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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-Q

(Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2003


OR

o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from to


Commission File Number: 000-31045

RAINDANCE COMMUNICATIONS, INC.(Exact Name of Registrant as specified in its charter)

Delaware(State or jurisdiction of
incorporation or organization)
    
    84-1407805(I.R.S. Employer Identification Number)


1157 Century Drive
Louisville, CO 80027(Address, including zip code, of principal executive offices)

(800) 878-7326(Registrants telephone number, including area code)

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 o

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

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

Common Stock, $0.0015 Par Value
    
    
    
    53,853,075 as of October 31, 2003.




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TABLE OF CONTENTS



|                                            |                                                                                               |                                                                                                        |  |  |  |  |  | 
|------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION              
|                                            | Item 1. Financial Statements                                                                 
|                                            |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                                                 
|                                            |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                                       
|                                            |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                                       
|                                            |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                  
|                                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                            |                                                                                               | Additional Risk Factors That May Affect Our Operating Results and The Market Price Of Our Common Stock
|                                            | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                            | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                 
|                                            | Item 1. Legal Proceedings                                                                    
|                                            | Item 2. Changes in Securities and Use of Proceeds                                            
|                                            | Item 3. Defaults Upon Senior Securities                                                      
|                                            | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                            | Item 5. Other Information                                                                    
|                                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                 
|EXHIBIT INDEX                              
|EX-10.17 Separation and Release Agreement  
|EX-31.1 Certification of Principal Officers
|EX-32.1 Section 1350 Certification         



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RAINDANCE COMMUNICATIONS, INC.

INDEX

PagePART I. FINANCIAL INFORMATIONItem 1.Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
(unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (unaudited)
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Additional Risk Factors that May Affect Our Operating Results and The Market Price of Our Common Stock
    
    
    25Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    36Item 2.Changes in Securities and Use of Proceeds
    
    
    36Item 3.Defaults Upon Senior Securities
    
    
    36Item 4.Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.Other Information
    
    
    36Item 6.Exhibits and Reports on Form 8-K
    
    
    36SIGNATURES
    
    
    37


Our website address is www.raindance.com. Our registration statement on
Form S-1, annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, as well as any amendments to those reports, are
available free of charge through our website as soon as reasonably practicable
after we file them with the SEC. Once at www.raindance.com, go to
Investors/SEC Filings and Financials.

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PART I. FINANCIAL INFORMATION




Item 1.Financial Statements




RAINDANCE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

September 30,
    
    December 31,2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    35,832
    
    
    $
    31,699Accounts receivable, net of allowance for doubtful accounts of $550 and $850 at
September 30, 2003 and December 31, 2002, respectively
    
    
    10,319
    
    
    
    8,982Due from affiliate
    
    
    50
    
    
    
    50Prepaid expenses and other current assets
    
    
    1,516
    
    
    
    983Due from employees
    
    
    12
    
    
    
    12Total current assets
    
    
    47,729
    
    
    
    41,726Property and equipment, net
    
    
    24,022
    
    
    
    24,493Goodwill, net
    
    
    45,587
    
    
    
    45,587Due from employees
    
    
    2
    
    
    
    2Other assets
    
    
    1,800
    
    
    
    1,197Total Assets
    
    $
    119,140
    
    
    $
    113,005Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    6,907
    
    
    $
    5,193Current portion of long-term debt
    
    
    1,312
    
    
    
    1,030Accrued expenses
    
    
    329
    
    
    
    629Accrued compensation
    
    
    2,595
    
    
    
    2,322Restructuring reserve
    
    
    270
    
    
    
    507Deferred revenue
    
    
    116
    
    
    
    423Total current liabilities
    
    
    11,529
    
    
    
    10,104Long-term debt, less current portion
    
    
    1,556
    
    
    
    2,026Restructuring reserve, less current portion
    
    
    258
    
    
    
    518Other
    
    
    54
    
    
    
    34Total Liabilities
    
    
    13,397
    
    
    
    12,682Stockholders Equity:Common stock, par value $.0015; 130,000,000 shares authorized; 53,826,718 and 51,895,813
shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively
    
    
    81
    
    
    
    78Additional paid-in capital
    
    
    278,515
    
    
    
    276,211Deferred stock-based compensation
    
    
    (3,058
    )
    
    
    (4,067
    )Accumulated deficit
    
    
    (169,795
    )
    
    
    (171,899
    )Total Stockholders Equity
    
    
    105,743
    
    
    
    100,323Commitments and contingenciesTotal Liabilities and Stockholders Equity
    
    $
    119,140
    
    
    $
    113,005


See accompanying notes to condensed consolidated financial statements.

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RAINDANCE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Revenue:Service
    
    $
    16,959
    
    
    $
    15,700
    
    
    $
    49,233
    
    
    $
    44,965Software
    
    
    1,056
    
    
    
    
    
    
    
    1,056
    
    
    
    Total Revenue
    
    
    18,015
    
    
    
    15,700
    
    
    
    50,289
    
    
    
    44,965Cost of revenue:Service
    
    
    7,394
    
    
    
    6,618
    
    
    
    20,745
    
    
    
    20,848Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total cost of revenue
(exclusive of
stock-based
compensation expense
of
$26, $49, $85 and
$148, respectively,
shown below)
    
    
    7,394
    
    
    
    6,618
    
    
    
    20,745
    
    
    
    20,848Gross profit
    
    
    10,621
    
    
    
    9,082
    
    
    
    29,544
    
    
    
    24,117Operating expenses:Sales and marketing
(exclusive of
stock-based
compensation expense
of $23, $71, $161 and
$221,
respectively, shown
below)
    
    
    4,644
    
    
    
    4,774
    
    
    
    13,949
    
    
    
    13,784Research and
development (exclusive
of stock-based
compensation expense
of $163, $154, $534
and
$468, respectively,
shown below)
    
    
    2,159
    
    
    
    1,854
    
    
    
    5,877
    
    
    
    5,966General and
administrative
(exclusive of
stock-based
compensation expense
of $467, $567,
$1,458 and $1,440,
respectively, shown
below)
    
    
    1,993
    
    
    
    1,774
    
    
    
    5,411
    
    
    
    5,483Stock-based
compensation expense
    
    
    679
    
    
    
    841
    
    
    
    2,238
    
    
    
    2,277Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    584Total operating
expenses
    
    
    9,475
    
    
    
    9,243
    
    
    
    27,475
    
    
    
    28,094Income (loss) from
operations
    
    
    1,146
    
    
    
    (161
    )
    
    
    2,069
    
    
    
    (3,977
    )Other income, net
    
    
    6
    
    
    
    23
    
    
    
    35
    
    
    
    69Net income (loss)
    
    $
    1,152
    
    
    $
    (138
    )
    
    $
    2,104
    
    
    $
    (3,908
    )Net income (loss) per
share:Basic
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.08
    )Diluted
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.08
    )Weighted average
number of common
shares outstanding:Basic
    
    
    53,565
    
    
    
    51,432
    
    
    
    53,135
    
    
    
    50,064Diluted
    
    
    55,320
    
    
    
    51,432
    
    
    
    54,733
    
    
    
    50,064


See accompanying notes to condensed consolidated financial statements.

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RAINDANCE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Nine Months EndedSeptember 30,2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    2,104
    
    
    $
    (3,908
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    7,715
    
    
    
    7,683Restructuring charges
    
    
    
    
    
    
    584Stock-based compensation
    
    
    2,238
    
    
    
    2,277Other
    
    
    36
    
    
    
    65Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,337
    )
    
    
    (3,207
    )Prepaid expenses and other current assets
    
    
    (828
    )
    
    
    280Other assets
    
    
    (58
    )
    
    
    645Accounts payable and accrued expenses
    
    
    1,025
    
    
    
    34Deferred revenue
    
    
    (307
    )
    
    
    444Net cash provided by operating activities
    
    
    10,588
    
    
    
    4,897Cash flows from investing activities:Purchase of property and equipment
    
    
    (6,882
    )
    
    
    (5,535
    )Proceeds from disposition of equipment
    
    
    29
    
    
    
    3Cash paid for acquisition of InterAct, net of cash received
    
    
    
    
    
    
    (2,772
    )Change in restricted cash
    
    
    194
    
    
    
    Net cash used by investing activities
    
    
    (6,659
    )
    
    
    (8,304
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    1,077
    
    
    
    1,383Payments on debt
    
    
    (873
    )
    
    
    (1,485
    )Net cash provided (used) by financing activities
    
    
    204
    
    
    
    (102
    )Increase (decrease) in cash and cash equivalents
    
    
    4,133
    
    
    
    (3,509
    )Cash and cash equivalents at beginning of period
    
    
    31,699
    
    
    
    34,221Cash and cash equivalents at end of period
    
    $
    35,832
    
    
    $
    30,712Supplemental cash flow information  interest paid in cash
    
    $
    126
    
    
    $
    534Supplemental disclosure of non-cash investing and financing activities:Accounts payable incurred for purchases of property and equipment
    
    $
    520
    
    
    $
    242Debt incurred for the purchase of property and equipment
    
    $
    686
    
    
    $
    


See accompanying notes to condensed consolidated financial statements.

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RAINDANCE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



|(1) |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|--- |  | ------------------------------------------



|(a) |  | Basis of presentation
|--- |  | ---------------------

Raindance Communications, Inc., (the Company), was incorporated under
the laws of the State of Delaware on April 17, 1997. The Company provides
business communication services for everyday business meetings and events. The
Companys Web and Phone Conferencing and Web Conferencing Pro communication
services are based on proprietary architecture that integrate traditional
telephony technology with real-time interactive web tools. The Companys
continuum of interactive services includes Web and Phone Conferencing for
reservationless automated audio conferencing with simple web controls and
presentation tools, Web Conferencing Pro, which allows users to integrate
reservationless automated audio conferencing with advanced web interactive
tools such as application sharing, web touring and online whiteboarding, and
Operator Assisted Conferencing. The Company operates in a single segment.

The condensed consolidated financial statements include the accounts of
Raindance Communications and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.

The accompanying condensed consolidated financial statements as of
September 30, 2003 and for the three and nine months ended September 30, 2003
and 2002 are unaudited and have been prepared in accordance with Generally
Accepted Accounting Principles on a basis consistent with the December 31, 2002
audited financial statements and include normal recurring adjustments which
are, in the opinion of management, necessary for a fair statement of the
results of these periods. These condensed consolidated statements should be
read in conjunction with our financial statements and notes related thereto
included in our Form 10-K (Commission File No. 000-31045), filed on March 26,
2003. Operating results for the three and nine months ended September 30, 2003
are not necessarily indicative of the results that may be expected for the full
year.

The preparation of the financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates are used in these financial statements to determine the allowance for
doubtful accounts, the useful lives of depreciable and intangible assets, the
valuation allowance for deferred tax assets and the restructuring charges and
reserves.

Certain prior period balances have been reclassified to conform to the
current period presentation.



|(b) |  | Cash and Cash Equivalents
|--- |  | -------------------------

Cash and cash equivalents consist of cash held in bank deposit accounts
and short-term, highly liquid investments purchased with maturities of three
months or less at the date of purchase. Cash equivalents at September 30, 2003
consist of money market accounts at four financial institutions.



|(c) |  | Restricted Cash
|--- |  | ---------------

Included in other assets is $0.3 million in restricted cash. Restricted
cash consists of amounts supporting irrevocable letters of credit issued by the
Companys bank and is primarily used for security deposits associated with some
of the Companys long term operating leases. Funds are held in certificates of
deposit at a commercial bank, and have been established in favor of a third
party beneficiary. The funds would be released to the beneficiary in the event
that the Company

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fails to comply with certain specified contractual obligations. Provided
the Company meets these contractual obligations, the letter of credit will be
discharged and the Company would no longer be restricted from the use of the
cash.



|(d) |  | Property and Equipment
|--- |  | ----------------------

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation of equipment is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years. Leasehold improvements are amortized over the shorter of related
lease terms or their estimated useful lives. Upon retirement or sale, the cost
of the assets disposed and the related accumulated depreciation is removed from
the accounts and any resulting gain or loss is included in operations in the
period realized.



|(e) |  | Goodwill
|--- |  | --------

The Company follows the provisions of Statement of Financial Accounting
Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. In
regards to the realizability of the Companys carrying amount of goodwill, SFAS
142 requires that goodwill not be amortized, but instead is reviewed for
impairment on an on-going basis. The Company consists of one reporting unit.
In accordance with SFAS 142, the Company performed, as of March 31, 2003, the
annual reassessment and impairment test, which indicated that the fair value of
the reporting unit exceeded the goodwill carrying value; and therefore, at that
time, goodwill was not deemed to be impaired. There can be no assurances that
the Companys goodwill will not be impaired in the future.



|(f) |  | Fair Value of Financial Instruments and Concentrations of Credit Risk
|--- |  | ---------------------------------------------------------------------

The carrying amounts of certain of the Companys financial instruments,
including cash and cash equivalents, accounts receivable and accounts payable,
approximate fair value because of the short-term nature of these instruments.
Because the interest rates on the Companys note payable obligations reflect
market rates and terms, the fair values of these instruments approximate
carrying amounts. Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. The Companys cash and cash equivalents are held with financial
institutions that the Company believes to be of high credit standing. The
Companys customer base consists of a large number of geographically dispersed
customers diversified across several industries. In the first, second and third
quarters of 2003, none of the Companys customers represented greater than 10%
of the Companys revenue, however, one customer represented greater than 10% of
the Companys accounts receivable. The receivable due from Qwest
Communications International, Inc. (Qwest) at September 30, 2003 was $1.5
million or 13.8% of the Companys total accounts receivable balance at such
date. The Companys operating results and cash flows could be adversely
affected in the event Qwest experiences financial difficulties that affect its
ability to pay us in a timely fashion.



|(g) |  | Revenue Recognition
|--- |  | -------------------

Revenue for the Companys Web and Phone Conferencing service is generally
based upon the actual time that each participant is on the phone or logged onto
the web. For example, a customer is charged a per-minute, per-user fee for each
participant listening and viewing a live or recorded simulcast. In addition,
the Company charges customers a one-time fee to upload visuals for a phone
conference or a recorded simulcast. The Company recognizes usage revenue from
our Web and Phone Conferencing service in the period the call or simulcast of
the call is completed. The Company recognizes revenue associated with any
initial set-up fees ratably over the term of the contract.

Revenue for the Companys Web Conferencing Pro service is derived from
subscription and usage fees in addition to event fees or, in more limited
cases, a software license fee. Revenue from subscriptions is recognized monthly
regardless of usage, while usage fees are based upon either connections or
minutes used. Event fees are generally hourly charges that are recognized as
the events take place. The Company recognizes revenue associated with any
initial set-up fees ratably over the term of the contract. Revenue from
software license agreements is either recognized upon shipment of the software
when all the following criteria have been met: persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable,
collectibility is probable, and vendor specific objective evidence is available
for the fair value of all undelivered elements, or recognized ratably over the
software support period if the Company does not have vendor specific objective
evidence for an undelivered element.

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Revenue for the Companys Operator Assisted Conferencing service is
generally based upon the actual time that each participant is on the phone. In
addition, the Company charges customers a fee for additional services such as
call taping, digital replay, participant lists and transcription services. The
Company recognizes usage revenue and related fees from our Operator Assisted
Conferencing service in the period the call is completed.



|(h) |  | Software Development Costs
|--- |  | --------------------------

Costs incurred in the engineering and development of the Companys services is
expensed as incurred, except certain software development costs. Costs
associated with the development of software to be marketed externally are
expensed prior to the establishment of technological feasibility as defined in
SFAS 86, Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed, and capitalized thereafter. To date, the Companys
software development has been completed concurrent with attaining technological
feasibility and, accordingly, all software development costs incurred to which
SFAS 86 is applicable have been charged to operations as incurred in the
accompanying financial statements. The Company capitalizes certain qualifying
computer software costs incurred during the application development stage in
accordance with Statement of Position 98-1 Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use (SOP 98-1) issued by
the American Institute of Certified Public Accountants, which was adopted by
the Company as of January 1, 1999. These costs are amortized on a straight-line
basis over the softwares estimated useful life. Based on plans regarding the
external distribution of software developed in the third quarter of 2003, the
Company changed its accounting treatment of costs associated with the
development of its next-generation service from SOP 98-1 to SFAS 86. Since the
second quarter of 2001, the Company had capitalized $2.8 million in costs
associated with its next-generation service, $1.3 million of which was related
to internal development and $1.5 million of which was related to contract
development.



|(i) |  | Net Income (Loss) Per Share
|--- |  | ---------------------------

Net income (loss) per share is presented in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share(SFAS 128). Under
SFAS 128, basic earnings (loss) per share (EPS) exclude dilution for potential
common stock and is computed by dividing net income or loss by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Potential common shares are comprised of shares of common stock issuable upon
the exercise of stock options and warrants and are computed using the treasury
stock method.

The following table sets forth the calculation of net income (loss) per
share for the three and nine months ended September 30, 2003 and 2002 (in
thousands, except per share amounts):

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income (loss)
    
    $
    1,152
    
    
    $
    (138
    )
    
    $
    2,104
    
    
    $
    (3,908
    )Common shares outstanding:Historical common shares outstanding at beginning of period
    
    
    53,293
    
    
    
    51,125
    
    
    
    51,896
    
    
    
    48,130Weighted average common shares issued during period
    
    
    272
    
    
    
    307
    
    
    
    1,239
    
    
    
    1,934Weighted average common shares at end of period  basic
    
    
    53,565
    
    
    
    51,432
    
    
    
    53,135
    
    
    
    50,064Effect of dilutive common stock options and warrants
    
    
    1,755
    
    
    
    
    
    
    
    1,598
    
    
    
    Weighted average common shares at end of period  diluted
    
    
    55,320
    
    
    
    51,432
    
    
    
    54,733
    
    
    
    50,064Net income (loss) per share  basic
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.08
    )Net income (loss) per share  diluted
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.08
    )


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The following common stock options and warrants have been excluded from
the computation of diluted net income (loss) per share for the three and nine
months ended September 30, 2003 and 2002 because their effect would have been
antidilutive:

Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2002
    
    2003
    
    2002Shares issuable
under stock options
    
    
    4,237,504
    
    
    
    3,992,006
    
    
    
    5,449,961
    
    
    
    2,265,871Shares issuable
pursuant to
warrants
    
    
    20,017
    
    
    
    652,790
    
    
    
    20,017
    
    
    
    652,790




|(j) |  | Stock-Based Compensation
|--- |  | ------------------------

The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees", and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of
the underlying stock exceeds the exercise price, the intrinsic value method.
Under SFAS 123, Accounting for Stock-Based Compensation", entities are
permitted to recognize as expense, over the vesting period, the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of APB Opinion 25 and
provide pro forma net income (loss) disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion 25
and provide the pro forma disclosures required by SFAS 123. All stock-based
awards to non-employees are accounted for at their fair value in accordance
with SFAS 123 and related interpretations.

Stock compensation expense is comprised of the following: (a) the
amortization of deferred compensation resulting from the grant of stock options
or shares of restricted stock to employees at exercise or sale prices deemed to
be less than fair value of the common stock at grant date, net of forfeitures
related to such employees who terminated service while possessing unvested
stock options, as these terminated employees have no further service
obligations; (b) the intrinsic value of modified stock options or restricted
stock awards, measured at the modification date, for the number of awards that,
absent the modification, would have expired unexercisable, and (c) deferred
stock-based compensation associated with the acquisition of InterAct
Conferencing, LLC.

The following table summarizes relevant information as to reported results
under the Companys intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition provisions of SFAS
123 had been applied for the three and nine months ended September 30, 2003 and
2002 (in thousands, except per share amounts):

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income (loss), as reported
    
    $
    1,152
    
    
    $
    (138
    )
    
    $
    2,104
    
    
    $
    (3,908
    )Add: Stock-based employee compensation expense
attributable to common stock options
    
    
    290
    
    
    
    514
    
    
    
    1,119
    
    
    
    1,747Deduct: Stock-based employee compensation
expense attributable to common stock options
determined under fair value based method
    
    
    (1,442
    )
    
    
    (3,549
    )
    
    
    (5,782
    )
    
    
    (10,223
    )Net (loss), as adjusted
    
    $
    
    
    
    $
    (3,173
    )
    
    $
    (2,559
    )
    
    $
    (12,384
    )Income (loss) per share  basic, as reported
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.08
    )Income (loss) per share  diluted, as reported
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.08
    )(Loss) per share  basic, as adjusted
    
    $
    (0.00
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.25
    )(Loss) per share  diluted, as adjusted
    
    $
    (0.00
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.25
    )


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The per share weighted-average fair value of stock options granted during
the three months ended September 30, 2003 and 2002 was $2.35 and $2.64,
respectively, and the per share weighted-average fair value of stock options
granted during the nine months ended September 30, 2003 and 2002 was $1.78 and
$2.98, respectively, using the Black-Scholes option pricing model. The Company
used the following weighted average assumptions in determining the fair value
of options granted during the three months ended September 30, 2003 and 2002:

September 30,2003
    
    2002Expected life (years)
    
    
    4
    
    
    
    6Risk-free interest rate
    
    
    2.85
    %
    
    
    5
    %Expected volatility
    
    
    126
    %
    
    
    106
    %Expected dividend yield
    
    None
    
    None




|(2) |  | ACQUISITION
|--- |  | -----------

On April 17, 2002, the Company entered into a definitive agreement to
acquire substantially all of the assets of InterAct Conferencing, LLC
(InterAct), a nationwide reseller of audio and web conferencing services. On
April 30, 2002, the Company completed the acquisition. In connection with the
acquisition, the Company also assumed certain liabilities of InterAct as of
April 30, 2002, consisting primarily of accounts payable and a $0.1 million
line of credit. The Company also assumed a facility lease obligation of
approximately $0.7 million associated with a building that is partially owned
by the former president and chief executive officer of InterAct who became an
officer of the Company upon the completion of the acquisition. Effective May 1,
2002, the results of InterActs operations are included in the Companys
consolidated financial statements.

The aggregate purchase consideration paid to InterAct was $7.8 million,
which was comprised of $3.8 million in cash and 1,200,982 shares of the
Companys common stock valued at $4.0 million. In addition, the Company
incurred $0.1 million of acquisition related expenses. 997,599 shares of the
Companys common stock were deemed to be compensation for future services.
Accordingly, the Company recorded $3.4 million in deferred stock-based
compensation, which is being expensed over three years, which began in May
2002. The value of the common stock issued was determined based on the average
market price of the Companys common stock over the three-day period before and
after the terms of the acquisition were agreed upon and announced. The
acquisition has been accounted for using the purchase method. The purchase
consideration allocation is as follows:

(In Millions)Tangible net assets
    
    $
    1.0Goodwill
    
    
    6.9Total purchase consideration allocation
    
    $
    7.9


The summary table below, prepared on an unaudited pro forma basis,
combines the Companys consolidated results of operations with InterActs
results of operations as if the InterAct acquisition took place on January 1,
2002 (in thousands, except per share data).

Nine Months Ended September 30,2002Revenue
    
    $
    46,475Net (loss)
    
    
    (3,738
    )Basic and diluted net (loss) per share
    
    
    (0.07
    )


The pro forma results for the nine months ended September 30, 2002 combine
the Companys results for the nine months ended September 30, 2002 with the
results of InterAct for the period from January 1, 2002 through April 30, 2002.
The pro forma results are not necessarily indicative of the results of
operations that would have occurred if the acquisition had been

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consummated on January 1, 2002. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that may have been achieved
from the combined operations.



|(3) |  | DEBT
|--- |  | ----

On October 9, 2001, the Company entered into a loan and security agreement
with a bank that was subsequently amended effective December 31, 2002. On
October 12, 2001 the Company received $5.0 million pursuant to the term loan
component of the loan and security agreement. The term loan is scheduled to be
repaid with monthly principal payments of approximately $0.1 million plus
interest at 5.25% with the final payment due in January 2006. Advances under
the revolving line of credit component of the loan and security agreement are
limited to $12.5 million or 90% of eligible accounts receivable as defined in
the agreement. The revolving line of credit is available through January 26,
2004. Advances under the revolving line of credit may be repaid and re-borrowed
at any time prior to the maturity date. At September 30, 2003, the Company did
not have an outstanding balance under the revolving line of credit and the
borrowing available, based on eligible accounts receivable, was $9.5 million.
The loan and security agreement is collateralized by substantially all tangible
and intangible assets of the Company and is subject to compliance with
covenants, including minimum liquidity coverage, minimum quick ratio and
maximum quarterly operating losses adjusted for interest, taxes, depreciation,
amortization and other non-cash charges. The Company is also prohibited from
paying any dividends without the banks prior written consent. At September 30,
2003, the balance due under this agreement (exclusively related to the term
loan) is $2.3 million, of which $1.0 million is current.

On May 29, 2003, the Company entered into a loan agreement with a vendor,
in the amount of $0.7 million, to finance certain fixed assets. The loan is
scheduled to be repaid with quarterly principal payments of approximately $0.1
million plus interest at 2.5% with the final payment due in April 2005. At
September 30, 2003, the balance due under this agreement is $0.6 million, of
which $0.3 million is current.



|(4) |  | COMMON STOCK PLANS
|--- |  | ------------------



|(a) |  | Stock Options
|--- |  | -------------

In February 2000, the Company adopted the 2000 Equity Incentive Plan that
amended and restated the 1997 stock option/stock issuance plan. Under the plan,
up to an aggregate of 15,872,777 shares are reserved for issuance, including
shares reserved pursuant to the plans evergreen provisions. At September 30,
2003, there were 4,583,963 shares available for future issuance under the plan.
Pursuant to the plan, the Companys Board of Directors may issue common stock
and grant incentive and non-statutory stock options to employees, directors and
consultants. Incentive and non-statutory stock options generally have ten-year
terms and vest over four years. Some of the Companys options entitle option
holders to exercise their options early, in which case shares issued upon
exercise are restricted and subject to repurchase at the exercise price if
those employees are terminated prior to the vesting of their shares. The
remaining options are only exercisable as the employee, director or consultant
vests in the underlying stock.

The Company utilizes APB Opinion 25 in accounting for its plans. In the
three and nine months ended September 30, 2003, a total of 6,500 and 14,150
common shares, respectively, were granted at less than fair value to members of
the Companys Board of Directors as compensation for board services rendered to
the Company, resulting in aggregate compensation expense of $17,940 and
$34,480, respectively. In February 2003, the Companys Board of Directors
approved an Executive Performance-Based Compensation Arrangement, pursuant to
which the Company granted 750,000 shares of restricted stock to certain
executives and key employees. The restricted stock grants cliff vest in six
years and include accelerated vesting if certain financial or product-based
performance milestones are achieved. The stock-based compensation charge
associated with these grants was $1.2 million and is being recorded as an
expense ratably over six years, with such charges being accelerated when it
becomes apparent that the financial or product-based performance milestones
will be achieved. In addition, pursuant to this arrangement, $4.7 million of
cash compensation was approved and will become payable upon the achievement of
such financial or product-based milestones. However, as indicated in Note 8,
the Companys former President and Chief Executive Officers employment will
terminate effective December 31, 2003, which will trigger the reversal of the
deferred portion of the Companys restricted stock grant compensation expense
in the amount of $0.3 million, as well as reducing the Companys cash
compensation commitment by $1.5 million.

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Stock option activity in the Companys 2000 Equity Incentive Plan during
the nine months ended September 30, 2003 and 2002 was as follows:

Nine Months Ended September 30,2003
    
    2002Number of
    
    Weighted Average
    
    Number of
    
    Weighted AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceBalance, beginning of period
    
    
    8,229,267
    
    
    $
    3.40
    
    
    
    7,593,578
    
    
    $
    3.33Granted at fair value
    
    
    1,223,850
    
    
    
    2.10
    
    
    
    2,147,386
    
    
    
    3.57Exercised
    
    
    (171,720
    )
    
    
    1.59
    
    
    
    (368,140
    )
    
    
    1.46Cancelled
    
    
    (840,927
    )
    
    
    4.65
    
    
    
    (1,008,280
    )
    
    
    3.60Balance, end of period
    
    
    8,440,470
    
    
    
    3.12
    
    
    
    8,364,544
    
    
    
    3.44


Restricted shares issued for options exercised which are subject to
repurchase totaled 1,873 shares at September 30, 2003.

The following table summarizes information about stock options outstanding
under the Companys 2000 Equity Incentive Plan at September 30, 2003:

Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Contractual
    
    Average
    
    Number of
    
    AverageExercise Prices
    
    Outstanding
    
    Life
    
    Exercise Price
    
    Options
    
    Exercise Price$  0.15 - 1.29
    
    
    1,456,238
    
    
    
    6.7
    
    
    $
    0.94
    
    
    
    1,042,300
    
    
    $
    0.891.44 - 1.75
    
    
    1,622,841
    
    
    
    8.1
    
    
    
    1.61
    
    
    
    839,369
    
    
    
    1.562.00 - 2.69
    
    
    1,754,374
    
    
    
    7.7
    
    
    
    2.54
    
    
    
    1,104,863
    
    
    
    2.572.79 - 3.49
    
    
    1,780,248
    
    
    
    8.8
    
    
    
    3.35
    
    
    
    679,769
    
    
    
    3.403.55 - 8.00
    
    
    1,424,342
    
    
    
    7.5
    
    
    
    5.32
    
    
    
    906,167
    
    
    
    5.5910.80 - 10.80
    
    
    402,427
    
    
    
    6.6
    
    
    
    10.80
    
    
    
    346,056
    
    
    
    10.808,440,470
    
    
    
    7.8
    
    
    
    3.12
    
    
    
    4,918,524
    
    
    
    3.29


In addition, the Company has sold or granted for services rendered to
employees, directors and consultants an aggregate of 1,343,899 shares of common
stock through stock grants under the plan at prices and values ranging from
$0.15 to $10.80 per share, which amount includes the 750,000 shares granted
pursuant to the Executive Performance-Based Compensation Arrangement. 200,000
of the shares granted under the Executive Performance-Based Compensation
Arrangement will be forfeited effective December 31, 2003 in connection with
the employment termination of the Companys former President and Chief
Executive Officer.

Pursuant to the Companys acquisition of Contigo Software, Inc. in June
2000, the Company assumed certain stock option plans and the outstanding stock
options of Contigo (assumed plans). Stock options under the assumed plans
have been converted into the Companys stock options and adjusted to reflect
the conversion ratio as specified by the applicable acquisition agreement, but
are otherwise administered in accordance with the terms of the assumed plans.
Stock options under the assumed plans generally vest over three years and
expire ten years from date of grant. No additional stock options will be
granted under the assumed plans. 6,963 shares were exercised in the assumed
plans during the three months ended September 30, 2003 and 172,834 options
remain outstanding.

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The following table summarizes information about stock options outstanding
under the Companys assumed plans at September 30, 2003:

Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Contractual
    
    Average
    
    Number of
    
    AverageExercise Prices
    
    Outstanding
    
    Life
    
    Exercise Price
    
    Options
    
    Exercise Price$  0.45 - 2.72
    
    
    52,520
    
    
    
    5.4
    
    
    $
    1.13
    
    
    
    52,520
    
    
    $
    1.133.92 - 3.92
    
    
    100,563
    
    
    
    6.3
    
    
    
    3.92
    
    
    
    100,563
    
    
    
    3.926.08 - 6.08
    
    
    19,751
    
    
    
    6.4
    
    
    
    6.08
    
    
    
    19,751
    
    
    
    6.08172,834
    
    
    
    6.0
    
    
    
    3.32
    
    
    
    172,834
    
    
    
    3.32




|(b) |  | Employee Stock Purchase Plan
|--- |  | ----------------------------

In February 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan (ESPP). The ESPP allows participating employees to purchase
shares of common stock at a 15% discount from the market value of the stock as
determined on specific dates at six-month intervals. The total common shares
available for issuance pursuant to the ESPP are 4,606,111, including shares
reserved pursuant to the plans evergreen provisions. In February and August
2003, 561,479 and 398,667 shares, respectively, were purchased by employees at
an average price of $0.82 and $0.86 per share, respectively. At September 30,
2003, 2,609,121 shares were reserved for future issuance. At September 30, 2003
approximately $108,264 in payroll deductions have been withheld from employees
for future purchases under the plan, which will be at an approximate average
price of $1.99 per share. The ESPP is a qualified plan under the applicable
section of the Internal Revenue Code and accordingly, no compensation expense
has been recognized for purchases under the plan.



|(5) |  | RESTRUCTURING
|--- |  | -------------

The Companys restructuring activities included workforce reductions, the
sale or disposition of assets, contract cancellations and the closure of
several remote sales offices.

Restructuring reserves and activity for the first nine months of 2003 are
detailed below (in thousands):

RestructuringReserve Balance
    
    Reserve
    
    
    
    
    
    Reserve BalanceDecember 31, 2002
    
    Adjustments
    
    Payments
    
    September 30, 2003Lease obligations, net of estimated sublease income
    
    $
    1,025
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    528


At September 30, 2003, the Companys restructuring reserves totaled $0.5
million, of which $0.3 million is current and solely relates to lease costs,
which will be relieved as payments are made. The Company has adjusted its
restructuring reserves in the past based on what it believes will be the most
probable outcome. Future minimum sublease receivables for all subleased
facilities, as of September 30, 2003, approximate $1.9 million that are
scheduled to be received through August 2005. The actual cost savings the
Company anticipated as a result of this restructuring effort have been
realized, with the exception of the restructuring costs associated with the
closure of remote sales facilities. Due to the real estate market that existed,
it took the Company longer than expected to sublease or otherwise terminate its
lease obligations in certain cities. The Company will continue to monitor and
adjust, as warranted, its restructuring reserve associated with remote sales
facilities based on current facts and circumstances. The Company may be
required to record additional restructuring charges on certain subleased
offices if subtenants default on these commitments.



|(6) |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------



|(a) |  | Operating Leases
|--- |  | ----------------

The Company leases office facilities under various operating leases that
expire through 2009. Two of the office facilities are leased from entities that
are controlled by current executive officers or former executive officers of
the Company.

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Most of the remaining facilities are satellite sales offices.
Total future minimum lease payments, not including any reductions for
subleases, under all operating leases, approximate $8.4 million at September
30, 2003. Future minimum sublease receivables for all subleased facilities, as
of September 30, 2003, approximate $1.9 million to be received by the Company
through August 2005.



|(b) |  | Purchase Commitments
|--- |  | --------------------

The Company has commitments for bandwidth usage and telephony services
with various service providers. The total commitment as of September 30, 2003
was approximately $16.9 million to be expended through 2005. Some of these
agreements may be amended to either increase or decrease the minimum
commitments during the life of the contract.

The Company has made a commitment to its primary conferencing bridge
provider for the purchase of equipment. The total commitment as of September
30, 2003 was approximately $11.4 million to be expended through 2005. See Note
9.



|(c) |  | Employment Contracts
|--- |  | --------------------

At September 30, 2003, the Company had an employment agreement with its
former President and Chief Executive Officer. The agreement provided for a
termination payment under certain circumstances. As of September 30, 2003, the
Companys liability would have been approximately $0.3 million if this officer
were terminated under certain conditions set forth in the agreement. In
October 2003 the Company and this former President and Chief Executive Officer
entered into an agreement to terminate his employment as of December 31, 2003,
which agreement supercedes and replaces the terms of this employment agreement.
See Note 8 for subsequent event.

In addition, the Company has a letter agreement with one of its executive
officers, which would require the Company to pay $0.1 million if the executive
officer was terminated under certain conditions set forth in the agreement.



|(d) |  | Litigation
|--- |  | ----------

In August 2003, a lawsuit was filed by Edisync Systems, LLC against the
Company alleging patent infringement. The Company believes that an estimated
loss of $0.3 million is probable, and accordingly has accrued this expense
under general and administrative expenses as of September 30, 2003. In
addition, from time to time, the Company has been subject to legal proceedings
and claims in the ordinary course of business. Any such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.



|(7) |  | CUSTOMER CONCENTRATION
|--- |  | ----------------------

In the first, second and third quarters of 2003, none of the Companys
customers represented greater than 10% of the Companys revenue, however, one
customer represented greater than 10% of the Companys accounts receivable.
The receivable due from Qwest Communications International, Inc. (Qwest) at
September 30, 2003 was $1.5 million or 13.8% of the Companys total accounts
receivable balance.



|(8) |  | SUBSEQUENT EVENT
|--- |  | ----------------

In October 2003 the Companys President and Chief Executive Officer
entered into a separation agreement to terminate his employment as of December
31, 2003. Pursuant to the terms of the separation agreement, the Company will
recognize approximately $0.6 million in the fourth quarter of 2003 related to
severance costs. In addition, 200,000 shares of common stock associated with
the Executive Performance-Based Compensation Arrangement were subject to
forfeiture and will be cancelled as of December 31, 2003, which will trigger
the reversal of the deferred portion of his restricted stock grant compensation
expense in the amount of $0.3 million. In addition, the cash compensation
commitment associated with the Executive Performance-Based Compensation
Arrangement will be reduced by $1.5 million as of December 31, 2003.

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##### Table of Contents





|(9) |  | RELATED PARTY TRANSACTION
|--- |  | -------------------------

In the
third quarter of 2003 the Company sold a software license to the
Company's primary hardware vendor in the
amount of $4.0 million, $1.1 million of which was recognized as revenue in
the third quarter of 2003 and $2.9 million of which will be recognized in the
fourth quarter of 2003. The Company also entered into an agreement with the
same vendor to purchase approximately $12.7 million in equipment to be expended
through December 31, 2005. The vendor, a privately held company, shares a
common board member with the Company.



|(10) |  | RECENT ACCOUNTING PRONOUNCEMENTS
|---- |  | --------------------------------

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some
of its shares in exchange for cash or other assets and certain obligations that
can be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Accordingly, the Company adopted SFAS 150 on July 1, 2003 and the
adoption of this statement did not have any impact on the Companys financial
position, results of operations or cash flows.

15



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##### Table of Contents






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

This Report onForm 10-Qcontains forward-looking statements, including
without limitation, statements containing the words believes, anticipates,
expects, and words of similar import and statements regarding our strategy,
financial performance, and our operations that involve risks and uncertainties.
Our actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the subsection entitled Additional
Risk Factors that May Affect Our Operating Results and The Market Price of Our
Common Stock. Readers are urged to carefully review and consider the various
disclosures made in this report and in our other reports filed with the SEC
that attempt to advise interested parties of certain risks and factors that may
affect our business. This analysis should be read in conjunction with our
consolidated financial statements and related notes and Managements Discussion
and Analysis of Financial Condition and Results of Operations included in our
Form 10-K (Commission File No. 000-31045), filed on March 26, 2003. You should
also read this analysis in conjunction with our condensed consolidated
financial statements and related notes that begin on page 3 of thisForm 10-Q.

Our reports are available free of charge through our website as soon as
reasonably practicable after we file them with, or furnish them to, the SEC.
Our website address is www.raindance.com. Once at www.raindance.com, go to
Investors/SEC Filings and Financials.

Overview

We provide business communication services for everyday business meetings
and events. Our Web and Phone Conferencing and Web Conferencing Pro
communication services are based on proprietary architecture that integrate
traditional telephony technology with real-time interactive web tools. Our
continuum of interactive services includes Web and Phone Conferencing for
reservationless automated audio conferencing with simple web controls and
presentation tools, Web Conferencing Pro, which allows users to integrate
reservationless automated audio conferencing with advanced web interactive
tools such as application sharing, web touring and online whiteboarding and
Operator Assisted Conferencing, which provides customers with operator
assistance during a conference and additional services such as call taping,
digital replay and transcription. We sell these services to businesses in
various markets as well as to resellers of conferencing and communications
services, through our direct and indirect sales channels.

In the fourth quarter of 2003, we expect to launch the beta version of our
next-generation service. Built on multimedia architecture that integrates
audio, web and video technologies, our next-generation service is expected to
be generally available in early 2004. In addition, we intend to continue
leveraging the infrastructure, technologies, and proprietary systems that we
have developed for our existing services to facilitate the rapid deployment of
service enhancements and future business communication services.

As of September 30, 2003, we had an accumulated deficit of $169.8 million.
Our net income was $1.2 million and our net loss was $0.1 million for the three
months ended September 30, 2003 and 2002, respectively. Our net income was
$2.1 million and our net loss was $3.9 million for the nine months ended
September 30, 2003 and 2002, respectively. Although we have achieved quarterly
net income for four consecutive quarters, we may incur losses in subsequent
quarters, particularly due to uncertainty surrounding a potential increase in
stock-based compensation expense in connection with proposed changes in
accounting rules and regulations, an anticipated increase in sales and
marketing expenditures in connection with the release of our next-generation
service, and an anticipated increase in research and development expenses in
connection with a change in accounting treatment of our software development
costs. Despite the progress we have made in managing and controlling expenses,
we will need to increase revenue to support expected expenses and to sustain
profitability.

On April 17, 2002, we entered into a definitive agreement to acquire
substantially all of the assets of InterAct Conferencing, LLC (InterAct), a
nationwide reseller of audio and web conferencing services. On April 30, 2002,
we completed the acquisition. In connection with the acquisition, we assumed
certain liabilities of InterAct as of April 30, 2002, consisting primarily of
accounts payable and a $0.1 million line of credit. We also assumed a facility
lease obligation of approximately $0.7 million associated with a building that
is partially owned by the former president and chief executive officer of
InterAct who became an officer of our company upon the completion of the
acquisition. Effective May 1, 2002, the results of InterActs operations are
included in our consolidated financial statements. The aggregate purchase
consideration paid to InterAct was approximately $7.8 million, which was
comprised of $3.8 million in cash and 1,200,982 shares of our

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common stock valued at $4.0 million. In addition, we incurred $0.1
million in acquisition related expenses. 997,599 shares of our common stock
were deemed to represent contingent purchase consideration and accordingly, we
recorded $3.4 million in deferred stock-based compensation, which is being
expensed over three years, which began in May 2002. The value of the common
stock issued was determined based on the average market price of our common
stock over the three-day period before and after the terms of the acquisition
were agreed upon and announced. The purchase price of $7.9 million was
allocated as follows: $1.0 million was allocated to the net assets acquired and
$6.9 million was allocated to goodwill.

While our business model is largely usage-based, which generally means
that our customers only pay for the services they use, our non-usage revenue,
such as from subscriptions and software licenses, may fluctuate based on the
timing of new subscription agreements, the expiration and renewal of existing
agreements and the timing of and revenue recognition associated with software
licenses. In the quarter ended September 30, 2003, 14.1% of our revenue was
non-usage based as compared to 17.7% in the quarter ended September 30, 2002.
We expect our non-usage based revenue to approximate 20% to 25% of our total
revenue in the fourth quarter of 2003.

The following describes how we recognize revenue for the services and software we offer:



| |  | Web and Phone Conferencing Revenue. Revenue for our Web and Phone Conferencing service is generally based upon the actual
time that each participant is on the phone or logged onto the web. For example, a customer is charged a per-minute,
per-user fee for each participant listening and viewing a live or recorded simulcast. In addition, we charge customers a
one-time fee to upload visuals for a phone conference or a recorded simulcast. We recognize usage revenue from our Web and
Phone Conferencing services in the period the call or simulcast of the call is completed. We recognize revenue associated
with any initial set-up fees ratably over the term of the contract.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Web Conferencing Pro Revenue. Revenue for our Web Conferencing Pro service is derived from subscription and usage fees in
addition to event fees or, in more limited cases, a software license fee. Revenue from subscriptions is recognized monthly
regardless of usage, while usage fees are based upon either connections or minutes used. Event fees are generally hourly
charges that are recognized as the events take place. We recognize revenue associated with any initial set-up fees ratably
over the term of the contract. Revenue from software license agreements is either recognized upon shipment of the software
when all the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred, the fee
is fixed or determinable, collectibility is probable, and vendor specific objective evidence is available for the fair
value of all undelivered elements, or recognized ratably over the software support period if we do not have vendor specific
objective evidence for an undelivered element.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Operator Assisted Revenue. Revenue for our Operator Assisted Conferencing service is generally based upon the actual time
that each participant is on the phone. In addition, we charge customers a fee for additional services such as call taping,
digital replay, participant lists and transcription services. We recognize usage revenue and related fees from our Operator
Assisted Conferencing service in the period the call is completed.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our cost of revenue consists primarily of telecommunication expenses,
depreciation of network and data center equipment, Internet access fees and
fees paid to network providers for bandwidth, equipment maintenance contract
expenses, compensation and benefits for operations personnel and allocated
overhead. Our telecommunication expenses are variable and directly correlate to
the use of our services and primarily are incurred when our customers use our
Web and Phone Conferencing service. A change in our mix of Web and Phone
Conferencing and Web Conferencing Pro revenue will affect our gross profit as
our cost of revenue is typically higher on our Web and Phone Conferencing
service as a result of price compression for this service. Our depreciation,
Internet access and bandwidth expenses, equipment maintenance expenses and
compensation expenses generally increase as we increase our capacity and build
our infrastructure. We plan to continue to make investments in our
infrastructure and increase our capacity. As a result, we expect expenses for
capital expenditures, depreciation, Internet access and bandwidth to increase
in absolute dollars. We expect that our current capacity and infrastructure,
coupled with the capital expenditures we have made and we expect to make, will
accommodate our revenue projections through the end of 2004. We have a limited
number of sources for our telephony services. One of our suppliers is WorldCom,
which currently conducts business under the MCI brand name, and which filed for
Chapter 11 bankruptcy protection in July 2002. If MCI was to terminate or
interrupt its services, we may experience difficulties in obtaining alternative
sources on commercially reasonable terms and may experience an increase in our
variable telephony cost.

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We incur sales and marketing expenses that consist primarily of the
salaries, commissions and benefits for our sales and marketing personnel,
remote sales offices expenses, market research, sales lead generation and
telemarketing expenses and allocated overhead. We expect sales and marketing
expenses to increase in absolute dollars and as a percentage of revenue as we
expand our sales force and increase our marketing initiatives during the
remainder of 2003 and in 2004.

We incur research and development expenses that consist primarily of
salaries and benefits for research and development personnel, equipment
maintenance contract expenses and allocated overhead. We expense research and
development costs as they are incurred, except for certain capitalized costs
associated with internally developed software. We capitalized $0.4 million,
$0.2 million and $0.2 million of internally developed software in the first,
second and third quarters of 2003, respectively. We expect to continue to
capitalize costs associated with internally developed software in the fourth
quarter of 2003 and in 2004; however we expect to see a decrease because we
will no longer capitalize costs associated with our next-generation service.
Based on plans regarding the external distribution of software developed in the
third quarter of 2003, we changed the accounting treatment of costs associated
with the development of our next-generation service from SOP 98-1 to SFAS 86.
Since the second quarter of 2001 we had capitalized $2.8 million in costs
associated with our next-generation service, $1.3 million of which was related
to internal development and $1.5 million of which was related to contract
development. We also expect to continue to make investments in research and
development and anticipate that these expenditures will increase in absolute
dollars in the remainder of 2003 and in 2004.

We incur general and administrative expenses that consist primarily of
expenses related to finance, human resources, administrative and general
management activities, including legal, accounting and other professional fees,
in addition to other general corporate expenses. We expect general and
administrative expenses to remain relatively flat in terms of absolute dollars;
however, we expect them to decrease as a percentage of revenue in the fourth
quarter of 2003 and in 2004.

Since our inception, we have used stock-based compensation for employees,
consultants and members of our Board of Directors to attract and retain strong
business and technical personnel. During the three months ended September 30,
2003 we did not record any deferred stock-based compensation; however, during
the nine months ended September 30, 2003, we recorded $1.2 million of deferred
stock-based compensation. We also expensed $0.7 million and $2.2 million
related to stock-based compensation in the three and nine months ended
September 30, 2003, respectively. The $1.2 million of the deferred stock-based
compensation relates to 750,000 shares of restricted stock issued to certain
executives and key employees under our Executive Performance-Based Compensation
Arrangement, as approved by the Board of Directors in February 2003. The
restricted stock grants cliff vest in six years and include accelerated vesting
if certain financial or product-based performance milestones are achieved.
Accordingly, the $1.2 million deferred stock-based compensation charge is being
expensed ratably over six years, with such charges being accelerated when it
becomes apparent that the financial or product-based milestones will be
achieved. However, the resignation of the Companys former President and Chief
Executive Officer effective December 31, 2003 will trigger the reversal of the
un-amortized portion of his restricted stock grant compensation expense in the
amount of $0.3 million. Stock-based compensation amounts are based on the
excess of the fair value of our common stock on the date of grant or sale over
the option exercise price or stock purchase price. Compensation expense related
to stock options is amortized over the vesting period of the options, which
generally is four years. In connection with the acquisition of InterAct, we
recorded $3.4 million of deferred stock-based compensation related to 997,599
shares of common stock we issued simultaneously with the closing of the
InterAct acquisition, which are being held in escrow and will be released
annually in equal one-third increments, which began in May 2003. The deferred
stock-based compensation related to the 997,599 shares is being expensed over
three years, which began in May 2002. The release of the stock held in escrow
is contingent upon certain employment obligations of Carolyn Bradfield, the
former president and chief executive officer of InterAct. The value of these
escrowed shares was determined based on the average market price of our common
stock over the three-day period before and after the terms of the acquisition
were agreed upon and announced. Assuming only the forfeiture of 200,000 shares
of restricted stock issued pursuant to the Executive Performance-Based
Compensation Arrangement associated with the employment termination of our
former President and Chief Executive Officer, we expect to incur stock-based
compensation expense of approximately $0.6 million in the fourth quarter of
2003, $1.3 million in 2004, $0.5 million in 2005, and $0.1 million in 2006,
2007 and 2008, respectively, for common stock issued or stock options awarded
to our employees or members of our Board of Directors, through September 30,
2003, under our equity plans.

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Other Data  Non-GAAP Financial Measure

We evaluate operating performance based on several factors, including our
primary internal financial measure of earnings before interest, taxes,
depreciation, amortization and stock-based compensation expense (adjusted
EBITDA). This analysis eliminates the effects of considerable amounts of
depreciation and stock-based compensation. Since our initial public offering,
we have reported adjusted EBITDA, a financial measure that is not defined by
Generally Accepted Accounting Principles (GAAP). Certain restructuring charges
historically presented in this non-GAAP financial performance measure have been
removed from adjusted EBITDA for such prior periods to conform to the
presentation of adjusted EBITDA for the third quarter and year to date 2003.

The calculation of adjusted EBITDA is as follows (in thousands):

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income (loss)
    
    $
    1,152
    
    
    $
    (138
    )
    
    $
    2,104
    
    
    $
    (3,908
    )Add: depreciation, amortization and other
income, net
    
    
    2,534
    
    
    
    2,528
    
    
    
    7,680
    
    
    
    7,614Add: stock-based compensation expense
    
    
    679
    
    
    
    841
    
    
    
    2,238
    
    
    
    2,277Adjusted EBITDA
    
    $
    4,365
    
    
    $
    3,231
    
    
    $
    12,022
    
    
    $
    5,983


The trends depicted by this calculation indicate that we have been
successful in reducing our net loss and generating net income as well as
increasing adjusted EBITDA, primarily as a result of our efforts to control
operating costs while simultaneously increasing revenue. For the three months
ended September 30, 2003, as compared with the three months ended September 30,
2002, our net loss decreased by $1.3 million, resulting in $1.2 million in net
income for the current quarter. For the nine months ended September 30, 2003,
as compared with the nine months ended September 30, 2002, our net loss
decreased by $6.0 million, resulting in $2.1 million in net income for the nine
months ended September 30, 2003. For the three months ended September 30,
2003, as compared with the three months ended September 30, 2002, adjusted
EBITDA increased by $1.1 million. For the nine months ended September 30, 2003,
as compared with the nine months ended September 30, 2002, adjusted EBITDA
increased by $6.0 million.

Adjusted EBITDA should be considered in addition to, not as a substitute
for, net income (loss) and other measures of financial performance reported in
accordance with GAAP. We believe that adjusted EBITDA is a useful performance
metric for our investors and is a measure of operating performance and
liquidity that is commonly reported and widely used by financial and industry
analysts, investors and other interested parties because it eliminates
significant non-cash charges to earnings. In addition, sophisticated financial
institutions and banks use adjusted EBITDA as a performance metric in their
lending practices. For example, adjusted EBITDA is used by our bank to
determine our compliance with a financial covenant articulated in our loan and
security agreement. However, adjusted EBITDA as used by us may not be
comparable to similarly titled measures reported by other companies.

The funds depicted by adjusted EBITDA are not available for our
discretionary use due to debt service, debt maturities and other commitments
that we have made. Cash flow calculated in accordance with GAAP is as follows:
net cash provided by operations was $3.9 million and $3.7 million for the three
months ended September 30, 2003 and 2002, respectively, and $10.6 million and
$4.9 million for the nine months ended September 30, 2003 and 2002,
respectively; net cash used in investing activities was $3.4 million and $1.1
million for the three months ended September 30, 2003 and 2002, respectively,
and $6.7 million and $8.3 million for the nine months ended September 30, 2003
and 2002, respectively; net cash provided by financing activities was $0.2
million for both the three months ended September 30, 2003 and 2002, and net
cash provided by financing activities was $0.2 million whereas net cash used by
financing activities was $0.1 million for the nine months ended September 30,
2003 and 2002, respectively.

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Results of Operations

Three and Nine Months Ended September 30, 2003 Compared to Three and Nine
Months Ended September 30, 2002

Revenue.Total revenue increased by $2.3 million to $18.0 million for the
three months ended September 30, 2003 from $15.7 million for the three months
ended September 30, 2002. Total revenue increased by $5.3 million to $50.3
million for the nine months ended September 30, 2003 from $45.0 million for the
nine months ended September 30, 2002. The increase was due in part to the
addition of new customers and an increase in usage from our existing customer
base, which is partially offset by pricing pressure we are experiencing for
some of our services, particularly our Web and Phone Conferencing Service. In
addition, we first recognized significant revenue from our Operator Assisted
Conferencing service in the first quarter of 2003. We also recognized $1.1
million in revenue in the third quarter of 2003 associated with the sale of a
Web Conferencing Pro license and we will recognize $2.9 million in revenue in
the fourth quarter of 2003 associated with this same license. This license was
entered into contemporaneously with our agreement to purchase $12.7 million in
hardware from the licensee, who is also our primary hardware vendor, through
December 2005. Opportunities to license our software have traditionally arisen
infrequently, are difficult to predict and we do not currently have any
software licensing revenue projected beyond 2003. Total minutes attributable to
our usage-based services were 168.2 million and 113.6 million for the three
months ended September 30, 2003 and 2002, respectively, and 465.0 million and
339.1 million for the nine months ended September 30, 2003 and 2002,
respectively.

Cost of Revenue.Cost of revenue increased $0.8 million to $7.4 million
for the three months ended September 30, 2003 from $6.6 million for the three
months ended September 30, 2002. Cost of revenue decreased $0.1 million to
$20.7 million for the nine months ended September 30, 2003 from $20.8 million
for the nine months ended September 30, 2002. Telecommunication costs
increased $0.4 million for the quarter ended September 30, 2003 over the
quarter ended September 30, 2002 due to an increase in minutes from our Web and
Phone Conferencing service, partially offset by volume discounts received from
our long distance telephony provider. Depreciation expense increased $0.2
million for the quarter ended September 30, 2003 over the quarter ended
September 30, 2002 due to hardware and software purchases. Expenses associated
with our Operator Assisted Conferencing service increased $0.2 million in the
current quarter, which coincides with our growth in revenue from this service.
Telecommunication cost decreased $0.9 million for the nine months ended
September 30, 2003 over the nine months ended September 30, 2002 due to volume
discounts received from one of our long distance telephony providers, as well
as an overall improvement in the utilization of our infrastructure. Total
depreciation expense increased $0.1 million for the nine months ended September
30, 2003 due to additional hardware and software being placed into service in
2003, partially offset by allocated depreciation due to decreased headcount
over the same period in the previous year. Salaries expense decreased $0.3
million due to decreased headcount in the nine months ended September 30, 2003
from the nine months ended September 30, 2002. Conversely, expense associated
with our Operator Assisted Conferencing service increased $0.8 million in the
current year, which coincides with our growth in revenue from this service.
Maintenance and repairs expense increased $0.2 million for the nine months
ended September 30, 2003 from the nine months ended September 30, 2002. The
primary reasons for our overall gross profit improvement are reductions in our
long distance rates, a general improvement in our infrastructure utilization,
and a software license with virtually no corresponding cost of revenue expense.

Sales and Marketing.Sales and marketing expense decreased $0.2 million to
$4.6 million for the three months ended September 30, 2003 from $4.8 million
for the three months ended September 30, 2002. Sales and marketing expense
increased $0.1 million to $13.9 million for the nine months ended September 30,
2003 from $13.8 million for the nine months ended September 30, 2002. There
was a slight variance in expenses in the current quarter as compared to the
same quarter in the previous year to account for this change, namely a decrease
in bad debt expense due to fewer bankruptcy filings within our customer base,
as well as a general improvement in our accounts receivable aging which
resulted in a reduction of our bad debt reserve, offset by an increase in
outside service expense due to the anticipated beta launch of next-generation
service in the fourth quarter of 2003. Commissions expense increased $0.4
million for the nine months ended September 30, 2003 as compared to the nine
months ended September 30, 2002 in connection with an increase in revenues in
the current year. Allocated depreciation expense increased $0.2 million for the
nine months ended September 30, 2003 from the nine months ended September 30,
2002 on account of increased sales and marketing headcount associated with our
acquisition of InterAct in April 2002. Outside service expense increased $0.3
million for the nine months ended September 30, 2003 as compared to the nine
months ended September 30, 2002 due to the anticipated beta launch of
next-generation service in the fourth quarter of 2003. Offsetting these
increases, bad debt expense decreased $0.7 million for the nine months ended
September 30, 2003 as compared with the nine months ended September 30, 2002
due to fewer bankruptcy filings within our customer base, as

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well as a general improvement in our accounts receivable aging, which
resulted in a reduction of our bad debt reserve.

Research and Development.Research and development expense increased $0.3
million to $2.2 million for the three months ended September 30, 2003 from $1.9
million for the three months ended September 30, 2002. Research and
development expense decreased $0.1 million to $5.9 million for the nine months
ended September 30, 2003 from $6.0 million for the nine months ended September
30, 2002. Personnel and payroll related expenses increased $0.3 million for
the three months ended September 30, 2003 over the three months ended September
30, 2002, due to an increase in headcount in the quarter ended September 30,
2003 from the quarter ended September 30, 2002. Personnel and payroll related
expenses decreased $0.2 million for the nine months ended September 30, 2003
over the nine months ended September 30, 2002, and although headcount has
increased because we hired additional personnel in connection with the
development of our next-generation service that took place in 2003, this was
more than offset by an increase in capitalized internally-developed software.
There was a slight variance in other expenses, primarily a $0.2 million
increase in repairs and maintenance for the nine months ended September 30,
2003 as compared to the nine months ended September 30, 2002. Based on plans
regarding the external distribution of software developed in the third quarter
of 2003, we changed the accounting treatment of costs associated with the
development of our next-generation service from SOP 98-1 to SFAS 86. As a
result, we expect personnel and payroll related costs and outside services to
increase in subsequent quarters.

General and Administrative.General and administrative expense increased
$0.2 million to $2.0 million for the three months ended September 30, 2003 as
compared to $1.8 million for the three months ended September 30, 2002.
General and administrative expense decreased $0.1 million to $5.4 million for
the nine months ended September 30, 2003 as compared to $5.5 million for the
nine months ended September 30, 2002. Legal and litigation expenses increased
$0.4 million for the three months ended September 30, 2003 as compared to the
three months ended September 30, 2002, due to recording a probable loss
contingency in the third quarter of 2003. Offsetting this increase was a
reduction in personnel and payroll related expenses and allocated depreciation
expense, each by $0.1 million in the current quarter, due to decreased
headcount. Legal and litigation related expenses increased $0.5 million for
the nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002 primarily due to recording a probable loss contingency in
the third quarter of 2003. Offsetting this increase was a reduction in
personnel and payroll related expenses and allocated depreciation expense by
$0.4 million and $0.2 million, respectively, for the nine months ended
September 30, 2003 as compared to the nine months ended September 30, 2002, due
to decreased headcount.

Stock-Based Compensation Expense.Stock-based compensation expense
decreased $0.1 million to $0.7 million for the three months ended September 30,
2003 from $0.8 million for the three months ended September 30, 2002.
Stock-based compensation expense decreased $0.1 million to $2.2 million for the
nine months ended September 30, 2003 as compared to $2.3 million for the nine
months ended September 30, 2002. Prior to our initial public offering, options
and stock purchase rights were granted at less than the estimated initial
public offering price resulting in deferred compensation charges, which are
being recognized over the applicable vesting periods, which generally are four
years. During the first quarter of 2003 we recorded $1.2 million of deferred
stock-based compensation that relates to 750,000 shares of restricted stock
issued to certain executives and key employees under our Executive
Performance-Based Compensation Arrangement. The restricted stock grants cliff
vest in six years and include accelerated vesting if certain financial or
product-based performance milestones are achieved. Accordingly, the $1.2
million deferred stock-based compensation charge is being expensed ratably over
six years, with such charges being accelerated when it becomes apparent that
the financial or product-based milestones will be achieved. However, the
resignation of the Companys former President and Chief Executive Officer
effective December 31, 2003 will trigger the reversal of the un-amortized
portion of his restricted stock grant compensation expense in the amount of
$0.3 million, assuming none of his financial or product-based milestones are
achieved by this time. In connection with the acquisition of InterAct, we
recorded $3.4 million of deferred stock-based compensation related to 997,599
shares of common stock we issued simultaneously with the closing of the
InterAct acquisition, which are being held in escrow and will be released
annually in equal one-third increments, which began in May 2003. The deferred
stock-based compensation related to the 997,599 shares is being expensed over
three years, which began in May 2002. The release of the stock held in escrow
is contingent upon certain employment obligations of Carolyn Bradfield, the
former president and chief executive officer of InterAct. The value of these
escrowed shares was determined based on the average market price of our common
stock over the three-day period before and after the terms of the acquisition
were agreed upon and announced.

Restructuring Charges.In the fourth quarter of 2000, we began an
assessment of our cost structure and in December 2000, our board of directors
approved a plan of restructuring, which was announced in January 2001. In
connection with this restructuring, we streamlined our operations to focus on
our core web conferencing service offerings. Additionally, in

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connection with streamlining operations, we refocused our marketing
strategy, reduced our workforce and closed several leased office facilities. In
connection with this restructuring we recorded restructuring charges of $0.2
and $0.4 million in the first and second quarter of 2002, respectively. At
September 30, 2003, our restructuring reserves totaled $0.5 million, of which
$0.3 million is current and solely relates to lease costs, which will be
relieved as payments are made. We may be required to record additional
restructuring charges on these offices in the future if subtenants default on
their commitments to us. The actual cost savings we anticipated as a result of
this restructuring effort have been realized with the exception of the
restructuring costs associated with the closure of remote sales facilities. Due
to the real estate market that existed, it took us longer than expected to
sublease or otherwise terminate our lease obligations in certain cities.
However, we will continue to monitor and adjust, as warranted, the
restructuring reserve associated with remote sales facilities based on current
facts and circumstances.

Other Income, net.Interest income remained flat at $0.1 million for the
three months ended September 30, 2003 and 2002, respectively. Interest expense
also remained flat at $0.1 million for the three months ended September 30,
2003 and 2002, respectively. Interest income decreased $0.2 million to $0.2
million for the nine months ended September 30, 2003 from $0.4 million for the
nine months ended September 30, 2002. The decrease was related to lower
interest rates in 2003 compared to 2002. Interest expense decreased $0.2
million to $0.1 million for the nine months ended September 30, 2003 from $0.3
million for the nine months ended September 30, 2002. The decrease was due to
refinancing our outstanding term loan with a lower interest rate and a
decreasing principal balance on which interest is calculated.

Liquidity and Capital Resources

As of September 30, 2003, cash and cash equivalents were $35.8 million, an
increase of $4.1 million compared with cash and cash equivalents held as of
December 31, 2002.

Net cash provided by operations was $10.6 million and $4.9 million for the
nine months ended September 30, 2003 and 2002, respectively. Cash provided by
operations increased significantly in the first nine months of 2003 as compared
to the first nine months of 2002 as we achieved net income of $2.1 million for
the current nine-month period compared to a net loss of $3.9 million for the
prior nine-month period. The improvement is also due to an increase in accounts
payable, partially offset by an increase in accounts receivable, increase in
prepaid expenses and decrease in deferred revenue.

Net cash used by investing activities was $6.7 million and $8.3 million
for the nine months ended September 30, 2003 and 2002, respectively. Net cash
used by investing activities in the first nine months of 2003 and 2002
primarily related to capital expenditures for equipment purchases.
Additionally, we paid cash, net of cash received, of $2.8 million for the
acquisition of InterAct in the second quarter of 2002. We expect capital
expenditures to increase in the fourth quarter of 2003 over 2002 due to planned
capital expenditures for equipment upgrades, additional capacity and future
service offerings.

Net cash provided by financing activities was $0.2 million for the nine
months ended September 30, 2003 and net cash used by financing activities was
$0.1 million for the nine months ended September 30, 2002. Cash provided by
financing activities in the first nine months of 2003 related to cash proceeds
from the exercise of common stock options offset by debt service payments.
Cash used by financing activities in the first nine months of 2002 related to
debt service payments offset by cash proceeds from the exercise of common stock
options.

As of September 30, 2003, we had approximately $2.9 million in total debt
obligations outstanding, of which approximately $1.3 million was current.

Effective December 31, 2002, we amended the terms of a loan and security
agreement that we originally entered into on October 9, 2001. We renewed and
increased the revolving line of credit and refinanced the term loan. In
connection with refinancing the term loan, the current outstanding balance will
be repaid with monthly principal payments of approximately $0.1 million plus
interest at 5.25% over 36 months, with the final payment due in January 2006.
Advances under the revolving line of credit are limited to $12.5 million or 90%
of eligible accounts receivable as defined and adjusted in the agreement. The
revolving line of credit is available through January 26, 2004. Advances under
the revolving line of credit may be repaid and re-borrowed at any time prior to
the maturity date. At September 30, 2003, we did not have an outstanding
balance under the revolving line of credit and the additional liquidity
available, based on eligible accounts receivable, was $9.5 million. The loan
and security agreement is collateralized by substantially all of our tangible
and intangible assets and is subject to compliance with covenants, including
minimum liquidity coverage, minimum quick ratio and maximum quarterly

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operating losses adjusted for interest, taxes, depreciation, amortization
and other non-cash charges. We are also prohibited from paying any dividends
without the banks prior written consent. At September 30, 2003, the balance
due under this agreement was approximately $2.3 million, of which approximately
$1.0 million was current. In addition, in May 2003, we entered into a loan
agreement with a vendor, in the amount of $0.7 million, to finance certain
fixed assets. The loan is scheduled to be repaid with quarterly principal
payments of approximately $0.1 million plus interest at 2.5% with the final
payment due in April 2005. At September 30, 2003, the balance due under this
agreement is $0.6 million, of which $0.3 million is current.

We also receive funds from time to time from the exercise of options or
similar rights to purchase shares of our common stock. We have no other
material external sources of liquidity.

We have generated positive cash flows from operations for eight
consecutive quarters and we expect to continue to generate positive cash flows
from operations in the near term. However, such cash flows may be less than the
amounts recorded in prior quarters due to an anticipated increase in sales and
marketing expenditures in connection with the beta release of our
next-generation service near the end of 2003 and an increase in research and
development expenses. Looking ahead, we expect our debt service payments to
decrease in the fourth quarter of 2003 over 2002 and we expect capital
expenditures to increase in the fourth quarter of 2003 over 2002 due to planned
capital expenditures for equipment upgrades, additional capacity and future
service offerings. We also expect proceeds from the exercise of common stock
options; however, it is not possible to estimate what impact this will have in
the fourth quarter of 2003.

We obtain a significant portion of our liquidity from operating cash
flows. Our customer base consists of a large number of geographically dispersed
customers diversified across several industries. During the first, second and
third quarters of 2003, no single customer accounted for greater than 10% of
our total revenue. At September 30, 2003, we had a receivable due from Qwest
Communications International, Inc. of $1.5 million or 13.8% of our total
accounts receivable balance. Our operating cash flows could be adversely
affected in the event Qwest experiences financial difficulties that affect its
ability to pay us in a timely fashion.

As of September 30, 2003, our purchase commitments for bandwidth usage and
telephony services and equipment were approximately $28.3 million and will be
expended over the next three years. Some of these agreements may be amended to
either increase or decrease the minimum commitments during the lives of the
respective contracts. $12.7 million of our purchase commitments for equipment
are pursuant to a single agreement with our primary hardware vendor, and will
be expended through December 2005. The Company entered into this hardware
agreement contemporaneously with its agreement to license certain software to
the hardware vendor for an aggregate of $4.0 million, which revenue is being
recognized in the third and fourth quarters of 2003.

We lease office facilities under various operating leases that expire
through 2009. Total future minimum lease payments, under all operating leases,
as of September 30, 2003, are approximately $8.4 million. We have subleased
five of these facilities and future minimum sublease receivables for all
subleased facilities, as of September 30, 2003, approximate $1.9 million that
we expect to receive through August 2005.

Our contractual obligations and commitments to make future payments as of
September 30, 2003 are as follows (in thousands):

Payments Due by PeriodLess than 1Total
    
    year
    
    2-3 years
    
    4-5 years
    
    Over 5 yearsLong-term debt
    
    $
    2,868
    
    
    $
    1,312
    
    
    $
    1,556
    
    
    $
    
    
    
    $
    Operating leases
    
    
    8,409
    
    
    
    2,408
    
    
    
    3,416
    
    
    
    1,769
    
    
    
    816Purchase obligations
    
    
    28,276
    
    
    
    18,206
    
    
    
    10,070
    
    
    
    
    
    
    
    Total contractual obligations and commitments
    
    $
    39,553
    
    
    $
    21,926
    
    
    $
    15,042
    
    
    $
    1,769
    
    
    $
    816


We expect that existing cash resources and our credit facility will be
sufficient to fund our anticipated working capital and capital expenditure
needs for at least the next twelve months. We base our expenses and
expenditures in part on our expectations of future revenue levels. If our
revenue for a particular period is lower than expected, we may take steps to
reduce

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our operating expenses accordingly. 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. Additional financing may not be available at all or, if available,
may not 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.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Actual results could differ from those
estimates. Significant estimates are used in these financial statements to
determine the allowance for doubtful accounts, the useful lives of depreciable
and intangible assets, the valuation allowance for deferred tax assets, and the
restructuring charges and reserves.

Our critical accounting policies and estimates are included in our Form
10-K, filed on March 26, 2003. Our critical accounting policy and estimate
with respect to our income tax valuation allowance is being updated as follows:

Currently, we have recorded a valuation allowance equal to our deferred
tax asset. We review our deferred tax assets on an ongoing basis for
realizability. While we have generated net income for four consecutive
quarters, we believe there currently is not enough positive evidence to support
a conclusion that it is more likely than not that we will utilize some or all
of our deferred tax assets. When we determine there is enough positive
evidence to support a conclusion that it is more likely than not that we will
realize some or all of our deferred tax asset, we will reduce the valuation
allowance on our deferred tax assets, which will increase net income in the
period in which such determination is made. Positive evidence to support a
conclusion that our deferred tax asset is realizable includes, but is not
limited to, generating net income in consecutive quarters and projections for
taxable income sufficient to utilize our deferred tax assets. Our deferred tax
assets at December 31, 2002 were $48.2 million.

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Additional Risk Factors That May Affect Our Operating Results and The Market
Price Of Our Common Stock

You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the
trading price of our common stock could decline, and you may lose all or part
of your investment.

You should not rely on forward-looking statements because they are inherently
uncertain.

This document contains certain forward-looking statements that involve
risks and uncertainties. We use words such as anticipate, believe,
expect, future, intend, plan and similar expressions to identify
forward-looking statements. These statements are only predictions. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this document. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us and described on
the following pages and elsewhere in this document. We assume no obligation to
update the forward-looking statements included in this document.

We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
below, as well as any cautionary language in this document, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this document
could have a material adverse effect on our business, operating results,
financial condition and stock price.

We have a history of losses and we may not sustain profitability.

Our operating costs have exceeded our revenue in each quarter since our
inception in April 1997, except for the four most recent quarters. We realized
net income of $0.6 million, $0.3 million, $0.6 million and $1.2 million in the
quarters ended December 31, 2002, March 31, 2003, June 30, 2003 and September
30, 2003, respectively. We may incur net losses in the near term as we expand
our sales force, increase marketing expenditures and continue to invest in
research and development efforts in connection with the launch of our
next-generation service. In addition, we may incur net losses in the future if
existing or future competitors decrease our market share, if price pressure
increases significantly and our revenue from web-related services does not
substantially increase, or if the web conferencing market does not rapidly
grow. If we incur net losses in the future, we may not be able to maintain or
increase our sales and marketing, research and development, or other operating
expenses, and as a result, we may be unable to continue our operations as
currently planned. Accordingly, we must significantly increase our revenue to
maintain profitability. We have incurred cumulative net losses of approximately
$169.8 million from our inception through September 30, 2003 and we may have
additional net losses in the future.

We have a limited operating history, which makes it difficult to evaluate our
business.

We have a limited operating history and you should not rely on our recent
results as an indication of our future performance. We were incorporated in
April 1997 and first recorded revenue in January 1998. We began commercially
offering our Web and Phone Conferencing service in April 1999, our Web
Conferencing Pro service in June 2000 and our Operator Assisted Conferencing
service in the first quarter of 2003. In January 2001, we restructured our
company to focus solely on our web conferencing services. In connection with
this restructuring, we made significant changes to our services and growth
strategies, our sales and marketing plans, and other operational matters,
including a significant reduction in our employee base. As a result, we have a
limited relevant operating history and it may be difficult to evaluate an
investment in our company, and we cannot be certain that our business model and
future operating performance will yield the results that we intend. In
addition, the rapidly changing nature of the web conferencing market makes it
difficult or impossible for us to predict future results, and you should not
expect our future revenue growth to equal or exceed our recent growth rates.
There are a number of factors described in this section that could cause
fluctuations in our operating results in any particular period. If any of these
risks are not within our control or we are otherwise unable to address these
risks in a cost-effective manner or at all, our operating results will be
harmed.

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We may fail to meet market expectations because of fluctuations in our
quarterly operating results, which would cause our stock price to decline.

As a result of our limited operating history, increased competition, the
rapidly changing market for our services, price pressure and the other risks
described in this section, our quarterly operating results have varied
significantly from period to period in the past and are likely to continue to
vary significantly in future periods. For example, our quarterly net income
ranged between $0.3 million and $1.2 million in the four quarters ended
September 30, 2003. Our quarterly revenue ranged between $15.4 million and
$18.0 million in the four quarters ended September 30, 2003. Many of the
factors that may cause fluctuations in our quarterly operating results are
beyond our control, such as increased competition, pricing pressure and market
demand for our services. Our ability to license software may also contribute to
such fluctuations, as licensing opportunities have traditionally arisen
infrequently, are difficult to predict and currently we do not have any
software licensing revenue projected beyond 2003. Additionally, we expect our
results will fluctuate based on seasonal sales patterns. Our operating results
have shown decreases in our usage-based services around the summer,
Thanksgiving, December and New Year holidays. We expect that our revenue during
these seasons will not grow at the same rates as compared to other periods of
the year because of decreased use of our services by business customers. As a
result of these factors and other risks described in this section, our
quarterly operating results are difficult to predict and may not meet the
expectations of securities analysts or investors. If this occurs, the price of
our common stock would decline.

A high percentage of our revenue is attributable to repeat customers, none of
whom are obligated to continue to use our services. The failure of continued
use of our services by existing customers could harm our operating results and
cause our stock price to decline.

A high percentage of our revenue is attributable to repeat customer usage
of our services. Our customers are not obligated to continue to use our
services as we provide our services largely on a usage-based pricing model. For
example, in the quarter ended September 30, 2003, 86% of our revenue was
usage-based. In addition, customers have no obligation to renew subscription
contracts with us. As a result, our inability to retain existing customers and
sustain or increase their usage of our services could result in lower than
expected revenue, and therefore, harm our ability to sustain profitability on a
consistent basis or at all, and cause our stock price to decline. In addition,
because many of our customers have no continuing obligations with us, we may
face increased downward pricing pressure that could cause a decrease in our
gross margins. Our customers depend on the reliability of our services and we
may lose a customer if we fail to provide reliable services for even a single
communication event.

A significant portion of our revenue is attributable to large customers that
have no obligation to continue to use our services.

We target our services to large companies, including large
telecommunications carriers, and as a result, we may experience an increase in
customer concentration. For example, our top five customers accounted for 25.2%
of our revenue in the quarter ended September 30, 2003. These large customers
have no obligation to continue to use our services. If any of these large
customers stop using our services or are unable to pay their debts as they
become due, our operating results will be harmed, our revenue will be
negatively impacted, and our ability to sustain profitability on a consistent
basis or at all could be harmed. In particular, we have a significant
receivable due from Qwest Communications International, Inc. at September 30,
2003, which was approximately $1.5 million or 13.8% of the Companys total
accounts receivable balance.

In the third and fourth quarters of 2003, we will recognize a significant
portion of our revenue from a non-recurring software license.

We recognized $1.1 million in revenue in the third quarter of 2003
associated with the sale of a Web Conferencing Pro license and we will
recognize $2.9 million in revenue in the fourth quarter of 2003 associated with
this same license. The software license fees associated with this license
will not recur. As a result, our inability to continue to sell software
licenses could result in lower than expected revenue, and therefore harm our
ability to sustain profitability on a consistent basis or at all, and cause our
stock price to decline. In addition, virtually no corresponding cost of revenue
expense is attributable to such licenses, which has the effect of significantly
improving our overall gross margins, and if we are unable to continue to sell
such licenses, our overall gross margins may decline. Licensing opportunities
have traditionally arisen infrequently, are difficult to predict and currently
we do not have any software licensing revenue projected beyond 2003. As a
result, our quarterly operating results are difficult to predict. In addition,
by licensing software we have created an

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opportunity for the licensee to compete against us, which may reduce our
market share, harm our competitive position, and create further price pressure.
As a result, our operating and financial performance may be harmed.

We anticipate that our operating expenses will increase, and if our revenue
does not increase, our operating results will be negatively impacted.

We anticipate incurring significant sales and marketing, research and
development and other operating expenses, particularly as we continue
developing our next-generation service and architecture and introduce this new
service into the marketplace. We project expenses in part on our estimates of
future revenue. If our revenue for a particular period is lower than we
expect, we may be unable to reduce our operating expenses for that period or at
all, in which case our operating results would be negatively impacted, and our
ability to sustain profitability on a consistent basis or at all could be
harmed.

If we fail to offer competitive pricing, we may not be able to attract and
retain customers.

The prices for our services are subject to rapid and frequent changes. In
many cases, competitors provide their services at significantly reduced rates,
for free or on a trial basis in order to win customers. In addition,
telecommunications providers enjoy lower telephony costs as a result of their
ownership of the underlying telecommunications network. As a result, these
carriers can offer services similar to ours at substantially reduced prices.
Due to competitive factors and the rapidly changing marketplace, we have
reduced our pricing in many circumstances and may be required to further reduce
our pricing structure in the future, which would negatively affect our revenue,
margins and our ability to sustain profitability on a consistent basis, or at
all. For example, in the third quarter of 2003 the average price per minute for
our Web and Phone Conferencing service decreased 4.5%.

The growth of our business substantially depends on our ability to successfully
develop and introduce new services and features in a timely manner.

Our growth depends on our ability to develop leading-edge web conferencing
services and features. For example, in 2004, we intend to commercially release
our next-generation web conferencing service and technology. We may not
successfully identify, develop and market this next-generation service and
features in a timely and cost-effective manner. If the services and features we
develop fail to achieve widespread market acceptance or fail to generate
significant revenue to offset development costs, we may not be able to sustain
profitability on a consistent basis or at all. In addition, our ability to
introduce new services and features may depend on us acquiring technologies or
forming relationships with third parties and we may be unable to identify
suitable candidates or come to terms acceptable to us for any such acquisition
or relationship. We also may not be able to successfully alter the design of
our systems to quickly integrate new technologies.

In addition, we have experienced development delays and cost overruns in
our development efforts in the past and we may encounter these problems in the
future. Delays and cost overruns could affect our ability to respond to
technological changes, evolving industry standards, competitive developments or
customer requirements.

Competition in the web conferencing services market is intense and we may be
unable to compete successfully, particularly as a result of recent
announcements from large software companies.

The market for web conferencing services is relatively new, rapidly
evolving and intensely competitive. Competition in our market will continue to
intensify and may force us to further reduce our prices, or cause us to
experience reduced sales and margins, loss of market share and reduced
acceptance of our services. Recently, Microsoft acquired Placeware, a
competitor of ours. As a result of this acquisition, Microsoft may expend
significantly greater resources developing and enhancing web conferencing
services and/or software that directly competes with our offerings, and because
Microsoft may leverage widespread use of their operating system by business
customers to capture market share in the web conferencing market, our market
share may significantly decline. In addition, some large software companies,
such as Oracle, are also providing web conferencing products in addition to
their software offerings. Oracle may expend significantly greater resources
developing, enhancing and marketing its web conferencing product, and as a
result, our market share may significantly decline. In addition, Oracle is a
large customer of ours and has indicated its intent to discontinue using our
services.

Many of our current and potential competitors have larger and more
established customer bases, longer operating histories, greater name
recognition, broader service offerings, more employees and significantly
greater financial, technical,

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marketing, public relations and distribution resources than we do. As a
result, these competitors may be able to spread costs across diversified lines
of business, and therefore, adopt aggressive strategies, such as reduced
pricing structures and large-scale marketing campaigns, that reduce our ability
to compete effectively. Telecommunication providers, for example, enjoy lower
telephony costs as a result of their ownership of the underlying
telecommunication network. We expect that many more companies will enter this
market and invest significant resources to develop web conferencing services.
These current and future competitors may also offer or develop products or
services that perform better than ours.

In addition, acquisitions or strategic partnerships involving our current
and potential competitors could harm us in a number of ways. For example:



| |  |  | competitors could acquire or partner with companies with which we have
distribution relationships and discontinue our partnership, resulting
in the loss of distribution opportunities for our services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a competitor could be acquired by or enter into a strategic
relationship with a party that has greater resources and experience
than we do, such as the Microsoft/Placeware acquisition, thereby
increasing the ability of the competitor to compete with our services;
or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a competitor could acquire or partner with one of our key suppliers.
| | - |  | --------------------------------------------------------------------

Our sales cycle makes it difficult to predict our quarterly operating results.

Our sales cycle varies from several weeks to several months depending on
the type and size of customer approached. Oftentimes, potential customers
require approvals from multiple decision makers within their organizations. In
addition, since most of our services are provided on a usage-based pricing
model, it generally takes several weeks or months before our services are
ramped for use within an organization. These variables make it difficult for
us to predict if and when our services will be adopted and used by our
customers. As a result, our quarterly operating results are difficult to
predict.

Our business and operating results may suffer if we fail to establish
distribution relationships or if our distribution partners do not successfully
market and sell our services.

For the quarter ended September 30, 2003, 17% of our revenue was
attributable to our indirect service customers. These customers may not be
obligated to distribute our services through their sales channels. In
addition, these customers may not be obligated to continue to use our services
or renew any subscription agreements with us. As a result, we cannot
anticipate the amount of revenue we will derive from these relationships in the
future. Our inability to retain these customers and sustain or increase their
distribution of our services could result in significant reductions in our
revenue or we may be required to reduce the price they pay for our services,
and therefore, harm our ability to sustain profitability on a consistent basis
or at all.

If we fail to establish new distribution relationships in a timely manner
or if our distribution partners do not successfully distribute our services,
our ability to achieve widespread adoption for our services will suffer and our
business and operating results will be harmed. Establishing these distribution
relationships can take several months or more. Additionally, it typically
takes several months or longer before our distribution arrangements generate
revenue. Our distribution partners are not prohibited from offering and
reselling the products and services of our competitors and may choose to devote
greater resources to marketing and supporting the products and services of our
competitors.

We depend on single source suppliers for key components of our infrastructure
and a limited number of sources for telephony services, the loss of which could
cause significant delays and increased costs in providing services to our
existing and prospective customers.

We purchase substantially all of our key components of our telephony
hardware infrastructure from a single supplier. Any extended reduction,
interruption or discontinuation in the supply of these components would cause
significant delays and increased costs in providing services to our existing
and prospective customers. These components form the basis of our audio
conferencing infrastructure, upon which the majority of our services rely. In
order to continue to expand our infrastructure capacity, we must purchase
additional components from this supplier. In September 2003, we made a
commitment to purchase $12.7 million of hardware from this supplier and
accordingly, expect our reliance upon this vendor to continue into the future.
If

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we were required to find alternative sources for these components, we may
experience difficulty in integrating them into our infrastructure and we could
be required to expend significant money and resources, which may harm our
operating results. We also have a limited number of sources for our telephony
services, which constitute the transport for our audio conferencing
infrastructure, upon which the majority of our services rely. One of these
suppliers on which we are substantially dependent for telephony services is
WorldCom, which currently conducts business under the MCI brand name and which
filed for Chapter 11 bankruptcy protection in July 2002. If this supplier was
to terminate or interrupt its services, we may experience difficulties in
obtaining alternative sources on commercially reasonable terms or in
integrating alternative sources into our technology platform. In addition, if
we were required to obtain these services from alternative sources, our cost of
sales may substantially increase.

Our business will suffer if our systems fail or become unavailable.

A reduction in the performance, reliability or availability of our systems
will harm our ability to provide our services to our users, as well as harm our
reputation. Some of our customers have experienced interruptions in our
services in the past due to service or network outages, periodic system
upgrades and internal system failures. Similar interruptions may occur from
time to time in the future. Because our revenue depends largely on the number
of users and the amount of minutes consumed by users, our business will suffer
if we experience frequent or extended system interruptions.

We maintain our primary data facility and hosting servers at our
headquarters in Louisville, Colorado, and a secondary data facility in Denver,
Colorado. Our operations depend on our ability to protect these facilities and
our systems against damage or interruption from fire, power loss, water,
telecommunications failure, vandalism, sabotage and similar unexpected events.
In addition, a sudden and significant increase in traffic on our systems or
infrastructure could strain the capacity of the software, hardware and systems
that we use. This could lead to slower response times or system failures. The
occurrence of any of the foregoing risks could cause service interruptions and,
as a result, materially harm our reputation, negatively affect our revenue, and
our ability to sustain profitability on a consistent basis or at all.

Our services are often used to share confidential and sensitive information
and, as a result, if our security system is breached, our business and
reputation could suffer.

We must securely receive and transmit confidential information for our
customers over public networks and maintain that information on internal
systems. Our failure to prevent security breaches could damage our reputation,
and expose us to risk of loss or liability. If we fail to provide adequate
security measures to protect the confidential information of our customers, our
customers may refrain from using our services or potential customers may not
choose to use our services, and as a result, our operating results would be
harmed. Our servers 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 protect against security breaches or to alleviate problems caused
by any breach. In addition, our internal systems are accessible to a number of
our employees. Although each of these employees is subject to a confidentiality
agreement, we may be unable to prevent the misappropriation of this
information.

If we do not increase the capacity of our infrastructure in excess of customer
demand, customers may experience service problems and choose not to use our
services.

The amount of conferencing events we host has increased significantly. We
must continually increase our capacity consistent with our growth in usage. We
generally maintain between 50% and 60% capacity based on average usage. To
accommodate increased customer usage and rapidly expand our operations requires
a significant increase in the capacity of our infrastructure. To increase
capacity, we may need to order equipment with substantial development and
manufacturing lead times, which can sometimes be several months or longer. If
we fail to increase our capacity in a timely and efficient manner, customers
may experience service problems, such as busy signals, improperly routed
conferences, and interruptions in service. Service problems such as these would
harm our reputation, cause us to lose customers and decrease our revenue, and
therefore our ability to sustain profitability on a consistent basis or at all.
Conversely, if we overestimate our capacity needs, we will pay for more
capacity than we actually use, resulting in increased costs without a
corresponding increase in revenue, which would harm our operating results.

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Our failure to manage growth could cause substantial increases in our operating
costs and harm our ability to sustain profitability on a consistent basis or at
all and, therefore, decrease the value of our stock.

Despite our restructuring in January 2001, which resulted in, among other
things, a significant reduction in the size of our workforce, we have rapidly
expanded since inception, and will continue to expand our operations and
infrastructure. This expansion has placed, and will continue to place, a
significant strain on our managerial, operational and financial resources and
we may not effectively manage this growth. Rapidly expanding our business would
require us to invest significant amounts of capital in our operations and
resources, which would substantially increase our operating costs. As a result,
our failure to manage our growth effectively could cause substantial increases
in our operating costs without corresponding increases in our revenue, thereby
harming our ability to sustain profitability on a consistent basis or at all.
Also, our management may have to divert a disproportionate amount of its
attention away from our day-to-day activities and devote a substantial amount
of time to managing growth. In order to rapidly expand our business we may need
to raise additional funds. Any future financing we require may not be available
on a timely basis, in sufficient amounts or on terms acceptable to us. If we
cannot obtain adequate funds, we may not be able to compete effectively.

Our joint venture with @viso Limited was not successful and any future plans
for international expansion may not be successful, which could harm our ability
to attract multi-national customers and adversely affect our operating results.

We have attempted to expand into international markets and spent
significant financial and managerial resources to do so. In particular, we
formed a joint venture with @viso Limited, a European-based venture capital
firm, to expand our operations to continental Europe and the United Kingdom.
Currently, this joint venture is in the process of being liquidated and will be
dissolved. This decision may harm our strategy to expand internationally and
attract multi-national customers. Further, we will not realize the value from
the costs associated with starting up this venture. In addition, we have
expended, and may continue to expend, significant costs, resources and time to
execute this dissolution and liquidation. As a result, our operating results
may be harmed and we may not sustain profitability on a consistent basis or at
all, thereby causing our stock price to decline.

If we expand internationally, either alone or with a partner, we would be
required to spend additional financial and managerial resources that may be
significant. We have limited experience in international operations and may not
be able to compete effectively in international markets. We face certain risks
inherent in conducting business internationally, such as:



| |  |  | difficulties in establishing and maintaining distribution channels and partners for our services;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | varying technology standards from country to country;
| | - |  | -----------------------------------------------------



| |  |  | uncertain protection of intellectual property rights;
| | - |  | -----------------------------------------------------



| |  |  | inconsistent regulations and unexpected changes in regulatory requirements;
| | - |  | ---------------------------------------------------------------------------



| |  |  | difficulties and costs of staffing and managing international operations;
| | - |  | -------------------------------------------------------------------------



| |  |  | linguistic and cultural differences;
| | - |  | ------------------------------------



| |  |  | fluctuations in currency exchange rates;
| | - |  | ----------------------------------------



| |  |  | difficulties in collecting accounts receivable and longer collection periods;
| | - |  | -----------------------------------------------------------------------------



| |  |  | imposition of currency exchange controls; and
| | - |  | ---------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------

In addition, our expansion into international markets may require us to
develop specific technology that will allow our current systems to work with
international telephony systems. We may not develop this technology in a timely
manner, in a way to prevent service disruptions or at all.

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We are not experienced in managing facilities, people and operations in
geographically diverse areas, which we now are required to do as a result of
the acquisition of InterAct Conferencing, LLC.

As a result of our acquisition of substantially all of the assets of
InterAct, we have operations in multiple facilities in geographically diverse
areas. In particular, we have transitioned the management of the sales force
to the former chief executive officer of InterAct, located in our Georgia
facility. We are not experienced in managing facilities, people and operations
in geographically diverse areas, and as a result, this may negatively impact
our operating results.

We may acquire other businesses, form joint ventures and make investments in
other companies that could negatively affect our operations and financial
results and dilute existing stockholders.

The pursuit of additional business relationships through acquisitions,
joint ventures, or other investment prospects may not be successful, and we may
not realize the benefits of any acquisition, joint venture, or other
investment.

We have limited experience in acquisition activities and may have to
devote substantial time and resources in order to complete acquisitions. There
may also be risks of entering markets in which we have no or limited prior
experience. Further, these potential acquisitions, joint ventures and
investments entail risks, uncertainties and potential disruptions to our
business. For example, we may not be able to successfully integrate a companys
operations, technologies, products and services, information systems and
personnel into our business. An acquisition may further strain our existing
financial and managerial controls, and divert managements attention away from
our other business concerns. There may also be unanticipated costs associated
with an acquisition that may harm our operating results and key personnel may
decide not to work for us. These risks could harm our operating results and
cause our stock price to decline.

In addition, if we were to make any acquisitions, we could, for example:



| |  |  | issue equity securities that would dilute our stockholders;
| | - |  | -----------------------------------------------------------



| |  |  | expend cash;
| | - |  | ------------



| |  |  | incur debt;
| | - |  | -----------



| |  |  | assume unknown or contingent liabilities; and
| | - |  | ---------------------------------------------



| |  |  | experience negative effects on our results of operations.
| | - |  | ---------------------------------------------------------

Our Web and Phone Conferencing service may become subject to traditional
telecommunications carrier regulation by federal and state authorities, which
would increase the cost of providing our services and may subject us to
penalties.

We believe our Web and Phone Conferencing service is not subject to
regulation by the Federal Communications Commission (FCC) or any state public
service commission because the services integrate traditional voice
teleconferencing and added value Internet services. The FCC and state public
service commissions, however, may require us to submit to traditional
telecommunications carrier regulations for our Web and Phone Conferencing
service under the Communications Act of 1934, as amended, and various state
laws or regulations as a provider of telecommunications services. If the FCC or
any state public service commission seeks to enforce any of these laws or
regulations against us, we could be prohibited from providing the voice aspect
of our Web and Phone Conferencing service until we have obtained various
federal and state licenses and filed tariffs. We believe we would be able to
obtain those licenses, although in some states, doing so could significantly
delay our ability to provide services. We also would be required to comply with
other aspects of federal and state laws and regulations. Subjecting our Web and
Phone Conferencing service to these laws and regulations would increase our
operating costs, could require restructuring of those services to charge
separately for the voice and Internet components, and would involve on-going
reporting and other compliance obligations. We also might be subject to fines
or forfeitures and civil or criminal penalties for non-compliance.

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Our competitors may be able to create systems with similar functionality to
ours and third-parties may obtain unauthorized use of our intellectual
property.

The success of our business is substantially dependent on the proprietary
systems that we have developed. To protect our intellectual property rights, we
currently rely on a combination of trademarks, service marks, trade secrets,
copyrights, and confidentiality agreements with our employees and third
parties, and protective contractual provisions. We also own four patents
relating to features of our Web Conferencing Pro service. These measures may
not be adequate to safeguard the technology underlying our web conferencing
services and other intellectual property. Unauthorized third parties may copy
or infringe upon aspects of our technology, services or other intellectual
property. Other than the patents that we own, our proprietary systems are not
currently protected by any patents and we may not be successful in our efforts
to secure patents for our proprietary systems. Regardless of our efforts to
protect our intellectual property, our competitors and others may be able to
develop similar systems and services without infringing on any of our
intellectual property rights. In addition, employees, consultants and others
who participate in the development of our proprietary systems and services may
breach their agreements with us regarding our intellectual property and we may
not have any adequate remedies. Furthermore, the validity, enforceability and
scope of protection for intellectual property such as ours in Internet-related
industries are uncertain and still evolving. We also may not be able to
effectively protect our intellectual property rights in certain countries. In
addition, our trade secrets may become known through other means not currently
foreseen by us. If we resort to legal proceedings to enforce our intellectual
property rights, the proceedings could be burdensome and expensive, and as a
result, harm our ability to sustain profitability on a consistent basis or at
all. Additionally, in any litigation the outcome is uncertain.

We have been sued for patent infringement and may be subject to additional
claims alleging intellectual property infringement.

In August 2003, a lawsuit was filed by Edisync Systems, LLC against us and
some of our competitors alleging patent infringement. This litigation is still
at an early stage; however we believe that an estimated loss of $0.3 million is
probable. In addition, we may be subject to other claims alleging intellectual
property infringement. Claims of this nature could require us to spend
significant amounts of time and money to defend ourselves, regardless of their
merit. If any of these claims were to prevail, we could be forced to pay
damages, comply with injunctions, divert management attention and resources, or
halt or delay distribution of our services while we reengineer them or seek
licenses to necessary intellectual property, which might not be available on
commercially reasonable terms or at all. As the number of competitors in our
market grows, there is an increased risk that the proprietary systems and
software upon which our services rely may be increasingly subject to
third-party infringement claims.

If any of the third party services that we use become unavailable to us, our
services would be subject to significant delays and increased costs.

We rely on third party services, such as Internet access, transport and
long distance providers. These companies may not continue to provide services
to us without disruptions, at the current cost, or at all. The costs associated
with a transition to a new service provider would be substantial. We may be
required to reengineer our systems and infrastructure to accommodate a new
service provider, which would be both expensive and time-consuming. In
addition, in the past, we have experienced disruptions and delays in our
services due to service disruptions from these providers. Any interruption in
the delivery of our services would likely cause a loss of revenue and a loss of
customers.

Our business may be harmed if our services do not work with the various
hardware and software systems, including corporate security measures, used by
our customers.

We currently provide services to customers with various hardware and
software systems, ranging from legacy to next-generation applications and
networking equipment. If our services are unable to support these diverse
platforms, and if we fail to modify our services to support new versions of
these applications and equipment, our services may fail to gain broad market
acceptance, which would cause our operating results to suffer. Furthermore,
because of bandwidth constraints on corporate intranets and concerns about
security, our customers and potential customers may block reception of web
services like ours within their corporate environments. In order for customers
to use our services, customers and users may need to reconfigure their
corporate intranets, security measures and firewalls. Widespread adoption of
our technology and services depends on overcoming these obstacles.

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Our web conferencing services will not generate significant revenue if
businesses do not switch from traditional teleconferencing and communication
services to web conferencing.

If businesses do not switch from traditional teleconferencing and
communication services, our services will not generate significant revenue.
Businesses that have already invested substantial resources in traditional or
other methods of communication may be reluctant to adopt new web conferencing
services. If sufficient demand for our services does not develop, we will have
difficulty selling our services and generating significant increases in
revenue. As a result, we would not sustain profitability on a consistent basis
or at all and the price of our common stock would decline. Growth in revenue
from our services will depend in part on an increase in the number of customers
using the web-based features in addition to our traditional conferencing
features.

Our current stock compensation expense negatively impacts our earnings, and if
we are required to report employee stock options as an expense in conjunction
with new accounting standards, our earnings will be adversely affected, which
may cause our stock price to decline.

Under our current accounting practice, stock compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. As of September 30, 2003 we had
approximately $3.1 million in deferred equity-based compensation expense. We
expect this expense to be amortized over six years and to negatively impact our
earnings during that time. $0.3 million of this expense will be reversed as of
December 31, 2003 in connection with the resignation of our former President
and Chief Executive Officer and the corresponding forfeiture of his restricted
shares of stock granted under the Executive Performance-Based Compensation
Arrangement. In addition, $1.5 million of this expense will expire over the
next year as options granted prior to our initial public offering and certain
restricted stock grants vest. Options granted to consultants will fluctuate
with our stock price, and as a result, the amount of future stock compensation
expense related to any unvested portion of such options is difficult to
predict. Regulatory authorities are currently reviewing various proposals that
would change the way stock options are reported. If we are required to report
all employee stock options as an expense based on a change in accounting
standards, our earnings will be negatively impacted, which may cause our stock
price to decline and our ability to sustain profitability on a consistent basis
or at all could be harmed.

We disclose non-GAAP financial information.

We prepare and release quarterly unaudited and annual audited financial
statements prepared in accordance with Generally Accepted Accounting Principles
(GAAP). We also disclose and discuss certain non-GAAP financial information
in the related earnings release and investor conference call. This non-GAAP
financial information excludes certain non-cash expenses, consisting primarily
of depreciation, the amortization of intangible assets and stock-based
compensation. We believe the disclosure of non-GAAP financial information helps
investors more meaningfully evaluate the results of our operations. However,
we urge investors to carefully review the GAAP financial information included
as part of our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K,
and our quarterly earnings releases and compare the GAAP financial information
with the non-GAAP financial results disclosed in our quarterly earnings
releases and investor calls.

We are subject to risks associated with governmental regulation and legal
uncertainties.

It is likely that a number of laws and regulations may be adopted in the
United States and other countries with respect to the Internet that might
affect us. These laws may relate to areas such as:



| |  |  | changes in telecommunications regulations;
| | - |  | ------------------------------------------



| |  |  | copyright and other intellectual property rights;
| | - |  | -------------------------------------------------



| |  |  | encryption;
| | - |  | -----------



| |  |  | personal privacy concerns, including the use of cookies and individual user information;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | e-commerce liability; and
| | - |  | -------------------------

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| |  |  | email, network and information security.
| | - |  | ----------------------------------------

Changes in telecommunications regulations could substantially increase the
costs of communicating on the Internet. This, in turn, could slow the growth in
Internet use and thereby decrease the demand for our services. Several
telecommunications carriers are advocating that the Federal Communications
Commission regulate the Internet in the same manner as other telecommunications
services by imposing access fees on Internet service providers. Recent events
suggest that the FCC may begin regulating the Internet in such a way. In
addition, we operate our services throughout the United States and state
regulatory authorities may seek to regulate aspects of our services as
telecommunication activities.

Other countries and political organizations are likely to impose or favor
more and different regulations than those that have been proposed in the United
States, thus furthering the complexity of regulation. The adoption of such laws
or regulations, and uncertainties associated with their validity and
enforcement, may affect the available distribution channels for and costs
associated with our services, and may affect the growth of the Internet. Such
laws or regulations may therefore harm our business.

We may be subject to assessment of sales and other taxes for the sale of our
services, license of technology or provision of services, for which we have not
accounted.

We may have to pay past sales or other taxes that we have not collected
from our customers. We do not currently collect sales or other taxes on the
sale of our services. Our business would be harmed if one or more states or any
foreign country were to require us to collect sales or other taxes from current
or past sales of services, particularly because we would be unable to go back
to customers to collect sales taxes for past sales and may have to pay such
taxes out of our own funds.

Our stock price is volatile and this volatility may depress our stock price,
result in litigation or indicate that our goodwill is impaired, resulting in
further declines to our stock price.

The stock market in general, and the stock price of our company in
particular, have experienced extreme price and volume fluctuations. For
example, between January 1, 2002 and September 30, 2003 our stock has traded as
high as $6.30 and as low as $1.20 on the Nasdaq National Market. The volatility
of our stock price can be due to factors such as, fluctuating operating
results, significant purchases and sales of our stock, announcements by us or
our competitors, changes in security analysts estimates of our performance, or
our failure to meet analysts expectations. Many of these factors are beyond
our control. In addition, broad market and industry factors may negatively
impact our stock price, regardless of our operating performance. Many
companies that have experienced volatility in their stock prices have been
targets for securities class action litigation. If we were subject to any such
litigation, we could be required to expend substantial costs and resources,
which could harm our business. Additionally, one of the factors that we
consider in determining a potential impairment of our goodwill is our stock
market capitalization. If our stock price declines and remains depressed for an
extended period of time, our reported goodwill could be materially adversely
impaired which would require us to write down our goodwill, and this charge may
cause our stock price to decline further.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

At September 30, 2003, we had long-term debt, including current portion,
in the aggregate amount of $2.9 million. The balance due of approximately $2.3
million as of September 30, 2003 under our loan and security agreement is being
repaid at a fixed interest rate of 5.25% with monthly payments due through
January 2006. The balance due of approximately $0.6 million as of September 30,
2003 under our loan agreement with a vendor will be repaid at a fixed interest
rate of 2.5% with quarterly payments due through April 2005. A change in
interest rates would not affect our obligations related to long-term debt
existing as of September 30, 2003, as the interest rates related to such debt
are fixed over the terms. At September 30, 2003, we had a $12.5 million
revolving line of credit with a loan value of $9.5 million. Advances under the
revolving line of credit will reflect interest at the banks prime rate and
therefore any advances under this revolving line of credit would subject us to
interest rate fluctuations. Increases in interest rates could, however,
increase the interest expense associated with future borrowings, including any
advances on our revolving line of credit. At September 30, 2003, we did not
have an outstanding balance under the revolving line of credit. We are exposed
to foreign currency risks through a receivable from our European joint venture
which is payable in Euros. We do not employ any risk mitigation techniques with
respect to this advance. Our European joint venture is in the process of
dissolution and liquidation and our foreign currency risk with respect to the
loan will be eliminated when these processes are completed. We may also decide
to make future investments that will subject us to market risk.




Item 4.Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that we file under the
Securities Exchange Act of 1934, as amended (Exchange Act), is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Interim Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure about our disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Exchange Act.

Nicholas J. Cuccaro, our Interim Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this Form 10-Q. Based on his evaluation, he concluded that our disclosure
controls and procedures are effective.

Furthermore, there have been no changes in our internal controls over
financial reporting during the fiscal quarter covered by this Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

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PART II. OTHER INFORMATION




Item 1.Legal Proceedings

From time to time, we have been subject to legal proceedings and claims in
the ordinary course of business. On August 19, 2003, Edisync Systems LLC, a
Colorado-based limited liability company, filed a lawsuit against us and some
of our competitors in the United States District Court for the District of
Colorado alleging patent infringement. This litigation is still at an early
stage; however we believe that an estimated loss of $0.3 million is probable,
and accordingly have accrued for such costs as of September 30, 2003. We are
not currently involved in any other material legal proceedings.




Item 2.Changes in Securities and Use of Proceeds

None.




Item 3.Defaults Upon Senior Securities

None.




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

None.




Item 5.Other Information

None.




Item 6.Exhibits and Reports on Form 8-K



| |  |  | (A.) Exhibits
| |  |  | -------------

Exhibit No.
    
    Description10.17
    
    Separation and Release Agreement, dated
October 14, 2003, between the Company and Paul Berberian.31.1
    
    Certification of principal executive officer
and principal financial officer required by Rule 13a-14(a)32.1
    
    Section 1350 Certification.




| |  | 
| |  | 



| |  | (B.) Reports on Form 8-K
| |  | ------------------------

On July 23, 2003, we filed a Form 8-K furnishing under Item 12 our
press release announcing our earnings for the quarter ended June 30, 2003.

On September 23, 2003, we filed a Form 8-K furnishing under Item 5
the resignation of Paul Berberian as the Companys Chief Executive
Officer, effective immediately, and the assumption of this role by
Nicholas Cuccaro, the Companys Chief Financial Officer, while the Company
searches for Mr. Berberians successor.

On October 22, 2003, we filed a Form 8-K furnishing under Item 12 our
press release announcing our earnings for the quarter ended September 30,
2003.

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SIGNATURES

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

RAINDANCE COMMUNICATIONS, INC.Date: November 14, 2003
    
    By:
    
    /s/ Nicholas J. CuccaroChief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)






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EXHIBIT INDEX



Exhibit No.
    
    Description10.17
    
    Separation and Release Agreement, dated
October 14, 2003, between the Company and Paul Berberian.31.1
    
    Certification of principal executive officer
and principal financial officer required by Rule 13a-14(a)32.1
    
    Section 1350 Certification.