
                      0.06
                      
                      
                      $
                      0.44
                      
                      
                      $
                      (0.05
                      )Basic
      weighted average common shares outstanding
                      
                      
                      25,312
                      
                      
                      
                      27,398
                      
                      
                      
                      19,802
                      
                      
                      
                      16,778
                      
                      
                      
                      6,222Diluted
      weighted average common shares outstanding
                      
                      
                      26,985
                      
                      
                      
                      27,398
                      
                      
                      
                      22,224
                      
                      
                      
                      19,430
                      
                      
                      
                      6,222


25





As of
      December 31,2009(1)(2)
                      
                      
                      2008(1)(3)
                      
                      
                      2007(1)
                      
                      
                      2006(2)
                      
                      
                      2005(in
      thousands)Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                      
                      $
                      39,427
                      
                      
                      $
                      34,127
                      
                      
                      $
                      29,746
                      
                      
                      $
                      42,155
                      
                      
                      $
                      55,746Working
      capital
                      
                      
                      32,171
                      
                      
                      
                      23,971
                      
                      
                      
                      16,525
                      
                      
                      
                      39,534
                      
                      
                      
                      51,535Total
      assets
                      
                      
                      122,885
                      
                      
                      
                      122,495
                      
                      
                      
                      235,013
                      
                      
                      
                      93,360
                      
                      
                      
                      76,370Long-term
      note payable and obligations under capital leases
                      
                      
                      198
                      
                      
                      
                      —
                      
                      
                      
                      59
                      
                      
                      
                      194
                      
                      
                      
                      241Accumulated
      deficit
                      
                      
                      (151,405
                      )
                      
                      
                      (154,014
                      )
                      
                      
                      (57,804
                      )
                      
                      
                      (59,162
                      )
                      
                      
                      (67,759
                      )Total
      stockholders’ equity (deficit)
                      
                      
                      103,696
                      
                      
                      
                      99,293
                      
                      
                      
                      196,431
                      
                      
                      
                      83,956
                      
                      
                      
                      68,355





(1)
            See
      Note 6 to the Consolidated Financial Statements for information regarding
      businesses acquired during the years ended December 31, 2009, 2008
      and 2007.


(2)
            Included
      in the net income for the year ended December 31, 2006 and 2009,
      respectively, is a tax benefit of $3.2 million and $1.4 million,
      respectively, which was the result of a reduction in the deferred tax
      asset reserve allowance.


(3)
            Included
      in the net loss for the year ended December 31, 2008 is a goodwill and
      intangible asset impairment charge of $102.6 million. The primary reason
      for the impairment charge was the decline of the Company’s stock price
      during the fourth quarter of 2008.




Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operation.




Safe
Harbor




In
addition to historical information, this Form 10-K 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 Item 1A. above and 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-K. Generally, the
words “anticipate”, “expect”, “intend”, “believe” and similar expressions
identify forward-looking statements. The forward-looking statements made in this
Form 10-K are made as of the filing date of this Form 10-K 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. In the following discussion and analysis of
results of operations and financial condition, certain financial measures may be
considered “non-GAAP financial measures” under Securities and Exchange
Commission rules. These rules require supplemental explanation and
reconciliation, which is provided in this Annual Report on Form
10-K.





We
believe presenting non-GAAP net income attributable to common stockholders,
non-GAAP net income per share attributable to common stockholders and non-GAAP
operating income is useful to investors, because it describes the operating
performance of the company and helps investors gauge the company’s ability to
generate cash flow, excluding some recurring charges that are included in the
most directly comparable measures calculated and presented in accordance with
GAAP.  We use these non-GAAP measures as important indicators of our past
performance and in planning and forecasting performance in future periods. The
non-GAAP financial information we present may not be comparable to
similarly-titled financial measures used by other companies, and investors
should not consider non-GAAP financial measures in isolation from, or in
substitution for, financial information presented in compliance with
GAAP.




Overview




We are a
leading provider of Do-It-For-Me and Do-It-Yourself website building tools,
online marketing, lead generation and technology solutions that enable small and
medium-sized businesses to build and maintain an effective online presence. We
offer a full range of online services, including online marketing and
advertising, local search, search engine marketing, search engine optimization,
lead generation, home contractor specific leads, website design and publishing,
logo and brand development and eCommerce solutions, meeting the needs of small
businesses anywhere along their lifecycle.


26





Our
primary offerings, eWorks! XL and SmartClicks, are comprehensive
performance-based packages that include website design and publishing, online
marketing and advertising, search engine optimization, search engine submission,
lead generation, hosting and email solutions, 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 eCommerce
solutions and other sophisticated online 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 online
presence with more sophisticated marketing and lead generation services.
Additionally, as the Internet continues to evolve, we plan to 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 275,000
subscribers to our eWorks! XL, SmartClicks, and subscription-based services as
of December 31, 2009, 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 online presence.




We
traditionally have sold 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 that utilizes leads generated by our strategic marketing
relationships to acquire new customers at our sales centers in Spokane,
Washington; Atlanta, Georgia; Jacksonville, Florida; Manassas, Virginia; Norton,
Virginia; Halifax, Nova Scotia; Barrie, Ontario; and Scottsdale, Arizona. 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.




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.


27




Sources
of Revenue




We derive our revenue from sales of a
variety of services to small and medium-sized businesses, including web design,
online marketing, search engine optimization, eCommerce solutions, logo design
and home contractor lead services. Leads are generated through online
advertising campaigns targeting customers in need of web design, hosting or
online marketing solutions, through strategic partnerships with enterprise
partners, or through our corporate websites.





Subscription
Revenue




We
currently derive a substantial majority of our revenue from fees associated with
our subscription services, which are generally sold through our eWorks! XL,
SmartClicks, Visibility Online, Web.com, Renex, 1ShoppingCart.com, and Solid
Cactus offerings. A significant portion 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.





The
Web.com product line subscription revenue is primarily generated from shared
hosting, managed services, eCommerce services, applications hosting and domain
name registrations. Revenue is recognized as the services are provided. Hosting
contracts generally are for service periods ranging from one to 24 months and
typically require up-front fees. These fees, including set-up fees for hosting
services, are deferred and recognized ratably over the customer’s expected
service period. Deferred revenue represents the liability for advance billings
to customers for services not yet provided.





For the
year ended December 31, 2009, subscription revenue accounted for
approximately 96% of our total revenue as compared to 98% and 97% for the years
ended December 31, 2008 and 2007, respectively. 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.




Professional
Services Revenue




We
generate professional services revenue from custom website design, eCommerce
store design, and Do-it-Yourself logo design. Our custom website design and
eCommerce store design work is typically billed on a fixed price basis and over
very short periods. Our Do-It-Yourself logo design is typically billed upon the
point-of-sale of the final product, which is created by the
customer.





Other
Revenue





We
occasionally generate revenue from the sale of perpetual licenses for use of our
patents. Other revenue consists of all fees earned from granting customers
licenses to use our patents.




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.


28





Cost
of Professional Services Revenue




Cost of
professional services revenue primarily consists of compensation expenses
related to our Web page development staff, eCommerce store design, logo design,
and allocated overhead costs. While in the near term, we expect to maintain or
reduce costs in this area, in the long term, we may add additional resources in
this area to support the growth in our professional services and custom design
functions.




Operating
Expenses




Sales
and Marketing Expense




Our
largest direct marketing expense are the costs associated with the online
marketing channels we use to acquire and promote our services. These channels
include search marketing, affiliate marketing and online partnerships. Sales
costs 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.




As market
conditions improve, 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. Accordingly, we expect
that, in the future, sales and marketing expenses will increase in absolute
dollars.




Research
and Development Expense




Research
and development expenses consist primarily of salaries and related expenses for
our research and development staff 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,
building and other intangible assets recorded due to the acquisitions we have
completed.




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations are
based on our 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 and estimates are described in more detail in Note 1 to our
consolidated financial statements included in this report, we believe the
following accounting policies to be critical to the judgments and estimates used
in the preparation of our consolidated financial statements.


29




Revenue
Recognition




We
recognize revenue in accordance with ASC 605 Revenue Recognition. 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.




Professional
services revenue is generated from custom website design, eCommerce store
design, and Do-it-Yourself logo design. 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 Do-It-Yourself logo design is typically billed
upon the point-of-sale of the final product, which is created by the
customer.




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 ASC 605-25 Revenue Recognition:
Multiple-Element Arrangement. 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 ASC 718, Compensation – Stock
Compensation. Stock-based compensation is amortized over the related
vesting periods.




We
granted to our employees options to purchase common stock at exercise prices
equal to the quoted market values of the underlying stock at the time of each
grant. Upon granting options to our employees, we valued the fair value of each
option award, on the date of the grant, using the Black Scholes option valuation
model.




Goodwill
and Intangible Assets




In
accordance with ASC 350 Intangibles - Goodwill and
Other, 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, developed technology and non-compete agreements, and they are
amortized using the straight-line method over the periods benefited, which is up
to eight 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. During the year ended December 31,
2009, we completed our annual impairment test of goodwill and other indefinite
lived intangible assets. The results of this test determined that goodwill and
other indefinite lived intangible assets were not impaired at December 31, 2009.
See Note 9 “Goodwill and Intangible Assets” in the consolidated financial
statements for additional information on goodwill and intangible
assets.


30




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. Management weighed several factors in
determining the fair value of amortizable intangibles, which primarily consists
of customer relationships, non-compete agreements, trade names, and developed
technology, including using valuation studies as one of many tools in
determining the fair value of amortizable intangibles.




Provision
for Income Taxes




The
Company accounts for income taxes under the provisions of ASC 740Income Taxes, using the
liability method. ASC 740 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the difference is expected to reverse.
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 a liability when we believe that
it is probable that a liability exists and that the liability is
measurable.




In
accordance with ASC 740, the Company annually evaluates the need for a valuation
allowance on its deferred tax assets based on cumulative profits generated in
the most recent three-year period as well as other positive evidence. As a
result of this evaluation, the Company recognized a net tax benefit of $1.4
million for the year ended December 31, 2009. There was no adjustment to the
valuation allowance necessary for the year ended December 31, 2008.





In
addition, we believe that we have fully reserved for any tax uncertainties in
accordance with ASC 740,
Income Taxes, which clarifies the accounting for uncertainty in income
tax positions recognized in financial statements. However, if actual results
differ from our estimates, we will adjust the tax provision in the period the
tax uncertainty is realized.




Results
of Operations




The
following table presents our selected consolidated statement of operations data
for the periods indicated (in thousands):




Year Ended December 31,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007Revenue:Subscription
                                                                  
                                                                  $
                                                                  102,166
                                                                  
                                                                  
                                                                  $
                                                                  117,256
                                                                  
                                                                  
                                                                  $
                                                                  77,676Professional
      services
                                                                  
                                                                  
                                                                  3,323
                                                                  
                                                                  
                                                                  
                                                                  2,758
                                                                  
                                                                  
                                                                  
                                                                  2,408Other
                                                                  
                                                                  
                                                                  1,000
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  —Total
      revenue
                                                                  
                                                                  
                                                                  106,489
                                                                  
                                                                  
                                                                  
                                                                  120,114
                                                                  
                                                                  
                                                                  
                                                                  80,084Cost
      of revenue (excluding depreciation and amortization shown separately
      below):Subscription
                                                                  
                                                                  
                                                                  38,311
                                                                  
                                                                  
                                                                  
                                                                  42,584
                                                                  
                                                                  
                                                                  
                                                                  32,381Professional
      services
                                                                  
                                                                  
                                                                  2,081
                                                                  
                                                                  
                                                                  
                                                                  1,310
                                                                  
                                                                  
                                                                  
                                                                  1,299Total
      cost of revenue
                                                                  
                                                                  
                                                                  40,392
                                                                  
                                                                  
                                                                  
                                                                  43,894
                                                                  
                                                                  
                                                                  
                                                                  33,680Gross
      profit
                                                                  
                                                                  
                                                                  66,097
                                                                  
                                                                  
                                                                  
                                                                  76,220
                                                                  
                                                                  
                                                                  
                                                                  46,404Operating
      expenses:Sales
      and marketing
                                                                  
                                                                  
                                                                  23,338
                                                                  
                                                                  
                                                                  
                                                                  28,687
                                                                  
                                                                  
                                                                  
                                                                  18,655Research
      and development
                                                                  
                                                                  
                                                                  8,477
                                                                  
                                                                  
                                                                  
                                                                  8,888
                                                                  
                                                                  
                                                                  
                                                                  3,921General
      and administrative
                                                                  
                                                                  
                                                                  19,140
                                                                  
                                                                  
                                                                  
                                                                  19,390
                                                                  
                                                                  
                                                                  
                                                                  16,513Restructuring
      charges
                                                                  
                                                                  
                                                                  1,940
                                                                  
                                                                  
                                                                  
                                                                  372
                                                                  
                                                                  
                                                                  
                                                                  243Depreciation
      and amortization
                                                                  
                                                                  
                                                                  13,295
                                                                  
                                                                  
                                                                  
                                                                  13,408
                                                                  
                                                                  
                                                                  
                                                                  5,454Goodwill
      and asset impairment
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  102,552
                                                                  
                                                                  
                                                                  
                                                                  —Total
      operating expenses
                                                                  
                                                                  
                                                                  66,190
                                                                  
                                                                  
                                                                  
                                                                  173,297
                                                                  
                                                                  
                                                                  
                                                                  44,786(Loss)
      income from operations
                                                                  
                                                                  
                                                                  (93
                                                                  )
                                                                  
                                                                  
                                                                  (97,077
                                                                  )
                                                                  
                                                                  
                                                                  1,618Interest,
      net
                                                                  
                                                                  
                                                                  233
                                                                  
                                                                  
                                                                  
                                                                  822
                                                                  
                                                                  
                                                                  
                                                                  1,938Income
      (loss) before income taxes from continuing operations
                                                                  
                                                                  
                                                                  140
                                                                  
                                                                  
                                                                  
                                                                  (96,255
                                                                  )
                                                                  
                                                                  
                                                                  3,556Income
      tax benefit (expense)
                                                                  
                                                                  
                                                                  1,429
                                                                  
                                                                  
                                                                  
                                                                  (125
                                                                  )
                                                                  
                                                                  
                                                                  (2,077
                                                                  )Net
      income (loss) from continuing operations
                                                                  
                                                                  
                                                                  1,569
                                                                  
                                                                  
                                                                  
                                                                  (96,380
                                                                  )
                                                                  
                                                                  
                                                                  1,479Discontinued
      operationsIncome
      (loss) from discontinued operations, net of tax
                                                                  
                                                                  
                                                                  232
                                                                  
                                                                  
                                                                  
                                                                  170
                                                                  
                                                                  
                                                                  
                                                                  (121
                                                                  )Gain
      on sale of discontinued operations, net of tax
                                                                  
                                                                  
                                                                  808
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Income
      (loss) from discontinued operations, net of tax
                                                                  
                                                                  
                                                                  1,040
                                                                  
                                                                  
                                                                  
                                                                  170
                                                                  
                                                                  
                                                                  
                                                                  (121
                                                                  )Net
      (loss) income
                                                                  
                                                                  
                                                                  2,609
                                                                  
                                                                  
                                                                  
                                                                  (96,210
                                                                  )
                                                                  
                                                                  
                                                                  1,358


31





The following table sets
forth, for each component of revenue, the cost of the revenue expressed as a
percentage of the related revenue for each of the periods
indicated:




Year Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Cost
      of subscription revenue
                      
                      
                      37
                      %
                      
                      
                      36
                      %
                      
                      
                      42
                      %Cost
      of professional services revenue
                      
                      
                      63
                      
                      
                      
                      47
                      
                      
                      
                      54




Comparison
of Years Ended December 31, 2009 and 2008




Total
revenue decreased 11% to $106.5 million in the year ended December 31, 2009
from $120.1 million in the year ended December 31, 2008. Total revenue
during the year ended December 31, 2009 declined primarily due to decreases in
our average revenue per subscriber as compared to the same period of the prior
year.




Subscription Revenue.
Subscription revenue decreased 13% to $102.2 million in the year ended
December 31, 2009 from $117.3 million in the year ended December 31,
2008. Subscription revenue decreased approximately $17.5 million primarily due
to decreases in our average revenue per subscriber as compared to the prior
year, which was slightly offset by additional revenue of $3.2 million from our
recent acquisition. The decrease in average revenue per subscriber was mainly
due to the addition of lower revenue subscribers from our Do-It-Yourself website
building and hosting products as well as a reduction in spending by our
enterprise partner subscribers.





Net
subscribers increased 9,368 during the year ended December 31, 2009, compared to
an increase of 2,393 in the year ended December 31, 2008. The average monthly
turnover decreased to 3.6% in the year ended December 31, 2009 from 4.0% in the
year ended December 31, 2008. Due to the current economic conditions and lower
marketing spend, gross subscriber additions were down from 150,017 during the
year ended December 31, 2008 to 139,521 during the year ended December 31,
2009.





Professional Services
Revenue. Professional services revenue increased 20% to $3.3 million in
the year ended December 31, 2009 from $2.8 million in the year ended
December 31, 2008. Professional services revenue increased approximately
$1.9 million from the additional service offerings of eCommerce store design and
logo design that were acquired as part of our recent acquisitions, which was
partially offset by a decrease of $915 thousand and $348 thousand in search
engine optimization services and custom design services,
respectively.





Other Revenue. Other revenue
increased to $1.0 million in the year ended December 31, 2009 from $100
thousand in the year ended December 31, 2008. This revenue was earned by
the sale of a perpetual license for the use of our patents.


32




Cost
of Revenue




Cost of Subscription Revenue.
Cost of subscription revenue decreased 10% to $38.3 million in the year ended
December 31, 2009 from $42.6 million in the year ended December 31,
2008. During the year ended December 31, 2009, we reduced costs by approximately
$4.3 million, driven by the decline of our subscription revenue and offset by
additional expense of $1.7 million due to the revenue associated with our recent
acquisition. In addition, as a lesser percentage of our sales came from our
strategic marketing relationships, fees related to these relationships decreased
by $1.6 million during the year ended December 31, 2009. Our gross margin on
subscription revenue declined slightly to 63% during the year ended December 31,
2009 from 64% during the year ended December 31, 2008.




Cost of Professional Services
Revenue. Cost of professional services revenue increased 59% to $2.1
million in the year ended December 31, 2009 from $1.3 million in the year
ended December 31, 2008. The increase was primarily the result of the
additional costs of approximately $1.1 million related to the eCommerce store
design revenue, which was partially offset by a reduction of $305 thousand in
payroll expenses. Gross margin on professional services revenue decreased to 37%
for the year ended December 31, 2009 as compared to 53% for the year ended
December 31, 2008. The decrease of gross margin was a result of the lower gross
margins of our new offerings due to the recent acquisition.





Operating
Expenses




Sales and Marketing Expenses.
Sales and marketing expenses decreased 19% to $23.3 million, or 22% of total
revenue, during the year ended December 31, 2009 from $28.7 million, or 24%
of total revenue, during the year ended December 31, 2008. The decrease of
$5.3 million in sales and marketing expenses was primarily the result of a
reduction in online marketing spending during the year, as well as, a reduction
in sales resources. Specifically, we experienced reductions in marketing and
advertising expense of $2.7 million and employee compensation and benefits
expense of $3.0 million, which was offset slightly by costs associated with our
recent acquisition of $744 thousand.





Research and
Development Expenses.Research and development expenses decreased 5% to $8.5 million, or 8% of total
revenue, during the year ended December 31, 2009 from $8.9 million, or 7%
of total revenue, during the year ended December 31, 2008. During the year
ended December 31, 2009, there was an overall decrease in employee compensation
and benefits expense totaling $492 thousand, in addition to the reduction of
costs associated with subcontracted labor totaling $133 thousand, which were
offset in part by costs associated with our recent acquisition of $217
thousand.





General and Administrative
Expenses. General and administrative expenses decreased 1% to $19.1
million, or 18% of total revenue, during the year ended December 31, 2009
from $19.4 million, or 16% of total revenue, during the year ended
December 31, 2008. Although costs remained relatively consistent during the
year ended December 31, 2009, the Company had increases for additional legal
expenses of $436 thousand, which were primarily associated with the sale of a
perpetual license, in addition to, increases in employee compensation and stock
compensation of $732 thousand. The Company also had additional expenses of $865
thousand due to the costs associated with our recent acquisition. These
increases in general and administrative expenses were reduced by reserve
adjustments of $987 thousand that the Company determined are no longer probable
due to the expiration of the statute of limitations and other legal resolutions.
In addition, due to current economic conditions, we proactively reduced our
overall general and administrative expenses.





Restructuring charges.Restructuring charges increased 422% to $1.9 million, or 2% of total
revenue, during the year ended December 31, 2009 from $372 thousand, or less
than 1% of total revenue, during the year ended December 31, 2008. During the
year ended December 31, 2009, the Company recorded aggregate charges of $1.9
million for restructuring costs, which included approximately $1.2 million of
stock compensation expense. In connection with the completion of the integration
of the Web.com acquisition, the Company terminated certain employees and
recorded related termination benefits, which increased restructuring
charges.




Depreciation and
Amortization Expense.Depreciation and amortization expense decreased 1% to $13.3 million, or 12% of
total revenue, during the year ended December 31, 2009 from $13.4 million,
or 11% of total revenue, during the year ended December 31, 2008.
Amortization and depreciation expenses are predominantly a result of tangible
and intangible assets acquired.





Goodwill and Asset Impairment.During the year ended December 31, 2009, based on our annual impairment
test of goodwill and other indefinite lived intangible assets, there were no
indicators of impairment.However, during the year
ended December 31, 2008, the Company completed its annual impairment test of
goodwill and other indefinite lived intangible assets and determined there was
an impairment. The Company recorded a goodwill and intangible asset impairment
charge of $102.6 million. The primary reason for the impairment charge was the
decline of our stock price during the fourth quarter of 2008.


33





Net Interest Income.Net
interest income decreased 72% to $233 thousand, or less than 1% of total
revenue, during the year ended December 31, 2009 from $822 thousand, or 1%
of total revenue, during the year ended December 31, 2008. The decrease in
interest income was due to a reduction in the interest rates of our investment
instruments.




Income tax benefit (expense).Income tax benefit increased to $1.4 million during the year ended
December 31, 2009 as compared to the income tax expense of $125 thousand during
the year ended December 31, 2008. The Company reevaluated the valuation
allowance on its deferred tax assets as a result of cumulative taxable income
generated in the most recent three-year period, forecasts of future taxable
income as well as other positive evidence. The Company’s tax rate for the years
ended December 31, 2009 and 2008 were (121.2%) and 0.1%, respectively.  The
increase in the tax benefit and decrease in tax rate was due to the net effect
of the release of the valuation allowance.




Discontinued operations. On
May 26, 2009, the Company sold its NetObjects Fusion software business for
approximately $4.0 million. The remaining $3.0 million of proceeds is expected
to be paid over the next several years using a formula based on estimated
revenue, with the entire balance expected to be paid by May 26, 2013. The
remaining proceeds will be recorded as a gain in discontinued operations as cash
payments are received. During the year ended December 31, 2009, the net gain of
$808 thousand is included in “Gain on sale of discontinued operations, net of
tax” on the Company’s Consolidated Statement of Operations. For the year ended
December 31, 2009 and 2008, the revenue generated by the NetObjects Fusion
software business was $428 thousand and $2.5 million and net income  was
$232 thousand and $170 thousand, respectively.





Comparison
of Years Ended December 31, 2008 and 2007




Total
revenue increased 50% to $120.1 million in the year ended December 31, 2008
from $80.1 million in the year ended December 31, 2007.




Subscription Revenue.
Subscription revenue increased 51% to $117.3 million in the year ended
December 31, 2008 from $77.7 million in the year ended December 31,
2007. The increase in subscription revenue was primarily the result of $36.5
million of additional revenue from the acquisition of Web.com as well as an
increase of $4.2 million due to the growth of the average number of customers
over the prior year. These increases were partially offset by the $1.1 million
impact of a decrease in our average revenue per subscriber as compared to the
prior year. The decrease in average revenue per subscriber was due to the
addition of lower revenue subscribers from our Do-It-Yourself website building
and hosting products as well as a reduction in spending by our enterprise
partner subscribers.





Net
subscribers increased 2,393 during the year ended December 31, 2008, compared to
an increase of 9,636 in the year ended December 31, 2007, which excluded the
customers acquired as part of the Web.com acquisition. The net subscriber
additions includes approximately 9,300 customers that we acquired in September
2008. The average monthly turnover decreased to 4.0% in the year ended December
31, 2008 from 4.8% in the year ended December 31, 2007.





Professional Services
Revenue. Professional services revenue increased 15% to $2.8 million in
the year ended December 31, 2008 from $2.4 million in the year ended
December 31, 2007. Several events during the year ended December 31, 2008
contributed to the increase of professional service revenues. In June 2008, we
acquired a Do-It-Yourself logo product to offer to our customers. Sales from
this new product were approximately $355 thousand for the year ended December
31, 2008. In addition, revenue from search engine optimization services,
originating from an acquisition completed in March 2007, increased approximately
$352 thousand over the prior year. These increases were partially offset by the
sale of  certain customers unrelated to our core business, in April 2008,
which resulted in a decrease of revenue of $173 thousand and a decrease of $157
thousand in our custom web design services.





Other Revenue. Other revenue
increased to $100 thousand in the year ended December 31, 2008. This
revenue was earned by the sale of perpetual licenses for the use of our
patents.




Cost
of Revenue




Cost of Subscription Revenue.
Cost of subscription revenue increased 32% to $42.6 million in the year ended
December 31, 2008 from $32.4 million in the year ended December 31,
2007. The increase in the cost of subscription revenue was primarily the result
of the additional costs of approximately $9.4 million related to the additional
subscription revenue associated with customers acquired as part of our
acquisitions in 2007. While total costs increased, our gross margin on
subscription revenue increased to 64% for the year ended December 31, 2008 as
compared to 58% in the year ended December 31, 2007. The increase of gross
margin was a result of a better mix of higher margin revenue and the continued
benefits of our migration and consolidation activities.


34




Cost of Professional Services
Revenue. Cost of professional services revenue remained constant at $1.3
million in the years ended December 31, 2008 and December 31, 2007.
While total costs remained constant over the prior year, increases in costs
related to the acquired Do-It-Yourself logo product and increased search engine
optimization services were offset by decreases in the cost due to the sale of
certain customers unrelated to our core business and a reduction in custom web
design services. Gross margin on professional services revenue increased to 53%
for the year ended December 31, 2008 as compared to 46% for the year ended
December 31, 2007. The increase of gross margin was a result of a better mix of
higher margin revenue.




Operating
Expenses




Sales and Marketing Expenses.
Sales and marketing expenses increased 54% to $28.7 million, or 24% of total
revenue, during the year ended December 31, 2008 from $18.7 million, or 23%
of total revenue, during the year ended December 31, 2007. An increase of
$7.3 million in expense was attributable to the addition of sales and marketing
resources in connection with our acquisitions during 2007. During the year ended
December 31, 2008, we had an increase in employee compensation and benefits cost
of $2.0 million and facility expenses of approximately $261 thousand, which was
offset by a reduction of $258 thousand in marketing and advertising
expenses.





Research and Development
Expenses. Research and development expenses increased 127% to $8.9
million, or 7% of total revenue, during the year ended December 31, 2008
from $3.9 million, or 5% of total revenue, during the year ended
December 31, 2007. This was primarily due to an increase of $3.9 million in
additional research and development resources associated with our acquisitions
in 2007. During the year ended December 31, 2008, we had an increase in
compensation and benefits costs of approximately $1.2 million due to an increase
in headcount from 68 at December 31, 2007 to 92 at December 31,
2008.





General and Administrative
Expenses. General and administrative expenses increased 17% to $19.4
million, or 16% of total revenue, during the year ended December 31, 2008
from $16.5 million, or 21% of total revenue, during the year ended
December 31, 2007. Due to our acquisition in 2007, there was an increase of
approximately $4.1 million of additional general and administrative expenses
over the prior period. This was partially offset by a reduction of employee
compensation and benefits expense of approximately $1.3 million, which was
primarily the result of our migration and consolidation activities.





Restructuring charges.During
the years ended December 31, 2008 and 2007, we recorded $372 thousand and $243
thousand, respectively, for restructuring charges. During the year ended
December 31, 2008, the Company restructured personnel in our operations and as a
result of this reorganization terminated employees and recorded termination
benefits of approximately $372 thousand.  During the year ended December
31, 2007, the Company restructured our organization by terminating employees and
closing facilities in Los Angeles, California and Seneca Falls, New York.





Depreciation and Amortization
Expense. Depreciation and amortization expense increased 146% to $13.4
million, or 11% of total revenue, during the year ended December 31, 2008
from $5.5 million, or 7% of total revenue, during the year ended
December 31, 2007. Amortization expense increased to $10.2 million during
the year ended December 31, 2008 from $3.8 million in the prior year due to
the increase in definite-lived intangible assets as a result of our mergers and
acquisitions in 2007. Depreciation expense increased to $3.2 million during the
year ended December 31, 2008 from $1.7 million in the prior year due to the
increase in fixed assets purchased and acquired as a result of our
acquisitions.





Goodwill and Asset Impairment.On December 31, 2008, the Company completed its annual impairment test of
goodwill and other indefinite lived intangible assets and determined there was
an impairment. The Company recorded a goodwill and intangible asset impairment
charge of $102.6 million. The primary reason for the impairment charge was the
decline of our stock price during the fourth quarter of 2008. During the year
ended December 31, 2007, based on our annual impairment test of goodwill and
other indefinite lived intangible assets, there were no indicators of
impairment.





Net Interest Income.Net
interest income decreased 58% to $822 thousand, or 1% of total revenue, during
the year ended December 31, 2008 from $1.9 million, or 2% of total revenue,
during the year ended December 31, 2007. The decrease in interest income
was due to the reduced average cash balances available to invest in money market
funds as a result of our recent acquisitions and the decline in interest
rates.




Income tax (expense).Income
tax expense decreased to $125 thousand during the year ended December 31, 2008
from $2.1 million during the year ended December 31, 2007. The Company’s tax
rate for the years ended December 31, 2008 and 2007 were 0.1% and 60.2%,
respectively.  The decrease in tax expense and tax rate was due to the
permanent book to tax differences related to the goodwill impairment and stock
based compensation.




Discontinued Operations.


35




Liquidity
and Capital Resources




As of
December 31, 2009, we had $39.4 million of unrestricted cash and cash
equivalents and $32.2 million in working capital, as compared to $34.1 million
of cash and cash equivalents and $24.0 million in working capital as of
December 31, 2008.




Net cash
provided by operations for the year ended December 31, 2009 increased 3%,
or $480 thousand, to $15.5 million from $15.0 million for the year ended
December 31, 2008.





Net cash
used in investing activities in the year ended December 31, 2009 was $5.2
million as compared to $3.7 million in the year ended December 31, 2008.
During the year ended December 31, 2009, we acquired substantially all the
assets and select liabilities of Solid Cactus for approximately $3.5
million.  Additionally, we sold our NetObjects Fusion software business and
recorded net proceeds of $808 thousand in connection with the initial payment.
We also invested approximately $1.1 million in property and equipment and
intangible assets. We increased restricted cash by $1.2 million due to
provisions in our Jacksonville building lease agreement. During the year ended
December 31, 2008, we acquired certain assets of LogoYes.com and Design Logic,
Inc. totaling approximately $4.3 million, including acquisition expenses. We
also acquired approximately 9,300 customers at a cost of $1.4 million, which
included $364 thousand liability for service to be provided to the acquired
customers. We received proceeds from the sales of restricted investments
totaling $8.5 million and reinvested $3.5 million of those proceeds. The
uninvested proceeds were transferred to a money market account and classified as
unrestricted cash. We purchased $4.3 million of real property and equipment and
paid off a note payable and the related restricted cash was released and
classified as unrestricted cash.





Net cash
used in financing activities in the year ended December 31, 2009 was $4.9
million as compared to net cash used in financing activities of $6.9 million for
the year ended December 31, 2008. On September 4, 2008, the Company
announced that its Board of Directors authorized the repurchase of up to $20
million of the Company’s outstanding common shares over eighteen months from the
approval date. On March 3, 2010, the Board of Directors extended the repurchase
program for an additional twelve months. During the year ended December 31,
2009, we repurchased approximately 1.5 million shares of our common stock and
options to purchase 225,000 shares of our common stock for approximately $5.7
million and paid $641 thousand for debt obligations we assumed as part of the
Solid Cactus acquisition. In addition, we received proceeds from the exercise of
stock options totaling $1.4 million. During the year ended December 31, 2008, we
had repurchased 2.1 million shares for $6.9 million. We reissued 608 thousand of
those shares for exercises of stock options, warrants and restricted share
issuances receiving proceeds of $1.2 million.  In addition, we reduced our
debt obligations by $1.2 million.




Non-GAAP
Financial Measures





In
addition to our financial information presented in accordance with U.S. GAAP,
management uses certain “non-GAAP financial measures” within the meaning of the
SEC Regulation G, to clarify and enhance understanding of past performance and
prospects for the future. Generally, a non-GAAP financial measure is a numerical
measure of a company’s operating performance, financial position or cash flows
that excludes or includes amounts that are included in or excluded from the most
directly comparable measure calculated and presented in accordance with GAAP. We
monitor non-GAAP financial measures because it describes the operating
performance of the company and helps management and investors gauge our ability
to generate cash flow, excluding some recurring charges that are included in the
most directly comparable measures calculated and presented in accordance with
GAAP. Relative to each of the non-GAAP financial measures, we further set forth
our rationale as follows:





Non-GAAP Operating
Income.  We exclude from non-GAAP operating income amortization of
intangibles, fair value adjustment to deferred revenue, restructuring charges
and stock-based compensation charges.  We believe that excluding these
non-cash charges assist management and investors in evaluating
period-over-period changes in our operating income without the impact of items
that are not a result of our day-to-day business and operations.




Non-GAAP Net Income and Non-GAAP Net
Income per Diluted Share.  We exclude from non-GAAP net income
and non-GAAP net income per diluted share amortization of intangibles, income
tax expense, fair value adjustment to deferred revenue, restructuring charges
and stock-based compensation, and include cash income tax expense, because we
believe that excluding such measures helps management and investors better
understand our operating activities.




Adjusted EBITDA. We exclude
from Adjusted EBITDA depreciation expense, amortization of intangibles, income
tax, interest expense, interest income, stock-based compensation, and
restructuring charges, because we believe that excluding such items helps
management and investors better understand operating
activities.


36




The
following table presents our non-GAAP measures for the periods indicated (in
thousands):




Twelve Months Ended December 31,2009
                    
                    
                    2008Reconciliation
      of GAAP net income (loss) to non-GAAP net incomeGAAP
      net income (loss)
                    
                    $
                    2,609
                    
                    
                    $
                    (96,210
                    )Amortization
      of intangibles
                    
                    
                    10,453
                    
                    
                    
                    10,208Goodwill
      and asset impairment
                    
                    
                    -
                    
                    
                    
                    102,552Stock
      based compensation
                    
                    
                    4,898
                    
                    
                    
                    4,789Restructuring
      charges
                    
                    
                    1,940
                    
                    
                    
                    372Income
      tax (benefit) expense
                    
                    
                    (1,429
                    )
                    
                    
                    126Cash
      income tax expense
                    
                    
                    (269
                    )
                    
                    
                    (270
                    )Fair
      value adjustment to deferred revenue
                    
                    
                    59
                    
                    
                    
                    308Loss
      on operating assets and liabilities
                    
                    
                    2
                    
                    
                    
                    44Non-GAAP
      net income
                    
                    $
                    18,263
                    
                    
                    $
                    21,919Diluted
      GAAP net income (loss) per share
                    
                    $
                    0.10
                    
                    
                    $
                    (3.51
                    )Dilutive
      equity and warrants per share
                    
                    
                    -
                    
                    
                    
                    0.28Amortization
      of intangibles per share
                    
                    
                    0.39
                    
                    
                    
                    0.34Goodwill
      and asset impairment
                    
                    
                    -
                    
                    
                    
                    3.45Stock
      based compensation per share
                    
                    
                    0.18
                    
                    
                    
                    0.17Restructuring
      charges per share
                    
                    
                    0.07
                    
                    
                    
                    0.01Income
      tax expense per share
                    
                    
                    (0.05
                    )
                    
                    
                    -Cash
      income tax expense per share
                    
                    
                    (0.01
                    )
                    
                    
                    (0.01
                    )Fair
      value adjustment to deferred revenue per share
                    
                    
                    -
                    
                    
                    
                    0.01Loss
      on operating assets and liabilities per share
                    
                    
                    -
                    
                    
                    
                    -Diluted
      Non-GAAP net income per share
                    
                    $
                    0.68
                    
                    
                    $
                    0.74Reconciliation
      of GAAP operating income (loss) to non-GAAP operating
    incomeGAAP
      operating (loss)
                    
                    $
                    (93
                    )
                    
                    $
                    (97,077
                    )Amortization
      of intangibles
                    
                    
                    10,453
                    
                    
                    
                    10,208Goodwill
      and asset impairment
                    
                    
                    -
                    
                    
                    
                    102,552Restructuring
      charges
                    
                    
                    1,940
                    
                    
                    
                    372Fair
      value adjustment to deferred revenue
                    
                    
                    59
                    
                    
                    
                    308Stock
      based compensation
                    
                    
                    4,898
                    
                    
                    
                    4,789Non-GAAP
      operating income
                    
                    $
                    17,257
                    
                    
                    $
                    21,152Reconciliation
      of GAAP operating margin to non-GAAP operating marginGAAP
      operating margin
                    
                    
                    0
                    %
                    
                    
                    -81
                    %Amortization
      of intangibles
                    
                    
                    9
                    %
                    
                    
                    9
                    %Goodwill
      and asset impairment
                    
                    
                    0
                    %
                    
                    
                    86
                    %Restructuring
      charges
                    
                    
                    2
                    %
                    
                    
                    0
                    %Fair
      value adjustment to deferred revenue
                    
                    
                    0
                    %
                    
                    
                    0
                    %Stock
      based compensation
                    
                    
                    5
                    %
                    
                    
                    4
                    %Non-GAAP
      operating margin
                    
                    
                    16
                    %
                    
                    
                    18
                    %Reconciliation
      of GAAP operating income (loss) to adjusted EBITDAGAAP
      operating (loss)
                    
                    $
                    (93
                    )
                    
                    $
                    (97,077
                    )Goodwill
      and asset impairment
                    
                    
                    -
                    
                    
                    
                    102,552Depreciation
      and amortization
                    
                    
                    13,295
                    
                    
                    
                    13,408Restructuring
      charges
                    
                    
                    1,940
                    
                    
                    
                    372Stock
      based compensation
                    
                    
                    4,898
                    
                    
                    
                    4,789Adjusted
      EBITDA
                    
                    $
                    20,040
                    
                    
                    $
                    24,044





Contractual
Obligations and Commitments




Our
principal commitments consist of obligations under leases for office space
(operating) and capital lease obligations for equipment. The following
summarizes our long-term contractual obligations as of December 31, 2009
(in thousands):


37


Payment Due by PeriodContractual Obligations
              
              Total
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              2014
              
              
              thereafterOperating lease obligations
      (1)
              
              $
              19,669
              
              
              $
              2,635
              
              
              $
              1,991
              
              
              $
              1,956
              
              
              $
              1,859
              
              
              $
              1,879
              
              
              $
              9,349Capital
      lease obligations (2)
              
              
              459
              
              
              
              245
              
              
              
              111
              
              
              
              74
              
              
              
              29
              
              
              
              —
              
              
              
              —





(1)
              Operating
      lease obligations are shown net of sublease rentals for the amounts
      related to each period
presented.


(2)
              Includes
      interest expected to be paid.





Off-Balance
Sheet Obligations





As of
December 31, 2009 and 2008, 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.





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.




Item 7A.
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 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.




Interest
Rate Sensitivity




We had
unrestricted cash and cash equivalents totaling $39.4 million and $34.1 million
at December 31, 2009 and 2008, 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 8.
Financial Statements and Supplementary Data.




Quarterly
Results of Operations




The
following tables set forth selected unaudited quarterly consolidated statement
of operations data for the eight most recent quarters. The information for each
of these quarters has been prepared on the same basis as the audited
consolidated financial statements included in this prospectus and, in the
opinion of management, includes all adjustments necessary for the fair
presentation of the results of operations for such periods. This data should be
read in conjunction with the audited consolidated financial statements and the
related notes included in this annual report. These quarterly operating results
are not necessarily indicative of our operating results for any future
period.


38




Three Months EndedMar 31,
                                    2009 (2)
                                  
                                  
                                  Jun 30,
                                    2009
                                  
                                  
                                  Sept 30,
                                    2009
                                  
                                  
                                  Dec 31,
                                    2009
                                  
                                  
                                  Mar 31,
                                    2008 (2)
                                  
                                  
                                  Jun 30,
                                    2008 (2)
                                  
                                  
                                  Sept 30,
                                    2008 (2)
                                  
                                  
                                  Dec 31,
                                    2008 (2)(in
      thousands)Total
      revenue
                                  
                                  $
                                  27,570
                                  
                                  
                                  $
                                  26,475
                                  
                                  
                                  $
                                  26,101
                                  
                                  
                                  $
                                  26,343
                                  
                                  
                                  $
                                  30,412
                                  
                                  
                                  $
                                  30,959
                                  
                                  
                                  $
                                  30,046
                                  
                                  
                                  $
                                  28,697Total
      cost of revenue
                                  
                                  
                                  9,608
                                  
                                  
                                  
                                  9,988
                                  
                                  
                                  
                                  10,152
                                  
                                  
                                  
                                  10,644
                                  
                                  
                                  
                                  11,279
                                  
                                  
                                  
                                  11,329
                                  
                                  
                                  
                                  11,102
                                  
                                  
                                  
                                  10,184Gross
      profit
                                  
                                  
                                  17,962
                                  
                                  
                                  
                                  16,487
                                  
                                  
                                  
                                  15,949
                                  
                                  
                                  
                                  15,699
                                  
                                  
                                  
                                  19,133
                                  
                                  
                                  
                                  19,630
                                  
                                  
                                  
                                  18,944
                                  
                                  
                                  
                                  18,513Total
      operating expenses
                                  
                                  
                                  17,218
                                  
                                  
                                  
                                  16,197
                                  
                                  
                                  
                                  17,556
                                  
                                  
                                  
                                  15,219
                                  
                                  
                                  
                                  18,121
                                  
                                  
                                  
                                  18,580
                                  
                                  
                                  
                                  17,545
                                  
                                  
                                  
                                  119,051Income
      (loss) from operations
                                  
                                  
                                  744
                                  
                                  
                                  
                                  290
                                  
                                  
                                  
                                  (1,607
                                  )
                                  
                                  
                                  480
                                  
                                  
                                  
                                  1,012
                                  
                                  
                                  
                                  1,050
                                  
                                  
                                  
                                  1,399
                                  
                                  
                                  
                                  (100,538
                                  )Net
      income (loss) from continued operations
                                  
                                  
                                  789
                                  
                                  
                                  
                                  307
                                  
                                  
                                  
                                  (1,595
                                  )
                                  
                                  
                                  2,068
                                  
                                  
                                  
                                  608
                                  
                                  
                                  
                                  1,837
                                  
                                  
                                  
                                  1,555
                                  
                                  
                                  
                                  (100,380
                                  )(1)Income
      (loss) from discontinued operations
                                  
                                  
                                  133
                                  
                                  
                                  
                                  917
                                  
                                  
                                  
                                  4
                                  
                                  
                                  
                                  (14
                                  )
                                  
                                  
                                  (58
                                  )
                                  
                                  
                                  360
                                  
                                  
                                  
                                  (263
                                  )
                                  
                                  
                                  131Net
      income (loss) (3)
                                  
                                  $
                                  922
                                  
                                  
                                  $
                                  1,224
                                  
                                  
                                  $
                                  (1,591
                                  )
                                  
                                  $
                                  2,054
                                  
                                  
                                  $
                                  550
                                  
                                  
                                  $
                                  2,197
                                  
                                  
                                  $
                                  1,292
                                  
                                  
                                  $
                                  (100,249
                                  ) (1)Net
      income (loss) per common share:Basic
      continued operations
                                  
                                  $
                                  .03
                                  
                                  
                                  $
                                  .01
                                  
                                  
                                  $
                                  (.06
                                  )
                                  
                                  $
                                  .08
                                  
                                  
                                  $
                                  .02
                                  
                                  
                                  $
                                  .07
                                  
                                  
                                  $
                                  .06
                                  
                                  
                                  $
                                  (3.75
                                  )Basic
      discontinued operations
                                  
                                  $
                                  .01
                                  
                                  
                                  $
                                  .04
                                  
                                  
                                  $
                                  .00
                                  
                                  
                                  $
                                  .00
                                  
                                  
                                  $
                                  .00
                                  
                                  
                                  $
                                  .01
                                  
                                  
                                  $
                                  (.01
                                  )
                                  
                                  $
                                  .01Diluted
      continued operations
                                  
                                  $
                                  .03
                                  
                                  
                                  $
                                  .01
                                  
                                  
                                  $
                                  (.06
                                  )
                                  
                                  $
                                  .07
                                  
                                  
                                  $
                                  .02
                                  
                                  
                                  $
                                  .06
                                  
                                  
                                  $
                                  .05
                                  
                                  
                                  $
                                  (3.75
                                  )Diluted
      discontinued operations
                                  
                                  $
                                  .00
                                  
                                  
                                  $
                                  .04
                                  
                                  
                                  $
                                  .00
                                  
                                  
                                  $
                                  .00
                                  
                                  
                                  $
                                  .00
                                  
                                  
                                  $
                                  .01
                                  
                                  
                                  $
                                  (.01
                                  )
                                  
                                  $
                                  .01





(1)
            Includes
      a goodwill and intangible asset impairment charge of $102.6
      million.


(2)
            Operating
      results relating to NetObjects Fusion revenue and expenses for all periods
      presented were reclassed to income (loss) from discontinued
      operations.


(3)
            Included
      in income (loss) for the year ended December 31, 2009 is a tax benefit of
      $1.4 million, which was the result of a reduction in the deferred tax
      asset reserve allowance.





Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.




None.




Item 9A.
Controls and Procedures.




Evaluation
of disclosure controls and procedures.




Based on
their evaluation as of December 31, 2009, 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 effective at the reasonable assurance
level to ensure that the information required to be disclosed by us in this
annual report on Form 10-K was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules, and that such information is accumulated and communicated to us to allow
timely decisions regarding required disclosures.





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 errors and all
fraud. A control systm, 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.


39


Management’s
Report on Internal Control over Financial Reporting.




The
management of Web.com Group, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended. The Company’s internal control over financial reporting is
designed to provide reasonable assurance, based on an appropriate cost-benefit
analysis, regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. The Company’s internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on management’s assessment and those criteria,
management concluded that the Company maintained effective internal control over
financial reporting as of December 31, 2009.




The
Company’s independent registered public accounting firm, Ernst & Young
LLP, has issued an audit report on the effectiveness of the Company’s internal
control over financial reporting.




Report
of Independent Registered Public Accounting Firm





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





We have
audited Web.com Group Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Web.com Group, Inc.’s management is responsible
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





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





In our
opinion, Web.com Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based onthe COSO criteria.


40





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2009consolidated financial
statements of Web.com Group, Inc. and our report dated March 5, 2010 expressed
an unqualified opinion thereon.





/s/
      Ernst & Young LLPIndependent
      Certified Public Accountants





Jacksonville,
Florida


March 5,
2010




Changes
in internal control over financial reporting.




There
were no changes in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2009
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.




Item 9B.
Other Information.




None.


41


PART
III




Item 10.
Directors, Executive Officers and Corporate Governance.




The
information required by this item, including such information regarding our
directors and executive officers and compliance with Section 16(a) of the
Securities Exchange act of 1934, is incorporated herein by reference from the
Proxy Statement. We have adopted a written code of ethics that applies to our
principal executive officer, principal financial officer and principal
accounting officer, or persons performing similar functions. The code of ethics
is posted on our website at http://ir.websitepros.com/sec.cfm. Amendments to,
and waivers from, the code of ethics that applies to any of these officers, or
persons performing similar functions, and that relates to any element of the
code of ethics definition enumerated in Item 406(b) of Regulation S-K, will
be disclosed at the website address provided above and, to the extent required
by applicable regulations, on a current report on Form 8-K.




Item 11.
Executive Compensation.




The
information required by this item is incorporated herein by reference from the
section entitled “Executive Compensation” in the Proxy Statement.




Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.




The
information required by this item is incorporated herein by reference from the
sections entitled “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” in the Proxy
Statement.




Item 13.
Certain Relationships and Related Transactions, and Director
Independence.




The
information required by this item is incorporated herein by reference from the
section entitled “Certain Relationships and Related Transactions” in the Proxy
Statement.




Item 14.
Principal Accounting Fees and Services.




The
information required by this item is incorporated herein by reference from the
section entitled “Ratification of Selection of Independent Registered Public
Accounting Firm” in the Proxy Statement.


42


PART
IV




Item 15.
Exhibits, Financial Statement Schedules.




The
following documents are filed as part of this Form 10-K:




1.
Financial Statements




INDEX
TO FINANCIAL STATEMENTS




PageWeb.com
      Group, Inc.Report
      of Independent Registered Public Accounting Firm
                  44Consolidated
      Balance Sheets at December 31, 2009 and 2008
                  45Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008
      and 2007
                  46Consolidated
      Statements of Stockholders’ Equity (Deficit) for the years ended
      December 31, 2009, 2008 and 2007
                  47Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008
      and 2007
                  48Notes
      to Consolidated Financial Statements
                  49




43


Report
of Independent Registered Public Accounting Firm




Board of
Directors and Shareholders


Web.com
Group, Inc.




We have
audited the accompanying consolidated balance sheets of Web.com Group, Inc. as
of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2009. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Web.com Group,
Inc. at December 31, 2009 and 2008 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.




We have
also audited, in accordance with the Standards of the Public Company Accounting
Oversight Board (United States), Web.com Group, Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 5, 2010
expressed an unqualified opinion thereon.




/s/
      Ernst & Young LLPIndependent
      Certified Public AccountantsJacksonville,
      Florida
                March
      5, 2010




44


Web.com
Group, Inc.


Consolidated
Balance Sheets


(In
thousands)




December 31,2009
              
              
              2008AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              39,427
              
              
              $
              34,127Restricted
      investments
              
              
              545
              
              
              
              —Accounts
      receivable, net of allowance of $428 and $645 thousand,
      respectively
              
              
              4,561
              
              
              
              5,019Prepaid
      expenses
              
              
              1,780
              
              
              
              1,430Prepaid
      marketing fees
              
              
              535
              
              
              
              665Deferred
      taxes
              
              
              1,482
              
              
              
              1,093Other
      current assets
              
              
              95
              
              
              
              173Total
      current assets
              
              
              48,425
              
              
              
              42,507Restricted
      investments
              
              
              927
              
              
              
              316Property
      and equipment, net
              
              
              7,388
              
              
              
              8,204Goodwill
              
              
              12,895
              
              
              
              9,000Intangible
      assets, net
              
              
              53,059
              
              
              
              62,085Other
      assets
              
              
              191
              
              
              
              383Total
      assets
              
              $
              122,885
              
              
              $
              122,495Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts
      payable
              
              $
              1,306
              
              
              $
              1,406Accrued
      expenses
              
              
              6,931
              
              
              
              6,230Accrued
      restructuring costs and other reserves
              
              
              1,064
              
              
              
              2,619Deferred
      revenue
              
              
              6,172
              
              
              
              7,831Accrued
      marketing fees
              
              
              259
              
              
              
              263Notes
      payable, current
              
              
              —
              
              
              
              59Capital
      lease obligations
              
              
              223
              
              
              
              —Other
      liabilities
              
              
              299
              
              
              
              128Total
      current liabilities
              
              
              16,254
              
              
              
              18,536Accrued
      rent expense
              
              
              676
              
              
              
              535Deferred
      revenue
              
              
              159
              
              
              
              180Accrued
      restructuring costs and other reserves
              
              
              —
              
              
              
              1,214Capital
      lease obligations
              
              
              198
              
              
              
              —Deferred
      tax liabilities
              
              
              1,429
              
              
              
              2,712Other
      long-term liabilities
              
              
              473
              
              
              
              25Total
      liabilities
              
              
              19,189
              
              
              
              23,202Stockholders’
      equity:Common
      stock, $0.001 par value; 150,000,000 shares authorized, 27,796,824 and
      28,093,759 shares issued and 26,176,967 and 26,633,436 outstanding at
      December 31, 2009 and 2008, respectively
              
              
              26
              
              
              
              27Additional
      paid-in capital
              
              
              260,552
              
              
              
              256,763Treasury
      stock, 1,619,857 and 1,460,323 shares at December 31, 2009 and 2008,
      respectively
              
              
              (5,477
              )
              
              
              (3,483
              )Accumulated
      deficit
              
              
              (151,405
              )
              
              
              (154,014
              )Total
      stockholders’ equity
              
              
              103,696
              
              
              
              99,293Total
      liabilities and stockholders’ equity
              
              $
              122,885
              
              
              $
              122,495




See
accompanying notes to consolidated financial statements.


45




Web.com
Group, Inc.


Consolidated
Statements of Operations


(In
thousands, except per share amounts)




Year Ended December 31,2009
              
              
              2008
              
              
              2007Revenue:Subscription
              
              $
              102,166
              
              
              $
              117,256
              
              
              $
              77,676Professional
      services
              
              
              3,323
              
              
              
              2,758
              
              
              
              2,408Other
              
              
              1,000
              
              
              
              100
              
              
              
              —Total
      revenue
              
              
              106,489
              
              
              
              120,114
              
              
              
              80,084Cost
      of revenue (excluding depreciation and amortization shown separately
      below):Subscription
      (a)
              
              
              38,311
              
              
              
              42,584
              
              
              
              32,381Professional
      services
              
              
              2,081
              
              
              
              1,310
              
              
              
              1,299Total
      cost of revenue
              
              
              40,392
              
              
              
              43,894
              
              
              
              33,680Gross
      profit
              
              
              66,097
              
              
              
              76,220
              
              
              
              46,404Operating
      expenses:Sales
      and marketing (a)
              
              
              23,338
              
              
              
              28,687
              
              
              
              18,655Research
      and development (a)
              
              
              8,477
              
              
              
              8,888
              
              
              
              3,921General
      and administrative (a)
              
              
              19,140
              
              
              
              19,390
              
              
              
              16,513Restructuring
      charges(a)
              
              
              1,940
              
              
              
              372
              
              
              
              243Depreciation
      and amortization
              
              
              13,295
              
              
              
              13,408
              
              
              
              5,454Goodwill
      and intangible asset impairment
              
              
              —
              
              
              
              102,552
              
              
              
              —Total
      operating expenses
              
              
              66,190
              
              
              
              173,297
              
              
              
              44,786(Loss)
      income from operations
              
              
              (93
              )
              
              
              (97,077
              )
              
              
              1,618Other
      income:Interest
      income, net
              
              
              233
              
              
              
              822
              
              
              
              1,938Income
      (loss) before income taxes from continuing operations
              
              
              140
              
              
              
              (96,255
              )
              
              
              3,556Income
      tax benefit (expense)
              
              
              1,429
              
              
              
              (125
              )
              
              
              (2,077
              )Net
      income (loss) from continuing operations
              
              
              1,569
              
              
              
              (96,380
              )
              
              
              1,479Discontinued
      operations:Income
      (loss) from discontinued operations, net of tax
              
              
              232
              
              
              
              170
              
              
              
              (121
              )Gain
      on sale of discontinued operations, net of tax
              
              
              808
              
              
              
              —
              
              
              
              —Income
      (loss) from discontinuing operations
              
              
              1,040
              
              
              
              170
              
              
              
              (121
              )Net
      income (loss)
              
              $
              2,609
              
              
              $
              (96,210
              )
              
              $
              1,358Basic
      earnings per share:Income
      (loss) from continuing operations per common share
              
              $
              0.06
              
              
              $
              (3.52
              )
              
              $
              0.08Income
      (loss) from discontinuing operations per common share
              
              $
              0.04
              
              
              $
              0.01
              
              
              $
              (0.01
              )Net
      income (loss) per common share
              
              $
              0.10
              
              
              $
              (3.51
              )
              
              $
              0.07Diluted
      earnings per share:Income
      (loss) from continuing operations per common share
              
              $
              0.06
              
              
              $
              (3.52
              )
              
              $
              0.07Income
      (loss) from discontinuing operations per common share
              
              $
              0.04
              
              
              $
              0.01
              
              
              $
              (0.01
              )Net
      income (loss) per common share
              
              $
              0.10
              
              
              $
              (3.51
              )
              
              $
              0.06Basic
      weighted average common shares outstanding
              
              
              25,312
              
              
              
              27,398
              
              
              
              19,802Diluted
      weighted average common shares outstanding
              
              
              26,985
              
              
              
              27,398
              
              
              
              22,224(a)
      Stock based compensation included aboveSubscription
      (cost of revenue)
              
              $
              450
              
              
              $
              357
              
              
              $
              244Sales
      and marketing
              
              
              913
              
              
              
              933
              
              
              
              774Research
      and development
              
              
              520
              
              
              
              441
              
              
              
              312General
      and administrative
              
              
              3,015
              
              
              
              3,058
              
              
              
              2,238Restructuring
      charges
              
              
              1,183
              
              
              
              —
              
              
              
              —$
              6,081
              
              
              $
              4,789
              
              
              $
              3,568




See
accompanying notes to consolidated financial statements.




46





Web.com
Group, Inc.


Consolidated
Statements of Stockholders’ Equity (Deficit)


(In
thousands, except share amounts)




Stockholders’ Equity (Deficit)Common Stock
                
                
                Treasury
                  Stock
                  Amount
                
                
                Additional
                  Paid-In
                  Capital
                
                
                Accumulated
                  Deficit
                
                
                Total
                  Stockholders’
                  Equity
                  (Deficit)Shares
                
                
                Amount
                
                
                Shares
                
                
                AmountBalance,
      December 31, 2006
                
                
                17,331,626
                
                
                
                17
                
                
                
                —
                
                
                
                —
                
                
                
                143,101
                
                
                
                (59,162
                )
                
                
                83,956Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,358
                
                
                
                1,358Exercise
      of stock options
                
                
                826,392
                
                
                
                1
                
                
                
                —
                
                
                
                —
                
                
                
                2,778
                
                
                
                —
                
                
                
                2,779Issuance
      of common stock in purchase of Renex
                
                
                139,461
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                16
                
                
                
                —
                
                
                
                16Issuance
      of restricted stock
                
                
                21,250
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Issuance
      of common stock in merger with Web.com
                
                
                9,153,957
                
                
                
                9
                
                
                
                —
                
                
                
                —
                
                
                
                104,745
                
                
                
                —
                
                
                
                104,754Stock
      compensation expense
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,568
                
                
                
                —
                
                
                
                3,568Balance,
      December 31, 2007
                
                
                27,472,686
                
                
                
                27
                
                
                
                —
                
                
                
                —
                
                
                
                254,208
                
                
                
                (57,804
                )
                
                
                196,431Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (96,210
                )
                
                
                (96,210
                )Exercise
      of stock options
                
                
                253,711
                
                
                
                —
                
                
                
                (44,722
                )
                
                
                253
                
                
                
                800
                
                
                
                —
                
                
                
                1,053Exercise
      of warrants
                
                
                142,279
                
                
                
                —
                
                
                
                (43,345
                )
                
                
                205
                
                
                
                (87
                )
                
                
                —
                
                
                
                118Issuance
      of common stock in purchase of Renex
                
                
                139,461
                
                
                
                —
                
                
                
                (139,461
                )
                
                
                778
                
                
                
                (778
                )
                
                
                —
                
                
                
                —Issuance
      of restricted stock
                
                
                693,525
                
                
                
                —
                
                
                
                (380,375
                )
                
                
                2,147
                
                
                
                (2,147
                )
                
                
                —
                
                
                
                —Purchase
      of treasury stock
                
                
                (2,068,226
                )
                
                
                —
                
                
                
                2,068,226
                
                
                
                (6,866
                )
                
                
                —
                
                
                
                —
                
                
                
                (6,866
                )Stock
      compensation expense
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                4,789
                
                
                
                —
                
                
                
                4,789Issuance
      costs of common stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (22
                )
                
                
                —
                
                
                
                (22
                )Balance,
      December 31, 2008
                
                
                26,633,436
                
                
                $
                27
                
                
                
                1,460,323
                
                
                $
                (3,483
                )
                
                $
                256,763
                
                
                $
                (154,014
                )
                
                $
                99,293Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,609
                
                
                
                2,609Exercise
      of stock options
                
                
                385,781
                
                
                
                —
                
                
                
                (385,781
                )
                
                
                811
                
                
                
                582
                
                
                
                —
                
                
                
                1,393Purchase
      of stock options
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (979
                )
                
                
                —
                
                
                
                (979
                )Exercise
      of warrants
                
                
                7,667
                
                
                
                —
                
                
                
                (7,667
                )
                
                
                16
                
                
                
                1
                
                
                
                —
                
                
                
                17Issuance
      of restricted stock
                
                
                606,000
                
                
                
                —
                
                
                
                (606,000
                )
                
                
                1,488
                
                
                
                (1,488
                )
                
                
                —
                
                
                
                —Purchase
      of treasury stock
                
                
                (1,455,917
                )
                
                
                (1
                )
                
                
                1,158,982
                
                
                
                (4,309
                )
                
                
                (389
                )
                
                
                —
                
                
                
                (4,699
                )Stock
      compensation expense
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6,081
                
                
                
                —
                
                
                
                6,081Issuance
      costs of common stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (19
                )
                
                
                —
                
                
                
                (19
                )Balance,
      December 31, 2009
                
                
                26,176,967
                
                
                $
                26
                
                
                
                1,619,857
                
                
                $
                (5,477
                )
                
                $
                260,552
                
                
                $
                (151,405
                )
                
                $
                103,696




See
accompanying notes to consolidated financial statements.


47




Web.com
Group, Inc.


Consolidated
Statements of Cash Flows


(In
thousands)




Year Ended
      December 31,2009
              
              
              2008
              
              
              2007Cash
      flows from operating activitiesNet
      income (loss)
              
              $
              2,609
              
              
              $
              (96,210
              )
              
              $
              1,358Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Gain
      on sale of discontinued operations
              
              
              (808
              )
              
              
              —
              
              
              
              —Depreciation
      and amortization
              
              
              13,295
              
              
              
              13,408
              
              
              
              5,454Goodwill
      and intangible asset impairment
              
              
              —
              
              
              
              102,552
              
              
              
              —Non-cash
      loss on assets
              
              
              2
              
              
              
              44
              
              
              
              —Stock
      based compensation expense
              
              
              4,898
              
              
              
              4,789
              
              
              
              3,568Restructuring
      costs
              
              
              1,940
              
              
              
              372
              
              
              
              243Deferred
      income tax (benefit) expense
              
              
              (1,672
              )
              
              
              (9
              )
              
              
              1,719Changes
      in operating assets and liabilities:Accounts
      receivable, net
              
              
              1,065
              
              
              
              1,275
              
              
              
              1,064Prepaid
      expenses and other assets
              
              
              73
              
              
              
              3,257
              
              
              
              636Accounts
      payable, accrued expenses and other liabilities
              
              
              (3,955
              )
              
              
              (13,472
              )
              
              
              (3,474
              )Deferred
      revenue
              
              
              (1,995
              )
              
              
              (1,034
              )
              
              
              (340
              )Net
      cash provided by operating activities
              
              
              15,452
              
              
              
              14,972
              
              
              
              10,228Cash
      flows from investing activitiesBusiness
      acquisitions, net of cash acquired
              
              
              (3,740
              )
              
              
              (4,573
              )
              
              
              (18,069
              )Proceeds
      from sale of investments securities
              
              
              —
              
              
              
              8,500
              
              
              
              5,000Gain
      from sale of discontinued operations
              
              
              808
              
              
              
              —
              
              
              
              —Purchase
      of investment securities
              
              
              —
              
              
              
              (3,491
              )
              
              
              (4,946
              )Change
      in restricted investments
              
              
              (1,156
              )
              
              
              1,194
              
              
              
              263Investment
      in intangible assets
              
              
              (5
              )
              
              
              (995
              )
              
              
              (2,109
              )Purchase
      of property and equipment
              
              
              (1,131
              )
              
              
              (4,321
              )
              
              
              (3,807
              )Net
      cash used in investing activities
              
              
              (5,224
              )
              
              
              (3,686
              )
              
              
              (23,668
              )Cash
      flows from financing activitiesStock
      issuance costs
              
              
              (19
              )
              
              
              (23
              )
              
              
              (311
              )Common
      stock repurchased
              
              
              (4,699
              )
              
              
              (6,866
              )
              
              
              —Stock
      options repurchased
              
              
              (979
              )
              
              
              —
              
              
              
              —Payments
      of debt obligations
              
              
              (641
              )
              
              
              (1,187
              )
              
              
              (1,437
              )Proceeds
      from exercise of stock options and other
              
              
              1,410
              
              
              
              1,171
              
              
              
              2,779Net
      cash (used in) provided by financing activities
              
              
              (4,928
              )
              
              
              (6,905
              )
              
              
              1,031Net
      increase (decrease) in cash and cash equivalents
              
              
              5,300
              
              
              
              4,381
              
              
              
              (12,409
              )Cash
      and cash equivalents, beginning of period
              
              
              34,127
              
              
              
              29,746
              
              
              
              42,155Cash
      and cash equivalents, end of period
              
              $
              39,427
              
              
              $
              34,127
              
              
              $
              29,746Supplemental
      cash flow informationInterest
      paid
              
              $
              47
              
              
              $
              26
              
              
              $
              19Income
      tax paid
              
              $
              296
              
              
              $
              146
              
              
              $
              233Supplemental
      disclosure of non-cash transactionsIssuance
      of equity in connection with acquisitions
              
              $
              —
              
              
              $
              —
              
              
              $
              104,770




See
accompanying notes to consolidated financial statements.


48


Web.com
Group, Inc.




Notes
to Consolidated Financial Statements


December 31,
2009




1.
The Company and Summary of Significant Accounting Policies




Description
of Company




Web.com
Group, Inc. (the “Company”) is a provider of Do-It-For-Me and Do-It-Yourself
website building tools, online marketing, lead generation, eCommerce, and
technology solutions that enable small and medium-sized businesses to build and
maintain an effective online presence. The Company offers a full range of web
services, including online marketing and advertising, local search, search
engine marketing, search engine optimization, e-mail, lead generation, home
contractor specific leads, website design and publishing, logo and brand
development and eCommerce solutions meeting the needs of a business anywhere
along its lifecycle.




The
Company has reviewed the criteria of Accounting Standards Codification (ASC)
280-10, Segment
Reporting and has determined that the Company is comprised of only one
segment, Web services and products.




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




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.




Principles
of Consolidation




The
Company’s consolidated financial statements include the assets, liabilities and
the operating results of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.




Revenue
Recognition




Substantially
all of the Company’s subscription revenue is generated from monthly
subscriptions for website design, shared hosting services, application hosting,
domain name registration, eCommerce and marketing services. For example, one of
the Company’s subscription standard contracts includes the design of a five-page
website, hosting and marketing services. The individual deliverables are not
independent of each other and are not sold or priced on a standalone basis.
Costs to complete the website and ready it for the end customer are minimal and
are expensed to cost of revenue as incurred. Upon the completion and initial
hosting of the website, the subscription is offered free of charge for a 30-day
trial period during which the customer can cancel at anytime. In accordance with
ASC 605, Revenue
Recognition, after the 30-day trial period has ended, revenue is
recognized 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 the Company’s fees is probable.
These criteria are met monthly as the Company’s service is provided on a
month-to-month basis and collections are generally made in advance of the
services.




Customers
are billed for subscription terms ranging from one to 24 months, at the
customer’s option. As customers are billed, subscription revenue is recorded as
deferred revenue in the accompanying balance sheets. As services are performed,
the Company recognizes subscription revenue ratably on a daily basis over the
service period. There are no undelivered elements at the end of the service
period. In addition, subscription revenue is generated from monthly subscription
packages for hosting and marketing services for customized websites. These
packages are sold separately from the customized website.




Professional
services revenue reflects revenue generated from custom website design. Revenue
from contracts for custom design is recorded using a proportional performance
model based on labor hours incurred. The extent of progress towards completion
of the custom website 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 between reporting periods as they are the primary
input to the provision of the Company’s professional services.




The
Company accounts for its multi-element arrangements, such as in the instances
where it designs a custom website and separately offer other services such as
hosting and marketing, in accordance with ASC 605-25, Revenue Recognition:
Multiple-Element  Arrangements. Based upon vendor-specific
objective evidence, the Company allocates multi-element arrangement
consideration to the separate units of accounting based upon their relative fair
values. The additional services provided with a custom website are recognized
separately over the period for which services are performed.


49




Cash
and Cash Equivalents




Cash and
cash equivalents include cash on hand, bank demand deposit accounts, and money
market accounts. For purposes of the statement of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.




Restricted
Investments





Restricted
Investments consist primarily of commercial paper and money market securities
with maturities of less than one year. The Company has classified these
investments as held-to-maturity as the Company has the intent and ability to
hold these securities to maturity. These investments are carried at cost, which
approximates fair market value. Realized gains and losses are included in
earnings and are considered immaterial to the Company. These investments are
restricted for use by certain vendors and creditors for credit card processing
and lease payments. These investments are classified based upon the term of the
restriction, and not necessarily the underlying security.





Concentrations
of Credit Risk




Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and cash equivalents and trade receivables. The
Company invests its cash in credit instruments of highly rated financial
institutions; three institutions hold 97% of the total investments.




Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
large number of customers comprising the Company’s customer base and their
geographic dispersion. The Company has not incurred any significant credit
related losses.




Accounts
Receivable




Trade
accounts receivable are recorded on the balance sheet at net realizable value.
The Company’s management uses historical collection percentages and
customer-specific information, when available, to estimate the amount of trade
receivables that are uncollectible and establishes reserves for uncollectible
balances based on this information. Generally
receivables are classified as past due after 60 days. Trade receivables are
written off once collection efforts are exhausted.The Company does not
require deposits or other collateral from customers. Bad debt expense reported
in operating expenses excludes provisions made to the allowance for doubtful
accounts for anticipated refunds, automated clearinghouse returns, and
chargebacks that are recorded as an adjustment to revenue.




Fair
Value of Financial Instruments




Financial
instruments include cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued expenses and debt. The respective carrying
value of these financial instruments approximates fair value since they are
short-term in nature or are receivable or payable on demand. Fair value
estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of period end.




Goodwill
and Other Intangible Assets




In
accordance with ASC 350,Intangibles – Goodwill and Other, goodwill is determined to have an
indefinite useful life and 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 2009 and determined
that there were no indicators of impairment during the year ended December 31,
2009.





Intangible
assets acquired as part of a business combination are accounted for in
accordance with ASC 805, 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 ASC
350. The Company completed its annual indefinite lived impairment test during
the fourth quarter of 2009 and determined that there were no indicators of
impairment during the year ended December 31, 2009.




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


50




Research
and Development Costs




The
Company expenses research and development costs as incurred.





Property
and Equipment




Property
and equipment, including software, are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided over
the estimated useful lives of the assets using the straight-line method.
Depreciation expense includes the amortization of assets recorded under capital
leases.




The asset
lives used are presented in the table below:




Average Life in
                        YearsComputer
      equipment
                      
                      
                      3Software
                      
                      
                      2-3Furniture
      and fixtures
                      
                      
                      5Telephone
      equipment
                      
                      
                      5Vehicle
                      
                      
                      5Building
                      
                      
                      30Building
      improvements
                      
                      
                      15Leasehold
      improvements
                      
                      Shorter of asset’s life
                        or
      life of the lease




Asset
Impairment




When
events or circumstances indicate possible impairment, the Company performs an
evaluation to determine if an impairment of long-lived assets used in operations
exists, using undiscounted estimated future operating cash flows attributable to
such assets compared to the assets’ carrying amounts.




If the
Company determines that long-lived assets have been impaired, the measurement of
impairment will be equal to the excess of the carrying amount of such assets
over the discounted estimated future operating cash flows, using a discount rate
commensurate with the risks involved. The Company would reflect the impairment
through a reduction in the carrying value of the long-lived assets. Long-lived
assets to be disposed of are recorded at the lower of carrying amount or
estimated fair value less costs to dispose.




Advertising




Advertising
costs are charged to operations as incurred. Total advertising expense was $5.1
million, $7.9 million, and $2.3 million for the years ending December 31,
2009, 2008 and 2007, respectively.




Income
Taxes




The
Company accounts for income taxes under the provisions of ASC 740,Income Taxes, using the
liability method. ASC 740 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the difference is expected to
reverse.




Stock-Based
Employee Compensation




The
Company accounts for stock-based compensation to employees in accordance with
ASC 718,Compensation – Stock
Compensation. Accordingly, the fair value of all stock awards are
recognized in compensation expense over the vesting period.




Comprehensive
Income (Loss)




Comprehensive
income (loss) equals net income (loss) for all periods
presented.


51


Net
Income (Loss) Attributable Per Common Share




The
Company computes net income (loss) attributable per common share in accordance
with ASC 260,Earnings Per
Share. Basic net income (loss) attributable per common share includes no
dilution and is computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted net income (loss) 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.




2.
New Accounting Standards




In June
2009, the Financial Accounting Standards Board (FASB) issued SFAS 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. SFAS 168 establishes the authoritive accounting principles
recognized by FASB to be applied by non-governmental entities in the preparation
of financial statements in conformity with generally accepted accounting
principles. SFAS 168 becomes effective for finanical statements issued for the
interim and annual periods ending after September 15, 2009. The Company has used
the new Codification when referring to generally accepted accounting principles
in this annual report ended December 31, 2009.




3.
Discontinued Operations





On May
26, 2009, the Company sold its NetObjects Fusion software business for $4.0
million. The Company no longer considers the NetObjects Fusion license software
product core to its predominantly subscription business model. The NetObjects
Fusion software business enabled customers to build websites either for
themselves or for others.





The
Company has received a partial payment of one million dollars in connection with
the NetObjects Fusion sale. The remaining $3.0 million of proceeds is expected
to be paid over the next several years using a formula based on estimated
revenue, with the entire balance expected to be paid by May 26, 2013. The
remaining proceeds will be recorded as a gain in discontinued operations as cash
payments are received. During the year ended December 31, 2009, the net
gain of $808 thousand is included in “Gain on sale of discontinued operations,
net of tax” on the Company’s Consolidated Statement of Operations.





For the
year ended December 31, 2009, 2008 and 2007, the revenue generated by the
NetObjects Fusion software was $428 thousand, $2.5 million and $2.4 million and
net income (loss) was $232 thousand, $170 thousand and ($121) thousand,
respectively. Operating results relating to the NetObjects Fusion revenue and
expenses for all periods presented are reported in discontinued
operations.





4.
Net Income (Loss) from Continuing Operations Per Common Share




Basic net
income (loss) from continuing operations per common share is calculated using
net income and the weighted-average number of shares outstanding during the
reporting period. Diluted net income from continuing operations 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
(loss) from continuing operations per common share for the years ended
December 31, 2009, 2008 and 2007 (in thousands except per share
amounts):




2009
              
              
              2008
              
              
              2007Net
      income (loss) from continuing operations
              
              $
              1,569
              
              
              $
              (96,380
              )
              
              $
              1,479Weighted
      average outstanding shares of common stock
              
              
              25,312
              
              
              
              27,398
              
              
              
              19,802Dilutive
      effect of stock options and restricted stock
              
              
              1,670
              
              
              
              —
              
              
              
              1,983Dilutive
      effect of warrants
              
              
              3
              
              
              
              —
              
              
              
              196Dilutive
      effect of escrow shares
              
              
              —
              
              
              
              —
              
              
              
              243Common
      stock and common stock equivalents
              
              
              26,985
              
              
              
              27,398
              
              
              
              22,224Net
      income (loss) from continuing operations per common share:Basic
              
              $
              0.06
              
              
              $
              (3.52
              )
              
              $
              0.08Diluted
              
              $
              0.06
              
              
              $
              (3.52
              )
              
              $
              0.07




For the
years ended December 31, 2009 and 2007, options to purchase approximately 4.5
million, and 1.8 million shares, respectively, of common stock with exercise
prices greater than the average fair value of the Company’s stock were not
included in the calculation of the weighted average shares for diluted net
income from continuing operations per common share because the effect would have
been anti-dilutive.


52





As a
result of the net loss from continuing operations during the year ended December
31, 2008, 6.3 million dilutive securities have been excluded from the
calculation because including those securities would have been
antidilutive.




5.
Valuation Accounts




The
Company’s accounts receivable allowance is summarized as follows (in
thousands):




December
      31, 2007
                                    
                                    $
                                    791Provision
                                    
                                    
                                    1,986Charge-off
                                    
                                    
                                    (2,132
                                    )December
      31, 2008
                                    
                                    $
                                    645Provision
                                    
                                    
                                    1,527Charge-off
                                    
                                    
                                    (1,744
                                    )December
      31, 2009
                                    
                                    $
                                    428




6.
Property and Equipment




The
Company’s property and equipment are summarized as follows (in
thousands):




December 31,2009
                
                
                2008Land
                
                $
                416
                
                
                $
                416Depreciable
      assets:Software
                
                
                2,439
                
                
                
                2,273Computer
      equipment
                
                
                6,923
                
                
                
                6,297Telephone
      equipment
                
                
                1,407
                
                
                
                1,068Furniture
      and fixtures
                
                
                3,167
                
                
                
                2,511Vehicle
                
                
                39
                
                
                
                2Building
                
                
                2,029
                
                
                
                2,029Building
      improvements
                
                
                252
                
                
                
                221Leasehold
      improvements
                
                
                819
                
                
                
                718Total
      depreciable assets
                
                
                17,075
                
                
                
                15,119Accumulated
      depreciation
                
                
                (10,103
                )
                
                
                (7,331
                )Property
      and equipment, net
                
                $
                7,388
                
                
                $
                8,204




Depreciation
expense relating to depreciable assets amounted to $2.8 million, $3.2 million,
and $1.7 million for the years ended December 31, 2009, 2008, and 2007,
respectively.




7.
Business Combinations




Acquisition
of certain assets from Solid Cactus, Inc and Solid Cactus Call Center,
Inc.




On April
27, 2009, the Company acquired substantially all the assets and select
liabilities of Solid Cactus, Inc. and Solid Cactus Call Center, Inc.
(collectively, “Solid Cactus”), with its headquarters in Shavertown,
Pennsylvania, and offices in Wilkes-Barre, Pennsylvania. Solid Cactus provides a
full-range of solutions for new and existing online businesses, including
website and eCommerce store design and programming, pay-per-click advertising
management, search engine optimization, affiliate program and e-mail marketing
management, call center and virtual office services, and Software as a Service
products. The Company believes the acquisition of Solid Cactus enhances the
Company’s strategic position as a comprehensive, "one-stop" resource for small
and medium-sized businesses seeking online marketing and eCommerce solutions.
Under the terms of the asset purchase agreement, the Company paid cash
consideration of approximately $3.5 million. In addition, the Company expects to
pay Solid Cactus contingent consideration of up to an additional $500 thousand
in April 2012. Although a reduction is not anticipated, this amount may be
reduced by the amount of any unaccrued liabilities that existed at the
acquisition date that the Company later discovers.


53




The
results of operations of Solid Cactus for the period from April 27, 2009 through
December 31, 2009 are included in the Company’s consolidated statement of
operations for the year ended December 31, 2009.




As of
December 31, 2009, the purchase accounting for this acquisition is still subject
to final adjustment primarily for completion of the final valuation of assets
and liabilities acquired.




The
following table summarizes the Company’s preliminary purchase price allocation
based on the fair values of the assets acquired and liabilities assumed on April
27, 2009 (in thousands):





Tangible
      current assets
                              
                              $
                              623Tangible
      non-current assets
                              
                              
                              946Developed
      technology
                              
                              
                              331Customer
      relationships
                              
                              
                              277Non-compete
                              
                              
                              71Domain
      name
                              
                              
                              748Goodwill
                              
                              
                              3,670Current
      liabilities
                              
                              
                              (2,011
                              )Non-current
      liabilities
                              
                              
                              (667
                              )Net
      assets acquired
                              
                              $
                              3,988




The
intangible assets are being amortized over a three to four year period, except
for the domain name which has an indefinite life.  The goodwill
represents business benefits the Company anticipates realizing in future periods
and is expected to be deductible for tax purposes.




Acquisition
of certain assets from LogoYes.com and Design Logic, Inc.




On June
18, 2008, the Company acquired certain assets from LogoYes.com and Design Logic,
Inc. (collectively, “LogoYes”). The Company believes that the LogoYes asset
acquisition enhances its ability to provide services to small and medium –sized
businesses by offering Do-it-Yourself logo design. Under the terms of the asset
purchase agreement, the Company paid cash consideration of approximately $4.5
million plus $176 thousand in transaction costs, which included $900 thousand
deposited in an escrow account to address any breaches of representations and
warranties. Any amounts remaining in the escrow account will be released to
LogoYes eighteen months after the closing date. On December 18, 2009, the
Company released approximately $892 thousand in escrow funds to
LogoYes.




The
results of operations of LogoYes for the period from June 18, 2008 through
December 31, 2009 are included in the Company’s consolidated statement of
operations for the year ended December 31, 2009.




The
following table summarizes the Company’s purchase price allocation based on the
fair values of the assets acquired on June 18, 2008 (in thousands):





Tangible
      current assets
                              
                              $
                              25Developed
      technology
                              
                              
                              1,563Non-compete
                              
                              
                              98Trade
      name
                              
                              
                              115Goodwill
                              
                              
                              2,875Net
      assets acquired
                              
                              $
                              4,676




The
intangible assets 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
and is expected to be deductible for tax purposes.





8.
Restructuring Costs and Other Reserves





In
connection with the acquisition of Web.com, the Company accrued, as part of its
purchase price allocation, certain liabilities that 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 $11.6
million.  As of December 31, 2009, the Company had $460 thousand of
merger-related costs remaining to be paid. These plans were formulated at the
time of the closing of the Web.com acquisition. These restructuring costs and
other reserves are expected to be paid through July 2010.


54





In
addition, as part of the liabilities assumed in the Web.com acquisition, 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 had remaining lease obligations as of September 30, 2007.
Due to the expiration of the statute of limitations and other legal resolutions,
$987 thousand of assumed liabilities were released into income during 2009. As
of December 31, 2009, the Company had a $284 thousand liability remaining for
these restructuring costs. These restructuring costs are expected to be paid
through July 2010.





During
the year ended December 31, 2008, the Company recorded aggregate charges of $836
thousand for restructuring, which principally comprised of contract termination
costs and employee termination benefits. As of December 31, 2009, the Company
had $134 thousand of restructuring costs remaining to be paid.  These
costs are expected to be paid through March 2010.




During
the year ended December 31, 2009, the Company recorded aggregate charges of $1.9
million for restructuring costs, which includes approximately $1.2 million of
stock-based compensation due to the acceleration of the vesting of certain
awards. In connection with the completion of the integration of the Web.com
acquisition, the Company terminated certain employees and recorded related
termination benefits.  As of December 31, 2009, the Company had $186
thousand of employee benefit costs remaining to be paid.  These costs
are expected to be paid through February 2011.




55




The
tables below summarize the activity of accrued restructuring costs and other
reserves during the year ended December 31, 2009 and 2008 (in
thousands):




Balance as of
                                      December 31,
                                      2008
                                    
                                    
                                    Additions
                                    
                                    
                                    Cash
                                      Payments
                                    
                                    
                                    Change in
                                      Estimates
                                    
                                    
                                    Balance as of
                                      December 31,
                                      2009Restructuring
      costs
                                    
                                    $
                                    1,009
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    (580
                                    )
                                    
                                    $
                                    (11
                                    )
                                    
                                    $
                                    418Employee
      Termination Benefits
                                    
                                    
                                    114
                                    
                                    
                                    
                                    757
                                    (1)
                                    
                                    
                                    (685
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    186Merger
      related costs
                                    
                                    
                                    2,710
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,777
                                    )
                                    
                                    
                                    (473
                                    )(2)
                                    
                                    
                                    460Balance
                                    
                                    $
                                    3,833
                                    
                                    
                                    $
                                    757
                                    
                                    
                                    $
                                    (3,042
                                    )
                                    
                                    $
                                    (484
                                    )
                                    
                                    $
                                    1,064





(1)
            During
      the year ended December 31, 2009, the additions to restructuring charges
      excluded non-cash stock compensation expenses of approximately $1.2
      million.


(2)
            During
      the year ended December 31, 2009 as a result of favorable legal
      developments, the Company no longer needed the reserve for existing legal
      matters recorded as part of the merger described
  above.




Balance as of
                                December 31,
                                2007
                              
                              
                              Additions
                              
                              
                              Cash
                                Payments
                              
                              
                              Change in
                                Estimates(1)
                              
                              
                              Balance as of
                                December
                                31, 2008Restructuring
      costs
                              
                              $
                              2,757
                              
                              
                              $
                              474
                              
                              
                              $
                              (1,937
                              )
                              
                              $
                              (285
                              )
                              
                              $
                              1,009Employee
      Termination Benefits
                              
                              
                              —
                              
                              
                              
                              362
                              
                              
                              
                              (248
                              )
                              
                              
                              —
                              
                              
                              
                              114Merger
      related costs
                              
                              
                              10,843
                              
                              
                              
                              —
                              
                              
                              
                              (8,133
                              )
                              
                              
                              —
                              
                              
                              
                              2,710Balance
                              
                              $
                              13,600
                              
                              
                              $
                              836
                              
                              
                              $
                              (10,318
                              )
                              
                              $
                              (285
                              )
                              
                              $
                              3,833





(1)During the year ended
December 31, 2008, the Company paid off a lease obligation early that was
previously recorded as a restructuring cost as part of an acquisition in
2007.  Due to the early termination of this lease, the excess
restructuring costs of $285 thousand were reclassified from accrued
restructuring costs to goodwill.





9.
Goodwill and Intangible Assets




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




December 31,
                                        
                                        Weighted-average
                                          Amortization2009
                                        
                                        
                                        2008
                                        
                                        periodIndefinite
      lived intangible assets:Goodwill
                                        
                                        $
                                        12,895
                                        
                                        
                                        $
                                        9,000Domain/Trade
      names
                                        
                                        
                                        13,880
                                        
                                        
                                        
                                        13,132Definite
      lived intangible assets:Non-compete
      agreements
                                        
                                        
                                        3,408
                                        
                                        
                                        
                                        3,337
                                        
                                        12 monthsCustomer
      relationships
                                        
                                        
                                        33,021
                                        
                                        
                                        
                                        32,744
                                        
                                        55
      monthsDeveloped
      technology
                                        
                                        
                                        29,203
                                        
                                        
                                        
                                        28,872
                                        
                                        44
      monthsOther
                                        
                                        
                                        98
                                        
                                        
                                        
                                        93Accumulated
      amortization
                                        
                                        
                                        (26,551
                                        )
                                        
                                        
                                        (16,093
                                        )$
                                        65,954
                                        
                                        
                                        $
                                        71,085




57


The
weighted-average amortization period for the amortizable intangible assets is
approximately 50 months. Total amortization expense was $10.5 million, $10.2
million, and $3.8 million for the years ended December 31, 2009, 2008, and
2007, respectively. At December 31, 2009, non-compete agreements have a
useful life of between two and three years, customer relationships have useful
lives of between one and eight years, and developed technology has useful lives
of between three and six years. The other intangible assets have useful lives of
between two and three years. Expected amortization expense for the next five
years is as follows (in thousands):




2010
                              
                              
                              9,9912011
                              
                              
                              9,4532012
                              
                              
                              9,1262013
                              
                              
                              7,4872014
                              
                              
                              3,122Total
                              
                              $
                              39,179




The
following table summarizes changes in the Company’s goodwill balances as
required by ASC 350-20 for the periods ended (in thousands):




December 31,2009
                                      
                                      
                                      2008Goodwill
      balance at beginning of period
                                      
                                      $
                                      111,294
                                      
                                      
                                      $
                                      107,933Accumulated
      impaired goodwill at beginning of period
                                      
                                      
                                      (102,294
                                      )
                                      
                                      
                                      —Goodwill
      balance at beginning of period, net
                                      
                                      
                                      9,000
                                      
                                      
                                      
                                      107,933Goodwill
      acquired during the period
                                      
                                      
                                      3,895
                                      
                                      
                                      
                                      3,361Goodwill
      impaired during the year
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (102,294
                                      )Goodwill
      balance at end of period
                                      
                                      
                                      115,189
                                      
                                      
                                      
                                      111,294Accumulated
      impaired goodwill balance at end of period,
                                      
                                      
                                      (102,294
                                      )
                                      
                                      
                                      (102,294
                                      )Goodwill
      balance at end of period, net
                                      
                                      $
                                      12,895
                                      
                                      
                                      $
                                      9,000




In
accordance with ASC 350, the Company reviews goodwill and other indefinite lived
intangible asset 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. On
December 31, 2009, we completed our annual impairment test of goodwill and other
indefinite lived intangible assets and determined there were no indicators of
impairment.





During
the year ended, December 31, 2008, we performed the initial step of our goodwill
impairment evaluation by comparing the fair market value of our Company, as
determined by using discounted cash flow and market approaches, giving equal
weight to both models, to its carrying value. These valuation techniques are
considered to be level 3 inputs with the hierarchy under ASC 820, Fair Value Measurements and
Disclosures.As the carrying amount exceeded the fair value, we performed
the second step of our impairment evaluation to calculate impairment and as a
result recorded a goodwill impairment charge of $102.3 million. The primary
reason for the impairment charge was the decline of our stock price during the
fourth quarter of 2008. In addition due to the impairment evaluation of
indefinite lived intangible assets, the Company determined that one of its
domain/trade names was impaired due to a product rebranding effort. The Company
recorded an intangible asset impairment charge of $258 thousand.




10.
Operating Leases




The table
below summarizes the Company’s operating leases as of December 31,
2009:





Location
                  
                  Square
                      Feet
                  
                  Lease ExpirationHeadquarters
      and principal administrative, finance, and marketing
      operations
                  
                  Jacksonville, FL
                  
                  
                  112,306
                  
                  July
      2019Sales
      center
                  
                  Manassas,
      VA
                  
                  
                  6,000
                  
                  September 2010Sales
      center
                  
                  Norton,
      VA
                  
                  
                  5,467
                  
                  November
      2010Sales
      center
                  
                  Barrie,
      Ontario,Canada
                  
                  
                  8,301
                  
                  May
      2012Lead
      Generation operations center
                  
                  Halifax, Nova Scotia,Canada
                  
                  
                  1,240
                  
                  September
      2010Search
      Engine Optimization operations center
                  
                  Scottsdale,
      AZ
                  
                  
                  8,280
                  
                  March
      2011DIY
      and Hosting operations center
                  
                  Atlanta,
      GA
                  
                  
                  27,482
                  
                  July
      2010DIFM
      operations center
                  
                  Houston,
      TX
                  
                  
                  2,251
                  
                  April
      2010eCommerce
      operations center
                  
                  Shavertown,
      PA
                  
                  
                  15,641
                  
                  March
      2013Sales
      center
                  
                  Wilkes-Barre,
      PA
                  
                  
                  5,587
                  
                  March
      2010




58




Rental
expense for the leased facilities and equipment amounted to approximately $3.4
million, $2.3 million and $1.7 million for the years ended December 31,
2009, 2008 and 2007, respectively. Accrued rent expense was $676 thousand and
$535 thousand as of December 31, 2009 and 2008, respectively.




As of
December 31, 2009, future minimum rental payments required under operating
leases that have initial or remaining non-cancelable terms in excess of one
year, including the leases described above, are as follows (in
thousands):




Minimum
                              Rental
                              Payments
                            
                            
                            Less:
                              Sublease
                              Rentals
                            
                            
                            Net Minimum
                              Rental
                              Payments2010
                            
                            
                            3,243
                            
                            
                            
                            (608
                            )
                            
                            
                            2,6352011
                            
                            
                            2,149
                            
                            
                            
                            (158
                            )
                            
                            
                            1,9912012
                            
                            
                            1,956
                            
                            
                            
                            -
                            
                            
                            
                            1,9562013
                            
                            
                            1,859
                            
                            
                            
                            -
                            
                            
                            
                            1,8592014
                            
                            
                            1,879
                            
                            
                            
                            -
                            
                            
                            
                            1,879Thereafter
                            
                            
                            9,349
                            
                            
                            
                            -
                            
                            
                            
                            9,349$
                            20,435
                            
                            
                            $
                            (766
                            )
                            
                            $
                            19,669




11.
Long-Term Debt and Capital Lease Obligations




Capital
Lease Obligations




The
Company acquired various capital lease obligations as part of the Solid Cactus
acquisition, which consisted of non-cancelable lease agreements of computers and
equipment that continues through 2013. The required minimum payments on these
capital leases as of December 31, 2009 are (in thousands):




2010
                                          
                                          $
                                          2452011
                                          
                                          
                                          1112012
                                          
                                          
                                          742013
                                          
                                          
                                          29Total
                                          
                                          
                                          459Less
      interest
                                          
                                          
                                          (38
                                          )421Less
      current portion
                                          
                                          
                                          (223
                                          )Total
      obligations under capital leases, long term
                                          
                                          $
                                          198




12.
Stock-Based Compensation




The
Company records compensation expense for employee and director stock-based
compensation plans based upon the fair value of the award in accordance with ASC
718, Compensation - Stock
Compensation.The Company has elected to use the with and without
methodology for determining whether an excess tax benefit has been
realized.


59


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 December 31, 2009,
the Company has reserved 4,074,428 shares of common stock for issuance under
this plan. Of the total reserved as of December 31, 2009, options to purchase a
total of 2,021,645 shares of the Company’s common stock were held by
participants under the plan, options to purchase 1,559,502 shares of common
stock have been exercised and options to purchase 493,281 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
Plan that became effective November 2005. As of December 31, 2009, the Company
had reserved 2,922,754 shares for equity incentives to be granted under the 2005
Plan. The option exercise price cannot be less than the fair value of the
Company’s stock on the date of grant. Options granted under the 2005 Plan
generally vest ratably over three or four years, are contingent upon continued
employment, and generally expire ten years from the grant date. As of December
31, 2009, options to purchase a total of 1,445,798 shares were held by
participants under the 2005 Plan, options to purchase 28,151 shares of common
stock have been exercised and restrictions lapsed on 6,755 shares of common
stock. In addition, options to purchase a total of 1,442,050 shares were
available for future issuances under the 2005 Plan.




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. 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 2005 Directors’ Plan calls for the automatic grant of
nonstatutory stock options to purchase shares of common stock, as well as
automatic grants of restricted 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 985,000 shares. As of December 31,
2009, options to purchase a total of 343,000 shares of the Company’s common
stock and 21,167 of restricted shares were held by participants under the plan.
As of December 31, 2009, no options have been exercised and restrictions lapsed
on 50,833 shares of common stock. In addition, 570,000 shares of common stock
were available for future issuances under the 2005 Directors’ Plan.




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 669,869 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. No shares
have been issued under the ESPP. Effective December 31, 2009, the ESPP has been
terminated by the Company’s Board of Directors.





In
connection with the acquisition of Web.com, the Company assumed six additional
equity incentive plans: the Interland-Georgia 1999 Stock Plan, Interland 1995
Stock Option Plan, Interland 2001 Equity Incentive Plan, Interland 2002 Equity
Incentive Plan, Interland 2005 Equity Incentive Plan, and Web.com 2006 Equity
Incentive 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 December 31, 2009, the Company has
reserved 2,424,558 shares for issuance upon the exercise of outstanding options
under the Web.com Option Plans.  Of the total reserved as of December
31, 2009, options to purchase a total of 1,544,385 shares of the Company’s
common stock were held by participants under the plan and options to purchase
638,710 shares of common stock have been exercised. 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.


60


The
Company’s Board of Directors adopted, and its stockholders approved, the 2008
Equity Incentive Plan (the “2008 Plan”), which became effective May 13, 2008.
The 2008 Plan provides for the grant of incentive stock options, nonstatutory
stock options, restricted stock awards, restricted stock unit awards, stock
appreciation rights, performance stock awards, performance cash awards, and
other stock-based awards (stock-based awards) to the Company’s employees,
directors and consultants. The aggregate number of shares of common stock that
was authorized pursuant to the stock-based awards granted under the 2008 Plan
was 3,000,000. As of December 31, 2009, options to purchase a total of 1,242,839
common shares and 888,550 shares of restricted stock were held by participants
under the 2008 Plan, options to purchase 7,397 shares of common stock have been
exercised and restrictions lapsed on 176,535 shares of common stock. In
addition, 684,679 shares of common stock were available for future issuances
under the 2008 Plan.





In
conjunction with the acquisition of substantially all of the assets and
select liabilities of Solid Cactus in April 2009, the Company granted stock
awards to 125 new employees from Solid Cactus under the Company’s 2009
Inducement Award Plan (the “2009 Plan”), adopted in anticipation of the
acquisition. The awards consisted of options to purchase an aggregate of 146,900
shares of the Company’s common stock.  The options have a ten year term and
an exercise price equal to the closing price of the Company’s common stock on
the date of grant. The options vest ratably each month over four years. As of
December 31, 2009, options to purchase a total of 133,345 shares of the
Company’s common stock were held by participants under the 2009 Plan and options
to purchase 561 shares of common stock had been exercised.





The Board
of Directors, or a committee thereof, administers all of the equity incentive
plans and determines the terms of awards granted, including the exercise price
of options, the number of shares subject to individual option awards and the
vesting period of options, within the limits set forth in the equity incentive
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 the Company’s
historical volatility, since the Initial Public Offering, 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.




Year Ended
      December 31,2009
                          
                          
                          2008
                          
                          
                          2007Risk-free
      interest rate
                          
                          
                          1.36-2.95
                          %
                          
                          
                          1.26-3.73
                          %
                          
                          
                          3.23-5.18
                          %Dividend
      yield
                          
                          
                          0
                          %
                          
                          
                          0
                          %
                          
                          
                          0
                          %Expected
      life (in years)
                          
                          
                          5
                          
                          
                          
                          5
                          
                          
                          
                          5Volatility
      (1)
                          
                          
                          62-64
                          %
                          
                          
                          39-52
                          %
                          
                          
                          53-60
                          %





(1)
            For
      options granted after January 1, 2008, the expected volatility rates are
      based on the Company’s historical volatility, since the Initial Public
      Offering, on the date of the grant.  For options granted prior
      to January 1, 2008, the expected volatility rates were based on peer group
      averages on the date of the grant.




Stock
Option Activity




The
following table summarizes option activity 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
                                                                    
                                                                    
                                                                    Aggregate
                                                                      Intrinsic Value
                                                                      (in
      thousands)Balance,
      December 31, 2008
                                                                    
                                                                    
                                                                    7,836,722
                                                                    
                                                                    $
                                                                    0.50
      to 185.46
                                                                    
                                                                    
                                                                    6.29Granted
                                                                    
                                                                    
                                                                    344,300
                                                                    
                                                                    
                                                                    3.55
      to 6.87
                                                                    
                                                                    
                                                                    4.66Exercised
                                                                    
                                                                    
                                                                    (385,781
                                                                    )
                                                                    
                                                                    0.50
      to 6.55
                                                                    
                                                                    
                                                                    3.61Forfeited
                                                                    
                                                                    
                                                                    (440,994
                                                                    )
                                                                    
                                                                    3.55
      to 14.05
                                                                    
                                                                    
                                                                    8.04Expired
                                                                    
                                                                    
                                                                    (606,809
                                                                    )
                                                                    
                                                                    0.50
      to 158.11
                                                                    
                                                                    
                                                                    6.83Balance,
      December 31, 2009
                                                                    
                                                                    
                                                                    6,747,438
                                                                    
                                                                    
                                                                    0.50
      to 185.46
                                                                    
                                                                    
                                                                    6.19
                                                                    
                                                                    
                                                                    
                                                                    5.38
                                                                    
                                                                    
                                                                    $
                                                                    11,877Exercisable
      at December 31, 2009
                                                                    
                                                                    
                                                                    5,417,360
                                                                    
                                                                    
                                                                    0.50
      to 185.46
                                                                    
                                                                    
                                                                    5.96
                                                                    
                                                                    
                                                                    
                                                                    4.68
                                                                    
                                                                    
                                                                    $
                                                                    10,736




Compensation
costs related to the Company’s stock options granted under the Company’s equity
incentive plans were $3.5 million, $3.8 million, and $3.4 million for the years
ended 2009, 2008, and 2007, respectively. Compensation expense is generally
recognized on a straight-line basis over the vesting period of grants. As of
December 31, 2009, the Company had $4.3 million of unrecognized
compensation costs related to stock options, which the Company expects to
recognize through November 2013.




61




The total
intrinsic value of options exercised during the years ended December 31,
2009, 2008, and 2007 was $924 thousand, $1.1 million, and $4.7 million,
respectively. The fair value of shares vested during the years ended
December 31, 2009, 2008, and 2007 was $3.6 million, $3.6 million, and $3.3
million, respectively. The weighted average grant-date fair value of options
granted during the years ended December 31, 2009, 2008, and 2007 was $2.52,
$3.04, and $5.03, respectively.




Price
ranges of outstanding and exercisable options as of December 31, 2009 are
summarized below:




Outstanding
      Options
                                        
                                        
                                        Exercisable
      OptionsExercise Price
                                        
                                        Number
                                          of Options
                                        
                                        
                                        Weighted
                                          Average
                                          Remaining
                                          Life (Years)
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price
                                        
                                        
                                        Number
                                          of Options
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price$0.50
                                        
                                        
                                        385,001
                                        
                                        
                                        
                                        2.41
                                        
                                        
                                        $
                                        0.50
                                        
                                        
                                        
                                        385,001
                                        
                                        
                                        $
                                        0.50$2.00
      – 2.99
                                        
                                        
                                        880,156
                                        
                                        
                                        
                                        3.87
                                        
                                        
                                        
                                        2.00
                                        
                                        
                                        
                                        880,156
                                        
                                        
                                        
                                        2.00$3.00
      – 3.99
                                        
                                        
                                        1,350,237
                                        
                                        
                                        
                                        4.29
                                        
                                        
                                        
                                        3.39
                                        
                                        
                                        
                                        1,216,133
                                        
                                        
                                        
                                        3.35$4.00
      –6.99
                                        
                                        
                                        848,030
                                        
                                        
                                        
                                        7.76
                                        
                                        
                                        
                                        4.99
                                        
                                        
                                        
                                        387,508
                                        
                                        
                                        
                                        5.09$7.00
      – 9.99
                                        
                                        
                                        2,456,422
                                        
                                        
                                        
                                        5.97
                                        
                                        
                                        
                                        8.85
                                        
                                        
                                        
                                        1,871,971
                                        
                                        
                                        
                                        8.87$10.00
      – 19.99
                                        
                                        
                                        812,086
                                        
                                        
                                        
                                        6.04
                                        
                                        
                                        
                                        10.65
                                        
                                        
                                        
                                        661,085
                                        
                                        
                                        
                                        10.71$20.00-185.46
                                        
                                        
                                        15,506
                                        
                                        
                                        
                                        1.37
                                        
                                        
                                        
                                        37.53
                                        
                                        
                                        
                                        15,506
                                        
                                        
                                        
                                        37.536,747,438
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        5,417,360




Restricted
Stock Activity





The
following information relates to awards of restricted stock that has been
granted under our 2005 Non-Employee Directors’ Stock Option Plan, 2005 Equity
Incentive Plan, and 2008 Equity Incentive 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, which ranges between one and four years. At December 31, 2009, there
were 909,717 shares of restricted stock outstanding.





The
following restricted stock activity occurred under the Company’s equity
incentive plans during the year ended December 31, 2009:





Restricted Stock Activity
                  
                  Shares
                  
                  
                  Weighted
                    Average
                    Grant-Date Fair ValueRestricted
      stock outstanding at December 31, 2008
                  
                  
                  654,859
                  
                  
                  $
                  6.31Granted
                  
                  
                  756,000
                  
                  
                  
                  4.53Forfeited
      shares
                  
                  
                  (260,584
                  )
                  
                  
                  6.32Lapse
      of restriction
                  
                  
                  (240,558
                  )
                  
                  
                  7.07Restricted
      stock outstanding at December 31, 2009
                  
                  
                  909,717
                  
                  
                  $
                  5.58





Compensation
expense for restricted stock awards during the years ended 2009 and 2008 was
approximately $2.6 million, and $932 thousand, respectively. As of December
312009, there was approximately $3.6 million of total unamortized compensation
cost related to the restricted stock outstanding.




13.
Common Shares Reserved




The
Company had reserved the following number of shares of common stock for future
issuance:




December 31,2009
                                
                                
                                2008
                                
                                
                                2007Outstanding
      stock options
                                
                                
                                6,747,438
                                
                                
                                
                                7,836,722
                                
                                
                                
                                6,873,462Options
      available for future grants and other awards
                                
                                
                                2,696,729
                                
                                
                                
                                2,616,777
                                
                                
                                
                                1,166,471Warrants
      outstanding
                                
                                
                                —
                                
                                
                                
                                21,667
                                
                                
                                
                                279,896Escrow
      shares relating to the Renex acquisition
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                139,461Total
      common shares reserved
                                
                                
                                9,444,167
                                
                                
                                
                                10,475,166
                                
                                
                                
                                8,459,290




62




14.
Income Taxes




The
provision (benefit) for income taxes consisted of the following for the years
ended December 2009, 2008, and 2007:




2009
                            
                            
                            2008
                            
                            
                            2007Current
      expense:Federal
                            
                            $
                            178
                            
                            
                            $
                            124
                            
                            
                            $
                            127State
                            
                            
                            3
                            
                            
                            
                            6
                            
                            
                            
                            —Foreign
                            
                            
                            118
                            
                            
                            
                            146
                            
                            
                            
                            231Deferred
      (benefit) expense:Federal
                            
                            
                            (1,552
                            )
                            
                            
                            (184
                            )
                            
                            
                            1,093State
                            
                            
                            (157
                            )
                            
                            
                            6
                            
                            
                            
                            653Foreign
                            
                            
                            (19
                            )
                            
                            
                            27
                            
                            
                            
                            (27
                            )Total
      tax (benefit) expense
                            
                            $
                            (1,429
                            )
                            
                            $
                            125
                            
                            
                            $
                            2,077




As of
December 31, 2009 and 2008, the Company had federal net operating loss
carryforwards of approximately $211.0 million and $219.3 million, respectively,
which begin to expire in the year 2019. The net operating loss carryforwards
include approximately $171.8 million obtained through the acquisition of Web.com
during 2007.  The net operating loss carryforwards are subject to
various limitations under Section 382 of the Internal Revenue Code. Accordingly,
the Company estimates that at least $140.1 million of net operating loss
carryforwards will be available during the carryforward period. An additional
amount may be available as a result of recognized built in gains during the
five-year period following the change in ownership.




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities are as follows at December 31
(in thousands):




2009
                                                              
                                                              
                                                              2008Deferred
      tax assets:Current:Net
      operating loss carryforwards
                                                              
                                                              $
                                                              3,868
                                                              
                                                              
                                                              $
                                                              2,214Allowance
      for doubtful accounts
                                                              
                                                              
                                                              163
                                                              
                                                              
                                                              
                                                              245Deferred
      rent
                                                              
                                                              
                                                              9
                                                              
                                                              
                                                              
                                                              6Deferred
      revenue
                                                              
                                                              
                                                              967
                                                              
                                                              
                                                              
                                                              1,197Intangible
      basis
                                                              
                                                              
                                                              34
                                                              
                                                              
                                                              
                                                              —Stock
      based compensation
                                                              
                                                              
                                                              577
                                                              
                                                              
                                                              
                                                              239Accrued
      restructuring costs and other reserves
                                                              
                                                              
                                                              367
                                                              
                                                              
                                                              
                                                              8885,985
                                                              
                                                              
                                                              
                                                              4,789Less:
      valuation allowance
                                                              
                                                              
                                                              (4,498
                                                              )
                                                              
                                                              
                                                              (3,670
                                                              )Net
      current deferred tax assets
                                                              
                                                              
                                                              1,487
                                                              
                                                              
                                                              
                                                              1,119Noncurrent:Fixed
      assets basis
                                                              
                                                              
                                                              528
                                                              
                                                              
                                                              
                                                              473Intangible
      basis
                                                              
                                                              
                                                              10,216
                                                              
                                                              
                                                              
                                                              —Deferred
      revenue
                                                              
                                                              
                                                              53
                                                              
                                                              
                                                              
                                                              59Stock
      based compensation
                                                              
                                                              
                                                              1,784
                                                              
                                                              
                                                              
                                                              1,190Accrued
      restructuring costs and other reserves
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              742Installment
      sale
                                                              
                                                              
                                                              55
                                                              
                                                              
                                                              
                                                              —Alternative
      minimum tax credit
                                                              
                                                              
                                                              559
                                                              
                                                              
                                                              
                                                              387Net
      operating loss carryforwards
                                                              
                                                              
                                                              49,391
                                                              
                                                              
                                                              
                                                              54,10962,586
                                                              
                                                              
                                                              
                                                              56,960Less:
      valuation allowance
                                                              
                                                              
                                                              (46,770
                                                              )
                                                              
                                                              
                                                              (50,448
                                                              )Net
      noncurrent deferred tax assets
                                                              
                                                              
                                                              15,816
                                                              
                                                              
                                                              
                                                              6,512Deferred
      tax liabilities:Current:Deferred
      revenue
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              7Stock
      based compensation
                                                              
                                                              
                                                              5
                                                              
                                                              
                                                              
                                                              19Total
      current deferred tax liabilities
                                                              
                                                              
                                                              5
                                                              
                                                              
                                                              
                                                              26Noncurrent:Intangible
      basis
                                                              
                                                              
                                                              17,202
                                                              
                                                              
                                                              
                                                              9,073Stock
      based compensation
                                                              
                                                              
                                                              5
                                                              
                                                              
                                                              
                                                              42Deferred
      rental income
                                                              
                                                              
                                                              38
                                                              
                                                              
                                                              
                                                              103Other
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              6Total
      noncurrent deferred tax liabilities
                                                              
                                                              
                                                              17,245
                                                              
                                                              
                                                              
                                                              9,224Net
      current deferred tax asset
                                                              
                                                              
                                                              1,482
                                                              
                                                              
                                                              
                                                              1,093Net
      noncurrent deferred tax(liability)
                                                              
                                                              
                                                              (1,429
                                                              )
                                                              
                                                              
                                                              (2,712
                                                              )Net
      deferred tax asset (liability)
                                                              
                                                              $
                                                              53
                                                              
                                                              
                                                              $
                                                              (1,619
                                                              )




63




The
valuation allowance decreased by approximately $2.8 million during 2009 and
increased by approximately $11.4 million during 2008. The change in the
valuation allowance from 2009 to 2008 is primarily attributable to the release
of a valuation reserve of $2.7 million.




The
provision (benefit) for income taxes differs from the amount computed by
applying the statutory U.S. federal income tax rates as a result of the
following:




2009
                              
                              
                              2008
                              
                              
                              2007U.S
      statutory rate
                              
                              
                              34.0
                              %
                              
                              
                              (34.0
                              )%
                              
                              
                              34.0
                              %State
      income taxes (net of federal tax benefit)
                              
                              
                              4.0
                              
                              
                              
                              (4.0
                              )
                              
                              
                              4.0Goodwill
      impairment charge
                              
                              
                              —
                              
                              
                              
                              30.3
                              
                              
                              
                              —Stock
      based compensation
                              
                              
                              69.9
                              
                              
                              
                              1.1
                              
                              
                              
                              21.9Change
      in valuation allowance
                              
                              
                              (229.8
                              )
                              
                              
                              6.7
                              
                              
                              
                              —Other
                              
                              
                              0.7
                              
                              
                              
                              —
                              
                              
                              
                              0.3(121.2
                              )%
                              
                              
                              0.1
                              %
                              
                              
                              60.2
                              %




The
Company applies ASC 740,
Income Taxes, which clarifies the accounting for uncertainty in income
tax positions recognized in financial statements. The Company is subject to
audit by the Canada Revenue Agency for four years and 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.





The
Company’s
unrecognized tax benefits are summarized as follows:




Balance
      at December 31, 2007
                                
                                $
                                91Additions
      in unrecognized tax benefit – prior year tax positions
                                
                                
                                —Additions
      in unrecognized tax benefit – current year tax positions
                                
                                
                                88Foreign
      exchange gains and losses
                                
                                
                                (17
                                )Balance
      at December 31, 2008
                                
                                $
                                162Additions
      in unrecognized tax benefits – prior year tax positions
                                
                                
                                —Additions
      in unrecognized tax benefits – current year tax positions
                                
                                
                                20Foreign
      exchange gains and losses
                                
                                
                                27Balance
      at December 31, 2009
                                
                                $
                                209


As of
December 31, 2009 and 2008, the Company had approximately $209 thousand and $162
thousand, respectively, of total unrecognized tax benefits, which could
favorably affect the effective income tax rate. In
addition, the Company recorded $22 thousand and $10 thousand during 2009 and
2008, respectively, of accrued interest on the unrecognized tax
benefits.





The
Company’s undistributed foreign earnings of approximately $800 thousand are
considered to be permanently reinvested into the foreign jurisdictions.
Accordingly, the company has not provided deferred taxes on these
earnings.





64




15.
Employee Savings Plan




Effective
August 1, 2000, the Company established a 401(k) savings plan designed to
qualify under Section 401(k) of the Internal Revenue Code. All employees at
the date of hire are eligible to participate in the plan. Each participant may
contribute to the plan up to the maximum allowable amount as determined by the
Federal Government. Employee 401(k) deferrals are 100% vested. Company
contributions are subject to a vesting schedule based on years of service. The
Company began making contributions to the plan in 2004. The Company recorded
contribution expense of $220 thousand, $416 thousand and $232 thousand for 2009,
2008, and 2007, respectively.




16.
Related Party Transactions




On May
18, 2009, pursuant to its repurchase program, the Company purchased
approximately 196,000 shares of common stock from the Company’s former President
and former director, Jeffrey M. Stibel. These shares of common stock were
purchased at a discount of 5%, which was based on the May 15, 2009 closing
price, for $865 thousand.




On
September 2, 2009 pursuant to its repurchase program, the Company purchased
approximately 81,067 shares of common stock from Mr. Stibel, 36,505 shares of
common stock from Kevin Carney, the Company’s Chief Financial Officer, and
28,391 shares of common stock from Alex Kazarani, a member of the Company’s
Board of Directors. These shares of common stock were purchased at a discount of
5%, which was based on the September 2, 2009 closing price, for approximately
$806 thousand. In addition, the Company purchased vested options to purchase
225,000 shares of the Company’s common stock from David L. Brown, the Company’s
Chief Executive Officer and a director. These options to purchase the Company’s
common stock were purchased at a discount of 5% less the exercise price per
option, for approximately $979 thousand.




The
Company hired Brown & Associates, an entity owned by the brother of the
Company’s Chief Executive Officer and director, on a contingency based fee to
determine whether the Company overpaid sales tax to various
entities.  The total amount of fees paid to Brown & Associates for
successful refunds of sales tax, totaling $787 thousand, was $153 thousand for
the year ended December 31, 2008. In addition, there was an unpaid balance of
$69 thousand as of December 31, 2009.





The
Company purchases online marketing services, including online advertising, from
The Search Agency, Inc. (TSA), an entity in which the Company’s former
President and former director, Jeffrey M. Stibel, has an equity interest.
Mr. Stibel is also a member and chairman of the Board of Directors of TSA.
The Company’s purchases of online marketing services from TSA are made pursuant
to the Company’s standard form of purchase order. The purchase order imposes no
minimum commitment or long-term obligation on the Company. The Company may
terminate the arrangement at any time. The Company pays TSA fees equal to a
specified percentage of the Company’s purchases of online advertising made
through TSA. The Company believes that the services it purchases from TSA, and
the prices it pays, are competitive with those available from alternative
providers. Mr. Stibel does not have a related party relationship with the
Company effective September 30, 2009. The total amount of fees paid to TSA for
services rendered thru September 30, 2009 was $444 thousand. There were no
unpaid balances related to these services provided at December 31, 2009. The
total amount of fees paid to TSA for services rendered for the year ended
December 31, 2008 was $1.0 million and $63 thousand was accrued as a payable at
December 31, 2008.




On
December 22, 2009, the Company entered into a Master Channel Partner Agreement
with ExactTarget, Inc. (“ExactTarget”) for ExactTarget to provide email
marketing solutions to the Company. Timothy Maudlin is the Lead Director of
Web.com and a member of the board of directors and a shareholder of ExactTarget.
The approximate dollar value of the amount involved in the transaction is
$168,500 plus a potential share of revenue from the sale of the email marketing
solution to end users.
 
 On
February 3, 2010, the Company entered into an Asset Purchase Agreement with
Innuity, Inc. (“Innuity”) for the purchase of website hosting accounts. Timothy
Maudlin is the Lead Director of Web.com and a shareholder of Innuity. The
approximate dollar value of the amount involved in the transaction is $1.5
million plus a potential share of revenue from the sale of additional Company
services to the website hosting account end users.




65





17.
Commitments and Contingencies





Letters
of Credit





The
Company utilizes letters of credit to back certain payment obligations relating
to its facility operating leases. The Company had no outstanding borrowings as
of December 31, 2009 and had approximately $1.7 million in standby letters of
credit.





Legal
Matters





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




On
August 2, 2006, Web.com Holding 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
Holding pertaining to events in 2001. Web.com Holding 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. These
actions were consolidated in state court in Pennsylvania on September 30, 2008.
On October 1, 2009, the parties entered into a confidential settlement agreement
which resolved the lawsuit.  The settlement did not have a material impact
to the Consolidated Financial Statements.




On June
19, 2006, Web.com Holding 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 Holdings’ patents. On January 8, 2009, the parties entered into a
confidential settlement and patent cross-licensing agreement, which resolved the
lawsuit. The revenue derived from the sale of the patent license is reflected in
other revenue for the year ended December 31, 2009.





The
outcome of any litigation cannot be assured, and despite management’s views of
the merits of any litigation, or the reasonableness of the Company’s estimates
and reserves, the Company’s cash balances could nonetheless be materially
affected by an adverse judgment. In accordance with ASC 450, Contingencies, the Company
believes it has adequately reserved for the contingencies arising from the
current legal matters where an outcome was deemed to be probable and the loss
amount could be reasonably estimated. As such, the Company does not believe that
the anticipated outcome of any current litigation will have a materially adverse
impact on its financial condition, cash flows, or results of
operations.





2.
Financial Statement Schedules




The
information required by Schedule II, Valuation and Qualifying Accounts, is
included in Note 5 to the Consolidated Financial Statements. All other financial
statement schedules are not applicable.


66


3.
Exhibits.





Exhibit No.
                              
                              Description
      of Document2.1
                              
                              Agreement
      and Plan of Merger and Reorganization dated June 26, 2007 by and among
      Web.com Group, Inc. Augusta Acquisition Sub, Inc., and Web.com,
      Inc.(1)3.1
                              
                              Amended
      and Restated Certificate of Incorporation of Web.com Group,
      Inc.(2)3.2
                              
                              Amended
      and Restated Bylaws of Web.com Group, Inc.(3)3.3
                              
                              Certificate
      of Ownership and Merger of Registrant (4)4.1
                              
                              Reference
      is made to Exhibits 3.1 and 3.24.2
                              
                              Specimen
      Stock Certificate.(4)4.3
                              
                              Warrant
      dated April 27, 2004, exercisable for 72,942 shares of common
      stock.(2)10.1
                              
                              1999
      Equity Incentive Plan and forms of related
  agreements.(2)10.2
                              
                              2005
      Equity Incentive Plan and forms of related
  agreements.(2)10.3
                              
                              2005
      Non-Employee Directors’ Stock Option Plan and forms of related
      agreements.(2)10.4
                              
                              2005
      Employee Stock Purchase Plan.(2)10.5
                              
                              2008
      Equity Incentive Plan and forms of related agreements.
  (5)+10.6
                              
                              2009
      Inducement Award Plan. (6)10.7
                              
                              Form
      of Option Grant Notice under 2009 Inducement Award Plan.
      (6)10.8
                              
                              Executive
      Severance Benefit Plan.(7)+10.9
                              
                              Form
      of Indemnity Agreement entered into between the registrant and certain of
      its officers and directors. (2)10.10
                              
                              Compensatory
      Arrangements of certain officers. (8)+10.11
                              
                              Lease
      agreement dated December 4, 2007 between the Company and FDG Flagler
      Center I, LLC (9)10.12
                              
                              Amended
      and Restated Employment Agreement by and between the Company and David L.
      Brown. (10)+10.13
                              
                              Amended
      and Restated Employment Agreement by and between the Company and Kevin
      Carney. (10)+10.14
                              
                              Transition
      Agreement by and between Jeffrey M. Stibel and the Company, dated August
      13, 2009. (11)+10.15
                              
                              Form
      of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement.
      (3)+21.1
                              
                              Subsidiaries
      of the registrant.23.1
                              
                              Consent
      of Ernst & Young, LLP, Independent Registered Public Accounting
      Firm.24.1
                              
                              Power
      of Attorney (included in the signature page hereto).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).(12)





(1)
                Filed
      as an exhibit to the Registrant's current report on Form 8-K (No.
      000-51595), filed with the SEC on June 27, 2007, and incorporated herein
      by reference.
 (2)
                Filed
      as an exhibit 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.
  67
  (3)
                Filed
      as an exhibit to the Registrant's current report on Form 8-K (No
      .000-51595), filed with the SEC on February 10, 2009, and incorporated
      herein by reference.
 (4)
                Filed
      as an exhibit to the Registrant's current report on Form 8-K (No.
      000-51595), filed with the SEC on October 30, 2008, and incorporated
      herein by reference.
 (5)
                  Filed
      as Appendix B to Company’s Proxy Statement on Schedule 14A, filed with the
      SEC on April 14, 2008, and incorporated herein by
    reference.(6)
                  Filed
      as an exhibit to the Registrants registration statement on Form S-8 (No.
      333-158819), filed with the SEC on April 27, 2009, and incorporated herein
      by reference.
 (7)
                Filed
      as an exhibit to the Registrant’s annual report on Form 10-K (No
      000-51595), filed with the SEC on March 6,
2009.
 
 (8)
                Filed
      as Item 5.02 to the Registrant's current report on Form 8-K (No.
      000-51595), filed with the SEC on March 20, 2009, and incorporated herein
      by reference.
 (9)
                Filed
      as an exhibit to the Registrant’s Quarterly Report on Form 10-Q (No.
      000-51595), filed with the SEC on May 12, 2008, and incorporated herein by
      reference.
 (10)
                Filed
      as an exhibit to the Registrant’s current report on Form 8-K (No.
      000-51595), filed with the SEC on November 3, 2009, and incorporated
      herein by reference.
 (11)
                Filed
      as an exhibit to the Registrant’s current report on Form 8-K (No.
      000-51595), filed with the SEC on August 17, 2009, and incorporated herein
      by reference.
 (12)
                The
      certification attached as Exhibit 32.1 accompanying this Annual Report on
      Form 10-K, is not deemed filed with the Securities and Exchange Commission
      and is not to be incorporated by reference into any filing of Web.com
      Group, 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 Annual Report on Form 10-K, irrespective of any general
      incorporation language contained in such
filing.
  +           Indicates
management contract or compensatory plan.


68


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.




Web.com
      Group, Inc.(Registrant)March
      5, 2010Date
              
              Kevin
      M. CarneyChief
      Financial Officer(Principal
      Financial and Accounting
Officer)




POWER
OF ATTORNEY




KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David L. Brown and Kevin M. Carney, and each of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution for him, and in his name in any and all capacities, to sign any and
all amendments to this Form 10-K, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, and any of them or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue
hereof.




Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
by the following persons on behalf of the Registrant in the capacities indicated
on March 5, 2010:




Name
                                                                            
                                                                            TitleChairman,
      President, Chief Executive OfficerDavid
      L. Brown
                                                                            
                                                                            (Principal
      Executive Officer)Chief
      Financial OfficerKevin
      M. Carney
                                                                            
                                                                            (Principal
      Financial and Accounting Officer)Lead
      DirectorTimothy
      I. MaudlinDirectorHugh
      M. DurdenDirectorAlex
      KazeraniDirectorRobert
      S. McCoy, Jr.


69


EXHIBIT
INDEX


Exhibit No.
                                
                                Description
      of Document2.1
                                
                                Agreement
      and Plan of Merger and Reorganization dated June 26, 2007 by and among
      Web.com Group, Inc. Augusta Acquisition Sub, Inc., and Web.com,
      Inc.(1)3.1
                                
                                Amended
      and Restated Certificate of Incorporation of Web.com Group,
      Inc.(2)3.2
                                
                                Amended
      and Restated Bylaws of Web.com Group, Inc.(3)3.3
                                
                                Certificate
      of Ownership and Merger of Registrant (4)4.1
                                
                                Reference
      is made to Exhibits 3.1 and 3.24.2
                                
                                Specimen
      Stock Certificate.(4)4.3
                                
                                Warrant
      dated April 27, 2004, exercisable for 72,942 shares of common
      stock.(2)10.1
                                
                                1999
      Equity Incentive Plan and forms of related
  agreements.(2)10.2
                                
                                2005
      Equity Incentive Plan and forms of related
  agreements.(2)10.3
                                
                                2005
      Non-Employee Directors’ Stock Option Plan and forms of related
      agreements.(2)10.4
                                
                                2005
      Employee Stock Purchase Plan.(2)10.5
                                
                                2008
      Equity Incentive Plan and forms of related agreements.
  (5)+10.6
                                
                                2009
      Inducement Award Plan. (6)10.7
                                
                                Form
      of Option Grant Notice under 2009 Inducement Award Plan. (6)10.8
                                
                                Executive
      Severance Benefit Plan.(7)+10.9
                                
                                Form
      of Indemnity Agreement entered into between the registrant and certain of
      its officers and directors. (2)10.10
                                
                                Compensatory
      Arrangements of certain officers. (8)+10.11
                                
                                Lease
      agreement dated December 4, 2007 between the Company and FDG Flagler
      Center I, LLC (9)10.12
                                
                                Amended
      and Restated Employment Agreement by and between the Company and David L.
      Brown. (10)+10.13
                                
                                Amended
      and Restated Employment Agreement by and between the Company and Kevin
      Carney. (10)+10.14
                                
                                Transition
      Agreement by and between Jeffrey M. Stibel and the Company, dated August
      13, 2009. (11)+10.15
                                
                                Form
      of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement.
      (3)+21.1
                                
                                Subsidiaries
      of the registrant.23.1
                                
                                Consent
      of Ernst & Young, LLP, Independent Registered Public Accounting
      Firm.24.1
                                
                                Power
      of Attorney (included in the signature page hereto).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).(12)





(1)
            Filed
      as an exhibit to the Registrant's current report on Form 8-K (No.
      000-51595), filed with the SEC on June 27, 2007, and incorporated herein
      by reference.


(2)
            Filed
      as an exhibit 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.




70




(3)
            Filed
      as an exhibit to the Registrant's current report on Form 8-K (No
      .000-51595), filed with the SEC on February 10, 2009, and incorporated
      herein by reference.


(4)
            Filed
      as an exhibit to the Registrant's current report on Form 8-K (No.
      000-51595), filed with the SEC on October 30, 2008, and incorporated
      herein by reference.


(5)
              Filed
      as Appendix B to Company’s Proxy Statement on Schedule 14A, filed with the
      SEC on April 14, 2008, and incorporated herein by
    reference.(6)
              Filed
      as an exhibit to the Registrants registration statement on Form S-8 (No.
      333-158819), filed with the SEC on April 27, 2009, and incorporated herein
      by reference.


(7)
            Filed
      as an exhibit to the Registrant’s annual report on Form 10-K (No
      000-51595), filed with the SEC on March 6,
2009.


(8)
            Filed
      as Item 5.02 to the Registrant's current report on Form 8-K (No.
      000-51595), filed with the SEC on March 20, 2009, and incorporated herein
      by reference.


(9)
            Filed
      as an exhibit to the Registrant’s Quarterly Report on Form 10-Q (No.
      000-51595), filed with the SEC on May 12, 2008, and incorporated herein by
      reference.


(10)
            Filed
      as an exhibit to the Registrant’s current report on Form 8-K (No.
      000-51595), filed with the SEC on November 3, 2009, and incorporated
      herein by reference.


(11)
            Filed
      as an exhibit to the Registrant’s current report on Form 8-K (No.
      000-51595), filed with the SEC on August 17, 2009, and incorporated herein
      by reference.


(12)
            The
      certification attached as Exhibit 32.1 accompanying this Annual Report on
      Form 10-K, is not deemed filed with the Securities and Exchange Commission
      and is not to be incorporated by reference into any filing of Web.com
      Group, 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 Annual Report on Form 10-K, irrespective of any general
      incorporation language contained in such
filing.





+           Indicates
management contract or compensatory plan.




71