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**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 Year Ended December 31, 2004**





**OR**





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





**For
the Transition Period from**  **to**  ****





**Commission
File Number: 0-30849**





**WEBEX
COMMUNICATIONS, INC.**


**(Exact
name of registrant as specified in its charter)**





**Delaware**
    **77-0548319****(State
      or other jurisdiction of incorporation or
      organization)**
    **(I.R.S.
      Employer Identification Number)**





**3979
      Freedom Circle****Santa
      Clara, California**
    **95054****(Address
      of principal executive offices)**
    **(Zip
      Code)**





**Registrant’s
telephone number, including area code: (408) 435-7000**





**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 per share**


**(Title
of Class)**





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





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





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes x No  ̈





The
aggregate market value of Common Stock held by non-affiliates as of June 30,
2004 (the last business day of the registrant’s most recently-completed second
fiscal quarter and based upon the closing sale price on the Nasdaq National
Market on such date) was approximately $642,407,272. Shares of Common Stock held
by each executive officer and director, and shares held by other individuals and
entities and based on Schedule 13G filings, have been excluded since such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.





As of
February 28, 2005, there were 45,259,724 shares of Common Stock, $0.001 per
share par value, outstanding.








**DOCUMENTS
INCORPORATED BY REFERENCE**





Items 10
(as to directors, audit committee and audit committee financial expert, and
section 16(a) beneficial ownership reporting compliance), 11, 12 (as to security
ownership of certain beneficial owners and management), 13 and 14 of Part III of
this Annual Report of Form 10-K are incorporated by reference from the proxy
statement for the registrant’s 2005 Annual Meeting of Stockholders
to be held on May 11, 2005, which proxy statement will be filed within 120 days
of the end of the fiscal year ended December 31, 2004 .








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**WEBEX
COMMUNICATIONS, INC.**





**FORM
10-K**


**For
the Year Ended December 31, 2004**





**TABLE
OF CONTENTS**





**Page No.****PART
      I**Item 1.
    Business
    1Item 2.
    Properties
    7Item 3.
    Legal Proceedings
    7Item 4.
    Submission of Matters to a Vote of Security Holders
    7Executive Officers of the Registrant
    8**PART
      II**Item 5.
    Market for the Registrant’s Common Stock, Related
      Stockholder Matters and Issuer Purchases of Equity Securities
    10Item 6.
    Selected Financial Data
    11Item 7.
    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
    12Item 7A.
    Quantitative and Qualitative Disclosures About Market Risk
    34Item 8.
    Financial Statements and Supplementary Data
    35Item 9.
    Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
    59Item 9A.
    Controls and Procedures
    59Item 9B.
    Other Information
    61**PART
      III**Item 10.
    Directors and Executive Officers of the Registrant
    61Item 11.
    Executive Compensation
    62Item 12.
    Security
      Ownership of Certain Beneficial Owners and Managementand
      Related Stockholder Matters
    62Item 13.
    Certain Relationships and Related Transactions
    64Item 14.
    Principal Accounting Fees and Services
    64**PART
      IV**Item 15.
    Exhibits and Financial Statement
    Schedules
    64Signatures
    67Exhibit Index
    68











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**When
used in this Report, the words “anticipates,” “expects,” “intends,” “plans,”
“believes,” “seeks,” “estimates” and similar expressions are intended to
identify forward-looking statements. These are statements that relate to future
periods and include, but are not limited to, statements as to our ability to
enhance the quality and variety of real-time communications, statements about
the features, benefits and performance of our current service offerings and
technology including our belief that use of our services allows users to be more
productive and efficient, our ability to introduce new product offerings and
increase revenue from existing products, our ability to integrate current and
emerging technology into our service offerings and our ability to find
replacements for third party technologies, expected expenses including those
related to sales and marketing, research and development and general and
administrative, our beliefs regarding the health and growth of the market for
our web conferencing services, anticipated increase in our customer base,
expansion of our service offerings and service functionalities, ability to
reduce operating expenses, expected revenue levels and sources of revenue,
expected impact, if any, of legal proceedings or changes in laws or regulations
relating to our business, expected increases in headcount, the adequacy of
liquidity and capital resources, the sufficiency of our cash reserves to meet
our capital requirements, expected growth in business and operations, our
ability to realize positive cash flow from operations, the ability of cash
generated from operations to satisfy our liquidity requirements, our ability to
continue to realize net earnings, and the effect of recent accounting
pronouncements. Forward looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, our
dependence on key products and/or services, demand for our products and
services, our ability to attract and retain customers and distribution partners
for existing and new services, our ability to expand and manage our operations
internationally, our ability to expand and manage our infrastructure to meet
both our internal corporate needs as well as the demand for our services, our
ability to control our expenses, our ability to recruit and retain employees
particularly in the areas of sales, engineering, support and hosting services,
the ability of distribution partners to successfully resell our services, the
economy, political tensions or conflict, the strength of competitive offerings,
the prices being charged by those competitors, the risks discussed below and the
risks discussed in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Factors that May Affect Results.” These
forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.**





*In
the sections of this report entitled “Business” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, all references to
“WebEx,” “we,” “us,” “our” or the “Company” mean WebEx Communications, Inc.*





Our
trademarks include WebEx (word and design), WebEx bifurcated ball logo design,
WebEx.com, MyWebEx, MyWebExPC, Bringing the Meeting to You, MediaTone, Meeting
Center, WebEx Meeting Center, Event Center, WebEx Event Center, We’ve Got To
Start Meeting Like This, Presentation Studio, WebEx Connect, WebEx Global Watch,
WebEx Contact Center, WebEx Access Anywhere and Power Panels. We also refer to
trademarks of other corporations and organizations in this document.








**PART
I**





**Item
1.*****Business*******





***Overview***





We
develop and market services that allow end-users to conduct meetings and share
software applications, documents, presentations and other content on the
Internet using a standard web browser. Integrated telephony and web-based audio
and video services are also available using standard devices such as telephones,
computer web-cameras and microphones. Because our services enable users to share
voice, data and video with others in remote locations, we believe we can enhance
the quality and variety of real-time communications compared to traditional
telephone communications. Our services enable users to engage in media-rich,
interactive, real-time communications without the need to be in the same
physical location, which we believe allows users to be more productive and
efficient.





We
commenced operations in February 1995, at the time under the name Silver
Computing, Inc. We went through name changes including the names Stellar
Computing Corporation, ActiveTouch, Inc. and WebEx, Inc. before reincorporating
in Delaware under our current name WebEx Communications, Inc. in July 2000. We
released interactive communications software built on our technology in early
1998, and our business at that time was focused on licensing software to
end-users. We began offering WebEx Meeting Center, our first real-time,
interactive, multimedia communications service, in February 1999 and began
selling the service to customers and distribution partners. With WebEx Meeting
Center, our business focus became, instead of licensing software to end-users,
providing customers and distribution partners access to our hosted services
under subscription and other service arrangements.








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Since
February 1999, our activities have been focused on continuing to enhance and
market our web communications services, on developing and deploying new
services, on expanding our sales and marketing organizations, and on expanding
our WebEx MediaTone Network. We currently offer the following services: WebEx
Meeting Center, WebEx Meeting Center Pro, WebEx Training Center, WebEx Support
Center, WebEx Event Center, WebEx Enterprise Edition, WebEx Sales Center, WebEx
SMARTtech, WebEx Presentation Studio, and our newest service,
MyWebExPC . ****





We sell
our services directly to our customers and indirectly through our distribution
partners. We offer our services on a monthly subscription basis to our customers
and on a revenue sharing, discounted or pay-per-use basis through our
distribution partners. Revenue from subscription services consists primarily of
monthly fixed fees, which are based upon either a fixed number of concurrent
ports, a fixed number of named hosts, or a fixed usage-based minimum commitment
fee, plus initial set-up fees. Typically, our fixed-fee contracts are for an
initial non-cancelable term ranging from three to twelve months, and then
automatically renew for additional periods unless terminated by either party. In
addition, we obtain revenue from certain “per minute”, or usage-based, pricing
arrangements including any of the following: usage in excess of the usage
commitment or the concurrent ports maximum, telephony, certain distribution
partner arrangements, or individual pay-per-use purchased directly from our
website.








***Our
Services and Technology Architecture***





We have
designed and developed our technology architecture to satisfy the interactive
communications requirements of a broad range of customers. We provide a number
of web communications services, which are delivered through the WebEx MediaTone
Network.





*WebEx
Communication Services* ***.*** Our web
communications services provide a broad range of features that build on the
real-time functionality and capabilities of the WebEx MediaTone Network.




•***WebEx
Meeting Center.***WebEx
Meeting Center is a service designed to enable the sharing of documents and
applications on the Web and to allow business
professionals
to communicate more effectively and economically through interactive online
meetings. WebEx Meeting Center is a service that can be easily
provisioned
with low start-up costs and without the need for the involvement of information
technology professionals. Our basic service, WebEx Meeting Center
Standard,
allows users to give presentations, demonstrate software, view and annotate any
document electronically, and includes integrated teleconferencing. An
upgraded
version of Meeting Center Standard, Meeting Center Pro, includes the full range
of Meeting Center Standard functionality and some additional features
such as
record and playback, integrated video, the ability to edit any document
collaboratively and the ability to share applications or a user’s entire
desktop.


•  ***WebEx
Support Center.*** This
service is primarily used by customer service organizations to provide remote
hands-on support for system or software application


problems.
WebEx Support Center enables our customers to enhance the effectiveness of
traditional telephone-based customer support by allowing their service


agents to
support end-users through a web browser, with no requirement for pre-installed
software on either computer. The service incorporates a custom user


interface to
simplify support interactions for both the support agent and the end-user.




•  ***WebEx
Event Center.*** WebEx Event Center offers business managers and executives a professionally
managed web conferencing service for communications


events such
as press briefings, product announcements and marketing events. WebEx Event
Center combines WebEx’s interactive meeting capabilities with


planning,
training, logistics management and real-time support services to provide a
comprehensive service that reduces the customer effort involved in hosting a


web seminar.
WebEx Event Center includes online confirmation, notification, and instruction,
customized attendee registration, high-resolution text and graphics, the


ability to
demonstrate a broad range of applications in real-time, audience feedback
collection via polling, white board interaction, guided web browsing, live chat,


recording and
archiving of seminars for on-demand playback, and end user reports.




•  ***WebEx
Training Center.*** WebEx
Training Center is a web communications service that is designed for training
and e-learning applications. With Training Center,


users can
coordinate training schedules from announcement to enrollment to follow-up,
deliver live instruction from a variety of sources directly to learners’


desktops, and
give presentations that include audio, video and interactive multimedia.
Training Center allows users to administer comprehensive tests, organize


multiple
simultaneous breakout sessions, and record, edit, play back and archive entire
sessions for future use.




•  ***WebEx*** ***Sales
Center*** ***.*** WebEx
Sales Center, launched in September 2004, is a comprehensive online sales
solution designed for sales professionals, both sales


representatives
seeking to engage prospects and close deals as well as sales managers seeking
effective online tools with which to monitor their sales organizations.


The Sales
Center application permits sales representatives to conduct customized
media-rich online sales presentations and demonstrations, invite specialists or


other
third-party experts to assist in the sales presentation regardless of the third
party’s location, and then following the presentation maintain contact with the


prospect via
the Sales Center online communications portal. For sales managers, the Sales
Center service is designed to improve sales operations with online sales


call analysis
and monitoring tools that can be integrated with other software applications
such as sales force automation and customer relationship management,


thereby
helping the manager to track sales activities and resource allocation.







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•  ***WebEx
Enterprise Edition.*** WebEx
Enterprise Edition is a service that integrates five of WebEx’s currently
available web communications services—WebEx


Meeting
Center, WebEx Support Center, WebEx Event Center, WebEx Training Center and
WebEx Sales Center—to create a single source for a customer’s enterprise


communications. WebEx
Enterprise Edition features include allowing users to create a personalized
“MyWebEx” meeting room with a unique URL that becomes a


default
meeting address for all Web meetings. WebEx Enterprise Edition enables users to
start meetings with a single click of the tool bar icon, allows users to access


or share
information securely in a Web meeting where the content or application resides
in an unattended remote computer, and enables users to integrate MyWebEx


with the
Microsoft Outlook application.




•  ***WebEx*** ***SMARTtech*** ***.***  The WebEx
SMARTtech service enables customers to centrally manage and administer their
company-wide computer networks through the


use of a
secure, Web-based remote access network provided by our SMARTtech service.
SMARTtech is designed to allow a computer-support organization within a


company to
install upgrades, perform maintenance, troubleshoot problems, and engage in
proactive support on hundreds or even thousands of computers without


the need of
the individual computer user to be present at the machine. SMARTtech’s
Web-based, remotely-administered and centralized computer support


capabilities
offer companies increased efficiency in managing their computer networks without
the need to invest in expensive software and hardware upgrades and


without
compromising network security .




•  ***WebEx
Presentation Studio.***  WebEx
Presentation Studio is a service that gives customers the ability to create and
deliver multimedia content for convenient, on-


demand access
via the Web. With Presentation Studio, users can create presentations that
include, and integrate as desired, audio content, video content and digital


presentation
software content such as presentations created with PowerPoint software. For
example, Presentation Studio enables organizations to create and


distribute
sales presentations to sales personnel, capture and track sales leads from
marketing and promotional presentations and deliver e-learning and training


presentations
to employees. Presentations created with Presentation Studio can be viewed over
the Web or can be downloaded to a laptop or a personal digital


assistant .




•  ***MyWebExPC.***  MyWebExPC,
launched in January 2005, is a service that allows the user to access a work or
home computer from any remote location in the world,


with the user
needing only a web browser and an Internet connection and without the user
needing to open any ports in a firewall protecting the user’s work or home


computer. For
example, from the remote location the MyWebExPC user can run any application on
or access the entire desktop of her work or home computer,


transfer
files to and from the computer, or print a document from the work or home
computer on a printer located at the user’s remote location .
MyWebExPC has


several
security features including end-to-end Secure Socket Layer (SSL) encryption, two
levels of required authentication and each of the following: (i) the ability to


blank the
screen of the work or
home computer
so no one can see what the remotely-located user is doing, (ii) the ability to
lock the keyboard and mouse of the home


or work
computer so no one can interrupt the remotely-located user’s use, and (iii) the
ability to logout or screen-lock the home or work computer after the
remotely-


located
user’s session is complete.




*WebEx
MediaTone Network* . ****** The
WebEx MediaTone Network is a private, switched, redundant network that is
designed to deliver scalable, secure, real-time communications services to our
customers by capturing screen data from a meeting presenter’s computer,
translating that information into a proprietary format, and routing that
information through WebEx switching clusters to the meeting session
participants. The WebEx MediaTone Network is based on MediaTone, our proprietary
information switching technology. Our MediaTone technology allows the WebEx
MediaTone Network to handle high-speed data, voice and video communications,
manage complex media types, and deliver advanced communications capabilities
regardless of location, platform, operating system, device, browser and
wired/wireless status. The WebEx MediaTone Network includes:




-  a
distributed network made up of dispersed communications switches, switching
centers and dedicated network links designed to reduce latency issues


and service
interruptions even when participants are located in different countries;




-  a network
designed to be redundant, meaning that it is designed to detect equipment
failures that might occur along the network that would cause a network outage


and to
remedy such failures by transferring network operations to alternate,
functioning equipment located elsewhere on the network;




-  WebEx
proprietary switches in data centers located in the U.S., Europe and Asia, in
our own facilities and at third-party co-location facilities;




-  high
capacity Internet connections for high-speed connectivity and redundancy;







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-  network
operations centers where we manage and monitor the WebEx MediaTone Network 24
hours a day, seven days a week;




-  the
ability to add capacity at any facility and otherwise manage heavy network
traffic during peak usage periods, enabling each WebEx switching cluster to
scale to


meet changes
in user demand;




-  online
content that is transmitted, or “switched”, in real time through the network
rather than being loaded to, temporarily archived on, and downloaded from, a


computer server;




-  encryption
of online content with Secure Socket Layer (SSL) technology to provide security;




- diagnostic
software for troubleshooting and rapid problem resolution;




- the
ability to create a personalized, continuous web meeting room, like a personal
telephone number or an office extension;




- the
ability to simultaneously share multiple documents and presentations at the same
time and the ability to flip back and forth among them;




- the
ability to support high-speed sharing of rich media content within Microsoft
PowerPoint presentations, such as the sharing of embedded flash files, the
sharing


of streaming
content such as Microsoft’s Media Player, and the sharing of previously-recorded
WebEx meetings, in each instance with the ability to start, pause,


stop, reverse
and fast-forward the content;




- the
ability to support video conferencing with just a browser and simple web
cameras; and




- the
ability to access or share information securely in a WebEx meeting even where
the content or applications reside in an unattended remote computer.










***Customers
and Distribution Partners***





We sell
our services directly to our customers and indirectly through our distribution
partners. We offer our services on a monthly subscription basis to our customers
and through a revenue sharing, discounted or pay-per-use basis through our
distribution partners. Our customers purchase and use our services themselves
while our distribution partners integrate and resell our services with their
offerings. Some of our distribution partners are also end-user customers.





As of
December 31, 2004, we had subscription agreements with approximately 11,150
direct customers. In 2004, we derived approximately 88% of our revenue from
direct sales to customers. Typically,
our direct sales contracts are for an initial non-cancelable term ranging from
three to twelve months, and then automatically renew for some period unless
terminated by either party.  As of
December 31, 2004, we had agreements in place with approximately 146
distribution partners, including portals, software and service vendors and
communications service providers. In 2004, we generated approximately 12% of our
revenue from these relationships. Software and service vendors have agreements
to resell our services to end-users by marketing, and in some cases integrating,
our services into their product or service offerings. Communications service
providers typically resell our services in conjunction with their
teleconferencing services. Our distribution agreements typically have terms of
one to three years and are automatically renewed for additional one-year terms
unless either party terminates the agreement with 30 days prior written notice.
In most of these agreements, the distribution partner purchases subscription or
pay per use services from us and resells such services to end user customers.
Under these agreements, the amount of revenue we receive depends on the level of
commitment and volume of business generated under the agreement.





Under our
distribution agreements, either we or the distribution partner bills the end
user customers. When we bill the end user, a percentage of the proceeds
generated from the distribution partner’s sale of our services is paid to the
distribution partner and the remainder is retained by us. When the distribution
partner bills the end user, we sell the services on a discounted basis to the
distribution partner, which in turn marks up the price and sells the services to
the end user. The latter is the predominant method in use with our distribution
partners.





In 2004,
sales of our Meeting Center service, whether directly to our customers or
indirectly through our distribution partners, accounted for approximately 50% of
our revenue. In 2003 and 2002, respectively, sales of our Meeting Center service
accounted for 60% and 65% of our revenue. This reduction in Meeting Center sales
as a percentage of our total revenue may continue as we introduce new service
offerings and increase revenue in other existing services.











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***Third
Party Software and Hardware***





We
license software and purchase hardware, such as database, operating system, and
web server software, font technology and servers, routers, and audio-conference
bridges. We believe that use of third party vendors enables us to integrate
current and emerging technologies into our proprietary service offerings. We
purchase, or license, these third party technologies
from companies including BEA Systems (application servers), Bitstream (font
technology), Oracle (database technology), Rackable (servers), Sun Microsystems
(servers), Veritas (file management), Pactolus (audio-conference bridge
technology), Sonus (audio-conference bridge technology), and Convidia
(audio-conference bridge technology). While the loss of one or more of these
vendors may result in the need to identify, secure and integrate alternative
technologies, we believe we can obtain, from other sources and on comparable
business terms, third party software or hardware functionally comparable to that
provided by these third party vendors.








***Research
and Development***





The
emerging market for web communications services is characterized by rapid
technological change, new product introductions and enhancements, evolving
customer requirements and rapidly changing industry standards. We devote a
substantial portion of our resources to developing and enhancing our network
services and application platform, extending our global network, and conducting
quality assurance testing.





As of
December 31, 2004, we had 831 employees engaged in research and development
activities. Our research and development expenditures were approximately $34.3
million, $24.8 million and $22.8 million in 2004, 2003 and 2002, respectively.
We expect to continue to devote significant resources to research and
development for the foreseeable future.





A
significant amount of our development and testing activity is conducted by our
subsidiary in China (“WebEx China”). As of December 31, 2004, of the 782
employees in our WebEx China operations, 665 employees were engaged in research
and development activities.  We rely
on WebEx China for a significant portion of our quality assurance, software
development and other activities .








***Sales
and Marketing***





Our sales
efforts target a broad range of businesses, government agencies and non-profit
organizations primarily through direct sales channels and, to a lesser extent,
through indirect sales channels. Direct sales are generated through our internal
sales force, while indirect sales are generated through agreements with our
distribution partners. Our internal sales force uses our own WebEx services to
maximize the effectiveness and efficiency of our direct sales channel.





As of
December 31, 2004, we had 492 employees engaged in sales and marketing
activities. Our sales and marketing expenditures were approximately $84.2
million, $74.2 million and $58.0 million in 2004, 2003 and 2002, respectively.
We expect to continue to devote significant resources to sales and marketing for
the foreseeable future.





We derive
sales revenues from both U.S.-based and non U.S.-based customers. In 2004, 2003
and 2002, the percentage of revenues from U.S customers was 88%, 93%, and 96%,
respectively. In 2004, 2003 and 2002, the percentage of revenues from our
non-U.S. customers was 12%, 7%, and 4%, respectively . Our
marketing programs include customer needs assessment and market analysis,
service and platform marketing, brand awareness, advertising, public relations,
lead generation, and educating organizations in our target markets.








***Competition***





The web
communications services market is intensely competitive, subject to rapid change
and is significantly affected by new product and service introductions and other
market activities of industry participants. Although we do not currently compete
against any one entity with respect to all aspects of our services, we do
compete with various companies with respect to specific elements of our web
communications services. For example, we compete with providers of traditional
communications technologies such as teleconferencing and videoconferencing,
applications software and tools companies, and web conferencing services such as
Centra Software, Cisco Systems, Citrix Systems, Genesys, IBM, Macromedia,
Microsoft, Oracle and Raindance.





Competition
from Microsoft for the general web conferencing market, or from other vendors
specifically targeted at the low-end market, may adversely affect
us. ** Microsoft
has become a more active participant in this web communications services market
since its acquisition of our competitor Placeware in 2003. Microsoft has a
current product offering which is competitive with ours and which is called
Microsoft Office Live Meeting. Microsoft Office Live Meeting is being marketed
together with other Microsoft software products and services under the name
Microsoft Office System. If Microsoft chose to deploy greater resources toward
the marketing of the Live Meeting service, Microsoft could become a more
significant competitor in the web communications market in which we operate.
Microsoft may attempt to leverage its dominant market position in the operating
system, productivity application or browser markets, through technical
integration or bundled offerings, to expand its presence in the web
communications market, which could make it difficult for other








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vendors
of web communications products and services, such as WebEx, to compete. In
addition, some competitors offer web communications products and services
targeted at customers who are more price-conscious and are less concerned about
functionality, scalability, integration and security features. Such offerings
may make it more difficult for us to compete in that segment of the market and
may cause some of our existing customers to switch to these competitors.





We believe that the principal competitive factors in our market include:




-  service
functionality, quality and performance;




-  ease of
use, reliability, scalability and security of services;




-  customer
service and support;




-  establishment
of a significant base of customers and distribution partners;




-  ability
to introduce new services to the market in a timely manner;




-  ability
to integrate with third-party offerings and services; and




-  pricing.





Although
we believe our services compete favorably with respect to many of these factors,
the market for our services is relatively new and rapidly evolving. We may not
be able to maintain our competitive position against current and potential
competitors, especially those with greater resources such as IBM, Microsoft and
Cisco.




***Intellectual
Property***





The
status of United States patent protection in the Internet industry is not well
defined and will evolve as the U.S. Patent and Trademark Office grants
additional patents. We currently have 21 issued patents in a number of areas
including peer-to-peer connections to facilitate conferencing, document
annotation, optimizing data transfer, graphical user interface for extracting
video presentations and remote collaboration systems involving multiple
computers, and we currently have over 30 patent applications pending in the
United States. Eight of the issued patents we acquired in connection with our
June 2003 acquisition of certain assets of Presenter, Inc. and five we purchased
in 2004 from NCR Corporation. We may seek additional patents in the future. We
do not know if our patent applications or any future patent application will
result in any patents being issued with the scope of the claims we seek, if such
patents are issued at all. We do not know whether any patents we have received
or may receive will be challenged, invalidated or be of any value. It is
difficult to monitor unauthorized use of technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States, and our competitors may independently develop technology
similar to ours. We will continue to seek patent and other intellectual property
protections, when appropriate, for those aspects of our technology that we
believe constitute innovations providing significant competitive advantages. The
pending, and any future, patent applications may not result in the issuance of
valid patents.





Our
success depends in part upon our rights to proprietary technology. We rely on a
combination of copyright, trade secret, trademark and contractual protection to
establish and protect our proprietary rights. We require our employees, to enter
into confidentiality and nondisclosure agreements upon commencement of
employment. Before we will disclose any confidential aspects of our services,
technology or business plans to customers, potential business partners and other
non-employees, we routinely require such persons to enter into confidentiality
and nondisclosure agreements. In addition, we require all employees, and those
consultants involved in the deployment of our services, to agree to assign to us
any proprietary information, inventions or other intellectual property they
generate, or come to possess, while employed by us. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our services or technology. These precautions may not
prevent misappropriation or infringement of our intellectual property.





Third
parties may infringe or misappropriate our copyrights, trademarks and similar
proprietary rights. When we become aware of such infringement, we may take
action including bringing legal action against such parties. In addition, we may
be subject to claims of alleged infringement of patents and other intellectual
property rights of third parties. We may be unaware of filed patent applications
which have not yet been made public and which relate to our services. From time
to time, we have received notices alleging that we infringe intellectual
property rights of third parties. In such cases, we investigate the relevant
facts, respond to the allegations and, where case facts and other conditions
warrant, consider settlement options.





Intellectual
property claims may be asserted against us in the future. Intellectual property
litigation is expensive and time-consuming and could divert management’s
attention away from running our business. Intellectual property litigation could
also require us to develop non-infringing technology or enter into royalty or
license agreements. These royalty or license agreements, if required, may not be
available on acceptable terms, if at all. Our failure or inability to develop
non-infringing technology or license the proprietary rights on a timely basis
would harm our business.


10k


***Employees***





As of
December 31, 2004, we had 1,826 full-time employees, including 831 in research
and development, 492 in sales and marketing, 302 in set-up, technical support,
customer support and training, and 201 in general and administrative. As of
December 31, 2004, 1,003 of our employees are based overseas, including 782 in
China as part of our WebEx China subsidiary and 156 in India as part of our
WebEx India subsidiary. None of our employees is covered by collective
bargaining agreements. We believe our relations with our employees are good.








***Available
Information***





Our
website is located at http://www.webex.com. We make available, free of charge,
on or through our website, our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to reports to be filed
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after electronically filing such
reports with the Securities and Exchange Commission. In addition, we have an
investor relations web page located on our website, which includes additional
information including webcasts of earnings announcements, stock information,
press releases and other information of interest to current and prospective
investors. Information on our website is not part of this report.








**Item
2.*****Properties*******





In April
2004, we entered into a lease agreement for approximately 160,000 square feet in
a building located in Santa Clara, California, which building is currently used
for sales, engineering, support, network operations and general corporate
functions, including its serving as our corporate headquarters. The lease term
for this building expires in 2014. We have taken occupancy of approximately
110,000 square feet of the building, and in 2008 we will take occupancy of the
remaining 50,000 square feet.





In
addition, we currently lease approximately 66,000 square feet in a building in
San Jose, California, which building prior to 2005 served as our corporate
headquarters. The lease for this building expires in February 2008. We also have
leased facilities in Atlanta, Georgia; Denver, Colorado; Chicago, Illinois;
Newport Beach, California; New York, New York; Phoenix, Arizona; Sacramento,
California; Amsterdam, the Netherlands; Bracknell, England; Melbourne,
Australia; Tokyo, Japan; and in India, in each of the cities of
Bangalore , Mumbai,
New Delhi, Hyderabad and Chennai.  These
facilities are used for sales-related activities and, in some cases, to house
equipment used in the operation of our MediaTone network. We also lease
facilities located in the Chinese cities of Hefei, HangZhou, Shanghai, Shenzhen
and Suzhou, in which we conduct quality assurance, software development and
other activities. The lease terms of all of these leases range from March 2005
to February 2008. While we believe that these offices are adequate to meet our
current requirements, it may be necessary for us to lease additional facilities
over the next 12 months .





In
February 2004, we purchased approximately nine acres of real property in
Mountain View, California on which resides a building containing approximately
125,000 square feet of commercial grade facility of which 25,000 square feet
consists of data infrastructure facility floor space. The purchase price was
$15.9 million. As part of the purchase, we also acquired certain items of data
infrastructure equipment previously installed and situated on the property. We
are currently using this building primarily as a network operating center
facility to accommodate growing usage requirements on our WebEx MediaTone
Network.








**Item
3.*****Legal
Proceedings*******





The
Company is not a party to any material pending legal proceedings.








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





No
matters were submitted to a vote of security holders during the fourth quarter
of the year ended December 31, 2004.

















**Executive Officers of the Registrant**





Our
executive officers and their ages as of March 1, 2005, are:





**Name**
    **Age**
    **Position**Subrah
      S. Iyar
    47
    Chief
      Executive Officer and Chairman of the BoardBill
      Heil
    47
    President
      and Chief Operating OfficerMin
      Zhu
    56
    Chief
      Technical Officer and DirectorMichael
      Everett
    55
    Chief
      Financial OfficerDean
      MacIntosh
    46
    Vice
      President, Finance and Principal Accounting OfficerDavid
      Farrington
    48
    Vice
      President, General Counsel and SecretaryShawn
      Farshchi
    48
    Chief
      Information Officer and VP, Technical OperationsWalt
      Weisner
    49
    Vice
      President, Global Support Services





**Subrah
S. Iyar** is a
co-founder of WebEx and has served as its Chairman and Chief Executive Officer
since February 1997. Prior to founding WebEx, Mr. Iyar served as Vice President
and General Manager of the Northern California Internet Business division of
Quarterdeck Corporation, a software company, from October 1995 until November
1996. From February 1983 to 1995, Mr. Iyar held several senior positions in
business development, marketing and sales management at Apple Computer, Inc., a
computer hardware company, and Intel Corporation, a semiconductor company. Mr.
Iyar holds a B.S. in Electrical Engineering from the Indian Institute of
Technology and an M.S. in Computer Engineering from the University of
Southwestern Louisiana.





**Bill
Heil**  has
served as President and Chief Operating Officer of WebEx since November 2004.
From June 2001 through October 2004, Mr. Heil was a principal with Kestrel
Partners, a consulting firm focused on high technology businesses. Concurrent
with his work as a consultant, Mr. Heil from December 2003 through November 2004
served as interim Chief Operating Officer of CAM Systems, a privately-held
traffic and billing application services provider, and he also served from March
2000 to April 2004 as an independent board member of OctigaBay, a privately-held
high performance computing company. From 1986 through 2001, Mr. Heil held
several product management and senior executive positions with Tandem Computer
and, following Tandem’s acquisition by Compaq Inc., similar senior management
positions with Compaq, a manufacturer of computer hardware and software
products. Prior to the acquisition of Tandem by Compaq in 1997, Mr. Heil served
as Tandem’s Senior Vice President of Product Management and Strategy (1994-1996)
and as Senior Vice President of Tandem’s ServerWare business unit (1996-1998).
Following the acquisition, Mr. Heil served as Vice President and General Manager
of the Tandem Division of Compaq (1998-1999), and later the Vice President of
Compaq’s Business Critical Servers Group (1999-2001). Mr. Heil
holds B.S. and M.S. degrees in Computer Science from the Massachusetts Institute
of Technology, and an M.B.A. from Harvard Business School.





**Min
Zhu** is a
co-founder of WebEx and has served as its Chief Technical Officer and as a
member of its Board of Directors since February 1997. Mr. Zhu also served as
President of WebEx from February 1997 to November 2004. Prior to founding WebEx,
Mr. Zhu in 1991 co-founded Future Labs, a real-time collaboration software
company that was subsequently sold to Quarterdeck in 1996. Mr. Zhu holds an M.S.
in Engineering Economic Systems from Stanford University.





**Michael
Everett**  has
served as Chief Financial Officer of WebEx since May 2003. From June 2001 to
February 2003, Mr. Everett served as Chief Financial Officer of Bivio Networks,
a privately-held provider of secure Internet Protocol service platforms. From
November 2000 to April 2001, Mr. Everett served as Senior Vice President and
Chief Financial Officer of VMWare, Inc., a privately-held infrastructure
software company that is now a subsidiary of EMC Corporation. From March 1997 to
November 2000, Mr. Everett served as Chief Financial Officer of Netro
Corporation, a publicly-traded broadband wireless access equipment provider
later acquired by SR Telecom. Mr. Everett also spent approximately ten years in
various executive capacities at Raychem Corporation, a company later acquired by
Tyco International, from 1987 through 1996, where he served as General
Counsel/Secretary (1987-1988), Senior Vice President and Chief Financial Officer
(1988-1993) and Senior Vice President, Asia (1993-1996). Mr. Everett holds a
B.A. from Dartmouth College and a J.D. from the University of Pennsylvania Law
School .





**Dean
MacIntosh** has
served as Vice President, Finance and Principal Accounting Officer of WebEx
since February 2005. From February 2001 to February 2005, Ms. MacIntosh served
as Vice President of Finance of WebEx. From August 1995 through February 2001,
Ms. MacIntosh held several finance-related positions with Lumisys Incorporated,
a publicly-held medical imaging manufacturer that was acquired by Eastman Kodak
Company in December 2000. Ms. MacIntosh served as Lumisys’s controller from
August 1995 through February 1997, as its vice president of finance from
February 1997 through August 1998, and as its chief financial officer from
August 1998 through completion of the acquisition by Kodak in December 2000.
Following the acquisition and until February 2001, Ms. MacIntosh assisted with
the transition of Lumisys finance-related activities to the Kodak finance
organization. Ms.
MacIntosh holds a B.A. from the University of California at Los Angeles and an
M.B.A. from San Francisco State University.








10k





**David
Farrington** has
served as Vice President, General Counsel and Secretary of WebEx since March
2000. From April 1998 to March 2000, Mr. Farrington was a partner at the law
firm of Skjerven Morrill MacPherson LLP in San Jose, California. From October
1989 to January 1998, Mr. Farrington worked at Apple Computer, where he held a
number of senior positions, including senior director of Apple’s corporate
development group, associate general counsel in charge of legal support for
Apple’s worldwide sales and marketing organization, and director of Apple’s
technology law group. Mr. Farrington holds a B.A. in Sociology from the
University of California, Santa Cruz and a J.D. from Hastings College of the Law
in San Francisco.





**Shawn
Farshchi**  has
served as Vice President, Technical Operations and Chief Information Officer of
WebEx since January 2003. From July 2002 to December 2002, Mr. Farshchi was
employed by Oracle Corporation, an enterprise software company, as Regional Vice
President, Oracle Managed Services. From March 2001 to July 2002, Mr. Farshchi
served as Vice President, Engineering and Chief Information Officer of
BroadVision Inc., a provider of self-service web applications. From March 1995
to March 2001, Mr. Farshchi held the following positions at DHL Express, an air
transport company now a division of Deutsche Post World Net: Manager,
Infrastructure Engineering (March 1995 to March 1996); Director, Infrastructure
Engineering (March 1996 to February 1997); Vice President, Infrastructure and
Operations (February 1997 to February 2000); and Chief Information Officer
(February 2000 to March 2001). Mr. Farshchi holds a B.S.E.E. from San Francisco
State University and both an M.S. (Telecommunications) and an M.B.A. from Golden
Gate University .





**Walt
Weisner**  has
served as Vice President, Global Support Services of WebEx since July 2003, and
prior to that as Senior Director of Customer Care from April 2002 until July
2003. From September 1999 until March 2002, Mr. Weisner served as Senior Vice
President of Customer Operations for Internet Connect, a broadband service
provider. From March 1997 until September 1999, Mr. Weisner served as Director
of Customer Support for Nextel Communications, a wireless communications service
provider. Mr. Weisner holds a B.B.A. from Cleveland State University .





No
executive officer of WebEx is employed for any specific term or duration of
office .











**PART
II**





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





**Market
of Common Stock**





Our
common stock trades publicly on the Nasdaq National Market under the symbol
“WEBX”. The following table sets forth for the periods indicated the highest and
lowest sale price of our common stock during each quarter:





**Fiscal
      Year 2004**
    
    
    **High**
    
    
    **Low**First
      Quarter
    
    $
    30.04
    
    $
    19.25Second
      Quarter
    
    $
    32.38
    
    $
    19.49Third
      Quarter
    
    $
    22.21
    
    $
    17.36Fourth
      Quarter
    
    $
    26.80
    
    $
    21.28**Fiscal
      Year 2003**
    
    
    **High**
    
    
    **Low**First
      Quarter
    
    $
    17.09
    
    $
    10.00Second
      Quarter
    
    $
    15.06
    
    $
    8.18Third
      Quarter
    
    $
    22.05
    
    $
    13.90Fourth
      Quarter
    
    $
    25.32
    
    $
    17.34








**Holders
of Record**





As of
February 28, 2005, there were approximately 93 holders of record (not including
beneficial holders of stock held in street name) of our common stock.








**Dividend
Policy**





We have
never declared nor paid any cash dividends on our capital stock. Any future
determination with respect to the payment of dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, our
operating results, financial condition and capital requirements, the terms of
then-existing indebtedness, general business conditions and such other factors
as the Board of Directors deems relevant.





**Securities
Authorized for Issuance under Equity Compensation Plans**





Information
regarding Securities Authorized for Issuance under Equity Compensation Plans is
included under Item 12 of Part III of this Report on Form 10-K.








**Issuer
Purchases of Equity Securities**





On July
29, 2004, we publicly announced a share repurchase program pursuant to which the
our Board of Directors authorized the repurchase of up to $40,000,000 of the
Company’s common stock over a 12-month period ending July 22, 2005. During the
third quarter of our fiscal year ended December 31, 2004, as reported on our
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission
on November 9, 2004, we repurchased 308,100 of our shares for an aggregate price
of $5,826,000. During the fourth quarter of our fiscal year ended December 31,
2004, we did not make any repurchases under this repurchase program, nor did we
make any other repurchases of our equity securities .

















**Item
6.*****Selected
Financial Data*******





The
following selected financial information has been derived from audited
consolidated financial statements including the periods contained in Item 8. The
information set forth below is not necessarily indicative of results of future
operations and should be read together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and related notes included in Items 7 and 8 of Part II of
this Form 10-K.





****
    
    **Years
      ended December 31,****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2001**
    
    
    **2000******
    
    **(in
      thousands, except per share data)****Consolidated
      Income Statement Data:**Net
      revenue
    
    $
    249,133
    
    $
    189,341
    
    $
    139,861
    
    $
    81,186
    
    $
    25,389Cost
      of revenue
    
    
    41,854
    
    
    31,798
    
    
    25,064
    
    
    21,527
    
    
    10,081Gross
      profit
    
    
    207,279
    
    
    157,543
    
    
    114,797
    
    
    59,659
    
    
    15,308Operating
      expenses:Sales
      and marketing
    
    
    84,192
    
    
    74,249
    
    
    58,026
    
    
    47,207
    
    
    50,807Research
      and development
    
    
    34,342
    
    
    24,769
    
    
    22,788
    
    
    16,284
    
    
    12,168General
      and administrative
    
    
    18,713
    
    
    13,575
    
    
    14,447
    
    
    10,301
    
    
    6,553Equity-based
      compensation*
    
    
    571
    
    
    1,849
    
    
    2,966
    
    
    13,688
    
    
    28,039Total
      operating expenses
    
    
    137,818
    
    
    114,442
    
    
    98,227
    
    
    87,480
    
    
    97,567Operating
      income (loss)
    
    
    69,461
    
    
    43,101
    
    
    16,570
    
    
    (27,821
    )
    
    (82,259
    )Interest
      and other income, net
    
    
    308
    
    
    1,074
    
    
    339
    
    
    189
    
    
    1,833Income
      (loss) before income taxes
    
    
    69,769
    
    
    44,175
    
    
    16,909
    
    
    (27,632
    )
    
    (80,426
    )Income
      tax expense (benefit)
    
    
    21,889
    
    
    (15,627
    )
    
    514
    
    
    —
    
    
    —Net
      income (loss)
    
    $
    47,880
    
    $
    59,802
    
    $
    16,395
    
    $
    (27,632
    )
    $
    (80,426
    )Net
      income (loss) per share:Basic
    
    $
    1.09
    
    $
    1.44
    
    $
    0.41
    
    $
    (0.76
    )
    $
    (3.81
    )Diluted
    
    $
    1.03
    
    $
    1.37
    
    $
    0.39
    
    $
    (0.76
    )
    $
    (3.81
    )Shares
      used to compute net income (loss) per share:Basic
    
    
    43,817
    
    
    41,554
    
    
    39,687
    
    
    36,418
    
    
    21,111Diluted
    
    
    46,451
    
    
    43,619
    
    
    42,353
    
    
    36,418
    
    
    21,111*Equity-based
      compensation:Sales
      and marketing
    
    $
    43
    
    $
    699
    
    $
    1,133
    
    $
    6,602
    
    $
    9,916Research
      and development
    
    
    52
    
    
    245
    
    
    528
    
    
    2,871
    
    
    6,404General
      and administrative
    
    
    476
    
    
    905
    
    
    1,305
    
    
    4,215
    
    
    11,719$
    571
    
    $
    1,849
    
    $
    2,966
    
    $
    13,688
    
    $
    28,039








****
    
    **December
      31,****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2001**
    
    
    **2000******
    
    **(in
      thousands)****Consolidated
      Balance Sheet Data:**Cash
      and cash equivalents and short-term investments
    
    $
    185,138
    
    $
    134,635
    
    $
    68,952
    
    $
    42,146
    
    $
    28,214Working
      capital
    
    
    190,066
    
    
    137,575
    
    
    64,907
    
    
    32,117
    
    
    19,374Total
      assets
    
    
    285,793
    
    
    201,496
    
    
    114,324
    
    
    90,296
    
    
    68,543Long-term
      obligations
    
    
    ----
    
    
    —
    
    
    —
    
    
    572
    
    
    1,269Deferred
      equity-based compensation
    
    
    (15
    )
    
    (74
    )
    
    (1,092
    )
    
    (5,724
    )
    
    (17,181
    )Accumulated
      deficit
    
    
    (1,043
    )
    
    (48,923
    )
    
    (108,725
    )
    
    (125,120
    )
    
    (97,488
    )Stockholders’
      equity
    
    
    247,062
    
    
    165,894
    
    
    88,120
    
    
    58,827
    
    
    45,506














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





**When
used in this Report, the words “anticipates,” “expects,” “intends,” “plans,”
“believes,” “seeks,” “estimates” and similar expressions are intended to
identify forward-looking statements. These are statements that relate to future
periods and include, but are not limited to, statements as to our ability to
enhance the quality and variety of real-time communications, statements about
the features, benefits and performance of our current service offerings and
technology including our belief that use of our services allows users to be more
productive and efficient, our ability to introduce new product offerings and
increase revenue from existing products, our ability to integrate current and
emerging technology into our service offerings and our ability to find
replacements for third party technologies, expected expenses including those
related to sales and marketing, research and development and general and
administrative, our beliefs regarding the health and growth of the market for
our web conferencing services, anticipated increase in our customer base,
expansion of our service offerings and service functionalities, ability to
reduce operating expenses, expected revenue levels and sources of revenue,
expected impact, if any, of legal proceedings or changes in laws or regulations
relating to our business, expected increases in headcount, the adequacy of
liquidity and capital resources, the sufficiency of our cash reserves to meet
our capital requirements, expected growth in business and operations, our
ability to realize positive cash flow from operations, the ability of cash
generated from operations to satisfy our liquidity requirements, our ability to
continue to realize net earnings, and the effect of recent accounting
pronouncements. Forward looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, our
dependence on key products and/or services, demand for our products and
services, our ability to attract and retain customers and distribution partners
for existing and new services, our ability to expand and manage our operations
internationally, our ability to expand and manage our infrastructure to meet
both our internal corporate needs as well as the demand for our services, our
ability to control our expenses, our ability to recruit and retain employees
particularly in the areas of sales, engineering, support and hosting services,
the ability of distribution partners to successfully resell our services, the
economy, political tensions or conflict, the strength of competitive offerings,
the prices being charged by those competitors, the risks discussed below and the
risks discussed in “Factors that May Affect Results” below. These
forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is
based.**








**Overview**





*Business,
Principal Products, Locations.* We offer
several real-time, interactive, multimedia web communications services. These
services allow end-users to conduct meetings and share software applications,
documents, presentations and other content on the Internet using a standard web
browser. Integrated telephony and web-based audio and video services are also
available using standard devices such as telephones, computer web-cameras and
microphones. Because our services enable users to share voice, data and video
with others in remote locations, we believe we can enhance the quality and
variety of real-time communications compared to traditional telephone
communications. Our services enable users to engage in media-rich, interactive,
real-time communications without the need to be in the same physical location,
which we believe allows users to be more productive and efficient.





Our
current business focus is to continue to enhance and market our various web
communications services, to develop and deploy new services, to expand our sales
and marketing organizations, and to expand our WebEx MediaTone Network. We offer
the following services: WebEx Meeting Center, WebEx Meeting Center Pro, WebEx
Training Center, WebEx Support Center, WebEx Event Center, WebEx Enterprise
Edition, WebEx Sales Center, WebEx SMARTtech, WebEx Presentation Studio and our
newest service, MyWebExPC, which was launched in January 2005 .





Our
corporate and technical operations headquarters are each located in Santa Clara
County, California, in the cities of  Santa Clara and Mountain View,
respectively. In addition, we have ten non-U.S. subsidiaries through which we
conduct various operating activities related to our business. In each of the
non-U.S. jurisdictions in which we have subsidiaries, China, Hong Kong, Japan,
Australia, India, the United Kingdom, France, Germany and the Netherlands, we
have employees or consultants engaged in sales and, in some cases, network
maintenance activities. In the case of our China subsidiary, our largest
subsidiary, our employees perform activities including quality assurance testing
and software development activities, creation of technical documentation,
background research for our sales personnel, preparation of marketing materials
and the provisioning of customer web sites. In April 2004, we acquired
CyberBazaar of Bangalore India, an audio conferencing company, in order to
directly pursue the web conferencing market in India. WebEx has renamed the
CyberBazaar entity WebEx Communications India Pvt. Ltd. WebEx Communications
India Pvt. Ltd, which we sometimes refer to as WebEx India, has maintained the
CyberBazaar offices and a significant portion of the CyberBazaar management team
and employees present at the time of the acquisition. The results of WebEx India
are included in the consolidated financial statements of WebEx subsequent to
April 30, 2004, the effective date of the acquisition.








10k


*Revenue
and Cash-Generation Models.* We sell
our services directly to customers, which both in the fourth quarter of 2004 and
for the full year 2004 accounted for approximately 88% of our revenue, or $59.6
million and $219.2 million, respectively. We also sell our services indirectly
to customers through those of our distribution partners that buy and resell our
services, which sales both in the fourth quarter of 2004 and for the full year
2004 accounted for approximately 12% of our revenue, or $8.1 million and $29.9
million, respectively. With these types of distribution partners, whom we also
generally refer to as resellers, w e sell to
and contract directly with the distribution partner, and revenue is recognized
based on net amounts charged to the distribution partner. We also have another
type of distribution partner—a distribution partner that acts as our sales or
referral agent. When a sale is made from us to a customer through the efforts of
this kind of distribution partner, the distribution partner receives from us a
percentage of the proceeds from the sale of WebEx services to the customer, and
we include the revenue received by us within the broad category of revenue
received from services sold directly to customers. We enter into distribution
relationships, either reseller or referral agent, so that we can increase total
revenue by obtaining customers that we could not obtain through our direct sales
efforts.





Historically,
revenue has been generated based on a monthly, fixed-fee subscription pricing
model. A customer may subscribe to a certain number of concurrent-user ports per
month, which would enable the customer to have that set number of users
connected to WebEx meetings at any one time, or to a minimum minutes commitment,
which would enable the customer to have up to a set number of total minutes
within the month to utilize our services. Another
of our fixed-fee offerings is the named host offering, in which a certain named
individual may host meetings at which up to a certain number of attendees may
participate. We refer
to the revenue associated with these monthly, fixed-fee subscription
arrangements, measured as of the end of any month, as committed
revenue .





In
addition, there are several situations in which customers are charged per minute
or usage-based pricing. These include: customer overage fees for port customers,
usage of minutes in excess of the minimum commitment, most types of telephony
charges, certain distribution partner arrangements and individual pay-per-use
services purchased directly from our website. Overage fees are charged when a
customer subscribing to a set number of ports uses more than the subscribed
number of ports in one or more web conference sessions. Per minute fees are
assessed when a customer on a minutes pricing model uses more than its monthly
commitment. Per minute telephone revenue comes when a customer in a web
conference session elects to have us set up and run the audio portion of the
conference, rather than the customer conducting its telephone usage
independently of us. A majority of revenue received from our telecommunications
partner arrangements is usage, or per-minute, based. Finally, when a customer
wants to use our services on a one-time basis by visiting our website,
purchasing the service and paying online by credit card, the pricing is
per-minute or usage based, except in instances where the online customer instead
purchases a one-month subscription for a fixed fee. We refer to the revenue
derived from this per minute or usage-based pricing model, measured as of the
end of any month, as uncommitted revenue .
Uncommitted revenue is increasing as a percentage of our total
revenue.





*Market
Opportunities, Related Challenges and Our Responses.* **** We
believe the market for web conferencing services to be healthy and growing.
Various published articles have cited several trends underlying this projected
market increase. One trend is the desire of many companies to achieve cost
savings in the areas of information technology, or IT, spending and employee
travel. In light of increased IT budget constraints reportedly faced by many
companies, we believe a cost-saving decision is to hire an external web
conferencing vendor to meet a company’s web conferencing needs, rather than
undertaking the capital and personnel spending necessary to construct and
maintain an internal company web conferencing network. Additionally, companies
may perceive that web conferencing usage can reduce costs to the extent that web
conferencing displaces the need for individuals within companies to travel in
order to conduct business, conduct training or participate in large-attendee
events.





Another
trend favoring the projected growth of the web conferencing market is the
relative infancy of the web conferencing market. The adoption of web
conferencing may follow a pattern similar to that which has been observed with
other computer-related technologies. According to this pattern, the first users
can be grouped into a category called early adopters—a relatively small
percentage of potential users who first discover and are able to understand and
make use of a new technology. If the product seems useful, a second wave of
users may arise which is often many times larger than the number of early
adopters. In the usual case, this larger number of users materializes because of
workplace usefulness: employers start to understand the utility of the
technology in the workplace and encourage or require employee usage of the
technology. Eventually, if the utility of the technology is compelling enough,
the technology may become a staple of most workplaces and the technology is
deemed mainstream. Under this adoption pattern, the greatest growth in the
market occurs during this migration from second wave to mainstream usage. One
such example of this adoption pattern is usage of the desktop computer during
the 1980s. Another example is usage of word processing software associated with
the desktop computer during the 1990s. In each instance, time required to
migrate from the early adoption phase to the mainstream phase exceeded ten
years.








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With some
technologies, the adoption pattern described above does not materialize fully.
If a technology has experienced early-adopter or second wave usage but then
proves not as useful as first believed or touted, or if an alternative
technology emerges, that technology may never progress to mainstream use. We
believe that, at present, web conferencing appears to be in either a very late
early adopter or an early second wave phase. Usage of the technology has
penetrated many worldwide corporations, but with many of these customers, this
penetration is in only one or a few divisions or departments of the corporation
and thus the percentage of employee users is still fairly low. So, there may
remain ahead for web conferencing the critical transition period from second
wave to mainstream adoption, where we believe the annual rate of growth of usage
would exceed previous rates of growth. However, there can be no assurance that
web conferencing will progress to mainstream use, and in fact usage of web
conferencing could regress.





There
exist a number of challenges to the projected market growth scenario for web
conferencing. One is a concern, actual or perceived, about security. As the
universe of corporate activities that can be conducted in a web conference
expands, more and more of these activities will embrace sensitive corporate or
government financial data, plans, projects or other proprietary information. If
web conferencing technologies do not have embedded within them adequate security
protections so that the contents of a web conference will remain private among
the participants, usage may not grow as projected. Moreover, to the extent that
there occur publicized incidents of security breaches associated with usage of a
web conferencing technology, no matter who the vendor, the security-related
concerns of would-be users of the technology likely will be increased and this
could dampen market growth. We have assigned a high priority, in the design and
implementation of our WebEx MediaTone Network, to these security issues.





Another
challenge to broad adoption of web conferencing services is general acceptance
of this mode of communication as a normal part of business activity. Individuals
may not feel comfortable using the technology, or they may prefer traditional
means of communicating such as the telephone or face-to-face meetings. Broad
adoption of web conferencing will require users to incorporate the use of this
technology as part of their normal business activity.





*Industry-Wide
Factors Relevant to Us.* The web
communications services market is intensely competitive, subject to rapid change
and is significantly affected by new product and service introductions and other
market activities of industry participants. Although we do not currently compete
against any one entity with respect to all aspects of our services, we do
compete with various companies in regards to specific elements of our web
communications services. For example, we compete with providers of traditional
communications technologies such as teleconferencing and videoconferencing,
applications software and tools companies, and web conferencing services such as
Centra Software, Cisco Systems, Citrix Systems, Genesys, Raindance, IBM, Oracle,
Macromedia, and Microsoft.





Competition
from Microsoft for the general web conferencing market, or from other vendors
specifically targeted at the low-end market, may adversely affect us. Microsoft
has become a more active participant in this web communications services market
since its acquisition of our competitor Placeware in 2003. Microsoft has a
current product offering which is competitive with ours and which is called
Microsoft Office Live Meeting. Microsoft Office Live Meeting is being marketed
together with other Microsoft software products and services under the name
Microsoft Office System. If Microsoft chose to deploy greater resources toward
the marketing of the Live Meeting service, Microsoft could become a more
significant competitor in the web communications market in which we operate.
Microsoft may attempt to leverage its dominant market position in the operating
system, productivity application or browser markets, through technical
integration or bundled offerings, to expand its presence in the web
communications market, which could make it difficult for other vendors of web
communications products and services, such as WebEx, to compete. In addition
some competitors offer web communications products and services targeted at
customers who are more price-conscious and are less concerned about
functionality, scalability, integration and security features. Such offerings
may make it more difficult for WebEx to compete in that segment of the market
and may cause some of our existing customers to switch to these
competitors.





**Critical
Accounting Policies and Estimates**





We
believe that there are a number of accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting policies
relate to revenue recognition, sales reserves, the allowance for doubtful
accounts, income taxes and goodwill and intangible assets. The policies, and our
procedures related to these policies, are described in detail below.





*Revenue
Recognition.* Revenue
is derived from the sale of web communications services. Web communications
services revenue is generated through a variety of contractual arrangements
directly with customers and with distribution partners, who in turn sell the
services to customers. The Company sells web communications services directly to
customers through service subscriptions and pay-per-use arrangements. Under
these arrangements, customers access the application hosted on WebEx servers
using a standard web browser. Subscription arrangements include monthly
subscriber user fees and user set-up fees. The subscription arrangements are
considered service arrangements in accordance with EITF








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Issue No.
00-3, “ *Application
of AICPA Statement of Position 97-2, Software Revenue Recognition, to
Arrangements That Include the Right to Use Software Stored on Another Entity’s
Hardware”* , and
with multiple deliverables under EITF 00-21, *“Accounting
for Revenue Arrangements with Multiple Deliverables”* , which
became effective during 2003. Under EITF 00-21, all deliverables are considered
one unit of accounting; therefore, committed revenue is recognized ratably over
the current term of the contract and variable usage-based fees are recognized as
usage occurs. During the initial term, the company provides training services,
web-page design and set-up services. In addition to subscription services
revenue, WebEx derives revenue from pay-per-use services and telephony charges
that are recognized as the related services are provided.





We also
enter into reselling arrangements with certain distribution partners, which
purchase and resell our services on a revenue sharing, discounted or pay-per-use
basis. Revenue under these arrangements is derived from our services provided to
end-users and is recognized over the service period provided that evidence of
the arrangement exists, the fee is fixed or determinable and collectibility is
reasonably assured. Initial set up fees received in connection with these
arrangements are recognized ratably over the initial term of the contract.
During the initial term, we provide training services, web-page design and
set-up services. Service fees are recognized as the services are provided for
pay-per-use service arrangements and ratably over the service period for
services provided on a subscription basis through the reseller. Our reseller
arrangements may require guaranteed minimum revenue commitments that are billed
in advance to the reseller. Advance payments received from reseller distribution
partners are deferred until the related services are provided or until otherwise
earned by us. We contract directly with distribution partners who are resellers,
and revenue is recognized based on net amounts charged to the distribution
partner.





Persuasive
evidence for all of our arrangements is represented by a signed contract. The
fee is considered fixed or determinable if it is not subject to refund or
adjustment. Collectibility of guaranteed minimum revenue commitments by
resellers is not reasonably assured; thus revenue from guaranteed minimum
commitments is deferred until services are provided to an end-user customer or
until collected from the reseller and the reseller forfeits commitment fees at
the end of the commitment period.





Commencing
in 2003, we began recognizing revenue from a reseller based in China with whom
we have an agreement but who is otherwise unaffiliated with WebEx. Due to
certain legal restrictions in China relating to our ability to sell directly to
customers in China, we entered into the reseller arrangement. Under this
arrangement, we license our communication service offerings to the reseller for
resale in China, and in consideration we receive licensing royalty revenue.
Royalty revenue due to us is based on the level of revenue reported by the
reseller and is recognized on a cash-received basis from the reseller. Also in
2003, subsequent to recognizing some revenue from our China-based reseller, we
entered into a loan agreement with this reseller. Under the terms of the
agreement, WebEx agreed to loan our reseller operating capital to partially fund
its early-stage operations. The reseller is currently operating at a loss and
has a negative cash flow. Repayment of the loan amount by the reseller will be
dependent on either another source of capital or profitable, cash positive
operation of the reseller. We believe that repayment is doubtful and therefore
we have reserved the current amount outstanding on the loan of $0.3 million
through a charge to sales and marketing expense. No additional revenue will be
recognized from this reseller until all outstanding loan amounts are paid in
full or the loan is otherwise settled.





*Sales
Reserves* . The
sales reserve is an estimate for losses on receivables resulting from customer
credits, cancellations and terminations and is recorded as a reduction in
revenue at the time of the sale. Increases to sales reserve are charged to
revenue, reducing the revenue otherwise reportable. The sales reserve estimate
is based on an analysis of the historical rate of credits, cancellations and
terminations. The accuracy of the estimate is dependent on the rate of future
credits, cancellations and terminations being consistent with the historical
rate. If the rate of actual credits, cancellations and terminations is different
than the historical rate, revenue would be different from what was reported.





*Allowance
for Doubtful Accounts.* We record an allowance for doubtful accounts to provide
for losses on accounts receivable due to customer credit risk. Increases to the
allowance for doubtful accounts are charged to general and administrative
expense as bad debt expense. Losses on accounts receivable due to financial
distress or failure of the customer are charged to the allowance for doubtful
accounts. The allowance estimate is based on an analysis of the historical rate
of credit losses. The accuracy of the estimate is dependent on the future rate
of credit losses being consistent with the historical rate. If the rate of
future credit losses is greater than the historical rate, then the allowance for
doubtful accounts may not be sufficient to provide for actual credit losses.





We
assess, on a quarterly basis, the adequacy of the sales reserve account balance
and the allowance for doubtful accounts account balance based on historical
experience. Any adjustments to these accounts are reflected in the income
statement for the current period, as an adjustment to revenue in the case of the
sales reserve and as a general and administrative expense in the case of the
allowance for doubtful accounts **.**














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The
following presents the detail of the changes in the sales reserve and allowance
for doubtful accounts for the last eight quarters ended December 31, 2004 (in
thousands):





Quarter
      EndedDecember
      31,
      2004
    
    
    September
      30,
      2004
    
    
    June
      30,
      2004
    
    
    March
      31,
      2004
    
    
    December
      31,
      2003
    
    
    September
      30,
      2003
    
    
    June
      30,
      2003
    
    
    March
      31,
      2003Balance
      at beginning of quarter
    
    $
    5,363
    
    $
    6,261
    
    $
    6,331
    
    $
    6,837
    
    $
    7,351
    
    $
    7,934
    
    $
    7,286
    
    $
    7,332Sales
      reserveBalance at beginning of quarter
    
    
    4,447
    
    
    4,995
    
    
    4,682
    
    
    4,571
    
    
    4,618
    
    
    4,866
    
    
    3,710
    
    
    3,948Deducted
      from revenue
    
    
    2,518
    
    
    1,331
    
    
    2,309
    
    
    2,115
    
    
    1,919
    
    
    2,657
    
    
    3,585
    
    
    1,679Amounts
      written off
    
    
    (2,334
    )
    
    (1,879
    )
    
    (1,996
    )
    
    (2,004
    )
    
    (1,966
    )
    
    (2,905
    )
    
    (2,429
    )
    
    (1,917
    )Change
    
    
    184
    
    
    (548
    )
    
    313
    
    
    111
    
    
    (47
    )
    
    (248
    )
    
    1,156
    
    
    (238
    )Balance at end of quarter
    
    
    4,631
    
    
    4,447
    
    
    4,995
    
    
    4,682
    
    
    4,571
    
    
    4,618
    
    
    4,866
    
    
    3,710Sales reserve as a percentage of gross
      accounts receivable
    
    
    12.2
    %
    
    12.8
    %
    
    15.2
    %
    
    16.1
    %
    
    16.2
    %
    
    16.7
    %
    
    17.8
    %
    
    14.1
    %Allowance
      for doubtful accountsBalance at beginning of quarter
    
    
    916
    
    
    1,266
    
    
    1,649
    
    
    2,266
    
    
    2,733
    
    
    3,068
    
    
    3,576
    
    
    3,384Charged
      (credited) to bad debt expense
    
    
    231
    
    
    (258
    )
    
    (135
    )
    
    (439
    )
    
    (268
    )
    
    364
    
    
    122
    
    
    632Amounts
      written off
    
    
    (144
    )
    
    (92
    )
    
    (248
    )
    
    (178
    )
    
    (199
    )
    
    (699
    )
    
    (630
    )
    
    (440
    )Change
    
    
    87
    
    
    (350
    )
    
    (383
    )
    
    (617
    )
    
    (467
    )
    
    (335
    )
    
    (508
    )
    
    192Balance at end of quarter
    
    
    1,003
    
    
    916
    
    
    1,266
    
    
    1,649
    
    
    2,266
    
    
    2,733
    
    
    3,068
    
    
    3,576Allowance for doubtful accounts as a percentage of
      gross accounts receivable
    
    
    2.6
    %
    
    2.6
    %
    
    3.8
    %
    
    5.6
    %
    
    8.0
    %
    
    9.9
    %
    
    11.2
    %
    
    13.5
    %Balance at end of quarter.
    
    
    5,634
    
    
    5,363
    
    
    6,261
    
    
    6,331
    
    $
    6,837
    
    $
    7,351
    
    $
    7,934
    
    $
    7,286Gross accounts receivable
    
    $
    38,072
    
    $
    34,694
    
    $
    32,918
    
    $
    29,198
    
    $
    28,251
    
    $
    27,651
    
    $
    27,336
    
    $
    26,396Total reserve as a percentage of gross accounts
      receivable
    
    
    14.8
    %
    
    15.4
    %
    
    19.0
    %
    
    21.7
    %
    
    24.2
    %
    
    26.6
    %
    
    29.0
    %
    
    27.6
    %





*Income
Taxes.* We
determine deferred tax assets and liabilities at the end of each year based on
the future tax consequences that can be attributed to net operating loss and
credit carryovers and differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, using
the tax rate expected to be in effect when the taxes are actually paid or
recovered. The recognition of deferred tax assets is reduced by a valuation
allowance if it is more likely than not that the tax benefits will not be
realized. The ultimate realization of deferred tax assets depends upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. We consider past performance, expected future
taxable income and prudent and feasible tax planning strategies in assessing the
amount of the valuation allowance. Our forecast of expected future taxable
income is based over such future periods that we believe can be reasonably
estimated. Changes in market conditions that differ materially from our current
expectations and changes in future tax laws in the U.S. and in international
jurisdictions may cause us to change our judgments of future taxable income.
These changes, if any, may require us to adjust our existing tax valuation
allowance higher or lower than the amount we have recorded. In the fourth
quarter of 2003, as a result of our assessment of projected future income, we
released $21.4 million of valuation allowance against deferred tax assets. In
the fourth quarter of 2004, again as a result of our assessment of projected
future income, we released $4.7 million of valuation allowance primarily related
to the remaining net operating loss carryforwards. This resulted in a tax
benefit in the fourth quarter of $3.8 million and a $0.9 million credit to
additional paid-in capital attributable to the tax benefit of stock options.








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In
addition, the calculation of tax liabilities involves significant judgment in
estimating the impact of uncertainties in the application of complex tax laws.
Resolution of these uncertainties in a manner inconsistent with our expectations
could have a material impact on our results of operations. We account for income
tax contingencies in accordance with Statement of *Financial
Accounting Standards No. 5, Accounting for Contingencies.*





*Impairment
of Goodwill and Intangible Assets* . We
assess the impairment of intangible and other long-lived assets whenever events
or changes in circumstances indicate that their carrying value may not be
recoverable from the estimated future cash flows expected to result from their
use and eventual disposition. Amortizable intangible assets subject to this
evaluation include acquired developed technology, patents, customer contracts
and relationships, trade name and covenant not to sue. We assess the impairment
of goodwill annually in our fourth quarter and whenever events or changes in
circumstances indicate that it is more likely than not that an impairment loss
has been incurred. We are required to make judgments and assumptions in
identifying those events or changes in circumstances that may trigger
impairment. Some of the factors we consider include:





-  Significant
decrease in the market value of an asset;





-  Significant changes in the
extent or manner for which the asset is being used or in its physical
condition;





-  A
significant change, delay or departure in our business strategy related to the
asset;





-  Significant negative changes in
the business climate, industry or economic conditions; and





- Current period operating
losses or negative cash flow combined with a history of similar losses or a
forecast that indicates continuing losses associated with the use of an


asset.








Our
impairment evaluation of long-lived assets includes an analysis of estimated
future undiscounted net cash flows expected to be generated by the assets over
their remaining estimated useful lives. If the estimated future undiscounted net
cash flows are insufficient to recover the carrying value of the assets over the
remaining estimated useful lives, we will record an impairment loss in the
amount by which the carrying value of the assets exceeds the fair value. We
determine fair value based on discounted cash flows using a discount rate
commensurate with the risk inherent in our current business model. If, as a
result of our analysis, we determine that our amortizable intangible assets or
other long-lived assets have been impaired, we will recognize an impairment loss
in the period in which the impairment is determined. Any such impairment charge
could be significant and could have a material adverse effect on our financial
position and results of operations. Major factors that influence our cash flow
analysis are our estimates for future revenue and expenses associated with the
use of the asset. Different estimates could have a significant impact on the
results of our evaluation .





Our
impairment evaluation of goodwill is based on comparing the fair value to the
carrying value of our reporting unit with goodwill.  If our revenue
and cost forecasts are not achieved, we may incur charges for goodwill
impairment, which could have material adverse effect on our income
statement.

















**Income
Statement**





The
following table sets forth, for the periods indicated, consolidated income
statement data as a percentage of net revenue.





****
    
    **Years ended December 31,****2004**
    
    
    **2003**
    
    
    **2002**Net
      revenue
    
    
    100
    %
    
    100
    %
    
    100
    %Cost
      of revenue
    
    
    17
    
    
    17
    
    
    18Gross
      profit
    
    
    83
    
    
    83
    
    
    82Operating
      expenses:Sales
      and marketing
    
    
    34
    
    
    39
    
    
    41Research
      and development
    
    
    14
    
    
    13
    
    
    16General
      and administrative
    
    
    8
    
    
    7
    
    
    11Equity-based
      compensation
    
    
    0
    
    
    1
    
    
    2Total
      operating expenses
    
    
    56
    
    
    60
    
    
    70Operating
      income
    
    
    27
    
    
    23
    
    
    12Interest
      and other income, net
    
    
    0
    
    
    1
    
    
    0Income
      before income taxes
    
    
    27
    
    
    24
    
    
    12Income
      tax expense (benefit)
    
    
    8
    
    
    (8
    )
    
    0Net
      income
    
    
    19
    %
    
    32
    %
    
    12
    %





*Net
revenue* .
    Net revenue increased from $139.9 million in 2002 to
$189.3 million in 2003 and to $249.1 million in 2004, which represents an
increase of 35% and 32% in 2003 and 2004, respectively. These increases were
primarily due to growth in our subscribing customer base and the increased
adoption by existing customers. By the end of 2004, the number of customers in
our subscribing base had grown by more than 26% from the end of
2003.





One of
the measurement tools, or metrics, which we use to help forecast future
revenues, is what we refer to as our monthly revenue rate, or what we sometimes
call MRR. We define our monthly revenue rate as the sum of the following: (i)
committed monthly subscriptions, or the aggregate dollar amount of minimum
minutes and ports that are contractually committed to us, as of the end of the
month, and (ii) average monthly uncommitted revenue for the quarter, or the
aggregate dollar amounts of per minute or usage-based services such as overage,
telephone, reseller-related and pay-per-use revenues for the quarter divided by
three. Our monthly subscription contracts at the end of December 2004 were
approximately $16.7 million and our average monthly uncommitted revenue in the
quarter ended December 31, 2004 was $6.6 million, and thus our monthly revenue
rate exiting December 2004 was $23.3 million. Certain one-time revenues, such as
set up fees, are not captured in MRR.





Another
metric we use to analyze customer losses and to help forecast future revenues is
monthly average lost subscription MRR. Our lost subscription MRR metric is
somewhat analogous to customer churn in the telecommunications business, except
that our lost subscription MRR is more inclusive than the churn metric used in
the telecommunications business. Whereas the telecommunications churn metric
typically includes only revenues lost because of customer terminations, our lost
subscription MRR includes not only revenues lost because of customer
terminations but also revenues lost because existing customers either have
reduced their subscription amounts or have elected to terminate their
subscriptions in favor of purchasing from our partners. We define our lost
subscription MRR as the quotient obtained from the following: (i) the average
monthly dollar amount of lost subscription contracts (including in that amount
reductions in subscription amounts and subscription amounts lost to the partner
channel) during the quarter, divided by (ii) our total subscriptions at the end
of the last month of the quarter plus the average monthly lost (including
existing customer subscriptions and switches to partners) subscription contracts
for the quarter. As can be understood from the definition of lost subscription
MRR, we calculate and evaluate lost subscription MRR on a quarterly basis. Our
lost subscription MRR for the three months ended December 31, 2004 was 1.9% per
month. The following table shows our MRR, and lost subscription MRR, for the
five quarters ended December 31, 2004 ($ in millions):





Quarter
      EndedDecember
      31, 2004
    
    
    September
      30, 2004
    
    
    June
      30,
      2004
    
    
    March
      31,
      2004
    
    
    December
      31, 2003Uncommitted
      usage - monthly average during the quarter
    
    $
    6.6
    
    $
    6.0
    
    $
    5.9
    
    $
    5.1
    
    $
    4.6Contracted
      subscriptions at the end of the quarter
    
    
    16.7
    
    
    15.9
    
    
    15.1
    
    
    14.1
    
    
    13.4Total
      MRR
    
    $
    23.3
    
    $
    21.9
    
    $
    21.0
    
    $
    19.2
    
    $
    18.0%
      of subscription MRR lost per month
    
    
    1.9
    %
    
    1.8
    %
    
    1.8
    %
    
    1.8
    %
    
    1.8
    %








*Cost
of revenue* .
    Our cost of revenue consists of costs related to user
set-up, network and data center operations, technical support and training
activities including Internet access and telephony communication costs,
personnel, licensed software and equipment costs and depreciation. Cost of
revenue increased from $25.1 million in 2002 to $31.8 million in 2003 and to
$41.9 million in 2004. As a percent of revenue, cost of revenue was 18%, 17% and
17% for 2002, 2003 and 2004, respectively. These increases in absolute dollars
in








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cost of
revenue were primarily due to increases in the cost for delivering existing and
new services to more customers, additional technical staff to support our
growing installed base of customers and new services, and expanding and
improving our worldwide network. In February 2004, we purchased land and a
building containing approximately 125,000 square feet of commercial grade
facility of which 25,000 square feet consists of data infrastructure facility
floor space for $15.9 million. Land totaling $9.7 million is not depreciated,
and the building totaling $6.2 million is being depreciated over 10 years. As
part of the purchase, we also acquired certain items of data infrastructure
equipment previously installed and situated on the property. During 2004, we
used this facility as our network-operating center as well as to expand our
primary switching center to accommodate growing usage requirements on our WebEx
MediaTone Network.





*Sales
and marketing.* Our sales and marketing expense consists of personnel
costs, including commissions, as well as costs of public relations, advertising,
marketing programs, lead generation, travel and trade shows. Sales and marketing
expense increased from $58.0 million in 2002 to $74.2 million in 2003 and to
$84.2 million in 2004. These increases were primarily due to increased sales
spending to expand our sales force and to increased marketing spending for
advertising focused on building brand awareness and generating sales leads.





*Research
and development* .
    Our research and development expense consists primarily
of salaries and other personnel-related expenses, depreciation of equipment,
supplies and consulting engineering services. Research and development expense
increased from $22.8 million in 2002 to $24.8 million in 2003 and to $34.3
million in 2004. The increase in research and development expense from 2002 to
2003 was primarily due to personnel related expenses resulting from increases in
staffing. In 2002, research and development included $3.3 million for the cost
of engineering services provided by three companies in China providing
engineering services to us on a contract basis. Our subsidiary WebEx China
acquired substantially all of the assets of, and hired a substantial majority of
the then-employees of, these companies in February 2003. We incurred $0.3
million of expense on a contract basis in 2003 prior to the acquisition. The
increase in research and development expense from 2003 to 2004 was primarily due
to personnel-related expenses resulting from increases in number of research and
development personnel including increases in the number of such personnel in
WebEx China.





*General
and administrative.* Our general and administrative expense consists
primarily of personnel costs for finance, human resources, legal and general
management, as well as professional expenses, such as legal and accounting, and
bad debt expense. General and administrative expense decreased from $14.4
million in 2002 to $13.6 million in 2003, and increased to $18.7 million in
2004. The decrease in general and administrative expense from 2002 to 2003 was
primarily due to the decrease of bad debt expense. Bad debt expense decreased
from $6.1 million in 2002 to $0.9 million in 2003 as a result of lower credit
losses compared to historical periods. The increases from 2003 to 2004 were
primarily due to lower bad debt expense and higher professional fees, increases
in personnel and payroll-related expenses required to address new regulations
including new regulations imposed by the Sarbanes Oxley Act of 2002. Bad debt
expense decreased from $0.9 million in 2003 to a $0.6 million credit in 2004.
This decrease in bad debt expense was primarily the result of lower credit
losses compared to historical periods. We expect bad debt expense to increase in
future periods as a result of the increased size of our installed customer
base.





*Equity-based
compensation.* Our equity-based compensation expense represents the
amortization of deferred equity-based compensation over the vesting period of
incentive stock options granted to employees and expenses related to issuance of
common stock warrants and options to non-employees. Deferred equity-based
compensation represents the difference between the exercise price of the stock
options granted to employees and the fair value of common stock at the time of
those grants. Equity-based compensation expense decreased from $3.0 million in
2002 to $1.8 million in 2003 and to $0.6 million in 2004. The decreases from
year to year were primarily due to the vesting of options granted, forfeitures
of unvested options by terminated employees and the effects of the fluctuations
of our stock price on the recognition of expense on options granted to
non-employees. Equity-based compensation expense related to the unvested portion
of non-employee options will be impacted by future changes in our stock price
and will fluctuate accordingly. In connection with the calculation of
equity-based compensation expense, members of our Board of Directors are treated
the same as employees of WebEx. In December 2004, the FASB issued SFAS 123R,
which requires the measurement of all employee share-based payments to
employees, including grants of employee stock options using the fair-value-based
method, to be recorded as expense in our results of operations. Since the
accounting provision of SFAS 123R is effective for reporting periods beginning
after June 15, 2005, we are required to adopt SFAS 123R in the third quarter of
fiscal 2005. We are evaluating the requirements under SFAS 123R and expect the
adoption to have a significant impact on our equity-based compensation
expense.





*Interest
and other income, net.* Interest and other income, net is comprised of interest
income and expense, the effect of non-functional currency transactions of our
foreign subsidiaries and certain other expenses. Interest and other income, net
increased from $0.3 million in 2002 to $1.1 million in 2003 and decreased to
$0.3 million in 2004. The increase from 2002 to 2003 was primarily due to lower
impairment charges on an investment and increased interest income as a result of
higher cash and short-term investments offset by lower market interest rates. In
2002, other expenses included an impairment write-down of $0.2 million, which
was the remaining carrying amount of a $1.0 million investment in a distribution








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partner,
Tonbu, Inc. The decrease from 2003 to 2004 was primarily due to increased losses
from currency exchange as a result of non-functional currency transactions of
our foreign subsidiaries, partially offset by higher interest earned as a result
of increased cash invested. In 2003 and 2004, other expenses included a loss
from currency exchange of $0.3 million and $1.9 million, respectively. There was
no material foreign currency exchange gain or loss in 2002.





*Income
taxes* .
    Because we incurred net operating losses in years prior
to 2002, we paid no federal, state and foreign income taxes in that period, nor
did we recognize any tax benefits for the related tax operating loss
carryforwards. During 2002, we realized pre-tax earnings and we had net
operating loss carryforwards available to offset taxable income in the U.S. We
recorded a provision for income tax of $0.5 million during 2002 related to
foreign and state taxes. In 2003, we continued to experience profitability and
therefore, had evidence to support the recognition of deferred tax assets.
Accordingly, in 2003 we recorded a current provision for income tax of $5.8
million related to federal, state and foreign income taxes, which was offset by
the release of a valuation allowance in the amount of $21.4 million based on
projected future income. In 2004, the provision for income tax includes a
release of $4.7 million of valuation allowance primarily related to remaining
net operating loss carryforwards, which resulted in a tax benefit of $3.8
million and a $0.9 million credit to additional paid-in capital attributable to
the tax benefit of stock options. The release of the valuation allowance was
recorded in the fourth quarter of 2004 when we updated our forecast of future
projected income. Our effective tax rate in 2002, 2003 and 2004 has fluctuated
as a result of the valuation allowance adjustments described above and may
continue to fluctuate in 2005 with the expected adoption of the new accounting
standard requiring expensing of stock-based employee compensation.





As of
December 31, 2004, we have approximately $3.7 million and $0.2  million
of net operating loss carryforwards for federal and state purposes,
respectively, available to offset income in future years. The federal net
operating loss carryforwards expire in 2020, and the state net operating loss
carryforwards expire beginning in 2006. We have approximately $5.1 million of
net operating loss carryforwards for foreign income tax purposes.





*Net
income.* As a result of the foregoing, we reported net income of
$47.9 million, $59.8 million and $16.4 million in 2004, 2003 and 2002,
respectively.








**Liquidity
and Capital Resources**





We have
generated net positive cash flow from operations since the third quarter of
2002. We anticipate cash flow from operations will fund our current operations
as well as fund future expansion.





As of
December 31, 2004, cash, cash equivalents and short-term investments were $185.1
million, an increase of $50.5 million compared with cash and cash equivalents of
$134.6 million as of December 31, 2003. As of December 31, 2004 and 2003, we had
no debt.





Net cash
provided by operating activities was $68.8 million in 2004, $60.7 million in
2003 and $31.9 million in 2002. Cash provided by operating activities in 2003
and 2002 was primarily the result of net income adjusted for non-cash components
offset by uses for working capital attributable to increases in accounts
receivable, decreases in accounts payable, offset by increases in taxes payable.
Cash provided by operating activities in 2004 was primarily the result of net
income adjusted for non-cash components offset by uses for working capital
attributable to increases in accounts receivable and decreases in taxes
payable.





Net cash
used in investing activities was $52.7 million in 2004, $37.2 million in 2003
and $43.6 million in 2002. Net cash used by investing activities related
primarily to the purchase of short-term investments, capital expenditures for
equipment, hardware and software used in our MediaTone network, the acquisitions
in 2004 of CyberBazaar, an India audio conferencing company, and of land and
building, including additional leasehold improvements, for our new switching
center. In 2004, 2003 and 2002, cash spent on property, plant and equipment was
$37.2 million, $9.2 million, $8.2 million, respectively.





Net cash
provided by financing activities was $23.4 million in 2004, $14.9 million in
2003 and $2.2 million in 2002. Cash provided by financing activities was
primarily the result of cash received from stock option exercises and employee
stock purchase plan purchases, and the full repayment of a loan to our Chief
Executive Officer in 2002, offset in part by cash used in the Company’s share
repurchase program in 2004. Under the
share repurchase program, which the Company’s board of directors authorized in
July 2004 for a one-year duration and which leaves to the Company’s discretion
whether and to what extent shares are repurchased during that one-year period, a
maximum of $40 million in shares of the Company’s common stock may be
repurchased on the open market. As of December 31, 2004, approximately $5.8
million worth of shares of the Company’s common stock has been
repurchased.





As of
December 31, 2004, our material purchase commitments, including usage of
telecommunication lines and data services, equipment and software purchases and
construction of leasehold improvements at new leased facilities, totaled $13.0
million. The
majority of the purchase commitments are expected to be settled in cash within
12 months with the
longest commitment expiring August 2007.








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We lease
office facilities under various operating leases that expire through 2014. In April
2004, we signed a lease to occupy space in a building located in Santa Clara,
California, that will serve as our corporate headquarters. The lease term is for
approximately ten years, and initial occupancy commenced in the third quarter of
2004. Future minimum lease payments under this lease begin in January 2005 and
total an aggregate of $23.8 million for the life of the lease. Total
future minimum lease payments under other operating leases amount to
approximately $11.3 million.





We have a
revolving credit line with a bank that provides available borrowings of up to
$7.0 million. Amounts borrowed under the revolving credit line bear interest at
the prime rate and may be repaid and reborrowed at any time prior to the
maturity date. The credit agreement expires on June 15, 2005. The credit
agreement is unsecured and is subject to compliance with covenants, including a
minimum quick ratio and minimum profitability, with which we are currently in
compliance. As of December 31, 2004, we had no outstanding borrowings under the
credit line, but we did have a $4.0 million letter of credit issued under the
line as security for our new headquarters lease.





In the
first quarter of 2004, we purchased land and a building for approximately $9.7
million and $6.2 million, respectively. Additional cash will be required to
expand our existing switching center in the new facility during 2005.





In April
2004, we completed the acquisition of CyberBazaar of Bangalore India, an audio
conferencing company, in order to directly pursue the web conferencing market in
India. We have renamed the CyberBazaar entity WebEx Communications India Pvt.
Ltd. WebEx Communications India has continued to maintain the CyberBazaar
offices, management team and employees. The CyberBazaar acquisition did not have
a material impact on our financial condition, income statement, or liquidity in
2004, and we do not expect it to have a material impact in 2005. WebEx paid the
former CyberBazaar shareholders approximately $2.7 million in cash at closing.
Additional payments of $1.4 million were accrued in 2004 and paid in 2005 based
on the performance of CyberBazaar in calendar year 2004. These additional
payments are tied to continued employment of the former owners of CyberBazaar at
our new India subsidiary and, accordingly, are being expensed as compensation.





In
September 2004, we entered into an agreement with NCR Corporation, a technology
company, which included the acquisition from NCR of certain intangible assets
and a release from any past liability associated with those assets. The terms of
the agreement included our acquiring five NCR patents issued in the U.S.
together with the foreign counterparts of those patents, obtaining licenses to
certain other NCR patents for the life of those patents, and mutually agreeing
with NCR not to commence legal actions against each other on other patents in
the companies’ respective portfolios for a period of three years. The acquired
patents were filed between 1993 and 1997. The amount paid in cash by us under
the agreement, which was allocated to the acquired intangible assets based on
fair value, was $2.6 million and is being amortized into cost of revenues. The
remainder of the consideration under the agreement consisted of $0.3 million,
which was allocated to the value of releases from any liability that might have
accrued prior to the effective date of the agreement and which was charged to
cost of revenue in the three months ended September 30, 2004.





We expect
that existing cash resources will be sufficient to fund our anticipated working
capital and capital expenditure needs for at least the next 12 months. We
generated positive cash flow from operations in each quarter of 2004. We
anticipate that we will continue to generate positive cash flow from operations
in 2005 and that existing cash reserves will therefore, be sufficient to meet
our capital and operating requirements during this period. If revenue in 2005 is
less than anticipated, we may take steps to reduce our discretionary expenses,
such as marketing, reduce planned capital expenditures or limit the hiring of
new personnel. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional public or private equity
securities or obtain additional debt financing. There can be no assurance that
additional financing would be available at all or, if available, would be
obtainable on terms favorable to us. If we are unable to obtain additional
financing, we may be required to reduce the scope of our planned technology and
product development and sales and marketing efforts, which could harm our
business, financial condition and operating results. Additional financing may
also be dilutive to our existing stockholders.





**Long
Term Contracts**





The
following table summarizes our significant contractual obligations at December
31, 2004, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods (in thousands).


Payments
due by period


Contractual  Obligations
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
      and thereafter
    
    
    TotalOperating
      lease obligations
    
    $
    4,881
    
    $
    3,533
    
    $
    3,422
    
    $
    3,703
    
    $
    3,255
    
    $
    16,347
    
    $
    35,141Purchase
      obligations
    
    
    12,498
    
    
    324
    
    
    45
    
    
    -
    
    
    -
    
    
    -
    
    $
    12,867Other
      commitments
    
    
    917
    
    
    458
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,375Total
    
    $
    18,296
    
    $
    4,315
    
    $
    3,467
    
    $
    3,703
    
    $
    3,255
    
    $
    16,347
    
    $
    49,383


****





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****


**Recent
Accounting Pronouncements**





See Note
1(s) of the Notes to the Consolidated Financial Statements for a full
description of recent accounting pronouncements including the respective
expected dates of adoption and effects on results of operations and financial
condition.





**Factors
That May Affect Results**





The risks
and uncertainties described below are not the only ones we face. If an adverse
outcome of any of the following risks actually occurs, our business, financial
condition or results of operations could suffer.








*Although
we realized net earnings for each of the twelve prior fiscal quarters including
the four in 2004, there is no assurance that we will be able to achieve
comparable results in the future, and we may experience net losses in future
years or quarters.*





We
realized net earnings in each of the twelve fiscal quarters in 2002, 2003 and
2004. However, we may experience net losses in future years or quarters if the
web communications market softens significantly, or if existing or future
competitors reduce our current market share of the web communications market or
require us to reduce our prices substantially to remain competitive. If we incur
net losses in the future, we may not be able to maintain or increase the number
of our employees, our investment in expanding our services and network, or our
sales, marketing and research and development programs in accordance with our
present plans, each of which is critical to our long-term success.








*Because
our quarterly results vary and are difficult to predict, we may fail to meet
quarterly financial expectations, which may cause our stock price to decline.*





Because
of the emerging nature of the market for web communications services, and
because of the uncertain impact of competition, our quarterly revenue and
operating results may fluctuate from quarter to quarter and may vary from
publicly announced quarterly or annual financial guidance. In addition, because
we have two different pricing models and the less predictable of the two
currently represents a greater percentage of our revenue than it has in the
past, our revenue and operating results will be more difficult to predict. The
two pricing models are what we refer to as, respectively, subscription-based and
usage-based, and the less predictable of the two is the usage-based pricing
model.





From a
revenue standpoint, our dominant pricing model has been a monthly, fixed-fee
subscription model. Under this model, a customer may subscribe to a certain
number of concurrent-user ports per month, which would enable the customer to
have up to that number of users connected to WebEx meetings at any one
time, or to a monthly minimum minutes commitment which would provide the
customer with up to a set number of people minutes per month with which to
utilize our services. Another of our fixed-fee offerings is the named host
offering, in which a certain named individual may host meetings at which up to a
certain number of attendees may participate.





In
addition, there are several situations in which customers are charged per
minute, or usage-based pricing. These include: customer overage fees, most types
of telephony charges, certain distribution partner arrangements and individual
pay-per-use purchased directly from our website. Overage fees are charged when
(i) a customer subscribing to a set number of ports uses more than the
subscribed number of ports in one or more web conference sessions, or (ii) when
a customer on a minutes pricing model uses more than its monthly commitment. Per
minute telephone revenue comes when a customer in a web conference session
elects to have us set up and run the audio portion of the conference, rather
than the customer conducting its telephone usage independent of us. The vast
majority of revenue received from our telecommunications partner arrangements is
usage, or per-minute, based. Finally, we make available on our website, for
purchase online by credit card and on a usage-based basis, certain of our
services.





Historically,
the majority of our revenue has been fixed fee, but the percentage of our
revenue which is derived from usage-based pricing models is greater than it has
been in the past. The various usage-based revenue sources are more variable and
difficult to predict than our fixed-fee subscription revenue sources, given that
customer demand may vary from








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month to
month depending on a number of factors, such as number of business days in a
month or vacation patterns. Accordingly, to the extent the percent of our
revenue derived from the various per-minute or usage-based sources increases,
our overall revenue becomes more difficult to predict. Since fixed-fee revenue
is what we refer to as committed revenue, and the usage-based revenue is what we
call uncommitted revenue, another way to describe this increasing
unpredictability is that our uncommitted revenues has grown faster than our
committed revenues.





A number
of other factors could also cause fluctuations in our operating results.





Factors
outside our control include:





-
    our
      distribution partners’ degree of success in distributing our services to
      end-users;





-
    the
      announcement, introduction and market acceptance of new or enhanced
      services or products by our competitors;





-
    changes
      in offerings, sourcing or pricing policies of our competitors and our
      distributors;





-
    market
      acceptance of our services;





-
    the
      growth rate of the market for web communications services; and





-
    a
      trend toward lower average per-minute prices in the telecommunications
      sector generally.





Factors
within our control include:





-
    our
      ability to develop, enhance and maintain our web communications network in
      a timely manner;





-
    the
      mix of services we offer, and our introduction of new and enhanced
      services;





-
    our
      ability to attract and retain customers;





-
    the
      amount and timing of operating costs and capital expenditures relating to
      expansion of our business and network infrastructure; and





-
    changes
      in our pricing policies.





If any of
these factors impact our business in an unplanned and negative manner during a
particular period, our operating results may be below market expectations, in
which case the market price of our common stock would likely decline. Also,
factors such as the growth rate of the market for our services, our ability to
maintain and enhance our network services and platform, and our competitors’
success could impact our longer-term financial performance by reducing demand
for our services, which would harm our business.








*We
expect that our operating expenses will continue to increase, and if our revenue
does not correspondingly increase, our business and operating results will
suffer.*





We expect
to continue to spend substantial financial and other resources on developing and
introducing new services, on expanding our sales and marketing organization and
our network infrastructure, and on upgrading leased facilities such as our
corporate headquarters. For example, in the first quarter of 2004 we purchased a
building in Mountain View, California which will serve as our primary network
switching facility, and in the second quarter of 2004 we entered into a ten-year
lease for space in a building located in Santa Clara, California which we have
begun occupying and which became our corporate headquarters in January 2005. We
base our expansion plans and expense levels in part on our expectations of
future revenue levels. If our revenue for a particular quarter is lower than we
expect, we may be unable to reduce proportionately our operating expenses for
that quarter, in which case our operating results for that quarter would suffer.
And because our fixed expenses have increased appreciably due to our
expectations relating to future revenue levels, if our revenue is sufficiently
below expectation in one or more quarters, we may be unable to effect
proportionate reductions in our operating expenses in a timely manner and
therefore, our operating results could suffer.








*Most
of our customers do not have long-term obligations to purchase our services;
therefore, our revenue and operating results could decline if our customers do
not continue to use our services.*








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Almost
all of our customer contracts have initial terms of three to 12 months. These
contracts are typically automatically renewed except where a customer takes
action to cancel a contract prior to the end of an initial or renewal term. Our
monthly average lost subscription MRR, an internal measurement tool we use to
evaluate subscription-based revenues we have lost, for the quarter ended
December 31, 2004 was 1.9%. In addition to cancellation, a customer may stop
buying our services directly from us and instead start purchasing our services
from one of our resellers. A customer may also change the number of ports or
types of services that the customer purchases directly from us such that the
overall revenue to us is lower. The
reasons why a customer would cancel use of our services have included the
failure of the customer’s employees to learn about and use our services, the
failure of the services to meet the customer’s expectations or requirements,
financial difficulties experienced by the customer, or the customer’s decision
to use services or products offered by a competitor. We may not obtain a
sufficient amount of new or incremental business to compensate for any customers
that we may lose. The loss of existing customers or our failure to obtain
additional customers would harm our business and operating results.








*Our
business and operating results may suffer if we fail to establish distribution
relationships, if our distribution partners do not successfully market and sell
our services, or if we fail to become a significant participant in the
telecommunications provider distribution channel.*





As of
December 31, 2004, we had distribution agreements in place with
telecommunications partners and software vendors that for 2004 accounted for 12%
of our revenue, which revenue generally consists of initial set-up fees,
commitment payments, and service fees. The majority of the payments received
from these distribution partners are per minute or usage-based payments. The
minority of payments are fixed-fee payments and are initially recorded as
deferred revenue because we defer revenue related to initial set-up fees
received at the beginning of the relationship and record revenue from
subscription services over the course of the service period as the distribution
partner resells our services. We also do not recognize commitment fees as
revenue until the commitment fee is paid and fully earned by the use of services
by the reseller’s end user customers or forfeiture of the commitment at the end
of the commitment period. We cannot anticipate the amount of revenue we will
derive from these relationships in the future. We must continue to establish and
extend these distribution partnerships. Establishing these distribution
relationships can take as long as several months or more. It typically also
takes several months before our distribution arrangements generate significant
revenue. Our distribution partners are not prohibited from offering and
reselling the products and services of our competitors and may choose to devote
insufficient resources to marketing and supporting our services or to devote
greater resources to marketing and supporting the products and services of other
companies. Also, with regard to the telecommunications-provider distribution
channel for web conferencing services which may prove economically significant
in the future, our web conferencing competitors may be more successful in
partnering with telecommunications providers, or telecommunications providers
may independently enter the web conferencing business, either alone or with web
conferencing vendors that do not include us. If we fail to establish new
distribution relationships in a timely manner, if our distribution partners do
not successfully distribute our services, if we lose existing distribution
partners for whatever reason or if we fail to become a significant participant
in the telecommunications-provider distribution channel, our ability to maintain
current levels of market acceptance of our web communications services will
suffer and our business and operating results will be harmed.








*Our
total revenue may suffer if we are unable to manage our distribution
relationships successfully to prevent the undercutting of our direct sales
efforts.* **





We sell
our services directly to customers and also indirectly through our distribution
partners. We enter into distribution relationships so that we can obtain
additional customers through distribution partners that we could not obtain
through our direct sales efforts. Under our agreements with our distribution
partners, either the distribution partner or WebEx bills the end-user customers.
When the distribution partner bills the end-user, we sell the services on a
discounted basis to the distribution partner, which in turn marks up the price
and sells the services to the end-user. In such cases, we contract directly with
the distribution partner, whom in this type of distribution arrangement we refer
to as a reseller, and revenue is recognized on amounts charged to the
distribution partner. A significant majority of our distribution partner
agreements are of this type. We also have distribution arrangements where we,
rather than the distribution partner, bill the end user. When we bill the
end-user, a percentage of the proceeds generated from the distribution partner’s
sale of WebEx services is paid to the distribution partner, whom in this type of
distribution arrangement we sometimes call a referral agent. Revenue is
recognized based on amounts charged to the end-user and amounts paid to the
distribution partner are recorded as sales expense. In either case, the revenue
received by us when a sale is made by a distribution partner, is not as great as
it would have been had the sale been made by us directly, for the same volume of
WebEx services. To the extent that sales of our services by our distribution
partners are sales that, absent the existence of the distribution arrangement,
would be made by our direct sales force, our sales revenue may decrease.
Additionally, to the extent our existing customers discontinue direct agreements
with us in order to purchase our services from distribution partners who are
resellers, our revenue may decrease.











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**


*We
expect to depend on sales of our standalone WebEx Meeting Center service for a
significant percentage of our revenue for the foreseeable future.*





Our
standalone WebEx Meeting Center service, the service which generates our largest
sales revenue, accounted for approximately 50% of our revenue for the year ended
December 31, 2004. We have developed and are selling other services, such as our
Event Center, Training Center, Support Center and Enterprise Edition services,
our SMARTtech service, our new Sales Center service launched in September 2004,
our new MyWebExPC offering launched in January 2005, and our audio conferencing
service offered through our recently-acquired subsidiary in India. However,
these services may not provide significant revenue in the future. If we are not
successful in developing, deploying and selling services other than our
standalone Meeting Center service, and if sales of our standalone Meeting Center
service decline or do not increase, our operating results will suffer.








*If
our services fail to function when used by large numbers of participants, we may
lose customers and our business and reputation may be harmed.*





Our
business strategy requires that our services be able to accommodate large
numbers of meetings and users at any one time. Our data network monitoring
system measures the capacity of our data network by bandwidth use. The goal of
our network capacity planning is to have our average daily peak usage be less
than 50% of our data network capacity. From time to time daily peak usage
exceeds 50% of data network capacity. However, since mid-2002 we have been able
to maintain average daily peak usage at under 50% of our data network capacity
by adding capacity whenever there is a trend toward increased average daily peak
usage. During the quarter ended December 31, 2004, the average of our daily peak
usages, as a percentage of our data network capacity, was less than 50% of our
total capacity. In addition to our data network, we also maintain an integrated
telephony network for which capacity planning is necessary. If we fail to
increase capacity in our data and telephony networks consistent with the growth
in usage of each, the performance of these networks could be adversely impacted.
In addition, we may encounter performance problems when making upgrades and
modifications to either or both of these networks. If our services do not
perform adequately because of capacity-related problems with either or both of
our data and telephony networks, particularly our data network, we may lose
customers and be unable to attract new customers and our operating results would
be harmed.








*If
our marketing, branding and lead-generation efforts are not successful, our
business may be harmed.*





We
believe that continued marketing and brand recognition efforts will be critical
to achieve widespread acceptance of our web communications services. Our
marketing and advertising campaigns or branding efforts may not be successful
given the expense required. For example, certain sales promotion initiatives,
such as free trial use, may dampen short-term sales even as such initiatives
attempt to cultivate participants’ desire to purchase and use our services, in
that a customer who might have otherwise purchased our services will instead
receive free use of our services for the trial period of time. In addition,
failure to adequately generate and develop sales leads could cause our future
revenue growth to decrease. Also, our ability to generate and cultivate sales
leads into large organizations, where there is the potential for significant use
of our services and where any future marketplace standardization of our service
might emerge, could harm our business. There is no assurance that we will
identify, and if we identify be able to secure, the number of strategic sales
leads necessary to help generate standardized marketplace acceptance of our
services, or to maintain rates of revenue growth we have experienced in the
past. If our marketing, branding or lead-generation efforts are not successful,
our business and operating results will be harmed.








*We
rely on our China subsidiary, which exposes us to risks of economic instability
in China, risks related to political tension between China and the United
States, and risks arising from an inability to enforce our intellectual property
rights.*





We have
relied, and for the foreseeable future we plan to continue to rely, on our
subsidiary WebEx China to conduct a significant portion of our quality assurance
testing and software development activities, and also a number of other
activities including lead research for our sales personnel, creation of
technical documentation, preparation of marketing materials and the provisioning
of customer websites. We have five facilities in China, located in each of
Hefei, Hangzhou, Shanghai, Shenzhen and Suzhou. Our China subsidiary employed,
as of December 31, 2004, approximately 782 of our worldwide employees. Our
reliance on WebEx China for a significant portion of our quality assurance,
software development and other activities exposes us to a variety of economic
and political risks including, but not limited to, technology-development
restrictions, potentially costly and pro-employee labor laws and regulations
governing our employees in China, and travel restrictions. Further, our
per-employee productivity is lower in China than it is the United States, due to
employee turnover in China and the length of time required for a new employee in
China to become productive in the position for which he or she was hired. We
also face foreign exchange risk in that we have significant payment obligations
that must be made in Chinese currency including employee salaries and lease
payments, which are currently not








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offset by
sales revenue in China. The Chinese currency, or yuan, is a currency whose rate
of exchange with other currencies is controlled by the Chinese government, and
any removal of that control could result in a significant appreciation of the
yuan relative to the U.S. dollar and thereby increase the negative effect of the
foreign exchange risk we face in China. In addition, political and economic
tensions between the United States and China could harm our ability to conduct
operations in China, which could increase our operating costs and harm our
business and operations. If we lost the services of our WebEx China subsidiary,
we would incur increased costs, which would harm our operating results and
business. Finally, because a substantial amount of our research and development
activity takes place in China, our business may be harmed if we encounter
difficulties enforcing our intellectual property rights there.








*Our
international business activities expose us to foreign exchange risk, foreign
country economic conditions and the challenges of managing a global business
operation, any of which if not managed successfully could harm our financial
condition.* **





A small,
but growing, part of our sales and support activities, and a significant portion
of our customer provisioning and research and development activities, are
conducted outside of the United States. These services are generally priced in
the local currency. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. We do not currently engage in hedging activities
or other actions to decrease fluctuations in operating results due to changes in
foreign currency exchange rates, although we may do so when the amount of
revenue obtained from sources outside the United States becomes significant. We
conduct sales, marketing, network and customer support operations in countries
outside of the United States, and we currently have subsidiaries in each of the
following countries: China, Hong Kong, Japan, Australia, India, the United
Kingdom, France, Germany and the Netherlands. Our future results could be
materially adversely affected by a variety of challenges generally associated
with managing a global business including, among others, the
following:





-
    staffing
      and managing international operations including multiple non-U.S.
      subsidiary structures;





-
    handling
      the various accounting, tax and legal complexities arising from our
      international operations;





-
    properly
      designing, testing andmaintaining
      internal controls over financial reporting in our non-U.S. subsidiaries,
      as required under Sarbanes-Oxley-related laws and regulations;





-
    understanding
      cultural differences affecting non-U.S. employee relations or sales
      transactions;
      and





-
    addressing
      political, economic or social instabilities that may arise from time to
      time in a specific non-U.S. country or
region.





The cost
of meeting these and other challenges, or our failure to address adequately one
or more of such challenges, could have a material adverse impact on our costs,
expenses, and financial condition .








*We
could incur unexpected costs resulting from claims relating to use of our
services.*





Many of
the business interactions supported by our services are critical to our
customers’ businesses. Although it is not standard practice for us to do so, in
some situations we do make warranties in our customer agreements as to service
uptime, or the percentage of time that our network will be operational and
available for customer use. Accordingly, any failure by us to fulfill such
warranty obligation, or more generally any failure in a customer’s business
interaction or other communications activity that is caused or allegedly caused
by our services, could result in a claim for damages against us, regardless of
our responsibility for the failure, and cause us to incur unexpected costs.








*Our
customers and end-users may use our services to share confidential and sensitive
information, and if our system security is breached, our reputation could be
harmed and we may lose customers.*





Our
customers and end-users may use our services to share confidential and sensitive
information, the security of which is critical to their business. Third parties
may attempt to breach our security or that of our customers. We may be liable to
our customers for any breach in security, and any breach could harm our
reputation and cause us to lose customers. In addition, computers are vulnerable
to computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays or loss of data. We may be required to
expend significant capital and other resources to further protect against
security breaches or to resolve problems caused by any breach, including
litigation-related expenses if we are sued.











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**


*The
software underlying our services is complex, and our business and reputation
could suffer if our services fail to perform properly due to undetected defects
or similar problems with our underlying software.*





Complex
software, such as the software underlying our services, often contains
undetected defects. We may be forced to delay commercial release of new services
or new versions of existing services until problems are corrected and, in some
cases, may need to implement enhancements to correct defects or bugs that we do
not detect until after deployment of our services. If we do detect a defect or
bug in our software before we introduce new versions of our services, we might
have to limit our services for an extended period of time while we resolve the
problem. In addition, problems with the software underlying our services could
result in:





-
    damage
      to our reputation;





-
    damage
      to our efforts to build brand awareness;





-
    loss
      of or delay in revenue;





-
    delays
      in or loss of market acceptance of our services; and





-
    unexpected
      expenses and diversion of resources to remedy errors.








*If
our services do not work with the many hardware and software platforms used by
our customers and end-users, our business may be harmed.*





We
currently serve customers and end-users that use a wide variety of constantly
changing hardware and software applications and platforms. If our services are
unable to support these platforms, they may fail to gain broad market
acceptance, which would cause our operating results to suffer. Our success
depends on our ability to deliver our services to multiple platforms and
existing, or legacy, systems and to modify our services and underlying
technology as new versions of applications are introduced. In addition, the
success of our services depends on our ability to anticipate and support new
standards, especially web standards.








*We
license third-party technologies, and if we cannot continue to license these or
alternate technologies in a timely manner and on commercially reasonable terms,
our business could suffer.*





We intend
to continue to license technologies from third parties, including applications
used in our research and development activities and technology, which is
integrated into our services. For example, we license database, operating
system, server and enterprise marketing automation software, billing software,
font-rendering technology and voice-over-Internet protocol (VOIP) technology.
These third-party technologies, and any that we may utilize in the future, may
not continue to be available to us on commercially reasonable terms. In
addition, we may fail to successfully integrate any licensed technology into our
services, our marketing communications operations or our online sales
operations. This in turn could increase our costs and harm our business and
operating results.








*Our
recent growth has placed a strain on our infrastructure and resources, and if we
fail to manage our future growth to meet customer and distribution partner
requirements, both within the U.S. and internationally, our business could
suffer.*





We have
experienced a period of rapid expansion in our personnel, facilities, and
infrastructure that has placed a significant strain on our resources. For
example, our worldwide headcount increased from 1,241 at December 31, 2003 to
1,826 at December 31, 2004. We expect to continue to increase our personnel in
2005. Our expansion has placed, and we expect that it will continue to place, a
significant strain on our management, operational and financial resources. In
addition, we are completing the physical transfer of our network switching
operations center to a new building and, separately, we are continuing
periodically to update our information technology infrastructure to meet
increased requirements for capacity, flexibility and efficiency resulting from
the growth of our business. In the event these updated systems or technologies
do not meet our requirements or are not deployed in a successful or timely
manner, our business may suffer. Any failure by us to manage our growth
effectively could disrupt our operations or delay execution of our business plan
and could consequently harm our business.








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*If we
unexpectedly lose the services of Subrah S. Iyar, our Chief Executive Officer,
Min Zhu, our Chief Technical Officer, or Bill Heil, our President and Chief
Operating Officer, our business may be harmed.*





Our
success will depend on our senior executives. In particular, the unexpected loss
of the services of any of our Chief Executive Officer and co-founder, Subrah S.
Iyar, our Chief Technical Officer and co-founder, Min Zhu, or our President and
Chief Operating Officer, Bill Heil, would harm our business. We do not have
long-term employment agreements with or life insurance policies on any of our
senior executives.








*If we
are unable to attract, integrate and retain qualified personnel, our business
could suffer.*





Our
future success will depend on our ability to attract, train, retain and motivate
highly skilled engineering, technical, managerial, sales and marketing and
customer support personnel. We expect to continue to increase our personnel in
2005. As the U.S. economy in general and the technology sector in particular
continue to grow, we could encounter increasing difficulty hiring qualified
personnel. If we encounter difficulty hiring, integrating and retaining a
sufficient number of qualified personnel in the future, the quality of our web
communications services and our ability to develop new services, obtain new
customers and provide a high level of customer service could all suffer, and
consequently the health of our overall business could suffer. If in our hiring
we hire employees from our competitors, we face a risk that a competitor may
claim that we have engaged in unfair hiring practices, which could cause us to
incur costs in defending ourselves against such claims, regardless of their
merits. Also, our competitors appear to value certain specialized skills
possessed by certain of our technical and sales employees, having hired or
attempted to hire such individuals in recent quarters. If the rate at which such
employees are hired away increases appreciably, our business and operations
could be harmed.








*Interruption
or malfunction of our internal business processing systems, including a new
system we installed during 2004, could disrupt the services we provide our
customers and could harm our business* *.*





Our
business, with its approximately 11,150 subscription customers and large number
of daily transactions, is substantially dependent on the continuous and
error-free functioning of our automated business processing systems covering
such areas as order-entry, billing, contract management and collection
activities. During the third quarter of 2004, we completed deployment of and are
now utilizing a comprehensive new proprietary business processing system to
capture and record for billing and financial statement generation purposes,
customer usage of our various services. Any material interruption or malfunction
of one or more of the underlying components of this new business processing
system, including bugs, start-up problems or other malfunctions relating to the
new system, could cause delays or errors in transaction processing, could
negatively affect customer relationships, and could harm our
business . In
addition, because a substantial amount of the new business processing system was
developed by us rather than having been purchased from an outside vendor, we
must rely on our own know-how and experience to identify, diagnose and repair
any malfunction of such software rather than being able to rely on an outside
vendor and multiple other users of the system to identify and correct such
defects. Actual malfunction-related costs that have had and could continue to
have negative effects on our business include, with respect to certain segments
of our business, a modestly longer collection cycle as a result of delayed
invoicing or invoice presentation issues, and our having to deploy additional
resources internally to complete the processing of certain sales transactions.








*Interruptions
in either our internal or outsourced computer and communications systems could
reduce our ability to provide our revenue-generating services and could harm our
business and reputation.*





The
success of our web communications services depends on the efficient and
uninterrupted operation of our internal and outsourced computer and
communications hardware and software systems. During the third quarter of 2004,
we completed installation of an updated version of our server management system,
which system monitors and reports on the status of our various servers through
which our real-time web communications services are delivered to customers. Any
system failure, including the malfunction of the new server management system,
that causes an interruption in our web communications services or a decrease in
their performance, could harm our relationships with our customers and
distribution partners. In addition, some of our communications hardware and
software are hosted at third-party co-location facilities. These systems and
operations are vulnerable to damage or interruption from human error,
telecommunications failures, physical or remote break-ins, sabotage, computer
viruses and intentional acts of vandalism. In addition, third party co-location
facilities may discontinue their operations due to poor business performance.
Because a substantial part of our central computer and communications hardware
and network operations are located in the San Francisco Bay Area, an earthquake
or other natural disaster could impair the performance of our entire network. In
the event of damage to or interruption of our internal or outsourced systems, if
we are unable to implement our disaster recovery plans or our efforts to restore
our services to normal levels in a timely manner are








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not
successful, our business would be harmed. In addition, business interruption
insurance may not adequately compensate us for losses that may occur. Finally,
in February 2004, we purchased approximately nine acres of real property in
Mountain View, California on which resides a building which we use primarily as
a switching center facility to accommodate growing usage requirements on our
WebEx MediaTone Network. Any malfunction or service interruption we suffer
relating to our network switching operations to the new building could disrupt
our communications services, could harm our relationships with our customers and
distribution partners, and could harm our business.








*We
might have liability for content or information transmitted through our
communications services.*





Claims
may be asserted against us for defamation, negligence, copyright, patent or
trademark infringement and other legal theories based on the nature and content
of the materials transmitted through our web communications services. Defending
against such claims could be expensive, could be time-consuming and could divert
management’s attention away from running our business. In addition, any
imposition of liability could harm our reputation and our business and operating
results, or could result in the imposition of criminal penalties.








*Our
success depends upon the patent protection of our software and technology.*





Our
success and ability to compete depend to a significant degree upon the
protection of our underlying software and our proprietary technology through
patents. We regard the effective protection of patentable inventions as
important to our future opportunities. We currently have 21 issued patents,
including eight we acquired in connection with our June 2003 acquisition of
certain assets of Presenter, Inc. and five we purchased in 2004 from NCR
Corporation. Our patents are in several areas including peer-to-peer connections
to facilitate conferencing, document annotation, optimizing data transfer,
graphical user interface for extracting video presentations, and remote
collaboration systems involving multiple computers. We currently have over 30
patent applications pending in the United States including eight patent
applications assigned to us in the Presenter asset acquisition transaction. We
may seek additional patents in the future. Our current patent applications cover
different aspects of the technology used to deliver our services and are
important to our ability to compete. However, it is possible that:





-
    any
      patents acquired by or issued to us may not be broad enough to protect us;





-
    any
      issued patent could be successfully challenged by one or more third
      parties, which could result in our loss of the right to prevent others
      from exploiting the inventions claimed in those patents;





-
    current
      and future competitors may independently develop similar technology,
      duplicate our services or design around any of our patents;





-
    our
      pending patent applications may not result in the issuance of patents; and





-
    effective
      patent protection, including effective legal-enforcement mechanisms
      against those who violate our patent-related assets, may not be available
      in every country in which we do business.








*We
also rely upon trademarks, copyrights and trade secrets to protect our
technology, which may not be sufficient to protect our intellectual property.*





We also
rely on a combination of laws, such as copyright, trademark and trade secret
laws, and contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our technology. Our trademarks include: WebEx
(word and design), WebEx bifurcated ball logo design, WebEx.com, MyWebEx,
MyWebExPC, Bringing the Meeting to You, MediaTone, Meeting Center, WebEx Meeting
Center, Event Center, WebEx Event Center, We’ve Got To Start Meeting Like This,
Presentation Studio, WebEx Connect, WebEx Global Watch, WebEx Contact Center,
WebEx Access Anywhere and Power Panels. Federal trademark applications acquired
from Presenter consist of the trademarks iPresenter, iPresentation and Instant
Presentation. We also refer to trademarks of other corporations and
organizations in this document. Also, our software is automatically protected by
copyright law. These forms of intellectual property protection are critically
important to our ability to establish and maintain our competitive position.
However,





-
    third
      parties may infringe or misappropriate our copyrights, trademarks and
      similar proprietary rights;





-
    laws
      and contractual restrictions, particularly those existing within or
      applied within non-U.S. jurisdictions such as China, may not be sufficient
      to prevent misappropriation of our technology or to deter others from
      developing similar technologies;








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-
    effective
      trademark, copyright and trade secret protection, including effective
      legal-enforcement mechanisms against those who violate our trademark,
      copyright or trade secret assets, may be unavailable or limited in foreign
      countries;





-
    other
      companies may claim common law trademark rights based upon state or
      foreign laws that precede the federal registration of our marks;
      and





-
    policing
      unauthorized use of our services and trademarks is difficult, expensive
      and time-consuming, and we may be unable to determine the extent of any
      unauthorized use.





Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which would significantly harm our business.








*We
may face intellectual property infringement claims that could be costly to
defend and result in our loss of significant rights.*





We may be
subject to legal proceedings and claims, including claims of alleged
infringement of the copyrights, trademarks and patents of third parties. Our
services may infringe issued patents. In addition, we may be unaware of filed
patent applications which have not yet been made public and which relate to our
services. From time to time, we have received notices alleging that we infringe
intellectual property rights of third parties. In such cases, we investigate the
relevant facts, respond to the allegations and, where case facts and other
conditions warrant, consider settlement options. Intellectual property claims
that may be asserted against us in the future could result in litigation.
Intellectual property litigation is expensive and time-consuming and could
divert management’s attention away from running our business. Intellectual
property litigation could also require us to develop non-infringing technology
or enter into royalty or license agreements. These royalty or license
agreements, if required, may not be available on acceptable terms, if at all, in
the event of a successful claim of infringement. Our failure or inability to
develop non-infringing technology or license proprietary rights on a timely
basis would harm our business.








*We
may engage in future acquisitions or investments that could dilute the ownership
of our existing stockholders, cause us to incur significant expenses, fail to
complement our existing revenue models or harm our operating results.*





We may
acquire or invest in complementary businesses, technologies or services. For
example, in April 2004 we completed the acquisition of CyberBazaar, the
principal business of which today is audio conferencing. We have changed the
name CyberBazaar to WebEx Communications India Pvt. Ltd. Integrating any newly
acquired businesses, employees, technologies or services may be expensive and
time-consuming. To finance any material acquisitions, it may be necessary for us
to raise additional funds through public or private financings. Additional funds
may not be available on terms that are favorable to us and, in the case of
equity financings as with acquisitions made with our stock, may result in
dilution to our stockholders. We may be unable to complete any acquisitions or
investments on commercially reasonable terms, if at all. Even if completed, we
may be unable to operate any acquired businesses profitably or successfully
integrate the employees, technology, products or services of any acquired
businesses into our existing business. To illustrate, in connection with the
CyberBazaar acquisition in April 2004, we added the former CyberBazaar workforce
to our worldwide employee headcount, we continue to offer the former CyberBazaar
audio conferencing services and we plan to eventually integrate our WebEx audio
conferencing and network technology into the WebEx India operation. However, if
we fail to integrate the former CyberBazaar employees and other employees hired
after the acquisition into our company, or otherwise fail to successfully manage
these new operations as our new WebEx India subsidiary in India, or if we fail
to successfully upgrade the former CyberBazaar audio conferencing assets or
expand our worldwide network into India, the acquisition may not meet our
financial expectations. If we are unable to integrate any newly acquired
entities or technologies effectively, including those related to our CyberBazaar
acquisition, our operating results could suffer. Future acquisitions by us, or
deterioration of the businesses we have acquired, could also result in large and
immediate write-downs, or incurrence of debt and contingent liabilities, any of
which would harm our operating results.








*We
must compete successfully in the web communications services market.*





The
market for web communications services is intensely competitive, subject to
rapid change and is significantly affected by new product and service
introductions and other market activities of industry participants. Although we
do not currently compete against any one entity with respect to all aspects of
our services, we do compete with various companies in regards to specific
elements of our web communications services. For example, we compete with
providers of traditional communications technologies such as teleconferencing
and videoconferencing, applications software and tools companies, and web
conferencing services such as Centra Software, Cisco Systems, Citrix Systems,
Genesys, IBM, Macromedia, Microsoft, Oracle and Raindance. Other companies could
choose to extend their products and services to include interactive
communications in the future. Many of








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our
current and potential competitors have longer operating histories, significantly
greater financial, technical and other resources and greater name recognition
than we do. Our current and future competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements. In
addition, current and potential competitors have established, and may in the
future establish, cooperative relationships with third parties and with each
other to increase the availability of their products and services to the
marketplace. Competitive pressures could reduce our market share or require us
to reduce the price of our services, either of which could harm our business and
operating results. For example, we offer VOIP to customers seeking that option
for the audio portion of their web conferencing service activity, which puts us
in competition with increasing numbers of low cost providers of VOIP products
and services of ever-increasing quality. One or more of these competitors may
offer a sufficiently low-cost, feature-attractive, audio-centric VOIP offering
that, though not a web conferencing offering, might divert business away from
us, or one or more of these competitors might themselves leverage their
experience in the VOIP segment of web communications to develop and market a
web-conferencing product or service of their own. Finally, our revenues and
market share could also be reduced if, during this time period where the market
is still relatively new and competitors are still emerging, we do not capitalize
on our current market leadership by timely developing and executing corporate
strategies that will increase the likelihood that our services will be accepted
as the market standard in preference to the offerings of our current and future
competitors.


**





*Competition
from Microsoft for the general web conferencing market or from other vendors
specifically targeted at the low-end market may adversely affect our operating
results.*





Microsoft
has become a more active participant in the web communications services market
since its acquisition of our competitor Placeware in 2003. Microsoft has a
current product offering which is competitive with ours and which is called
Microsoft Office Live Meeting. Microsoft Office Live Meeting is being marketed
together with other Microsoft software products and services under the name
Microsoft Office System. Microsoft has recently announced certain improvements
to the Live Meeting service and other product developments, and also an
acquisition related to the areas of communication and collaboration. Microsoft’s
investment of development and marketing resources in products or services that
compete directly with WebEx and Microsoft’s integrations of competitive
functionality with other communication and collaboration offerings may have an
adverse impact on WebEx’s business. Microsoft may attempt to leverage its
dominant market position in the operating system, productivity application or
browser markets, through technical integration or bundled offerings, to expand
its presence in the web communications market, which could make it difficult for
other vendors of web communications products and services, such as WebEx, to
compete. In addition some competitors offer web communications products and
services targeted at customers who are more price-conscious and are less
concerned about functionality, scalability, integration and security features.
Such offerings may make it more difficult for WebEx to compete in that segment
of the market and may cause some of WebEx’s existing customers to switch to
these competitors. If WebEx is unable to deliver competitive offerings for that
segment of the market, WebEx’s operating results may suffer.








*Our
future success depends on the broad market adoption and acceptance of web
communications services.*





The
market for web communications services is relatively new and rapidly evolving.
Market demand for communications services over the Web is uncertain. If the
market for web communications services does not continue to grow, our business
and operating results will be harmed. Factors that might influence broad market
acceptance of our services include the following, all of which are beyond our
control:





-
    willingness
      of businesses and end-users to use web communications services for
      websites;





-
    the
      continued growth and viability of the Web as an instrument of commerce;





-
    the
      willingness of our distribution partners to integrate web communications
      services for websites in their service offerings; and





-
    the
      ongoing level of security and reliability for conducting business over the
      Web.








*Our
success depends on the continued growth of web usage and the continued growth in
reliability and capacity of the Internet.*





Because
customers access our network through the Web, our revenue growth depends on the
continued development and maintenance of the Internet infrastructure. This
continued development of the Web would include maintenance of a reliable network
with the necessary speed, data capacity and security, as well as timely
development of complementary products and services, including high-speed modems
and other high-bandwidth communications technologies, for providing reliable,
high-performance Internet access








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and
services. The success of our business will rely on the continued improvement of
the Web as a convenient and reliable means of customer interaction and commerce,
as well as an efficient medium for the delivery and distribution of information
by businesses to their employees. If increases in web usage or the continued
growth in reliability and capacity of the Internet fail to materialize, our
ability to deliver our services may be adversely affected and our operating
results could be harmed.








*We
face risks associated with government regulation of the Internet, and related
legal uncertainties.*





Currently,
a relatively small number of existing laws or regulations specifically apply to
the Internet, other than laws generally applicable to businesses. Many
Internet-related laws and regulations, however, are pending and may be adopted
in the United States, in individual states and local jurisdictions and in other
countries. These laws may relate to many areas that impact our business,
including encryption, network and information security, the convergence of
traditional communication services, such as telephone services, with Internet
communications, taxes and wireless networks. For example, media reports have
surfaced from time to time concerning possible future regulation, and perhaps
also taxation, of VOIP products and services similar to the manner in which
current telephony services are currently regulated and taxed. These types of
regulations could differ between countries and other political and geographic
divisions both inside and outside the United States. Non-U.S. countries and
political organizations may impose, or favor, more and different regulation than
that which has been proposed in the United States, thus furthering the
complexity of regulation. In addition, state and local governments within the
United States may impose regulations in addition to, inconsistent with, or
stricter than federal regulations. The adoption of such laws or regulations, and
uncertainties associated with their validity, interpretation, applicability and
enforcement, may affect the available distribution channels for, and the costs
associated with, our products and services. The adoption of such laws and
regulations may harm our business. In addition to the effect of such potential
future laws and regulations, existing laws and regulations in both domestic and
non-U.S. jurisdictions could be interpreted to apply to our web communications
business, in which case our regulatory compliance obligations and associated
financial burdens could increase. An example of a non-U.S. law or regulation
that we are expending resources, both infrastructure-related and legal-related,
to comply with are the various privacy statutes enacted by the European Union.
Examples of U.S. laws and regulations that we may have to expend greater
resources to comply with are various U.S. state sales tax laws and regulations
that may be held by the applicable authorities to apply to the sale of our web
communications services.








*Current
and future economic and political conditions may adversely affect our business.*





Current
economic and political conditions, including the effects of the war in Iraq,
uncertainty about Iraq’s political future, continuing tensions throughout the
Middle East and the supply and price of petroleum products continue to impact
the U.S. and global economy, and any negative development in one of these
geopolitical areas could cause significant worldwide economic harm. Any
sustained increase in the price of petroleum products above present levels would
likely negatively impact the U.S. and world economies generally, which in turn
could hurt our business. Any significant downturn in the U.S. economy, whether
due to the effect of increasing interest rates or otherwise, could cause
existing or potential customers to decide not to purchase our services, which in
turn would hurt our business. To the extent that changes in laws, regulations or
taxes in the U.S. diminish the economic benefits of arrangements by U.S.
companies with non-U.S. subsidiaries or suppliers, our business would be
adversely affected. As with our operations in China, our operations in India
could be significantly disrupted if U.S. relations with India deteriorate, or if
India becomes involved in armed conflict or otherwise becomes politically
destabilized. Moreover, depending on severity, a significant terrorist attack
anywhere in the world and particularly one within the United States could have a
significantly negative effect on both the domestic and global economies. If
economic conditions worsen as a result of economic, political or social turmoil
or military conflict, or if there are further terrorist attacks in the United
States or elsewhere, our customers may not be able to pay for our services and
our distribution partners may cease operations, which may harm our operating
results.








*We
may experience electrical system failures whether accidentally or intentionally
caused, which could disrupt our operations and increase our expenses.*





California
has experienced, and could in the future experience energy shortages and
blackouts. As was made evident by the well-publicized August 2003 blackout which
simultaneously affected several eastern U.S. states for a period exceeding 24
hours, a similarly widespread, long-lasting power outage could occur in northern
California. As with the eastern U.S. power supply, an important source of
electrical power to northern California consists of a multi-state grid situated
in the western United States. An accidental interruption of, or criminal
disruption to, a key supply or distribution component of the power grid could
cause a significant power outage in northern California. If power outages or
energy price








10k





increases
occur in the future in northern California or other locations where we maintain
operations, such events could disrupt our operations, prevent us from providing
our services, harm our reputation, and result in a loss of revenue and increase
in our expenses, all of which could substantially harm our business and results
of operations.








*Changes
to financial accounting standards may affect our results of operations and cause
us to change our business practices* *.*





We
prepare our financial statements to conform with generally accepted accounting
principles, or GAAP, in the United States. These accounting principles are
subject to interpretation by the American Institute of Certified Public
Accountants, the Securities and Exchange Commission and various bodies formed to
interpret and create appropriate accounting policies. A change in those policies
can have a significant effect on our reported results and may affect our
reporting of transactions completed before a change is announced. Changes to
those rules or the questioning of current practices may adversely affect our
reported financial results or the way we conduct our business. For example,
accounting policies affecting many aspects of our business, including rules
relating to employee stock option grants, have recently been revised or are
under review. ****** The
Financial Accounting Standards Board (FASB) during the fourth quarter of 2004
adopted final rules which will change the way companies account for equity
compensation in their financial statements. FASB has stated that the new
accounting standard would become effective for fiscal periods beginning after
June 2005. This change in accounting standards will require us to report as a
compensation expense options granted to and shares purchased by our employees
pursuant to our stock option and employee stock purchase plans, and will have a
negative impact on our reported net income. Because of the negative impact such
accounting will have on our net income, we are likely to re-evaluate the form
and amount of employee equity-based compensation we will provide in the future,
such as reducing the number of stock options granted to employees or the
discount available for participants in our employee stock purchase plan. These
possible changes in equity compensation practices would lessen the projected
negative impact of the new FASB rule on our reported net income. However, if we
decide to reduce the amount of equity-based compensation we provide to our
employees, we may be forced to increase cash compensation to employees to make
up for the loss of equity-based compensation opportunities, which would increase
our expenses. Apart from these quantifiable effects of the new FASB rule, we may
have trouble retaining or recruiting key technical or management talent if we
fail to offer compensation packages that are competitive with those being
offered by other public or privately-held technology companies.








*Our
stock price has been and will likely continue to be volatile because of stock
market fluctuations that affect the prices of technology stocks. A decline in
our stock price could result in securities class action litigation against us
that could divert management’s attention and harm our business.*





Our stock
price has been and is likely to continue to be highly volatile. For example,
between January 1, 2004 and February 27, 2005, our stock price has traded as
high as $32.38 on April 12, 2004 and as low as $17.36 on July 19, 2004. Our
stock price could fluctuate significantly due to a number of factors, including:





-
    variations
      in our actual or anticipated operating results;





-
    sales
      of substantial amounts of our stock;





-
    announcements
      by or about us or our competitors, including technological innovation, new
      products, services or acquisitions;





-
    litigation
      and other developments relating to our patents or other proprietary rights
      or those of our competitors;





-
    conditions
      in the Internet industry;





-
    changes
      in laws, regulations, rules or standards by governments, regulatory
      bodies, exchanges or standards bodies; and





-   changes in securities analysts’ estimates of our performance, or
our failure to meet analysts’ expectations.





Many of
these factors are beyond our control. In addition, the stock markets in general,
and the Nasdaq National Market and the market for Internet technology companies
in particular, continue to experience significant price and volume fluctuations.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. These broad market and industry
factors may decrease the market price of our common stock, regardless of our
actual operating performance. In the past, companies that have experienced
volatility in the market prices of their stock have been the objects of
securities class action litigation. If we were to be the object of securities
class action litigation, we could face substantial costs and a diversion of
management’s attention and resources, which could harm our
business.








10k


**Item
7A.****Quantitative
and Qualitative Disclosures About Market Risk**





*Foreign
Currency Risk.* A small,
but growing, part of our business is conducted outside the United States. In the
majority of non-U.S. transactions, whether they be sales revenue transactions or
the payment of expenses or other obligations owing in the non-U.S. country, the
currency involved is the local, non-U.S. currency. In some countries we have far
more sales collections than we do payment obligations; in other countries, the
reverse is true. For example, in China we have significant payment obligations
that must be made in Chinese currency including employee salaries and lease
payments, which are currently not offset by sales revenue in China. As a result
of this imbalance between local currency collections and payments in certain
non-U.S. countries, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in such
foreign markets. When the amount of revenue obtained from sources outside the
United States becomes significant, we may engage in hedging activities or other
actions to decrease fluctuations in operating results due to changes in foreign
currency exchange rates.





*Interest
Rate Risk.* We do
not use derivative financial instruments or market risk sensitive instruments.
Instead, we invest in highly liquid investments with short maturities.
Accordingly, we do not expect any material loss from these investments and
believe that our potential interest rate exposure is not material.

















**Item 8.** ***Financial Statements and Supplementary
Data*** ****








**INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS**


**Page**Financial
      Statements:Report of Independent Registered Public
      Accounting Firm
    36Consolidated Balance Sheets as of December 31, 2004
      and 2003
    37Consolidated Income Statements for the years ended December
      31, 2004, 2003 and 2002
    38Consolidated Statements of Stockholders' Equity and
      Comprehensive Income for the years ended December 31, 2004, 2003 and
      2002
    39Consolidated Statements of Cash Flows for the years ended
      December 31, 2004, 2003 and 2002
    40Notes to Consolidated Financial
    Statements
    41











****


**Report of Independent Registered Public Accounting
Firm**








The Board
of Directors and Stockholders


WebEx
Communications, Inc.:








We have
audited the accompanying consolidated balance sheets of WebEx Communications,
Inc. and subsidiaries (the Company) as of December 31, 2003 and 2004, and the
related consolidated income statements, statements of stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these consolidated 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, as well as 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 financial position of WebEx Communications, Inc.
and subsidiaries as of December 31, 2003 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) the effectiveness of the internal control over
financial reporting of WebEx Communications, Inc. as of December 31, 2004, based
on the criteria established in *Internal Control - Integrated Framework*
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 9, 2005 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal
control over financial reporting.








/s/ KPMG
LLP








Mountain
View, California


March 9,
2005























**WEBEX
COMMUNICATIONS, INC.**





**CONSOLIDATED BALANCE SHEETS**


**(In
thousands, except share data)**





****
    
    **December
      31,****2004**
    
    
    **2003****ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    110,552
    
    $
    70,996Short-term
      investments
    
    
    74,586
    
    
    63,639Accounts
      receivable, net of allowances of $5,634 and $6,837 at December 31, 2004
      and 2003, respectively
    
    
    32,438
    
    
    21,414Prepaid
      expenses and other current assets
    
    
    4,817
    
    
    2,505Prepaid
      income taxes
    
    
    1,739
    
    
    —Deferred
      tax assets
    
    
    4,665
    
    
    14,623Total
      current assets
    
    
    228,797
    
    
    173,177Property
      and equipment, net
    
    
    44,783
    
    
    19,275Goodwill
    
    
    1,822
    
    
    —Intangible
      assets, net
    
    
    3,410
    
    
    541Deferred
      tax assets
    
    
    5,724
    
    
    6,809Other
      non-current assets
    
    
    1,257
    
    
    1,694Total
      assets
    
    $
    285,793
    
    $
    201,496**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current
      liabilities:Accounts
      payable
    
    $
    8,685
    
    $
    4,648Accrued
      liabilities
    
    
    20,179
    
    
    18,953Income
      tax payable
    
    
    —
    
    
    2,353Deferred
      revenue
    
    
    9,867
    
    
    9,648Total
      liabilities
    
    
    38,731
    
    
    35,602Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized; no shares issued or
      outstanding
    
    
    —
    
    
    —Common
      stock, $0.001 par value; 250,000,000 shares authorized; 44,952,804 and
      42,771,601 shares issued and outstanding at December 31, 2004 and 2003,
      respectively
    
    
    45
    
    
    43Additional
      paid-in capital
    
    
    245,807
    
    
    213,275Deferred
      equity-based compensation
    
    
    (15
    )
    
    (74
    )Accumulated
      other comprehensive income
    
    
    2,268
    
    
    1,573Accumulated
      deficit
    
    
    (1,043
    )
    
    (48,923
    )Total
      stockholders’ equity
    
    
    247,062
    
    
    165,894Total
      liabilities and stockholders’ equity
    
    $
    285,793
    
    $
    201,496



































See
accompanying notes to consolidated financial statements














**WEBEX
COMMUNICATIONS, INC.**





**CONSOLIDATED INCOME STATEMENTS**


**(In
thousands, except per share data)**





****
    
    Years
      ended December 31,**2004**
    
    
    **2003**
    
    
    **2002**Net
      revenue
    
    $
    249,133
    
    $
    189,341
    
    $
    139,861Cost
      of revenue
    
    
    41,854
    
    
    31,798
    
    
    25,064Gross
      profit
    
    
    207,279
    
    
    157,543
    
    
    114,797Operating
      expenses:Sales
      and marketing
    
    
    84,192
    
    
    74,249
    
    
    58,026Research
      and development
    
    
    34,342
    
    
    24,769
    
    
    22,788General
      and administrative
    
    
    18,713
    
    
    13,575
    
    
    14,447Equity-based
      compensation*
    
    
    571
    
    
    1,849
    
    
    2,966Total
      operating expenses
    
    
    137,818
    
    
    114,442
    
    
    98,227Operating
      income
    
    
    69,461
    
    
    43,101
    
    
    16,570Interest
      and other income, net
    
    
    308
    
    
    1,074
    
    
    339Income
      before income taxes
    
    
    69,769
    
    
    44,175
    
    
    16,909Income
      tax expense (benefit)
    
    
    21,889
    
    
    (15,627
    )
    
    514Net
      income
    
    $
    47,880
    
    $
    59,802
    
    $
    16,395Net
      income per share:Basic
    
    $
    1.09
    
    $
    1.44
    
    $
    0.41Diluted
    
    $
    1.03
    
    $
    1.37
    
    $
    0.39Shares
      used to compute net income per share:Basic
    
    
    43,817
    
    
    41,554
    
    
    39,687Diluted
    
    
    46,451
    
    
    43,619
    
    
    42,353*
      Equity-based compensation:Sales
      and marketing
    
    $
    43
    
    $
    699
    
    $
    1,133Research
      and development
    
    
    52
    
    
    245
    
    
    528General
      and administrative
    
    
    476
    
    
    905
    
    
    1,305$
    571
    
    $
    1,849
    
    $
    2,966











See
accompanying notes to consolidated financial statements



















10k


**WEBEX
COMMUNICATIONS, INC.**





**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME**


**Years
ended December 31, 2004, 2003 and 2002**


**(In
thousands, except share data)**





****
    
    Common
      Stock
    
    **Additional**
      **Paid-in**
    
    
    **Note**
      **Receivable
      from Stock-**
    
    
    **Deferred**
      **Equity-**
      **Based**
      **Compen-**
    
    
    **Compre-**
      **hensive**
    
    
    **Accumulated
      Other Comprehensive**
    
    
    **Accum-**
      **ulated**
    
    
    **Total
      Stockholders’******
    
    
    Shares
    
    
    **Amount**
    
    
    **Capital**
    
    
    **holder**
    
    
    **sation**
    
    
    **Income**
    
    
    **Income**
    
    
    **Deficit**
    
    
    **Equity****Balances
      at December 31, 2001**
    
    
    39,998,432
    
    $
    40
    
    $
    189,649
    
    $
    (45
    )
    $
    (5,724
    )
    
    
    
    $
    27
    
    $
    (125,120
    )
    $
    58,827Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    $
    16,395
    
    
    —
    
    
    16,395
    
    
    16,395Foreign
      currency translation adjustment
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    549
    
    
    549
    
    
    —
    
    
    549Unrealized
      gain on investments
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    205
    
    
    205
    
    
    —
    
    
    205Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,149Issuance
      of common stock in connection with Employee Stock Purchase
      Plan
    
    
    420,707
    
    
    —
    
    
    4,501
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    4,501Repurchase
      of common shares
    
    
    (172,641
    )
    
    —
    
    
    (204
    )
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    (204
    )Forfeitures
      of stock options
    
    
    —
    
    
    —
    
    
    (3,047
    )
    
    —
    
    
    3,047
    
    
    
    
    
    —
    
    
    —
    
    
    —Issuance
      of common stock in connection with the exercise of stock
      options
    
    
    775,401
    
    
    1
    
    
    4,880
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    4,881Amortization
      of equity-based compensation to employees
    
    
    —
    
    
    —
    
    
    1,075
    
    
    —
    
    
    1,585
    
    
    
    
    
    —
    
    
    —
    
    
    2,660Equity-based
      compensation to non-employees
    
    
    —
    
    
    —
    
    
    306
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    306**Balances
      at December 31, 2002**
    
    
    41,021,899
    
    $
    41
    
    $
    197,160
    
    $
    (45
    )
    $
    (1,092
    )
    
    
    
    $
    781
    
    $
    (108,725
    )
    $
    88,120Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    $
    59,802
    
    
    —
    
    
    59,802
    
    
    59,802Foreign
      currency translation adjustment
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    935
    
    
    935
    
    
    —
    
    
    935Unrealized
      loss on investments, net of reclassifications for realized
      gains
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (143
    )
    
    (143
    )
    
    —
    
    
    (143
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    60,594Issuance
      of common stock in connection with Employee Stock Purchase
      Plan
    
    
    536,019
    
    
    1
    
    
    4,688
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    4,689Repurchase
      of common shares
    
    
    (26,717
    )
    
    —
    
    
    (25
    )
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    (25
    )Forfeitures
      of stock options
    
    
    —
    
    
    —
    
    
    (364
    )
    
    —
    
    
    364
    
    
    
    
    
    —
    
    
    —
    
    
    —Issuance
      of common stock in connection with the exercise of stock
      options
    
    
    1,240,400
    
    
    1
    
    
    10,621
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    10,622Repayment
      of note
    
    
    —
    
    
    —
    
    
    —
    
    
    45
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    45Amortization
      of equity-based compensation to employees
    
    
    —
    
    
    —
    
    
    413
    
    
    —
    
    
    654
    
    
    
    
    
    —
    
    
    —
    
    
    1,067Equity-based
      compensation to non-employees
    
    
    —
    
    
    —
    
    
    782
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    782**Balances
      at December 31, 2003**
    
    
    42,771,601
    
    $
    43
    
    $
    213,275
    
    $
    —
    
    $
    (74
    )
    
    
    
    $
    1,573
    
    $
    (48,923
    )
    $
    165,894Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    $
    47,880
    
    
    
    
    
    47,880
    
    
    47,880Foreign
      currency translation adjustment
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    833
    
    
    833
    
    
    —
    
    
    833Unrealized
      loss on investments, net of reclassifications
      for
      realized gains
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (138
    )
    
    (138
    )
    
    —
    
    
    (138
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,575Issuance
      of common stock in connection with
      Employee
      Stock Purchase Plan
    
    
    639,639
    
    
    1
    
    
    6,365
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    6,366Repurchase
      of common shares
    
    
    (308,100
    )
    
    —
    
    
    (5,826
    )
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    (5,826
    )Forfeitures
      of stock options
    
    
    —
    
    
    —
    
    
    (13
    )
    
    —
    
    
    13
    
    
    
    
    
    —
    
    
    —
    
    
    -----Issuance
      of common stock in connection with the
      exercise
      of stock options
    
    
    1,849,664
    
    
    1
    
    
    22,885
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    22,886Stock
      option income tax benefit
    
    
    —
    
    
    —
    
    
    8,596
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    8,596Amortization
      of equity-based compensation to
      employees
    
    
    —
    
    
    —
    
    
    8
    
    
    —
    
    
    46
    
    
    
    
    
    —
    
    
    —
    
    
    54Equity-based
      compensation to non-employees
    
    
    —
    
    
    —
    
    
    517
    
    
    —
    
    
    —
    
    
    
    
    
    —
    
    
    —
    
    
    517**Balances
      at December 31, 2004**
    
    
    44,952,804
    
    $
    45
    
    $
    245,807
    
    $
    —
    
    $
    (15
    )
    
    
    
    $
    2,268
    
    $
    (1,043
    )
    $
    247,062





















**WEBEX
COMMUNICATIONS, INC.**





**CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
thousands)**





Years
      ended Deceember 31,**2004**
    
    
    **2003**
    
    
    **2002**Cash
      flows from operating activities:Net
      income
    
    $
    47,880
    
    $
    59,802
    
    $
    16,395Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for doubtful accounts and sales reserve
    
    
    7,672
    
    
    10,690
    
    
    13,703Depreciation
      and amortization
    
    
    12,368
    
    
    11,947
    
    
    12,639Deferred
      income taxes
    
    
    11,622
    
    
    (21,432
    )
    
    —Tax
      benefit of stock plans
    
    
    8,596
    
    
    —
    
    
    —Impairment
      of investment
    
    
    —
    
    
    —
    
    
    250Equity-based
      compensation
    
    
    571
    
    
    1,849
    
    
    2,966Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    (18,696
    )
    
    (12,639
    )
    
    (15,230
    )Prepaid
      expenses and other current assets
    
    
    (2,312
    )
    
    230
    
    
    (864
    )Other
      non-current assets
    
    
    437
    
    
    (92
    )
    
    (116
    )Accounts
      payable
    
    
    4,037
    
    
    (1,275
    )
    
    (1,277
    )Accrued
      liabilities
    
    
    1,226
    
    
    8,103
    
    
    1,892Income
      tax payable
    
    
    (5,510
    )
    
    1,838
    
    
    515Deferred
      revenue
    
    
    219
    
    
    914
    
    
    598Other
    
    
    695
    
    
    836
    
    
    387Net
      cash provided by operating activities
    
    
    68,805
    
    
    60,771
    
    
    31,858Cash
      flows from investing activities:Repayment
      of loan by related party
    
    
    —
    
    
    —
    
    
    1,100Payments
      of security deposits
    
    
    —
    
    
    4
    
    
    (255
    )Net
      short-term investments activity
    
    
    (10,947
    )
    
    (27,283
    )
    
    (36,195
    )Asset
      and business acquisitions, net of cash acquired
    
    
    (4,535
    )
    
    (686
    )
    
    —Purchases
      of property and equipment
    
    
    (37,193
    )
    
    (9,249
    )
    
    (8,241
    )Net
      cash used in investing activities
    
    
    (52,675
    )
    
    (37,214
    )
    
    (43,591
    )Cash
      flows from financing activities:Net
      proceeds from issuances of common stock
    
    
    29,252
    
    
    15,356
    
    
    9,382Repurchase
      of common stock
    
    
    (5,826
    )
    
    (25
    )
    
    (204
    )Principal
      payments of capital lease obligations
    
    
    —
    
    
    (489
    )
    
    (1,494
    )Borrowings
      of short-term debt
    
    
    —
    
    
    —
    
    
    10,500Repayments
      of short-term debt
    
    
    —
    
    
    —
    
    
    (16,000
    )Net
      cash provided by financing activities
    
    
    23,426
    
    
    14,842
    
    
    2,184Decrease
      in cash and cash equivalents
    
    
    39,556
    
    
    38,399
    
    
    (9,549
    )Cash
      and cash equivalents at beginning of the year
    
    
    70,996
    
    
    32,597
    
    
    42,146Cash
      and cash equivalents at end of the year
    
    $
    110,552
    
    $
    70,996
    
    $
    32,597Supplemental
      disclosures of noncash investing and financing activities:Increase
      (decrease) in deferred equity-based compensation
    
    $
    (13
    )
    $
    (364
    )
    $
    (3,047
    )Unrealized
      gain (loss) on investments
    
    $
    (138
    )
    $
    (143
    )
    $
    205Cash
      paid for:Interest
    
    $
    2
    
    $
    12
    
    $
    80Taxes
    
    $
    7,180
    
    $
    4,113
    
    $
    198
















See
accompanying notes to consolidated financial statements





















**NOTE 1.    ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES**








**(a)**  **Company
Background**





WebEx
commenced operations under the name Silver Computing, Inc. in February 1995.
WebEx changed its name to Stellar Computing Corporation in June 1997,
ActiveTouch Systems, Inc. in December 1997, ActiveTouch, Inc. in May 1998, and
WebEx, Inc. in December 1999. In July 2000, WebEx reincorporated in Delaware
under the name WebEx Communications, Inc. WebEx released interactive
communications software built on its technology in early 1998, and its business
at that time was focused on licensing software to end-users. WebEx began
offering WebEx Meeting Center, its first real-time, interactive multimedia
communications service, in February 1999 and began selling the service to
customers and distribution partners. With WebEx Meeting Center, WebEx’s business
focus became providing customers and distribution partners access to its hosted
services under subscription and other service arrangements, and WebEx
discontinued licensing software to end-users.





WebEx
currently develops and markets services that allow end-users to conduct meetings
and share software applications, documents, presentations and other content on
the Internet using a standard web browser. Integrated telephony and web-based
audio and video services are also available using standard devices such as
telephones, computer web-cameras and microphones.








**(b)**  **Basis
of Presentation**





The
accompanying consolidated financial statements include the accounts of WebEx and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the prior years’ financial statements to conform to the
current year presentation.








**(c)**  **Foreign
Currency Translation**





In
general, the functional currency of each foreign operation is the local
currency. Assets and liabilities recorded in foreign currencies are translated
at year-end exchange rates; revenues and expenses are translated at average
exchange rates during the year. The effects of foreign currency translation
adjustments are included in stockholders’ equity as a component of “Accumulated
other comprehensive income ” in the accompanying consolidated financial
statements. The effects of foreign currency transactions are included in “Other
income, net” in the determination of net income. In 2003 and 2004, other
expenses included losses from foreign currency transactions totaling $0.3
million and $1.9 million, respectively. There was no material foreign currency
transaction gain or loss in 2002.








**(d)**  **Revenue
Recognition**





Revenue
is derived from the sale of web communications services. Web communications
services revenue is generated through a variety of contractual arrangements
directly with customers and with distribution partners, who in turn sell the
services to customers. The Company sells web communications services directly to
customers through service subscriptions or similar agreements and pay-per-use
arrangements. Under these arrangements, customers access the application hosted
on WebEx servers using a standard web browser. Subscription arrangements include
monthly subscriber user fees, user set-up fees and training. The subscription
arrangements are considered service arrangements in accordance with Emerging
Issues Task Force (“EITF”) Issue No. 00-3, *Application
of AICPA Statement of Position 97-2, Software Revenue Recognition, to
Arrangements That Include the Right to Use Software Stored on Another Entity’s
Hardware* , and
with multiple deliverables under EITF 00-21, *Accounting
for Revenue Arrangements with Multiple Deliverables.* Under
EITF 00-21, all deliverables are considered one unit of accounting. During the
initial term of an agreement, the Company may provide training services,
web-page design and set-up services. WebEx considers all such deliverables to be
combined with service revenues into one unit of accounting, as individual
delivered items do not have stand-alone value to the customer; therefore, such
revenue is recognized ratably (i.e. straight-line) over the initial term of the
contract. Committed and fixed fee subscription service revenue is also
recognized ratably (i.e. straight-line) over the current term of the
contract. In addition to committed and fixed fee or subscription service
revenue, WebEx derives revenue from pay-per-use services, usage in excess of
commitments and other per-minute-based charges that are recognized as such
services are provided. WebEx refers to these forms of revenue as uncommitted
revenue.





The
Company also enters into reselling arrangements with distribution partners,
which purchase and resell the Company’s services on a revenue sharing,
discounted or pay-per-use basis. Revenue under these arrangements is derived
from services provided to end-users and is recognized over the service period
provided that evidence of the arrangement exists, the fee is fixed or
determinable and collectibility is reasonably assured. Initial set up fees
received in connection with these arrangements are recognized ratably (i.e.
straight-line) over the initial term of the contract. During the initial term,
the Company provides training








10k





services,
web-page design and set-up services. Service fees are recognized as the services are
provided for pay-per-use service arrangements and ratably (i.e. straight-line)
over the service period for services provided on a subscription basis through
the reseller. The Company’s reseller arrangements may require guaranteed minimum
revenue commitments that are billed in advance to the reseller. Advance payments
received from distribution partners are deferred until the related services are
provided or until otherwise earned by WebEx. When the distribution partner bills
the end-user, WebEx sells the services on a discounted basis to the distribution
partner, which in turn marks up the price and sells the services to the
end-user. In such cases, which represent most of the Company’s reselling
arrangements, WebEx contracts directly with the distribution partner and revenue
is recognized based on discounted amounts charged to the distribution partner.
When WebEx bills the end-user directly, a percentage of the proceeds generated
from the distribution partner’s sale of WebEx services are paid to the
distribution partner. In these cases revenue is recognized based on amounts
charged to the end-user, and amounts paid to the distribution partner are
recorded as sales and marketing expense.





Persuasive
evidence for each arrangement is represented by a signed contract. The fee is
considered fixed or determinable if it is not subject to refund or adjustment.
Collectibility is considered reasonably assured if WebEx expects that the
customer will be able to pay amounts under the arrangement as they become due.
Collectibility of guaranteed minimum revenue commitments by resellers is not
reasonably assured; thus, revenue from guaranteed minimum commitments is
deferred until services are provided to an end-user customer or until collected
from the reseller and forfeited at the end of the commitment period.





In the
third quarter of 2003, WebEx recognized approximately $0.2 million of revenue
from an unaffiliated reseller based in China. Due to certain legal restrictions
in China relating to the ability of WebEx to sell directly to customers in
China, WebEx entered into the reseller arrangement. Under this arrangement,
WebEx licenses its communication service offerings to the reseller for resale in
China, and in consideration WebEx receives licensing royalty revenue. Royalty
revenue due to WebEx is based on the level of revenue reported by the reseller
and is recognized as cash is received from the reseller. Also under the reseller
arrangement, WebEx provides maintenance services to the reseller. Subsequent to
recognizing the $0.2 million of revenue, WebEx entered into a loan agreement
with this reseller in the fourth quarter of 2003. Under the terms of the loan
agreement, WebEx lent the reseller operating capital to partially fund its
early-stage operations. The reseller is currently operating at a loss and has
negative cash flow. As of December 31, 2004, WebEx had loaned the reseller $0.3
million and recorded a reserve for the full amount of the loan. Repayment of the
loan amount by the reseller will be dependent on either another source of
capital or profitable, cash positive operations of the reseller. Revenue is
recognized on a cash-received basis from the reseller because collectibility is
not reasonably assured prior to collection. No revenue was recognized in the
fourth quarter of 2003 or at anytime in 2004, and no revenue will be recognized
from this reseller in the future until all outstanding loan amounts have been
collected or otherwise settled.





Deferred
revenue includes amounts billed to customers for which revenue has not been
recognized that generally results from the following: (1) unearned portion of
monthly billed subscription service fees; (2) deferred set-up fees; and (3)
advances received from distribution partners under revenue sharing arrangements.
As of December 31, 2004 and December 31, 2003, accounts receivable includes
unbilled receivables of $2.6 million and $1.9 million respectively, for unbilled
per-minute-based charges that occurred during the final month of the respective
quarter.











**(e)**  **Sales
Reserve and Allowance for Doubtful Accounts**





WebEx
records an estimate of sales reserve for losses on receivables resulting from
customer cancellations or terminations as a reduction in revenue at the time of
sale. The sales reserve is estimated based on an analysis of the historical rate
of cancellations or terminations. The accuracy of the estimate is dependent on
the rate of future cancellations or terminations being consistent with the
historical rate.





WebEx
records an allowance for doubtful accounts to provide for losses on receivables
due to customer credit risk. Increases to the allowance for doubtful accounts
are charged to general and administrative expense as bad debt expense. Losses on
accounts receivable resulting from customers’ financial distress or failure are
charged to the allowance for doubtful accounts. The allowance is estimated based
on an analysis of the historical rate of credit losses. The accuracy of the
estimate is dependent on the future rate of credit losses being consistent with
the historical rate.

















The
following presents the detail of the changes in the sales reserve and allowance
for doubtful accounts for the years ended December 31, 2004, 2003 and 2002 (in
thousands):








Year
      endedDecember
      31,
      2004
    
    
    December
      31,
      2003
    
    
    December
      31,
      2002Balance
      at beginning of year
    
    $
    6,837
    
    $
    7,332
    
    $
    6,825Sales
      reserveBalance
      at beginning of year
    
    
    4,571
    
    
    3,948
    
    
    5,082Deducted
      from revenue
    
    
    8,273
    
    
    9,840
    
    
    7,610Amounts
      written off
    
    
    (8,213
    )
    
    (9,217
    )
    
    (8,744
    )Change
    
    
    60
    
    
    623
    
    
    (1,134
    )Balance
      at end of year
    
    
    4,631
    
    
    4,571
    
    
    3,948Allowance
      for doubtful accountsBalance
      at beginning of year
    
    
    2,266
    
    
    3,384
    
    
    1,743Charged
      (credited) to bad debt expense
    
    
    (601
    )
    
    850
    
    
    6,093Amounts
      written off
    
    
    (662
    )
    
    (1,968
    )
    
    (4,452
    )Change
    
    
    (1,263
    )
    
    (1,118
    )
    
    1,641Balance
      at end of year
    
    
    1,003
    
    
    2,266
    
    
    3,384Balance
      at end of year
    
    $
    5,634
    
    $
    6,837
    
    $
    7,332





WebEx
assesses the adequacy of the sales reserve account balance and the allowance for
doubtful accounts account balance based on historical experience. Any
adjustments to these accounts are reflected in the income statement for the
current period, as an adjustment to revenue in the case of the sales reserve and
as a general and administrative expense in the case of the allowance for
doubtful accounts.





**(f)**  **Cash
Equivalents**





Cash
equivalents consist of highly liquid investments with remaining maturities of
less than three months at date of purchase.








**(g)**  **Short-Term
Investments**





Short-term
investments are classified as available-for-sale and carried at fair value with
changes in fair value recorded net of tax as a component of other comprehensive
income.

















The
following table presents the carrying amounts and unrealized gains (losses) on
the Company’s short-term investments at December 31, 2004 and 2003 (in
thousands):








****
    
    December
      31**2004**
    **2003**Amortized
      Cost
    
    
    Unrealized
      Loss
    
    
    Fair
      Value
    
    
    Amortized
      Cost
    
    
    Unrealized
      Gain
    
    
    Fair
      ValueAvailable
      for sale marketable securitiesCertificates
      of deposit
    
    
    10,179
    
    
    --
    
    
    10,179
    
    
    16,766
    
    
    --
    
    
    16,766Commercial
      paper
    
    
    58,496
    
    
    (89
    )
    
    58,407
    
    
    40,811
    
    
    62
    
    
    40,873Insurance
      company contracts
    
    
    6,000
    
    
    --
    
    
    6,000
    
    
    6,000
    
    
    --
    
    
    6,00074,675
    
    
    (89
    )
    
    74,586
    
    
    63,577
    
    
    62
    
    
    63,639





As of
December 31 2004 and 2003, the Company’s investments in marketable debt securities had maturities less than 18 months.
Realized gains and losses from sales of available securities were not material
in 2002, 2003 and 2004.








**(h)**  **Restricted
Cash**





Included
in other non-current assets in the consolidated balance sheets at December 31,
2004 and 2003 is $204,000 of restricted cash pledged to support a letter of
credit provided as a security deposit on one of WebEx’s leased facilities. The
deposit was required for the full term of the lease, which expired in 2004. The
Company expects the letter of credit to be cancelled in 2005 and the related
deposit released.








**(i)**  **Financial
Instruments and Concentrations of Credit Risk**





The
carrying values of WebEx’s financial instruments, including cash equivalents,
accounts receivable and accounts payable, approximate fair values due to the
short-term nature of these instruments.





Financial
instruments that subject WebEx to concentration of credit risk consist primarily
of cash, cash equivalents, short-term investments and trade accounts receivable.
WebEx is exposed to credit risk related to cash, cash equivalents, and
short-term investments in amounts greater than the federally insured limits in
the event of default by the financial institutions or the issuers of these
investments. WebEx performs ongoing credit evaluations of its customers’
financial condition, and generally requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts based on the expected
collectibility of all accounts receivable, which are concentrated in the United
States.








**(j)**  **Property
and Equipment**





Property
and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are
amortized over the shorter of the estimated useful lives of the improvements or
the remaining lease term. Land is not depreciated. Depreciation and amortization
are based on the following useful lives:








Useful
      LifeComputer
      equipment and purchased software
    3
      yearsBuilding
    10
      yearsOffice
      furniture and fixtures
    3-10
      yearsLeasehold
      improvements
    3-10
      years























**(k)**  **Goodwill and Intangible
Assets, net**





The
carrying amount of goodwill as of December 31, 2004 was $1.8 million. In
accordance with SFAS No. 142, the Company does not amortize goodwill but
evaluates it at least on an annual basis for impairment. The goodwill resulted
from the April 2004 acquisition of CyberBazaar of Bangalore India, an audio
conferencing company, which was acquired to pursue directly the web conferencing
market in India. The Company completed its annual goodwill impairment test
during the fourth quarter of 2004 and determined that the carrying amount of
goodwill was not impaired.





Intangible
assets, net as of December 31, 2004 and December 31, 2003 consisted of the
following (in thousands):





****
    
    December
      31,**2004**
    
    
    **2003**Intellectual
      property rights
    
    $
    4,326
    
    $
    1,735Trade
      name and domain name
    
    
    630
    
    
    371Customer related intangibles
    
    
    672
    
    
    1525,628
    
    
    2,258Less
      accumulated amortization
    
    
    (2,218
    )
    
    (1,717
    )Intangible assets, net
    
    $
    3,410
    
    $
    541





Amortization
expense for the years ended December 31, 2004, 2003 and 2002 were $501,000,
$157,000 and $391,000, respectively.





Intangible
assets, net consist of purchased intellectual property rights, trade and domain
names and customer related intangibles. Amortization is recorded using the
straight-line method over the estimated useful lives of these assets. The
purchased intellectual property rights have separate components of $1.7 million,
$0.2 million and $2.4 million that are amortized over three, five and ten years,
respectively. The trademarks and domain names are amortized over ten years, and
the customer related intangibles have separate components of $0.2 million and
$0.5 million that are amortized over three and five years,
respectively.





Future
amortization expense of existing intangibles will be as follows (in
thousands):





**Year ending December 31,**
    
    
    **Amortization**
      **expense**2005
    
    $
    6032006
    
    
    5582007
    
    
    4512008
    
    
    3642009
    
    
    274Thereafter
    
    
    1,160Total
      amortization expense
    
    $
    3,410








**(l)**  **Software
Development Costs**





Software
development costs are expensed as incurred until it is determined that the
technology needed to achieve performance requirements exists. To date, WebEx’s
software has been available for deployment concurrent with the establishment of
technological feasibility and, accordingly, costs qualifying for capitalization
have been insignificant. Software applications purchased from third parties that
are for internal use in managing the business and delivering services are
capitalized and amortized over their estimated useful lives of 3 years.








**(m)**  **Impairment
of Long-Lived Assets**





WebEx
evaluates its long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset and
its eventual disposition. If the carrying value exceeds the cash flows, such
assets are considered to be impaired, and the impairment loss to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets held for sale are reported at the lower of the
carrying amount of the assets or fair value less costs to sell.








10k





**(n)**  **Income
Taxes**





Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to operating loss and tax credit carryforwards and differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is recorded against deferred tax assets if it is more likely
than not that all or a portion of the deferred tax assets will not be realized.








**(o)**  **Equity-Based
Compensation**





The
Company accounts for stock awards to employees and directors in accordance with
the intrinsic value method of Accounting Principles Board Opinion No. 25 (APB
25), *Accounting
for Stock Issued to Employees* and
related interpretations. Under this method, compensation expense for fixed plan
stock options is recorded on the date of the grant only if the grant date fair
value of the underlying stock exceeds the exercise price. Deferred stock-based
compensation is amortized over the vesting period using the method described in
FASB Interpretation No. 28 (FIN 28).





The
Company accounts for stock awards to non-employees in accordance with the
provisions of SFAS 123, *Accounting
for Stock-Based Compensation,* and
Emerging Issues Task Force (EITF) Issue No. 96-18, *Accounting
for Equity Instruments That are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services* . The
equity-based compensation expense for options granted to non-employees is
re-measured for changes in their fair value until the underlying options vest.





Had all
awards been accounted for under the fair value method of SFAS 123, reported net
income would have been adjusted to the amounts appearing below (in thousands,
except per share amounts).





****
    
    Year
      ended December 31,**2004**
    
    
    **2003**
    
    
    **2002**Net
      income as reported
    
    $
    47,880
    
    $
    59,802
    
    $
    16,395Add
      Back: Stock-based compensation related to employees included
      in determination of net income, net of tax
    
    
    (1,937
    )
    
    1,067
    
    
    2,660Deduct:
      Stock-based compensation related to employees determined under the
      fair-value based method, net of tax
    
    
    (20,539
    )
    
    (30,298
    )
    
    (34,790
    )Pro-forma
      net income (loss) as if the fair value based method had
      been applied to all awards
    
    $
    25,404
    
    $
    30,571
    
    $
    (15,735
    )Pro-forma
      basic net income (loss) per share as if the fair value based method had
      been
      applied to all awards
    
    $
    0.58
    
    $
    0.74
    
    $
    (0.40
    )Pro-forma
      diluted net income (loss) per share as if the fair value based method had
      been applied to all awards
    
    $
    0.55
    
    $
    0.70
    
    $
    (0.40
    )





The fair
value of each option granted during periods subsequent to the effective date of
the Company's registration statement on Form S-1 with the Securities and
Exchange Commission on July 27, 2000 was estimated on the date of grant using
the Black-Scholes option-pricing model, using the following assumptions: no
dividends, expected life of 3.5 years, expected volatility of 86% in 2004, 99%
in 2003 and 90% in 2002 and risk-free interest rates in 2004, 2003 and 2002 of
3.21%, 2.37% and 3.32%, respectively. The fair value of each option granted
during periods prior to July 27, 2000 was estimated on the date of the grant
using the minimum value method with the following weighted average assumptions:
no dividends, expected life of 3.5 years and risk free interest rate of 6.39%.
The weighted-average grant date fair value of the options granted during the
years ended December 31, 2004, 2003 and 2002 was $13.15, $9.39 and $9.51 per
share, respectively.





The fair
value of employee stock purchase rights granted under the 2000 Employee Stock
Purchase Plan in the years ended December 31, 2004, 2003 and 2002 was estimated
using Black-Scholes option-pricing model using the following weighted average
assumptions: no dividends, expected life of 2 years, expected volatility of 86%
in 2004, 99% in 2003 and 90% in 2002 and a risk free interest rate of 1.47%,
1.14% and 1.90% in 2004, 2003 and 2002, respectively. The weighted-average fair
value of employee stock purchase rights granted under the 2000 Employee Stock
Purchase Plan during the years ended December 31, 2004, 2003 and 2002 was $5.75,
$4.81 and $8.66 per share, respectively.





**(p)**  **Use
of Estimates**





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and








10k





liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Despite the Company’s best effort to make
these good faith efforts and assumptions, actual results may differ.








**(q)**  **Net
Income Per Share**





Basic net
income per common share is computed using the weighted-average number of common
shares outstanding for the period excluding restricted common shares subject to
repurchase. Diluted net income per common share reflects the dilution of
restricted common stock subject to repurchase and incremental shares of common
stock issuable upon the exercise stock options computed using the treasury stock
method.





The
following table sets forth the components used in the computation of basic and
diluted net income per common share (in thousands except per share data):





****
    
    Years
      ended December 31,**2004**
    
    
    **2003**
    
    
    **2002**Numerator:Net
      income
    
    $
    47,880
    
    $
    59,802
    
    $
    16,395Denominator:Denominator
      for basic net income per common share
    
    
    43,817
    
    
    41,554
    
    
    39,687Effect
      of dilutive securities:Restricted
      common shares subject to repurchase
    
    
    ----
    
    
    27
    
    
    688Stock
      options
    
    
    2,634
    
    
    2,038
    
    
    1,978Denominator
      for diluted net income per common share
    
    
    46,451
    
    
    43,619
    
    
    42,353Basic
      net income per common share
    
    $
    1.09
    
    $
    1.44
    
    $
    0.41Diluted
      net income per common share
    
    $
    1.03
    
    $
    1.37
    
    $
    0.39





The
following potential common shares have been excluded from the computation of
diluted net income per share for the years ended December 31, 2004, 2003 and
2002 because their effect would have been antidilutive (in thousands):





****
    
    Year
      ended December 31,**2004**
    
    
    **2003**
    
    
    **2002**Shares
      issuable under stock options
    
    
    2,483
    
    
    1,514
    
    
    4,016








The
weighted-average exercise price of antidilutive stock options outstanding as of
December 31, 2004, 2003 and 2002 was $27.55, $19.30 and $23.06, respectively.
These options may have a dilutive effect on future periods.








**(r)**  **Advertising
Costs**





Advertising
costs are expensed as incurred. WebEx’s advertising and promotion expense was
$13.6 million, $14.0 million, and $10.8 million for the years ended December 31,
2004, 2003 and 2002, respectively.








**(s)**  **Recent
Accounting Pronouncements**





In
December 2003, the FASB issued Interpretation No. 46 (“FIN 46R”) (revised
December 2003), *Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51* (“ARB
51”), which addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity though means other than voting rights and
accordingly should consolidate the entity. The adoption of FIN 46 has had no
effect on the Company’s consolidated financial position, income statement or
cash flows.





In
December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), *Revenue
Recognition* , which
superseded Staff Accounting Bulletin No. 101 (SAB 101), *Revenue
Recognition in Financial Statements* . The
primary purpose of SAB 104 was to rescind accounting guidance contained in SAB
101 related to multiple element revenue arrangements, which was superseded as a
result of the issuance of Emerging Issues Task Force 00-21 (EITF 00-21), *Accounting
for Revenue Arrangements with Multiple Deliverables.* SAB 104
also incorporated certain sections of the SEC’s *Revenue
Recognition in Financial Statements - Frequently Asked Questions and
Answers* document. Since the Company has been following the provisions of EITF 00-21
since its effective date, the issuance of SAB 104 did not have a material impact
on the Company’s consolidated financial position, income statement or cash
flows.








10k





In
December 2004, the FASB issued SFAS 123R, *Share-Based
Payment* , which
requires the measurement of all share-based payments to employees, including
grants of employee stock options, using a fair value based method and the
recording of such expense in the Company’s consolidated income statement. The
accounting provisions of SFAS 123R are effective for reporting periods beginning
after June 15, 2005. The Company is required to adopt SFAS 123R in the third
quarter of 2005. The pro forma disclosures previously permitted under SFAS 123
no longer will be an alternative to financial statement recognition. Although
the Company has not yet determined whether the adoption of SFAS 123R will result
in amounts that are similar to the current pro forma disclosures under SFAS 123,
the Company is evaluating the requirements under SFAS 123R and expects the
adoption to have a significant adverse impact on its consolidated income
statement and net income per share.




















**NOTE 2.**  **CONSOLIDATED
FINANCIAL STATEMENTS DETAILS (tables in thousands)**





PROPERTY AND EQUIPMENT





****
    
    **December
      31,****2004**
    
    
    **2003**Computer
      equipment and purchased software
    
    $
    65,656
    
    $
    45,838Land
    
    
    9,732
    
    
    --Building
    
    
    6,200
    
    
    --Office
      furniture and fixtures
    
    
    1,040
    
    
    968Leasehold
      improvements
    
    
    10,624
    
    
    8,53793,252
    
    
    55,343Less
      accumulated depreciation and amortization
    
    
    (48,469
    )
    
    (36,068
    )Property
      and equipment, net
    
    $
    44,783
    
    $
    19,275





Depreciation
expense for the years ended December 31, 2004, 2003 and 2002 was $11.9 million,
$11.8 million and $12.2 million, respectively.








ACCRUED LIABILITIES





****
    
    December
      31,**2004**
    
    
    **2003**Accrued
      compensation and benefits
    
    $
    9,212
    
    $
    9,475Other
    
    
    10,967
    
    
    9,478Total
      accrued liabilities
    
    
    20,179
    
    
    18,953








INTEREST AND OTHER INCOME, NET





****
    
    Year
      ended December 31,**2004**
    
    
    **2003**
    
    
    **2002**Interest
      income
    
    $
    2,278
    
    $
    1,849
    
    $
    801Interest
      expense
    
    
    (14
    )
    
    (12
    )
    
    (80
    )Other
      expense, net
    
    
    (1,956
    )
    
    (763
    )
    
    (382
    )Interest
      and other income, net
    
    $
    308
    
    $
    1,074
    
    $
    339








In 2004
and 2003, other expenses included a foreign currency loss of $1.9 million and
$0.3 million, respectively. There was no material foreign currency gain or loss
in 2002.








**NOTE 3.**  **SHORT-TERM
DEBT**





In 2002,
the Company had a revolving line of credit that provided for available
borrowings of up to $7.5 million. Amounts borrowed under the revolving credit
line bore interest at the prime rate plus 0.75%. The credit agreement was
collateralized by all tangible and intangible assets of the Company and was
subject to compliance with covenants, including a minimum liquidity ratio,
minimum cash balance, minimum tangible net worth, maximum quarterly operating
losses excluding equity-based compensation charges, and minimum quarterly
revenue. Effective July 21, 2003 the credit agreement was amended to provide
available borrowings of up to $2.5 million. Amounts borrowed under the revolving
line of credit bore interest at the prime rate. The credit agreement was
unsecured and was subject to compliance with covenants, including a minimum
quick ratio and minimum profitability. The credit agreement expired on July 15,
2004.





WebEx
currently has a revolving credit line with a bank that provides available
borrowings of up to $7.0 million. Amounts borrowed under the revolving credit
line bear interest at the prime rate and may be repaid and reborrowed at any
time prior to the maturity date. The credit agreement expires on June 15, 2005.
The credit agreement is unsecured and is subject to compliance with covenants,
including a minimum quick ratio and minimum profitability, with
which WebEx is currently in compliance. As of December 31,
2004, WebEx  had no outstanding borrowings under the credit line, but
did have a $4.0 million letter of credit issued under the line as security
for WebEx's new headquarters lease.










**NOTE 4.**  **STOCKHOLDERS’
EQUITY**





**Stock
Plans**





The
Company has granted stock options to employees, directors and consultants under
the 1998 Stock Option Plan and the 2000 Stock Incentive Plan. Under the 1998
Stock Option Plan and the 2000 Stock Incentive Plan, the Company has authorized
a total of 24,677,769 shares available for grant. Incentive stock options and
non-qualified stock options granted to employees under these plans generally
expire after 10 years or earlier in the case of termination or death and
generally vest over four years (one year cliff for 25% of the shares and 2.08%
monthly thereafter). As of December 31, 2004, there were a total of 735,515
shares available for issuance under the 2000 Stock Incentive Plan and no shares
under the 1998 Stock Option Plan.





WebEx
also administers the 2000 Employee Stock Purchase Plan, which along with the
2000 Stock Incentive Plan was approved by the stockholders on June 17, 2000. A
total of 2,737,398 shares of common stock have been reserved for issuance under
this plan. This plan allows eligible employees to purchase common stock at 85%
of the lower of the fair value of common stock on either the first day or last
day of a defined participation period not to exceed 24 months. As of December
31, 2004, 697,064 shares are available for issuance under this plan.





A summary
of the options activity under the 1998 and 2000 stock option plans for the years
ended December 31, 2004, 2003 and 2002, is as follows:





**2004**
    **2003**
    **2002******
    
    
    **Number
      of****Shares**
    
    
    **Weighted
      Average Exercise**
      **Price**
    
    
    **Number
      of****Shares**
    
    
    **Weighted
      Average Exercise**
      **Price**
    
    
    **Number
      of****Shares**
    
    
    **Weighted
      Average Exercise**
      **Price**Outstanding
      at beginning of year
    
    
    10,708,567
    
    $
    16.06
    
    
    9,347,796
    
    $
    15.70
    
    
    7,160,472
    
    $
    15.21Granted
    
    
    3,415,919
    
    $
    21.82
    
    
    3,673,432
    
    $
    14.31
    
    
    4,145,407
    
    $
    5.17Exercised
    
    
    (1,849,664
    )
    $
    12.43
    
    
    (1,240,400
    )
    $
    8.55
    
    
    (775,401
    )
    $
    6.29Canceled
    
    
    (1,304,478
    )
    $
    16.79
    
    
    (1,072,261
    )
    $
    15.57
    
    
    (1,182,682
    )
    $
    17.10Outstanding
      at end of year
    
    
    10,970,344
    
    $
    18.38
    
    
    10,708,567
    
    $
    16.06
    
    
    9,347,796
    
    $
    15.70Options
      vested at end of year
    
    
    4,663,634
    
    $
    17.73
    
    
    4,078,446
    
    $
    15.65
    
    
    2,700,762
    
    $
    15.51








As of
December 31, 2004 the exercise prices and the weighted average remaining
contractual life of outstanding options were as follows:





****
    
    **Options
      Outstanding**
    **Options
      Vested****Range
      of**
      **Exercise
      Prices**
    
    
    **Number**
      **Outstanding**
    
    
    **Weighted-Average**
      **Remaining**
      **Contractual**
      **Life
      (Years)**
    ****
      ****
      ****
      ****
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    
    **Number**
      **Vested**
    
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**$
      0.35 to $ 1.50
    
    
    261,976
    
    
    5.14
    
    $
    1.21
    
    
    268,641
    
    $
    1.21$
      3.00 to $ 8.25
    
    
    307,699
    
    
    6.52
    
    $
    7.95
    
    
    254,451
    
    $
    7.90$
      8.51 to $ 15.55
    
    
    2,868,183
    
    
    7.13
    
    $
    12.08
    
    
    1,521,035
    
    $
    11.95$15.66
      to $20.14
    
    
    2,744,330
    
    
    8.24
    
    $
    17.51
    
    
    950,912
    
    $
    17.28$20.72
      to $25.57
    
    
    4,044,665
    
    
    8.65
    
    $
    22.96
    
    
    1,121,603
    
    $
    24.77$25.58
      to $34.06
    
    
    591,391
    
    
    7.18
    
    $
    28.72
    
    
    394,892
    
    $
    29.13$35.00
      to $55.38
    
    
    152,100
    
    
    5.76
    
    $
    42.35
    
    
    152,100
    
    $
    42.3510,970,344
    
    
    
    
    
    
    
    
    4,663,634




WebEx
uses the intrinsic-value method in accounting for its employee stock-based
compensation plans. In 2000 and 1999, WebEx recorded deferred equity-based
compensation for the difference at the grant date between the exercise price of
each stock option granted and the fair value of the underlying common stock. In
addition, in 2004, 2003 and 2002 WebEx recognized additional equity-based
compensation expense of $8,000, $413,000 and $1.1 million, respectively, for
vesting modifications to existing awards primarily related to terminated
employees.





10k


**Share
Repurchases**





On July
29, 2004, the Company publicly announced a share repurchase program of up to $40
million of the Company’s common stock over a 12-month period ending July 22,
2005. During 2004, the Company repurchased 308,100 shares for an aggregate price
of $5.8 million.








**NOTE 5.**  **INCOME
TAXES**





Income
before income taxes is attributable to the following geographic locations for
the years ended December 31, 2004, 2003 and 2002 (in thousands):





**2004**
    ****
    ****
    **2003**
    ****
    ****
    **2002**United
      States
    
    $
    70,766
    
    $
    43,455
    
    $
    17,104Foreign
    
    
    (997
    )
    
    720
    
    
    (195
    )Income
      before income tax
    
    $
    69,769
    
    $
    44,175
    
    $
    16,909





Income
tax expense (benefit) attributable to operations for the years ended December
31, 2004, 2003 and 2002 was as follows (in thousands):





**2004**
    ****
    ****
    **2003**
    ****
    ****
    **2002****Current**Federal
    
    $
    8,076
    
    $
    699
    
    $
    -State
      and local
    
    
    1,797
    
    
    4,631
    
    
    2Foreign
    
    
    394
    
    
    475
    
    
    512Total
      current income tax expense
    
    
    10,267
    
    
    5,805
    
    
    514**Deferred**Federal
    
    
    7,097
    
    
    (17,999
    )
    
    -State
      and local
    
    
    4,525
    
    
    (3,433
    )
    
    -Foreign
    
    
    -
    
    
    -
    
    
    -Total
      deferred income tax expense (benefit)
    
    
    11,622
    
    
    (21,432
    )
    
    -Total income tax expense (benefit)
    
    $
    21,889
    
    $
    (15,627
    )
    $
    514





In 2004,
an income tax benefit of $8.6 million was allocated to stockholders’ equity for
compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes. In 2004, an income tax liability of $433,000 was
recorded and goodwill was increased for a pre-acquisition tax contingency of an
acquired business.





Income
tax expense (benefit) for 2004, 2003 and 2002 differed from the amounts computed
by applying the U.S. federal income tax rate of 35% to pretax income as a result
of the following (in thousands):





****
    
    **Year
      Ended December 31,****2004**
    
    
    **2003**
    
    
    **2002**Expected
      income tax provision at statutory rate
    
    $
    24,419
    
    $
    15,639
    
    $
    5,919State
      and local income taxes, net of federal benefit
    
    
    3,863
    
    
    3,260
    
    
    2Equity-based
      compensation related
    
    
    (1,681
    )
    
    (4,896
    )
    
    —Foreign
      tax differential
    
    
    —
    
    
    198
    
    
    580Alternative
      minimum tax
    
    
    —
    
    
    699
    
    
    —Net
      change in valuation allowance
    
    
    (3,755
    )
    
    (29,641
    )
    
    (6,041
    )Other
    
    
    (957
    )
    
    (886
    )
    
    54Total
      tax expense (benefit)
    
    $
    21,889
    
    $
    (15,627
    )
    $
    514








10k





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities as of December 31, 2004 and 2003 are as
follows (in thousands):





**2004**
    
    
    **2003**Deferred
      tax assets:Allowances
      and accruals
    
    $
    3,577
    
    $
    5,492Equity-based
      compensation
    
    
    950
    
    
    1,834Property
      and equipment
    
    
    2,499
    
    
    936Intangible
      assets
    
    
    353
    
    
    821Equity
      investment
    
    
    218
    
    
    405Deferred
      revenue
    
    
    308
    
    
    880Net
      operating loss carryforwards
    
    
    2,823
    
    
    13,850Tax
      credit carryforwards
    
    
    1,052
    
    
    3,277Gross
      deferred tax assets
    
    
    11,780
    
    
    27,495Less
      valuation allowance
    
    
    (1,391
    )
    
    (6,063
    )Net
      deferred tax assets
    
    $
    10,389
    
    $
    21,432








In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. In 2003, the Company continued to
experience growth in profitable operations, and therefore had evidence to
support the reduction of the valuation allowance against the deferred tax
assets. Accordingly, in 2003 a provision for current income tax of $5.8 million
relating primarily to foreign and state taxes was recorded which was offset by
the release of a valuation allowance of $21.4 million in the fourth quarter,
based on the amount of future deductible amounts more likely than not to be
realized through projected future income. In 2004, the provision for income tax
includes a release of $4.7 million of valuation allowance primarily related to
remaining net operating loss carry forwards, which resulted in a tax benefit of
$3.8 million and a $0.9 million increase to additional paid-in capital
attributable to the tax benefit of stock options. The release of the valuation
allowance was recorded in the fourth quarter of 2004 when the Company updated
its forecast of projected income. The net change in the total valuation
allowance for the years ended December 31, 2004 and 2003 was a decrease of $4.7
million and $29.6 million, respectively.





The
valuation allowance against deferred tax assets of $1.4 million as of December
31, 2004 pertains to net operating loss carryforwards resulting from the
exercise of stock options. When and if realized, the tax benefit of these
deferred assets will be accounted for as a credit to additional paid-in capital
rather than a reduction of income tax expense.





As of
December 31, 2004, WebEx has approximately $3.7 million and $0.2  million
of net operating loss carryforwards for federal and state purposes,
respectively, available to offset income in future years. The federal net
operating loss carryforwards expire in 2020, and the state net operating loss
carryforwards expire beginning in 2006. WebEx has approximately $5.1 million of
net operating loss carryforwards for foreign income tax purposes.





As of
December 31, 2004, the Company has AMT and research credit carryforwards for
federal income tax purposes of approximately $1.1 million, available to reduce
future income taxes. The federal research credit carryforwards will expire
beginning in 2025. The AMT credit can be carried forward indefinitely.





Federal
and California tax laws impose substantial restrictions on the utilization of
net operating loss and credit carryforwards in the event of an “ownership
change” for tax purposes, as defined in Section 382 of the Internal Revenue
Code. The Company has determined that there were ownership changes under Section
382 during 1998, 1999, and 2000. Consequently, a portion of the Company’s tax
carryforwards will expire before they can be fully utilized. Therefore, in 2002,
the Company reduced its reported available federal and state net operating loss
carryforwards by $4.5 million and $4.0 million, respectively.











10k


****


**NOTE 6.**  **COMMITMENTS
AND CONTINGENCIES**





*Contractual
Obligations*





WebEx
leases certain equipment and facilities under non-cancelable operating leases
expiring through 2014. Future minimum lease payments and purchase obligations by
year and in the aggregate, as of December 31, 2004, are as follows (in
thousands):








**Contractual
      Obligations**
    
    
    **2005**
    ****
    ****
    **2006**
    ****
    ****
    **2007**
    ****
    ****
    **2008**
    ****
    ****
    **2009**
    ****
    ****
    **2010
      and thereafter**
    ****
    ****
    **Total**Operating
      lease obligations
    
    $
    4,881
    
    $
    3,533
    
    $
    3,422
    
    $
    3,703
    
    $
    3,255
    
    $
    16,347
    
    $
    35,141Purchase
      obligations
    
    
    12,498
    
    
    324
    
    
    45
    
    
    -
    
    
    -
    
    
    -
    
    
    12,867Other
      commitments
    
    
    917
    
    
    458
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,375Total
    
    $
    18,296
    
    $
    4,315
    
    $
    3,467
    
    $
    3,703
    
    $
    3,255
    
    $
    16,347
    
    $
    49,383








WebEx
leases office facilities under various operating leases that expire through
2014.In April
2004, WebEx signed a lease to occupy space in a building located in Santa Clara,
California, that will serve as WebEx’s corporate headquarters. The lease term is
for approximately ten years, and initial occupancy commenced in the third
quarter of 2004. The Company took possession of additional space in January 2005
and is committed to occupy additional space in 2008, which is included in the
future minimum rental payments. Future minimum lease payments under this lease
begin in January 2005 and total an aggregate of $23.8 million for the life of
the lease. Under the lease agreement, the landlord provided incentives including
the construction of leasehold improvements for no additional payments by the
Company and payment of certain operating expenses for the initial 20 months
covered by the lease. The lease requires a security deposit of $4.0 million,
which WebEx satisfied through a letter of credit issued under WebEx’s credit
line. Rent expense is being recognized based on an effective rate of rent per
square foot, which takes into account scheduled rent increases and the
incentives provided by the lessor, and results in the same amount of rent
expense per square foot occupied in all periods during the lease term. Total
future minimum lease payments under other operating leases amount to
approximately $11.3 million.





Rent
expense under operating leases was $5.4 million, $4.7 million, and $4.7 million,
for the years ended December 31, 2004, 2003 and 2002, respectively. Rent expense
was reduced by rental income of $77,000, $893,000 and $405,000 in 2004, 2003 and
2002, respectively.





At
December 31, 2004, WebEx has purchase commitments totaling approximately $12.9
million for the usage of telecommunication lines and data services, equipment
and software purchases and the construction of leasehold improvements at new
leased facilities. The majority of the purchase commitments are expected to be
settled in cash within 12 months with the longest commitment expiring August
2007.





In
December 2004, the Company entered into an agreement with the government of Hong
Kong and Hong Kong University of Science and Technology (HKUST) pursuant to
which WebEx and the government of Hong Kong were to each pay equal amounts to
fund certain research and development projects to be jointly managed by WebEx
and HKUST. In December 2004, Webex paid $500,000 in cash resulting from the
agreement, which was fully expensed to research and development expense, and has
future payment obligations under the agreement totaling $1.4 million. The future
payment obligation is included in other commitments in the table above. WebEx
will obtain sole ownership of the intellectual property resulting from the
projects, provided, however that WebEx and HKUST may agree that some of the
proceeds of products and services arising from the projects will be paid to
HKUST. The parties have not yet entered into any such agreement regarding
proceeds. The agreement provides for termination of the agreement and
modification of the projects, schedule and funding under certain
circumstances.





*Other*





WebEx
does not currently collect sales tax from customers in the United States and
believes the services it provides are exempt from sales tax.  No tax
authorities are attempting to collect such taxes from WebEx.  However, it
is possible in the future that tax authorities in one or more states could
assert that WebEx is obligated to collect such taxes from its customers and
remit those taxes to those authorities.  The collection and remittance of
such taxes is not expected to have a material impact on WebEx's financial
statements.  It is also possible, however, that such authorities could seek
to collect sales taxes for sales of services by WebEx in the past.  If such
a claim were to be asserted against WebEx and WebEx was found liable for such
back taxes and WebEx was unable to collect such taxes from its customers, WebEx
could incur an expense equal to the amount of such taxes and any associated
interest and penalties.  WebEx believes that such taxes, interest and
penalties are not estimable at this time.





*Indemnity
and Warranty Obligations*





In
WebEx’s agreements with customers and distribution partners, WebEx agrees to
indemnify the customers and distribution partners in the event a third party
asserts an intellectual property infringement claim against the customer or
distribution partner based on WebEx services. Certain restrictions are placed on
the indemnity obligations, including geographical limitations
and limitations on the type of claims covered. In addition, WebEx has provided
certain warranties and committed to certain service levels in some of its







10k





agreements
with customers and distribution partners. These warranty and service level
provisions specify limited remedies available to the customer or distribution
partner in the event of a breach of the warranty or a failure to meet the
specified service level. In addition, WebEx’s agreements contain limitation of
liability provisions, which disclaim responsibility for consequential, special
or indirect damages and which generally limit WebEx’s liability under the
agreements to the amount of fees paid to WebEx. As of December 31, 2004, WebEx
had incurred no liability with respect to its indemnification obligations and
had not incurred any material liability with respect to its warranty and service
level obligations.








**NOTE
7.**  **ASSET
AND BUSINESS ACQUISITIONS**





In April
2004, WebEx acquired CyberBazaar of Bangalore India, an audio conferencing
company, in order to directly pursue the web conferencing market in India. WebEx
renamed the CyberBazaar entity WebEx Communications India Pvt. Ltd. WebEx
Communications India will endeavor to maintain the CyberBazaar offices,
management team and employees. The total purchase price for net assets acquired
was $2.7 million, paid in cash, and was allocated as follows ($ in
thousands):








Amount
    
    
    Estimated
      life (years
    )Net
      tangible assets
    
    $
    885Developed
      technology
    
    
    100
    
    
    3Customer
      contracts
    
    
    70
    
    
    1Customer
      relationships
    
    
    450
    
    
    5Trade
      name
    
    
    160
    
    
    3Goodwill
    
    
    1,389Deferred
      tax liability, net
    
    
    (391
    )$
    2,663





Subsequent
to the acquisition of CyberBazaar, certain pre-acquisition tax contingencies of
$433,000 were determined to be both probable and estimable. Accordingly, in the
fourth quarter of 2004, an income tax liability was recorded and goodwill
related to the CyberBazaar acquisition was increased from $1.4 million to $1.8
million. The results of CyberBazaar are included in the consolidated financial
statements of WebEx subsequent to April 30, 2004, the effective date of the
acquisition. Additional payments of $1.4 million were accrued in 2004 and paid
in 2005 based on the performance of CyberBazaar in calendar year 2004. The
additional payments are tied to continued employment by the former owners of
CyberBazaar and accordingly are being expensed as compensation. The compensation
agreement with the former owners of CyberBazaar continues through December 31,
2006. Pro-forma financial information for this acquisition is not presented
because the results of operations of CyberBazaar are not material to the results
of operations of WebEx prior to the date of acquisition.





In
September 2004, WebEx entered into an agreement with NCR Corporation, a
technology company, which included the acquisition from NCR of certain
intangible assets and a release from any past liability associated with those
assets. The terms of the agreement included WebEx’s acquiring five of NCR
patents issued in the U.S. together with the foreign counterparts of those
patents, obtaining licenses to certain other NCR patents for the life of those
patents, and mutually agreeing with NCR not to commence legal actions against
each other on other patents in the companies’ respective portfolios for a period
of three years. The acquired patents were filed between 1993 and 1997. The
amount paid in cash by WebEx under the agreement which was allocated to the
acquired intangible assets was $2.6 million and was allocated based on the
relative fair value as follows ($ in thousands):





Amount
    
    
    Estimated
      life (years
    )Patents
      Purchased and Licensed
    
    $
    2,441
    
    
    10Covenant
      Not to Sue
    
    
    150
    
    
    3





The
remainder of the consideration under the agreement consisted of $0.3 million,
which was allocated to the fair value of releases from any liability that might
have accrued prior to the effective date of the agreement and which was charged
to cost of revenue in the three months ended September 30, 2004.





In June
2003, WebEx completed the acquisition of the net assets of Presenter, Inc., a
provider of software for authorizing, managing and delivering multimedia web
presentations. The








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acquisition
of the assets of Presenter, Inc. will enable WebEx to enhance the features of
its services. The total purchase price for assets acquired was $686,000 and was
allocated as follows ($ in thousands):





EstimatedAmount
    
    
    life
      (years
    )Net
      tangible assets
    
    $
    117Developed
      technology
    
    
    214
    
    
    3Patents
    
    
    235
    
    
    5Customer
      relationships
    
    
    84
    
    
    3Backlog
    
    
    36
    
    
    0.5$
    686





**NOTE 8.**  **SEGMENT
REPORTING**





SFAS No.
131, *Disclosure
about Segments of an Enterprise and Related Information* ,
establishes standards for the reporting by business enterprises of information
about operating segments, products and services, geographic areas, and major
customers. The standard for determining what information to report is based on
operating segments within WebEx that are regularly reviewed and used by the
chief operating decision maker in evaluating financial performance and resource
allocation.





WebEx’s
chief operating decision-maker is considered to be the chief executive officer
(CEO). Based on the financial information reviewed by the CEO, the Company has
determined that it operates in a single operating segment, specifically, web
communications services.





The
composition of the Company’s sales to customers between those in the United
States of America and those in other locations for 2004 and 2003 is set forth
below (in thousands). Revenue is attributed to a specific geographic location
based on the billing address for services since the location of actual use
cannot be determined. Revenues from customers outside the United States of
America in 2002 were not material.





****
    
    
    
    
    **Year ended******
    ****
    ****
    ****
    ****
    **December
      31,******
    ****
    ****
    ****
    ****
    ****
    **2004**
    ****
    ****
    **2003**United
      States
    $
    220,133
    
    $
    176,786Canada
    
    10,057
    
    
    3,033North America
    
    230,190
    
    179,819Europe
    
    13,922
    
    
    7,283Other
    
    5,021
    
    
    2,239$
    249,133
    
    $
    189,341





Long-lived
assets located in countries outside the Untied States of America totaled $3.1
million for the year ended December 31, 2004.





**NOTE
9.**  **RELATED
PARTY TRANSACTIONS**





Prior to
February 2003, WebEx had contracts for engineering services with three companies
in China owned by WebEx's Chief Technical Officer, who is also a major
stockholder, and his spouse. WebEx contracted with these companies to perform
development projects, assign ownership of the work performed to WebEx, and
invoice WebEx for services rendered based on a monthly fee per employee working
on WebEx projects. These companies provided a significant amount of quality
assurance testing and software development activities for WebEx. Research and
development expenses for engineering services pursuant to these arrangements for
the years ended December 31, 2004, 2003 and 2002 were $0, $300,000 and $3.3
million, respectively.





In
February 2003, WebEx announced the purchase of substantially all the assets of
these companies, consisting primarily of computers and equipment for cash of
$199,000. The valuation of the assets was determined by an independent
appraisal. In addition, WebEx hired a majority of the employees and contractors
of these companies to continue to provide engineering services as employees of
WebEx. The purchase price was allocated to the tangible assets acquired.





WebEx
recorded revenue of $4,000, $63,000 and $73,000 for the years ended December 31,
2004, 2003 and 2002, respectively, from Baan, a software company which was
founded by a member of WebEx’s Board of Directors. This Board member is also a
principal in Vanenburg Capital Management I, B.V., and a holder of shares of
WebEx common stock as of December 31, 2004.








10k





For the
years ended December 31, 2003 and 2002, TIBCO Software, Inc. paid WebEx $249,000
and $261,000, respectively for WebEx services. Vivek Ranadivé, a director of the
company until May 2003, was then and now is Chairman of the Board and Chief
Executive Officer of TIBCO Software.





In
October 2003, WebEx licensed software from Cordys USA Inc., a company owned by
an affiliate of WebEx’s largest shareholder, of whom one of WebEx’s directors is
managing director. WebEx paid no money for the software license, but did provide
assistance to Cordys in the design and testing of the software.  In 2004,
WebEx purchased $28,000 in training services from Cordys and contemplated
licensing additional software from Cordys.  WebEx is currently in the
process of acquiring software licenses from Cordys in the amount of
$54,000.





In 2002, a
loan made to WebEx's Chief Executive Officer was repaid in
full.














**NOTE
10.    QUARTERLY RESULTS OF OPERATIONS
(unaudited)**





The
following table sets forth our quarterly results of operations data for each of
the eight quarters ended December 31, 2004 and 2003 (in thousands, except per
share data):





****
    
    Three
      Months Ended****
    
    
    Dec.
      31,
      2004
    
    
    **Sept.
      30,**
      **2004**
    
    
    **June
      30,**
      **2004**
    
    
    **Mar.
      31,**
      **2004****Income
      Statement Data:**Net
      revenue
    
    $
    67,693
    
    $
    63,968
    
    $
    61,128
    
    $
    56,344Cost
      of revenue
    
    
    10,927
    
    
    11,018
    
    
    10,384
    
    
    9,525Gross
      profit
    
    
    56,766
    
    
    52,950
    
    
    50,744
    
    
    46,819Operating
      expenses:Sales
      and marketing
    
    
    21,691
    
    
    21,200
    
    
    21,377
    
    
    19,924Research
      and development
    
    
    9,740
    
    
    9,122
    
    
    8,265
    
    
    7,215General
      and administrative
    
    
    5,857
    
    
    4,419
    
    
    5,030
    
    
    3,407Equity-based
      compensation*
    
    
    124
    
    
    66
    
    
    (130
    )
    
    511Total
      operating expenses
    
    
    37,412
    
    
    34,807
    
    
    34,542
    
    
    31,057Operating
      income
    
    
    19,354
    
    
    18,143
    
    
    16,202
    
    
    15,762Interest
      and other income (expense), net
    
    
    (409
    )
    
    172
    
    
    433
    
    
    112Income
      before income taxes
    
    
    18,945
    
    
    18,315
    
    
    16,635
    
    
    15,874Income
      tax expense
    
    
    3,169
    
    
    6,497
    
    
    6,350
    
    
    5,873Net
      income
    
    $
    15,776
    
    $
    11,818
    
    $
    10,285
    
    $
    10,001Net
      income per shareBasic
    
    $
    0.35
    
    $
    0.27
    
    $
    0.23
    
    $
    0.23Diluted
    
    $
    0.34
    
    $
    0.26
    
    $
    0.22
    
    $
    0.22Shares
      used in computing net income per shareBasic
    
    
    44,477
    
    
    44,026
    
    
    43,807
    
    
    42,954Diluted
    
    
    47,012
    
    
    45,833
    
    
    46,499
    
    
    46,459____________
      *
      Equity-based compensation:Sales
      and marketing
    
    $
    4
    
    $
    (1
    )
    $
    (11
    )
    $
    51Research
      and development
    
    
    8
    
    
    6
    
    
    11
    
    
    27General
      and administrative
    
    
    112
    
    
    61
    
    
    (130
    )
    
    433$
    124
    
    $
    66
    
    $
    (130
    )
    $
    511

















****
    
    Three Months
      Ended****
    
    
    Dec.
      31,
      2003
    
    
    **Sept.
      30,**
      **2003**
    
    
    **June
      30,**
      **2003**
    
    
    **Mar.
      31,**
      **2003****Income
      Statement Data:**Net
      revenue
    
    $
    53,860
    
    $
    48,764
    
    $
    44,909
    
    $
    41,808Cost
      of revenue
    
    
    8,761
    
    
    8,180
    
    
    7,451
    
    
    7,406Gross
      profit
    
    
    45,099
    
    
    40,584
    
    
    37,458
    
    
    34,402Operating
      expenses:Sales
      and marketing
    
    
    18,913
    
    
    17,889
    
    
    19,051
    
    
    18,396Research
      and development
    
    
    6,621
    
    
    5,992
    
    
    6,098
    
    
    6,058General
      and administrative
    
    
    4,114
    
    
    3,671
    
    
    2,988
    
    
    2,802Equity-based
      compensation*
    
    
    547
    
    
    406
    
    
    577
    
    
    319Total
      operating expenses
    
    
    30,195
    
    
    27,958
    
    
    28,714
    
    
    27,575Operating
      income
    
    
    14,904
    
    
    12,626
    
    
    8,744
    
    
    6,827Interest
      and other income, net
    
    
    143
    
    
    237
    
    
    298
    
    
    396Income
      before income tax
    
    
    15,047
    
    
    12,863
    
    
    9,042
    
    
    7,223Income
      tax expense (benefit)
    
    
    (19,414
    )
    
    1,672
    
    
    1,175
    
    
    940Net
      income
    
    $
    34,461
    
    $
    11,191
    
    $
    7,867
    
    $
    6,283Net
      income per shareBasic
    
    $
    0.81
    
    $
    0.27
    
    $
    0.19
    
    $
    0.15Diluted
    
    $
    0.76
    
    $
    0.25
    
    $
    0.19
    
    $
    0.15Shares
      used in computing net income per shareBasic
    
    
    42,440
    
    
    41,788
    
    
    41,208
    
    
    40,800Diluted
    
    
    45,538
    
    
    44,275
    
    
    42,415
    
    
    42,246____________
      *
      Equity-based compensation:Sales
      and marketing
    
    $
    392
    
    $
    67
    
    $
    141
    
    $
    99Research
      and development
    
    
    (62
    )
    
    81
    
    
    119
    
    
    107General
      and administrative
    
    
    217
    
    
    258
    
    
    317
    
    
    113$
    547
    
    $
    406
    
    $
    577
    
    $
    319



















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





Not
applicable.





**** **Item****** **9A.** ***Controls
and Procedures*** ****





*Evaluation
of disclosure controls and procedures.* We
maintain “disclosure controls and procedures,” as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that
are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognizes that disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure controls and
procedures, our management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions .





Based on
their evaluation as the end of the period covered by this Annual Report on Form
10-K, our Chief Executive Officer and Chief Financial Officer have concluded
that, subject to the limitations noted above, our disclosure controls and
procedures were effective to ensure that material information relating to us,
including our consolidated subsidiaries, is made known to them by others within
those entities, particularly during the period in which this Annual Report on
Form 10-K was being prepared.





**Limitations
on the Effectiveness of Controls and Permitted Omission from Management’s
Assessment.*Our internal control over financial reporting is
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. All internal control
systems, no matter how well designed, have inherent limitations, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can only provide reasonable
assurance with respect to financial statement preparation. 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
connection with management’s evaluation discussed in its report below, we
excluded an evaluation of our wholly-owned subsidiary, WebEx Communications
India Pvt., Ltd. (formerly known as CyberBazaar), which we acquired in April
2004. Such exclusion was in accordance with Securities and Exchange Commission
guidance that an assessment of a recently-acquired business may be omitted in
management’s report on internal controls over financial reporting, provided the
acquisition took place within twelve months of management’s evaluation.*





*Management’s
Report on Internal Control Over Financial Reporting.* Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f).





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in *Internal
Control - Integrated Framework* issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Not
included in this evaluation of our internal control over financial reporting was
an evaluation of our wholly owned operating subsidiary CyberBazaar, which is
located in India and which we acquired in April 2004. We have renamed the
CyberBazaar entity WebEx Communications India Pvt. Ltd. The total fiscal year
2004 revenue of WebEx Communications India Pvt. Ltd. was approximately $2.2
million and total assets as of December 31, 2004 were $2.1 million.





Based on
this evaluation, our management believes that, as of December 31, 2004, our
internal control over financial reporting was effective based on those
criteria. Our management’s assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2004 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their
report which is included herein.








10k





*Attestation
Report of the Registered Public Accounting Firm.*





**Report
of Independent Registered Public Accounting Firm**





The Board
of Directors and Stockholders


Webex
Communications, Inc.:





We have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting appearing under Item 9A,
that WebEx Communications, Inc. maintained effective internal control over
financial reporting as of December 31, 2004, based on the criteria established
in *Internal
Control - Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management of WebEx Communications, Inc. is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the internal control over financial reporting of
WebEx Communications, Inc. 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, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, 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, management’s assessment that Webex Communications, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in *Internal
Control - Integrated Framework* issued
by COSO. Also, in our opinion, Webex Communications, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in *Internal
Control - Integrated Framework* issued
by COSO.





During
2004, Webex Communications, Inc. acquired CyberBazaar of Bangalore, India, which
was renamed WebEx Communications India Pvt. Ltd. (WebEx India) during
2004.  Management excluded from its assessment of the effectiveness of
internal control over financial reporting of Webex Communications, Inc. as of
December 31, 2004 WebEx India's internal control over financial
reporting associated with total assets of $2.1 million and total revenues
of $2.2 million included in the consolidated financial statements of Webex
Communications, Inc. and subsidiaries as of and for the year ended December 31,
2004. Our audit of internal control over financial reporting of Webex
Communications Inc. also excluded an evaluation of the internal control over
financial reporting of WebEx India.








10k


We also
have audited, in accordance with the standards of Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Webex
Communications, Inc. as of December 31, 2003 and 2004, and the related
consolidated income statements, statements of stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated March 9, 2005 expressed an
unqualified opinion on those consolidated financial statements.











/s/ KPMG
LLP


Mountain
View, California


March 9,
2005







*Changes
in internal control over financial reporting.* There
was no significant change in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) identified in connection with
management’s evaluation during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting .








**Item 9B.** ***Other
Information***





None.








**PART
III**








**Item 10.** ***Directors and Executive
Officers of the Registrant*** ****





The
information required by Item 10 of Form 10-K with respect to directors is
incorporated herein by reference to the information contained in the section
entitled “Election of Directors” in the Company’s definitive Proxy Statement to
be filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company’s 2004 Annual Meeting of Stockholders to
be held on May 11, 2005 (the “Proxy Statement”). For information with respect to
the executive officers of the Company, see “Executive Officers of the
Registrant” at the end of Part I of this report.





Item 405
of Regulation S-K calls for disclosure of any known late filings or failure by
an insider to file a report required by Section 16(a) of the Securities Act.
This information is contained in the Section entitled “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement and is incorporated
herein by reference.





Item 401
of Regulation S-K calls for disclosure of whether or not the Company has a
financial expert serving on the audit committee of its Board of Directors, and
if so who that individual is. This information is contained in the Section
entitled “Audit Committee Financial Expert” in the Proxy Statement and is
incorporated herein by reference.





WebEx has
adopted a code of ethics that applies to all WebEx employees, including WebEx’s
principal executive officer, its principal financial officer, its principal
accounting officer and persons performing similar functions. This code of
ethics, called a Code of Conduct, is available free of charge on the WebEx
public website (www.webex.com) on the investor relations webpage. Future
amendments or waivers relating to the Code of Conduct will be disclosed on the
webpage referenced in this paragraph within five (5) business days following the
date of such amendment or waiver.





10k
 **Item 11.** ***Executive
Compensation*** ****





The
information required by Item 11 of Form 10-K is incorporated herein by reference
to the information contained in the sections entitled “Election of
Directors—Compensation of Directors”, “Executive Compensation and Related
Information” and “Election of Directors—Compensation Committee Interlocks and
Insider Participation” in the Proxy Statement.








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





The
information required by Item 12 of Form 10-K is incorporated herein by reference
to the information contained in the sections entitled “Security Ownership of
Certain Beneficial Owners and Management.” Equity compensation plan information
is provided immediately below:





The
following table sets forth certain information as of December 31, 2004 with
respect to compensation plans of the Company under which equity securities of
the Company are authorized for issuance.























**EQUITY
COMPENSATION PLAN INFORMATION**





**Number of securities to**
      **be issued upon exercise**
      **of outstanding
      options,**
      **warrants
      and rights**
    **Weighted-average**
      **exercise
      price of**
      **outstanding options,**
      **warrants
      and rights**
    **Number of securities**
      **remaining available for**
      **future
      issuance under**
      **equity compensation plans**
      **(excluding securities**
      **reflected
      in column (a))****Plan
      category**
    **(a)**
    **(b)**
    **(c)**Equity
      compensation plans approved by security holders (1)
    10,970,344
    18.38
    735,515(2)Equity
      compensation plans not approved by security
      holders
    -
    -
    -Total
    10,970,344
    18.38
    1,432,579
      (3)


____________


(1)  Includes
our 1998 Stock Plan and our 2000 Stock Incentive Plan.





(2)  Includes
the number of shares reserved under our 2000 Stock Incentive Plan. The number of
shares reserved for issuance under our 2000 Stock Incentive Plan will be
increased on the first day of each of the Company’s fiscal years from 2005 to
2010 by the lesser of (i) 5,500,000 shares, (ii) eight percent (8%) of the
number of outstanding shares of our common stock on that date, or (iii) a lesser
amount determined by our Board of Directors.





(3)  Includes
697,064 shares available for purchase pursuant to our 2000 Employee Stock
Purchase Plan. The 2000 Employee Stock Purchase Plan provides that shares of
common stock will be purchased by plan participants at a price equal to 85% of
the fair market value per share of common stock on either the first day
preceding the offering period or the last day of the offering period, on
whichever day the closing price per share is less. The number of shares reserved
for issuance under our 2000 Employee Stock Purchase Plan will be increased on
the first day of each of the Company’s current and future fiscal years from 2005
to 2010 by the lesser of (i) 1,500,000 shares, (ii) two percent
(2%) of the number of outstanding shares of our common stock on that date, or
(iii) a lesser amount determined by our Board of Directors.











10k





**Item 13.** ***Certain
Relationships and Related Transactions*** ****





The
information required by Item 13 of Form 10-K is incorporated herein by reference
to the information contained in the section entitled “Certain Relationships and
Related Transactions” in the Proxy Statement.








**Item 14.** ***Principal
Accountant Fees and Services*** ****





The
information required by Item 14 of Form 10-K is incorporated herein by reference
to the information contained in the section entitled “Ratification of
Independent Auditors—Audit and Non-Audit Fees” and “Ratification of Independent
Auditors - Pre-Approval Policies and Procedures” in the Proxy Statement.











**PART
IV**





**Item** **15.** ***Exhibits
and Financial Statement Schedules***





(a)  The
following documents are filed as part of this Report:





(1)  Financial
Statements—See Index to the Consolidated Financial Statements in Item 8 of this
Report.





(2)  Financial
Statement Schedules—Schedules not listed have been omitted because they are not
applicable or required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or the Notes thereto.





(3)  Exhibits—See
Exhibit Index in Item 15(b) of this Report.





(b)  Exhibit
Index:





**Exhibit Number**
    **Description
      of Document**3(i)(1)
    Amended
      and Restated Certificate of Incorporation.3(ii)(2)
    Amended
      and Restated Bylaws.4.1(1)
    Form
      of Common Stock Certificate.4.2(3)
    Amended
      and Restated Investors’ Rights Agreement, dated March 30, 2000 by and
      among the registrant and the parties who are signatories
      thereto.10.1(3)*
    Registrant’s
      Amended and Restated 1998 Stock Plan.10.2*
    Registrant’s
      Amended and Restated 2000 Stock Incentive Plan.10.3(1)*
    Registrant’s
      2000 Employee Stock Purchase Plan.10.4(1)*
    Form
      of Directors and Officers’ Indemnification Agreement.











10k





**Exhibit Number**
    **Description
      of Document**10.5(1)
    Sublease,
      dated April 26, 2000, by and between MarchFirst, Inc. and the
      registrant.10.6(4)
    Lease,
      dated October 25, 2000, by and between the registrant and North Valley
      Tech LLC.10.7(4)
    Lease,
      dated October 17, 2000, by and between the registrant and WDCI,
      Inc.10.8(5)
    Agreement
      of Purchase and Sale of 364 Ferguson Drive, Mountain View, California by
      and between Granum Limited and the Company dated February 1, 2004, and
      First Amendment thereto dated February 17, 2004.10.9(6)
    Office
      Lease by and between Mission Towers LLC and Registrant dated April 21,
      2004.21.1
    Subsidiaries
      of the Registrant.23.1
    Consent
      of Independent Registered Public Accounting Firm.24.1
    Power
      of Attorney (see page 60 of this Form 10-K).31.1
    Certification
      of the Chief Executive Officer Pursuant to Rule
      13a-14(a)/15d-14(a)31.2
    Certification
      of the Chief Financial Officer Pursuant to Rule
      13a-14(a)/15d-14(a)32.1+
    Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
      Pursuant To Section 906 of The Sarbanes-Oxley Act of
  200232.2+
    Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
      Pursuant To Section 906 of The Sarbanes-Oxley Act of
  2002





____________


*  Denotes a
management contract or compensatory plan or arrangement.


+  In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos.
33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, the certification furnished in Exhibits 32.1 and Exhibit 32.2 are
deemed to accompany this Form 10-K and will not be deemed “filed” for purpose of
Section 18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, whether made before or after the date hereof irrespective of any
general incorporation language contained in any such filing, except to the
extent that the registrant specifically incorporates it by reference .





(1)  Incorporated
by reference to Exhibits 3.3, 4.1, 10.3, 10.4 and 10.8, respectively, of
Amendment No. 1 to Registrant’s Registration Statement on Form S-1 (File No.
333-33716)  filed with the Securities and Exchange Commission on June 21,
2000.





(2)  Incorporated
by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for
the year ending December 31, 2001.





(3)  Incorporated
by reference to Exhibits 4.2 and 10.1, respectively, of Registrant’s
Registration Statement on Form S-1 (File No. 333-33716) filed with the
Securities and Exchange Commission on March 31, 2000.





(4)  Incorporated
by reference to Exhibits 10.1 and 10.2, respectively, of Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.








10k





(5)  Incorporated
by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004.





(6)  Incorporated
by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.





(c)  See the
Consolidated Financial Statements and Supplementary Data beginning on page 34 of
this Report. Schedules not listed have been omitted because they are not
applicable or required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or the Notes
thereto














10k


**SIGNATURES**





Pursuant
to the requirements of the Section 13 or 15(d) 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, on this 16th day of March 2005.




**WEBEX
      COMMUNICATIONS, INC.**Date: 
      March 16, 2005
    By:
    /s/ SUBRAH
      S. IYARSubrah S. IyarChief
      Executive Officer





**POWER OF ATTORNEY**





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Subrah S. Iyar, Michael T. Everett and David
Farrington, and each of them individually, as his or her attorney-in-fact, each
with full power of substitution, for him or her in any and all capacities, to
sign any and all amendments to this Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his or her substitute, may do or cause to be done by
virtue hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:





**Name**
    
    **Title**
    
    **Date**/s/    SUBRAH
      S. IYAR
      
      Subrah
      S. Iyar
    
    Chief
      Executive Officer (Principal Executive Officer) and
    Director
    
    March
      16, 2005/s/    MIN
      ZHU
      
      Min
      Zhu
    
    Director
    
    March
      16, 2005/s/    MICHAEL
      T. EVERETT
      
      Michael
      Everett
    
    Chief
      Financial Officer (Principal Financial Officer)
    
    March 16,
      2005/s/    DEAN
      MACINTOSH
      
      Dean
      MacIntosh
    
    Principal
      Accounting Officer
    
    March
      16, 2005/s/    JAN
      BAAN
      
      Jan
      Baan
    
    Director
    
    March
      16, 2005/s/    MICHAEL
      T. FLYNN
      
      Michael
      Flynn
    
    Director
    
    March
      16, 2005/s/    ANTHONY
      R. MULLER
      
      Anthony
      R. Muller
    
    Director
    
    March
      16, 2005/s/    CASIMIR
      SKRZYPCZAK
      
      Casimir
      Skrzypczak
    
    Director
    
    March
      16, 2005








10k


**EXHIBIT INDEX**





**Exhibit Number**
    **Description
      of Document**3(i)(1)
    Amended
      and Restated Certificate of Incorporation.3(ii)(2)
    Amended
      and Restated Bylaws.4.1(1)
    Form
      of Common Stock Certificate.4.2(3)
    Amended
      and Restated Investors’ Rights Agreement, dated March 30, 2000 by and
      among the registrant and the parties who are signatories
      thereto.10.1(3)*
    Registrant’s
      Amended and Restated 1998 Stock Plan.10.2*
    Registrant’s
      Amended and Restated 2000 Stock Incentive Plan.10.3(1)*
    Registrant’s
      2000 Employee Stock Purchase Plan.10.4(1)*
    Form
      of Directors and Officers’ Indemnification Agreement.











10k





**Exhibit Number**
    **Description
      of Document**10.5(1)
    Sublease,
      dated April 26, 2000, by and between MarchFirst, Inc. and the
      registrant.10.6(4)
    Lease,
      dated October 25, 2000, by and between the registrant and North Valley
      Tech LLC.10.7(4)
    Lease,
      dated October 17, 2000, by and between the registrant and WDCI,
      Inc.10.8(5)
    Agreement
      of Purchase and Sale of 364 Ferguson Drive, Mountain View, California by
      and between Granum Limited and the Company dated February 1, 2004, and
      First Amendment thereto dated February 17, 2004.10.9(6)
    Office
      Lease by and between Mission Towers LLC and Registrant dated April 21,
      2004.21.1
    Subsidiaries of the
    Registrant.23.1
    Consent of Independent Registered Public
      Accounting Firm.24.1
    Power of Attorney (see page 60 of this Form
      10-K).31.1
    Certification of the Chief Executive
      Officer Pursuant to Rule 13a-14(a)/15d-14(a)31.2
    Certification of the Chief Financial
      Officer Pursuant to Rule 13a-14(a)/15d-14(a)32.1+
    Certification of Chief Executive Officer
      Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
      The Sarbanes-Oxley Act of 200232.2+
    Certification of Chief Financial Officer
      Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
      The Sarbanes-Oxley Act of 2002





____________


*  Denotes a
management contract or compensatory plan or arrangement.


+  In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos.
33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, the certification furnished in Exhibits 32.1 and Exhibit 32.2 are
deemed to accompany this Form 10-K and will not be deemed “filed” for purpose of
Section 18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, whether made before or after the date hereof irrespective of any
general incorporation language contained in any such filing, except to the
extent that the registrant specifically incorporates it by reference .





(1)  Incorporated
by reference to Exhibits 3.3, 4.1, 10.3, 10.4 and 10.8, respectively, of
Amendment No. 1 to Registrant’s Registration Statement on Form S-1 (File No.
333-33716) filed with the Securities and Exchange Commission on June 21, 2000.





(2)  Incorporated
by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for
the year ending December 31, 2001.





(3)  Incorporated
by reference to Exhibits 4.2 and 10.1, respectively, of Registrant’s
Registration Statement on Form S-1 (File No. 333-33716) filed with the
Securities and Exchange Commission on March 31, 2000.








10k





(4)  Incorporated
by reference to Exhibits 10.1 and 10.2, respectively, of Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.





(5)  Incorporated
by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004.





(6)  Incorporated
by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.





(c)  See the
Consolidated Financial Statements and Supplementary Data beginning on page 34 of
this Report. Schedules not listed have been omitted because they are not
applicable or required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or the Notes
thereto.