##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



---

FORM 10-Q

| |  |                                                                                          
| |  | -----------------------------------------------------------------------------------------
| |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
| |  |                                                                                          
| |  | For the Quarterly Period Ended March 31, 2002                                            
| |  |                                                                                          
| |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
| |  |                                                                                          
| |  | For the 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      No

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

|                                |  |  |   |  |  |                                  |  | 
|------------------------------- |  |  | - |  |  | -------------------------------- |  | 
|Common Stock, $0.0015 Par Value |  |  |  |  |  | 50,908,270 as of April 30, 2002.



---

---





---

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                           
|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                     
|EX-2.3 Asset Purchase Agreement



---



##### Table of Contents



RAINDANCE COMMUNICATIONS, INC.

INDEX

|           |  |                                                                                                                |  |  |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------------------------------- |  |  | -- | ---- | -- | 
|           |  |                                                                                                                |  |  |    | Page
|           |  |                                                                                                                |  |  |    |     
|PART I.    |  | FINANCIAL INFORMATION                                                                                          |  |  |    |     
|Item 1.    |  | Financial Statements                                                                                           |  |  |    |     
|           |  | Condensed Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002 (unaudited)                   |  |  | 3  |     
|           |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2002 (unaudited) |  |  | 4  |     
|           |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2002 (unaudited) |  |  | 5  |     
|           |  | Notes to the Condensed Consolidated Financial Statements (unaudited)                                           |  |  | 6  |     
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                          |  |  | 11 |     
|           |  | Additional Risk Factors that May Affect Our Operating Results and The Market Price of Our Common Stock         |  |  | 18 |     
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  |  | 25 |     
|PART II.   |  | OTHER INFORMATION                                                                                              |  |  |    |     
|Item 1.    |  | Legal Proceedings                                                                                              |  |  | 26 |     
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                      |  |  | 26 |     
|Item 3.    |  | Defaults Upon Senior Securities                                                                                |  |  | 26 |     
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                            |  |  | 26 |     
|Item 5.    |  | Other Information                                                                                              |  |  | 26 |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                               |  |  | 26 |     
|SIGNATURES |  |                                                                                                                |  |  |    |      | 27 | 

2



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.Financial Statements




RAINDANCE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |          |  
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------- | -------- | -------------- | - | ----------- | -------- | -
|                                            |                                                                                                                                                                              |   |                   |          |                |   | (unaudited)
|                                            |                                                                                                                                                                              |   | December 31, 2001 |          | March 31, 2002
|                                            |                                                                                                                                                                              |   |                   |          |               
|Assets                                      |                                                                                                                                                                              |   |                   |          |                |   |             |         
|Current assets:                             |                                                                                                                                                                              |   |                   |          |                |   |             |         
|                                            | Cash and cash equivalents                                                                                                                                                    |   | $                 | 34,222   |                |   | $           | 32,398   |  
|                                            | Accounts receivable, net of allowance for doubtful accounts of $775 and $770 at
December 31, 2001 and March 31, 2002, respectively                                           |   |                   | 5,517    |                |   |             | 7,115    |  
|                                            | Due from affiliate                                                                                                                                                           |   |                   | 993      |                |   |             | 826      |  
|                                            | Prepaid expenses and other current assets                                                                                                                                    |   |                   | 1,786    |                |   |             | 2,114    |  
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|                                            | Total current assets                                                                                                                                                         |   |                   | 42,518   |                |   |             | 42,453   |  
|Property and equipment, net                 |                                                                                                                                                                              |   | 27,959            |          |                |   | 28,598      |         
|Goodwill                                    |                                                                                                                                                                              |   | 38,652            |          |                |   | 38,652      |         
|Other assets                                |                                                                                                                                                                              |   | 1,123             |          |                |   | 1,205       |         
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|Total Assets                                |                                                                                                                                                                              | $ | 110,252           |          |                | $ | 110,908     |         
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|Liabilities and Stockholders Equity        |                                                                                                                                                                              |   |                   |          |                |   |             |         
|Current liabilities:                        |                                                                                                                                                                              |   |                   |          |                |   |             |         
|                                            | Accounts payable                                                                                                                                                             |   | $                 | 5,428    |                |   | $           | 7,540    |  
|                                            | Current portion of long-term debt                                                                                                                                            |   |                   | 1,893    |                |   |             | 1,603    |  
|                                            | Accrued expenses                                                                                                                                                             |   |                   | 1,274    |                |   |             | 1,175    |  
|                                            | Accrued vacation                                                                                                                                                             |   |                   | 659      |                |   |             | 785      |  
|                                            | Current portion of restructuring reserve                                                                                                                                     |   |                   | 662      |                |   |             | 659      |  
|                                            | Current portion of deferred revenue                                                                                                                                          |   |                   | 1,035    |                |   |             | 556      |  
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|                                            | Total current liabilities                                                                                                                                                    |   |                   | 10,951   |                |   |             | 12,318   |  
|Long-term debt, less current portion        |                                                                                                                                                                              |   | 3,064             |          |                |   | 2,787       |         
|Restructuring reserve, less current portion |                                                                                                                                                                              |   | 914               |          |                |   | 814         |         
|Deferred revenue, less current portion      |                                                                                                                                                                              |   | 516               |          |                |   | 672         |         
|Other                                       |                                                                                                                                                                              |   | 39                |          |                |   | 42          |         
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|Total Liabilities                           |                                                                                                                                                                              |   | 15,484            |          |                |   | 16,633      |         
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|Stockholders Equity:                       |                                                                                                                                                                              |   |                   |          |                |   |             |         
|                                            | Undesignated preferred stock, 10,000,000 shares authorized; none issued or outstanding                                                                                       |   |                   |         |                |   |             |         |  
|                                            | Common stock, par value $.0015; 130,000,000 shares authorized; 48,130,324 and 48,694,123
shares issued and outstanding at December 31, 2001 and March 31, 2002, respectively |   |                   | 72       |                |   |             | 73       |  
|                                            | Additional paid-in capital                                                                                                                                                   |   |                   | 267,064  |                |   |             | 267,835  |  
|                                            | Unearned stock option compensation                                                                                                                                           |   |                   | (3,823   | )              |   |             | (3,239   | )
|                                            | Accumulated deficit                                                                                                                                                          |   |                   | (168,545 | )              |   |             | (170,394 | )
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|                                            | Total Stockholders Equity                                                                                                                                                   |   |                   | 94,768   |                |   |             | 94,275   |  
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         
|                                            | Commitments and contingencies                                                                                                                                                |   |                   |          |                |   |             |          |  
|                                            | Total Liabilities and Stockholders Equity                                                                                                                                   |   | $                 | 110,252  |                |   | $           | 110,908  |  
|                                            |                                                                                                                                                                              |   |                   |          |                |   |             |         

See accompanying notes to condensed consolidated financial statements

3



---



##### Table of Contents






RAINDANCE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)

|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |       |        |  
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------- | ---- | ------ | ----- | ------ | -
|                                                                       |                                                                                                                        |                          |         | Three months ended
|                                                                       |                                                                                                                        |                          |         | March 31,         
|                                                                       |                                                                                                                        |                          |         |                   
|                                                                       |                                                                                                                        |                          |         | 2001               |         | 2002
|                                                                       |                                                                                                                        |                          |         |                    |         |     
|Revenue                                                                |                                                                                                                        | $                        | 9,017   |                    |         | $    | 13,877 |      
|Cost of revenue:                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|                                                                       | (exclusive of stock-based compensation expense of
$62 and $49, respectively, shown below)                              |                          |         | 6,128              |         |      |        | 6,929 |       
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|Gross profit                                                           |                                                                                                                        |                          | 2,889   |                    |         |      | 6,948  |      
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|Operating expenses:                                                    |                                                                                                                        |                          |         |                    |         |      |        |      
|                                                                       | Sales and marketing (exclusive of stock-based compensation expense of
$169 and $78, respectively, shown below)         |                          |         | 6,689              |         |      |        | 4,201 |       
|                                                                       | Research and development (exclusive of stock-based compensation
expense of $141 and $158, respectively, shown below)   |                          |         | 1,509              |         |      |        | 1,983 |       
|                                                                       | General and administrative, (exclusive of stock-based compensation
expense of $24 and $365, respectively, shown below) |                          |         | 2,278              |         |      |        | 1,809 |       
|                                                                       | Amortization of goodwill                                                                                               |                          |         | 6,626              |         |      |        |      |       
|                                                                       | Stock-based compensation expense                                                                                       |                          |         | 396                |         |      |        | 650   |       
|                                                                       | Restructuring charges and contract termination expenses                                                                |                          |         | 2,581              |         |      |        | 172   |       
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|                                                                       |                                                                                                                        | Total operating expenses |         |                    | 20,079  |      |        |       | 8,815  |  
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|                                                                       |                                                                                                                        | Loss from operations     |         |                    | (17,190 | )    |        |       | (1,867 | )
|Other income (expense)                                                 |                                                                                                                        |                          | (791    | )                  |         |      | 18     |      
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|Net loss                                                               |                                                                                                                        | $                        | (17,981 | )                  |         | $    | (1,849 | )    
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|Loss per share-basic and diluted                                       |                                                                                                                        | $                        | (0.38   | )                  |         | $    | (0.04  | )    
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      
|Weighted average number of common shares outstanding-basic and diluted |                                                                                                                        |                          | 46,962  |                    |         |      | 48,424 |      
|                                                                       |                                                                                                                        |                          |         |                    |         |      |        |      

See accompanying notes to condensed consolidated financial statements.

4



---



##### Table of Contents






RAINDANCE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(Unaudited)

|                                                                                       |  |                    |         |      |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------ | -
|                                                                                       |  | Three months ended
|                                                                                       |  | March 31,         
|                                                                                       |  |                   
|                                                                                       |  | 2001               |         | 2002
|                                                                                       |  |                    |         |     
|Cash flows from operating activities:                                                  |  |                    |         |      |  |   |        |  
|Net loss                                                                               |  | $                  | (17,981 | )    |  | $ | (1,849 | )
|Adjustments to reconcile net loss to net cash provided (used) by operating activities: |  |                    |         |      |  |   |        |  
|Depreciation and amortization                                                          |  |                    | 9,047   |      |  |   | 2,348  |  
|Loss on disposition of short-term investment                                           |  |                    | 1,195   |      |  |   |       |  
|Restructuring charges and contract termination expenses                                |  |                    | 1,495   |      |  |   | 172    |  
|Stock-based compensation                                                               |  |                    | 396     |      |  |   | 650    |  
|Other                                                                                  |  |                    | 68      |      |  |   | 17     |  
|Changes in operating assets and liabilities:                                           |  |                    |         |      |  |   |        |  
|Accounts receivable                                                                    |  |                    | (958    | )    |  |   | (1,598 | )
|Prepaid expenses and other current assets                                              |  |                    | (51     | )    |  |   | (230   | )
|Other assets                                                                           |  |                    | 189     |      |  |   | (15    | )
|Accounts payable and accrued expenses                                                  |  |                    | (997    | )    |  |   | 1,170  |  
|Deferred revenue                                                                       |  |                    | (373    | )    |  |   | (307   | )
|                                                                                       |  |                    |         |      |  |   |        |  
|Net cash provided (used) by operating activities                                       |  |                    | (7,970  | )    |  |   | 358    |  
|                                                                                       |  |                    |         |      |  |   |        |  
|Cash flows from investing activities:                                                  |  |                    |         |      |  |   |        |  
|Purchase of property and equipment                                                     |  |                    | (511    | )    |  |   | (2,101 | )
|Proceeds from disposition of equipment                                                 |  |                    | 8       |      |  |   | 3      |  
|                                                                                       |  |                    |         |      |  |   |        |  
|Net cash used by investing activities                                                  |  |                    | (503    | )    |  |   | (2,098 | )
|                                                                                       |  |                    |         |      |  |   |        |  
|Cash flows from financing activities:                                                  |  |                    |         |      |  |   |        |  
|Proceeds from issuance of common stock                                                 |  |                    |        |      |  |   | 484    |  
|Payments on debt                                                                       |  |                    | (363    | )    |  |   | (568   | )
|Other                                                                                  |  |                    | (8      | )    |  |   |       |  
|                                                                                       |  |                    |         |      |  |   |        |  
|Net cash used by financing activities                                                  |  |                    | (371    | )    |  |   | (84    | )
|                                                                                       |  |                    |         |      |  |   |        |  
|Decrease in cash and cash equivalents                                                  |  |                    | (8,844  | )    |  |   | (1,824 | )
|Cash and cash equivalents at beginning of period                                       |  |                    | 43,311  |      |  |   | 34,222 |  
|                                                                                       |  |                    |         |      |  |   |        |  
|Cash and cash equivalents at end of period                                             |  | $                  | 34,467  |      |  | $ | 32,398 |  
|                                                                                       |  |                    |         |      |  |   |        |  
|Supplemental cash flow information  interest paid in cash                             |  | $                  | 58      |      |  | $ | 228    |  
|                                                                                       |  |                    |         |      |  |   |        |  
|Supplemental disclosure of non-cash investing and financing activities:                |  |                    |         |      |  |   |        |  
|Accounts payable incurred for purchases of property and equipment                      |  | $                  | 287     |      |  | $ | 1,040  |  
|                                                                                       |  |                    |         |      |  |   |        |  
|Exchange of investment for forgiveness of debt                                         |  | $                  | 157     |      |  | $ |       |  
|                                                                                       |  |                    |         |      |  |   |        |  

See accompanying notes to condensed consolidated financial statements.

5



---



##### Table of Contents






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. We provide integrated Web
conferencing services for everyday business meetings and events. Our
business-to-business communication services are based on proprietary
architecture that integrates 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, and Web Conferencing Pro, formerly called
Collaboration, which allows users to integrate reservationless automated audio
conferencing with advanced Web interactive tools such as application sharing,
Web touring and online whiteboarding. 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 March
31, 2002 and for the three months ended March 31, 2001 and 2002 are unaudited
and have been prepared in accordance with generally accepted accounting
principles on a basis consistent with the December 31, 2001 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 consolidated statements should be read in conjunction with our financial
statements and notes thereto included in our Form 10-K (Commission File No.
000-31045), filed on March 27, 2002. Operating results for the three months
ending March 31, 2002 are not necessarily indicative of the results that may be
expected for the full year.

Certain prior year balances have been reclassified to conform with the
current year 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 March 31, 2002
consist of money market accounts at three financial institutions.

(c) Restricted Cash

Included in other assets is $0.6 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 the Companys 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 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.

6



---



##### Table of Contents



(e) Goodwill

The Company first recorded goodwill and its related amortization in 2000
in connection with its acquisition of Contigo Software, Inc. in June 2000.
Goodwill was amortized on a straight-line basis over the estimated useful life
of three years. In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill no
longer be amortized, but instead will be reviewed for impairment on an on-going
basis. Accordingly, the amortization of goodwill ceased upon adoption of the
Statement, which was January 1, 2002. The Company has determined that it
consists of one reporting unit. The Companys initial goodwill impairment test
indicates that the fair value of the reporting unit exceeds the goodwill
carrying value and therefore, at this time, goodwill is not deemed to be
impaired. The reconciliation of reported net loss and reported loss per share
and adjusted net loss and adjusted loss per share, which represents the effect
of adopting SFAS 142, is as follows (in thousands, except per share amounts):

|                                            |  |                    |         |      |  |   |        |  
|------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------ | -
|                                            |  | Three months ended
|                                            |  | March 31,         
|                                            |  |                   
|                                            |  | 2001               |         | 2002
|                                            |  |                    |         |     
|Net loss                                    |  | $                  | (17,981 | )    |  | $ | (1,849 | )
|Add back: goodwill amortization             |  |                    | 6,626   |      |  |   |       |  
|                                            |  |                    |         |      |  |   |        |  
|Adjusted net loss                           |  | $                  | (11,355 | )    |  | $ | (1,849 | )
|                                            |  |                    |         |      |  |   |        |  
|Loss per share  basic and diluted          |  | $                  | (0.38   | )    |  | $ | (0.04  | )
|Add back: goodwill amortization             |  |                    | 0.14    |      |  |   |       |  
|                                            |  |                    |         |      |  |   |        |  
|Adjusted loss per share  basic and diluted |  | $                  | (0.24   | )    |  | $ | (0.04  | )
|                                            |  |                    |         |      |  |   |        |  

(f) Revenue Recognition

Revenue for our Web and Phone Conferencing service is based upon the
actual time that each participant is on the phone or logged onto the Web.
Similarly, 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 revenue from our Web and Phone Conferencing
services as soon as a call or simulcast of a call is completed. We recognize
revenue associated with any initial set-up fees ratably over the term of the
contract.

Revenue for our Web Conferencing Pro, formerly called Collaboration,
service is derived from a concurrent user and usage fee in addition to event
fees or, in more limited cases, a software license fee. Revenue from concurrent
user fees is recognized monthly regardless of usage, while usage fees are based
upon either monthly 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 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.

Prices and specific service terms for Webcasting (former service) were
usually negotiated in advance of service delivery. We recognized revenue from
live event streaming when the content was broadcast over the Internet. We
recognized revenue from encoding recorded content when the content became
available for viewing over the Internet. We recognized revenue from
pre-recorded content hosting ratably over the hosting period.

Prices and specific service terms for Talking Email (former service) were
negotiated in advance of service delivery. We recognized revenue, including any
setup fees, ratably over the life of the contract.

(g) Loss Per Share

Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share(SFAS 128). Under
SFAS 128, basic earnings (loss) per share (EPS) excludes dilution for potential
common stock and is computed by dividing income or loss attributable to common
stockholders by the weighted average number of

7



---



##### Table of Contents



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. Basic and diluted EPS are the same for the
three months ended March 31, 2001 and 2002 as all potential common stock
instruments are antidilutive.

The following table sets forth the calculation of loss per share for the
three months ended March 31, 2001 and 2002 (in thousands, except per share
amounts):

|                                   |                                                                     |   |                    |        |      |   |        |        | 
|---------------------------------- | ------------------------------------------------------------------- | - | ------------------ | ------ | ---- | - | ------ | ------ | 
|                                   |                                                                     |   | Three months ended
|                                   |                                                                     |   | March 31,         
|                                   |                                                                     |   |                   
|                                   |                                                                     |   | 2001               |        | 2002
|                                   |                                                                     |   |                    |        |     
|Net loss                           |                                                                     | $ | (17,981            | )      |      | $ | (1,849 | )     
|                                   |                                                                     |   |                    |        |      |   |        |       
|Common shares outstanding:         |                                                                     |   |                    |        |      |   |        |       
|                                   | Historical common shares outstanding at beginning of period         |   |                    | 46,835 |      |   |        | 48,130 | 
|                                   | Weighted average common shares issued during period                 |   |                    | 127    |      |   |        | 294    | 
|                                   |                                                                     |   |                    |        |      |   |        |       
|                                   | Weighted average common shares at end of period  basic and diluted |   |                    | 46,962 |      |   |        | 48,424 | 
|                                   |                                                                     |   |                    |        |      |   |        |       
|Loss per share  basic and diluted |                                                                     | $ | (0.38              | )      |      | $ | (0.04  | )     
|                                   |                                                                     |   |                    |        |      |   |        |       

The following potential common shares have been excluded from the
computation of diluted net loss per share for the three months ended March 31,
2001 and 2002 because their effect would have been antidilutive:

|                                     |  |                 |           |      |  |  |           | 
|------------------------------------ |  | --------------- | --------- | ---- |  |  | --------- | 
|                                     |  | As of March 31,
|                                     |  |                
|                                     |  | 2001            |           | 2002
|                                     |  |                 |           |     
|Shares issuable under stock options  |  |                 | 8,154,739 |      |  |  | 7,931,919 | 
|Shares issuable pursuant to warrants |  |                 | 652,790   |      |  |  | 652,790   | 

The weighted-average exercise price of stock options outstanding as of
March 31, 2001 and 2002 was $3.63 and $3.31, respectively. The weighted-average
exercise price of warrants outstanding as of March 31, 2001 and 2002 was $7.35.

(2) JOINT VENTURES

In June 2000, the Company entered into an agreement with @viso Limited, a
European-based venture capital firm, to form Evoke Communications, B.V., a
Netherlands corporation (Evoke Communications Europe). Pursuant to this
agreement, the Company advanced Evoke Communications Europe approximately $4.6
million which was to be repaid under the terms of a promissory note. In the
third quarter of 2001 the board of directors of Evoke Communications Europe
unanimously approved a plan of liquidation and dissolution and, as a result,
Evoke Communications Europe will be liquidated and its operations will cease.
The Company recorded an impairment charge of $1.8 million in 2001, which
represented the excess of the note receivable over the cash and equipment we
expected to receive. In the fourth quarter of 2001, the Company received
equipment valued at $1.8 million. The equipment was transferred to the Company
at net book value. In the first quarter of 2002 the Company received $0.2
million in cash. The receivable, net of the impairment charge and equipment and
cash we received, is reflected in the balance sheet in current assets as due
from affiliate. In April 2002, the Company received an additional $0.6 million
in cash and anticipates receiving, prior to December 31, 2002, the remaining
amount of approximately $0.2 million.

(3) 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. The Company recorded charges totaling $9.5
million in 2000 and $1.7 million in 2001. In the first quarter of 2002, the
Company recorded a charge of $0.2 million associated with offices that remain
vacant while the Company continues its efforts to sub-lease these facilities.

8



---



##### Table of Contents



Restructuring reserves and activity for the first three months of 2002 are
detailed below (in thousands):

|                                   |  |                   |       |             |  |                 |     |                |  |   |     |  |  |   |       | 
|---------------------------------- |  | ----------------- | ----- | ----------- |  | --------------- | --- | -------------- |  | - | --- |  |  | - | ----- | 
|                                   |  |                   |       |             |  | Restructuring   |     |                |  |   |     |  |  |  
|                                   |  | Reserve Balance   |       | Reserve     |  | Reserve Balance
|                                   |  | December 31, 2001 |       | Adjustments |  | Payments        |     | March 31, 2002
|                                   |  |                   |       |             |  |                 |     |               
|Closure of remote sales facilities |  | $                 | 1,576 |             |  | $               | 172 |                |  | $ | 275 |  |  | $ | 1,473 | 
|                                   |  |                   |       |             |  |                 |     |                |  |   |     |  |  |   |       | 

At March 31, 2002, the Companys restructuring reserves totaled $1.5
million, of which $0.7 is current and solely relates to lease costs, which will
be relieved as payments are made. The Company adjusts its restructuring
reserves based on what we believe will be the most probable outcome. As a
result, facility reserves may increase or decrease based on the ability to
sublease vacant spaces, which are under non-cancelable operating leases
expiring at various dates through 2005. Through March 31, 2002, the Company has
been successful in sub-leasing four facilities and terminating four facility
lease commitments. Future minimum sublease receivables for the four subleased
facilities, as of March 31, 2002, approximate $1.8 million that will be
received through August 2005. As of March 31, 2002, the facility reserve was
comprised of seven offices. Currently, the minimum lease payments for the seven
offices total approximately $97,000 per month. 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 current real estate market, it has taken
the Company longer than expected to sub-lease or otherwise terminate its lease
obligations in certain cities. However, the Company continually monitors and
adjusts, as warranted, its restructuring reserve associated with remote sales
facilities based on current facts and circumstances. A failure to reduce or
eliminate the commitment on the seven remaining offices in a timely fashion
will cause the Company to make unfavorable adjustments to the restructuring
reserve in subsequent quarters. Additionally, the Company will continue to
expend cash on its monthly commitment on these facilities.

(4) 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 either directors or former directors of the Company. Most of
the remaining facilities are satellite sales offices. As indicated in Note 3,
the Company is in the process of attempting to sublease or otherwise minimize
its net commitment with respect to seven offices. Through March 31, 2002, we
have been successful in terminating four facility leases and subleasing four
facilities. Total future minimum lease payments, not including any reductions
for executed sub-leases and other potential reductions, under all operating
leases, approximate $12.0 million at March 31, 2002. Future minimum sublease
receivables for the four subleased facilities, as of March 31, 2002,
approximate $1.8 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 March 31, 2002 is
approximately $39.8 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.

(c) Employment Contracts

The Company has an employment agreement with one of its executive
officers. The agreement continues until
terminated by the executive or the Company, and provides for a termination
payment under certain circumstances. As of March 31, 2002, the Companys
liability would be approximately $322,500 if the officer was terminated under
certain conditions set forth in the agreement.

(d) Severance

The Company has made commitments to executives who are no longer with the
Company. As of March 31, 2002, the Companys severance liability to these
executives was approximately $50,000, all of which will be expended by June 30,
2002. The expense associated with this liability was recognized in the year
ending December 31, 2000.

9



---



##### Table of Contents



(e) Litigation

From time to time, the Company has been subject to legal proceedings and
claims in the ordinary course of business. Currently, we are not aware of any
legal proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on the Companys financial position,
results of operations or liquidity.

(5) CUSTOMER CONCENTRATION

In the quarter ending March 31, 2002, the Company recorded sales to Qwest
Communications International, Inc. (Qwest), which represented 16.6% of total
revenue. The receivable due from Qwest at March 31, 2002, all of which was
current, was $1.5 million or 19.0% of the Companys total accounts receivable
balance.

(6) SUBSEQUENT EVENT

On April 18, 2002, the Company entered into a definitive agreement to
acquire substantially all of the assets of InterAct Conferencing, LLC. On April
30, 2002, the Company completed the acquisition of substantially all of the
assets of InterAct, a nationwide reseller of audio and web conferencing
services. As a result of the acquisition, the Company has expanded its sales
force and expects the acquisition to positively impact revenue and net income.
In addition to InterActs assets, the Company also assumed certain liabilities
of InterAct as of April 30, 2002, consisting primarily of accounts payable and
a $125,000 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 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 will be included in the Companys
consolidated financial statements.

The aggregate purchase price was approximately $11.2 million, including
$3.8 million in cash and 2,198,581 shares of the Companys common stock valued
at $7.4 million. 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 Company is in the process of obtaining a third-party valuation
of the tangible and intangible assets of InterAct and therefore, the allocation
of the purchase price has not yet been determined.

(7) RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 143 (SFAS 143), Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective in fiscal years
beginning after June 15, 2002, with early adoption permitted. We expect that
the provisions of SFAS 143 will not have a material impact on our consolidated
results of operations and financial position upon adoption. We plan to adopt
SFAS 143 effective January 1, 2003.

In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 145 (SFAS 145), Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.SFAS 145 updates, clarifies and simplifies existing
accounting pronouncements. SFAS 145 rescinds Statement 4, which required all
gains and losses from extinguishments of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to classify
those gains and losses. Statement 64 amended Statement 4, and is no longer
necessary because Statement 4 has been rescinded. Statement 44 was issued to
establish accounting requirements for the effects of transition to the
provisions of the Motor Carrier Act of 1980. Because the transition has been
completed, Statement 44 is no longer necessary. SFAS 145 amends Statement 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions are accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASBs goal
of requiring similar accounting treatment for transactions that have similar
economic effects. SFAS 145 also makes technical corrections to existing
pronouncements.

10



---



##### Table of Contents






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

This Report on Form 10-Q contains 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 27, 2002. You should
also read this analysis in conjunction with our condensed consolidated
financial statements and related notes that begin on page 3.

Overview

We provide integrated Web conferencing services that offer simple,
reliable and cost-effective tools for everyday business meetings and events.
These services offer a continuum of real-time, interactive communications tools
for businesses, including automated phone conferencing, Web conferencing for
Web presentations with online controls and advanced collaboration tools, which
allow users, among other things, to share applications, tour the Web and
whiteboard ideas online. Our business model is largely usage-based, which
generally means that our customers only pay for the services they use. We sell
these services to large and medium-sized corporations in various markets, as
well as to resellers of conferencing and communications services through our
direct and indirect sales channels.

We have incurred losses since commencing operations and, as of March 31,
2002, we had an accumulated deficit of $170.4 million. Our net loss was $18.0
million and $1.8 million for the three months ended March 31, 2001 and 2002,
respectively. We have not achieved profitability on a quarterly or annual
basis. We intend to continue to develop our proprietary systems and services,
expand our infrastructure, and increase our sales efforts. We expect to
continue to incur losses at least through 2002, particularly due to significant
non-cash charges for amortization of unearned stock option compensation and
depreciation expense. Despite the progress we have made in managing and
controlling expenses, we will need to generate higher revenue to support
expected expenses and to achieve and sustain profitability.

On April 18, 2002, we entered into a definitive agreement to acquire
substantially all of the assets of InterAct Conferencing, LLC. On April 30,
2002, we completed the acquisition of substantially all of the assets of
InterAct, a nationwide reseller of audio and web conferencing services. As a
result of the acquisition we have expanded our sales force and expect the
acquisition to positively impact revenue and net income. In addition to
InterActs assets, we also assumed certain liabilities of InterAct as of April
30, 2002, primarily accounts payable and a $125,000 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 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
will be included in our consolidated financial statements. The aggregate
purchase price was approximately $11.2 million, including $3.8 million in cash
and 2,198,581 shares of our common stock valued at $7.4 million. 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. We are in the process of obtaining
a third-party valuation of the tangible and intangible assets of InterAct and
therefore, the allocation of the purchase price has not yet been determined.

Prior to our restructuring in January 2001, we derived revenue from
services other than our Web conferencing services. Revenue attributable to our
Web conferencing services represented 93% of our total revenue for the three
months ended March 31, 2001. As part of the restructuring announced in January
2001, we indicated our intent to primarily focus on our core Web conferencing
service offerings. Accordingly, the second quarter of 2001 was the final
quarter in which revenue was generated from Webcasting and Talking Email as we
satisfied legacy commitments made to customers. Revenue
attributable to our Web conferencing services represented 100% of our
total revenue for the three months ended March 31, 2002. The following
describes how we recognize revenue for the services we have offered in 2001 and
2002.

11



---



##### Table of Contents





| |  | Web and Phone Conferencing Revenue. Revenue for our Web and Phone
Conferencing service is based upon the actual time that each
participant is on the phone or logged onto the Web. Similarly, 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 revenue from our Web
and Phone Conferencing services as soon as a call or simulcast of a
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, formerly called Collaboration, is derived from a concurrent
user and usage fee in addition to event fees or, in more limited
cases, a software license fee. Revenue from concurrent user fees is
recognized monthly regardless of usage, while usage fees are based
upon either monthly 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 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.
| 
| |  | Webcasting Revenue (former service).Prices and specific service terms
were usually negotiated in advance of service delivery. We recognized
revenue from live event streaming when the content was broadcast over
the Internet. We recognized revenue from encoding recorded content
when the content became available for viewing over the Internet. We
recognized revenue from pre-recorded content hosting ratably over the
hosting period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| 
| |  | Talking Email Revenue (former service).Prices and specific service
terms were negotiated in advance of service delivery. We recognized
revenue, including any setup fees, ratably over the life of the
contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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. 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 will
continue to make investments in our infrastructure, however, we do not expect a
need for large-scale capital expenditures in 2002. As a result, we expect
expenses for depreciation, Internet access and bandwidth expenses to slightly
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 in early 2002, will accommodate our revenue projections through
2002. We expect capital expenditures to average between $1.0 million to $2.0
million per quarter over the remainder of the year.

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. In the fourth quarter of 2000
and continuing into the first quarter of 2001 we streamlined our sales force,
renegotiated certain sales and marketing commitments and consolidated certain
remote sales offices and we believe that we have experienced substantially all
the benefits of these cost savings initiatives. We expect sales and marketing
expenses to increase, particularly as a result of the increase in sales and
marketing headcount associated with the InterAct acquisition, however, we
expect the percentage increase will be at a lower rate than our projected
percentage revenue growth.

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 expect to continue to make
investments in research and development and anticipate that these expenses will
increase in terms of absolute dollars over the remainder of the year, however,
we expect them to decrease as a percentage of revenue over time.

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 over time.

12



---



##### Table of Contents



Since our inception, we have used stock-based compensation for employees
and members of our board of directors to attract and retain strong business and
technical personnel. During the quarter ended March 31, 2001 and 2002 we
recorded $0.5 million and $0.1 million of deferred stock option compensation,
respectively, and we expensed $0.4 million and $0.7 million related to
stock-based compensation, respectively. 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 range from one to four years. We expect to incur stock-based
compensation expense of approximately $1.6 million over the remainder of 2002,
$1.5 million in 2003 and $0.1 million in 2004 for common stock issued or stock
options awarded to our employees or members of our board of directors through
March 31, 2002, under our stock compensation plans.

Other Data

We evaluate operating performance based on several factors, including our
primary internal financial measure of loss before amortization and other
charges (LBAC). Consistent with our increased focus on controlling capital
spending, we measure operating performance after charges for depreciation. This
analysis eliminates the effects of considerable amounts of amortization of
goodwill recognized in prior years in connection with our acquisition of
Contigo Software, Inc., stock-based compensation and the other charges set
forth below.

The calculation of loss before amortization and other charges is as
follows (in thousands):

|                                                             |  |                              |         |      |  |   |        |  
|------------------------------------------------------------ |  | ---------------------------- | ------- | ---- |  | - | ------ | -
|                                                             |  | Three Months Ended March 31,
|                                                             |  |                             
|                                                             |  | 2001                         |         | 2002
|                                                             |  |                              |         |     
|Net loss                                                     |  | $                            | (17,981 | )    |  | $ | (1,849 | )
|Add: Amortization of goodwill                                |  |                              | 6,626   |      |  |   |       |  
|Add: Stock-based compensation expense                        |  |                              | 396     |      |  |   | 650    |  
|Add: Loss on sale of common stock                            |  |                              | 1,195   |      |  |   |       |  
|Add: Restructuring charges and contract termination expenses |  |                              | 2,581   |      |  |   | 172    |  
|                                                             |  |                              |         |      |  |   |        |  
|Loss before amortization and other charges                   |  | $                            | (7,183  | )    |  | $ | (1,027 | )
|                                                             |  |                              |         |      |  |   |        |  

Beginning January 1, 2002, we have a significant reduction or improvement
in our net loss because of the issuance of a new accounting standard that
eliminates goodwill amortization. As indicated in the LBAC calculation above,
we expensed $6.6 million in goodwill amortization in the first quarter of 2001.
As a result of this new accounting standard, which became effective January 1,
2002, we are no longer expensing goodwill amortization and, correspondingly,
our net loss has decreased relative to prior periods in which we did expense
significant amounts of goodwill amortization. The trends depicted by the LBAC
calculation indicate that we have been successful in significantly reducing
both our net loss as well as LBAC, primarily as a result of our efforts to
control operating costs while simultaneously increasing revenue. For the three
months ended March 31, 2001 as compared with the three months ended March 31,
2002, our net loss decreased by $16.1 million and LBAC decreased by $6.2
million.

The funds depicted by LBAC 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 generally accepted accounting principles is
as follows: net cash used by operations was $8.0 million for the three months
ended March 31, 2001 and net cash provided by operations was $0.4 million for
the three months ended March 31, 2002; net cash used by investing activities
was $0.5 million and $2.1 million for the three months ended March 31, 2001 and
2002, respectively; net cash used by financing activities was $0.4 million and
$0.1 million for the three months ended March 31, 2001 and 2002, respectively.
LBAC should be considered in addition to, not as a substitute for, net loss and
other measures of financial performance reported in accordance with generally
accepted accounting principles. LBAC is a measure of operating performance and
liquidity that is commonly reported and widely used by analysts, investors and
other interested parties because it eliminates significant non-cash charges and
other charges to earnings. However, LBAC as used by us may not be comparable to
similarly titled measures reported by other companies.

13



---



##### Table of Contents



Results of Operations

Quarter Ended March 31, 2002 Compared to Quarter Ended March 31, 2001

Revenue.Total revenue increased by $4.9 million from $9.0 million for the
quarter ended March 31, 2001 to $13.9 million for the quarter ended March 31,
2002. The increase was primarily due to increased customer account penetration
and the addition of new customers. As part of the restructuring announced in
January 2001, we indicated our intent to primarily focus on our core Web
conferencing service offerings. Accordingly, the second quarter of 2001 was the
final quarter in which revenue was generated from Webcasting and Talking Email
as we satisfied legacy commitments made to customers.

Cost of Revenue.Cost of revenue increased $0.8 million from $6.1 million
for the quarter ended March 31, 2001 to $6.9 million for the quarter ended
March 31, 2002. Depreciation expense decreased $0.7 million for the quarter
ended March 31, 2002 over the quarter ended March 31, 2001 primarily due to the
write-down of particular assets to their fair value in the second quarter of
2001. We are not recording any depreciation expense on assets no longer in use
and held for disposal. Telecommunication costs increased $2.0 million for the
quarter ended March 31, 2002 over the quarter ended March 31, 2001. This
increase resulted from additional phone charges consistent with increased use
of our Web and Phone Conferencing service. Maintenance expense decreased $0.4
million for the quarter ended March 31, 2002 over the quarter ended March 31,
2001. The decrease was primarily due to the reduction of maintenance costs
associated with the equipment we took out of service in the second quarter of
2001.

Sales and Marketing.Sales and marketing expense decreased $2.5 million
from $6.7 million for the quarter ended March 31, 2001 to $4.2 million for the
quarter ended March 31, 2002. Expenses related to advertising and promotion
decreased $1.4 million for the quarter ended March 31, 2002 from the quarter
ended March 31, 2001. In the first quarter of 2001 we incurred $0.3 million in
expenses related to our name change. Expenses related to outside services
decreased $0.5 million for the quarter ended March 31, 2002 from the quarter
ended March 31, 2001. The remainder of the decrease in sales and marketing
expense is a result of decreased office rent expenses and trade show related
expenditures.

Research and Development.Research and development expense increased $0.5
million from $1.5 million for the quarter ended March 31, 2001 to $2.0 million
for the quarter ended March 31, 2002. Personnel and payroll related expenses
increased $0.2 million as a result of an increase in headcount and salaries.
The remainder of the increase is explained by a $0.2 million increase in
allocated depreciation and a $0.1 million increase in maintenance and repairs.

General and Administrative.General and administrative expense decreased
$0.5 million from $2.3 million for the quarter ended March 31, 2001 to $1.8
million for the quarter ended March 31, 2002. In the first quarter of 2001, we
incurred $0.2 million in royalty expenses pertaining to a contract that was
terminated at the end of the quarter. Personnel and payroll related expenses
decreased $0.1 million as a result of a reduction in general and administrative
headcount. The remainder of the decrease is primarily due to a decrease in
personal property taxes related to the decrease in property and equipment and a
decrease in consulting fees.

Amortization of Goodwill.Amortization of goodwill was $6.6 million for
the quarter ended March 31, 2001 as result of our acquisition of Contigo in
June 2000. In 2002, Statement of Financial Accounting Standards No. 142 (SFAS
142), Goodwill and Other Intangible Assets became effective and as a result,
we will not amortize approximately $38.7 million in net goodwill over the next
two years.

Stock-Based Compensation Expense.Stock-based compensation expense
increased $0.3 million from $0.4 million for the quarter ended March 31, 2001
to $0.7 million for the quarter ended March 31, 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 vesting periods ranging from one to
four years.

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 connection with
streamlining operations, we refocused our marketing strategy, reduced our
workforce and closed several
leased office facilities. We recorded charges totaling $9.5 million in
2000 and $1.7 million in 2001. In the first quarter of 2002, we recorded a
charge of $0.2 million associated with offices that remain vacant while we
continue our efforts to
14Table of Contents

sub-lease these facilities. At March 31, 2002, the
restructuring reserves totaled $1.5 million, of which $0.7 is current and
solely relates to lease costs, which will be relieved as payments are made. We
adjust our restructuring reserves based on what we believe will be the most
probable outcome. As a result, facility reserves may increase or decrease based
on the ability to sublease vacant spaces, which are under non-cancelable
operating leases expiring at various dates through 2005. Through March 31,
2002, we have been successful in sub-leasing four facilities and terminating
four facility lease commitments. As of March 31, 2002, the facility reserve was
comprised of seven offices. 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 current real estate market, it has taken us longer than expected to
sub-lease or otherwise terminate our lease obligations in certain cities.
However, we continually monitor and adjust, as warranted, our restructuring
reserve associated with remote sales facilities based on current facts and
circumstances. A failure to reduce or eliminate the commitment on the seven
remaining offices in a timely fashion will cause us to make unfavorable
adjustments to the restructuring reserve in subsequent quarters.

Other Income (Expense).Interest income decreased $0.4 million from $0.5
million for the quarter ended March 31, 2001 to $0.1 million for the quarter
ended March 31, 2002. The decrease was related to higher cash balances and
higher interest rates in 2001 compared to 2002. Interest expense remained flat
at $0.1 million for the quarters ended March 31, 2001 and 2002. In the first
quarter of 2001, we recorded a $1.2 million realized loss on the sale of an
investment.

Liquidity and Capital Resources

As of March 31, 2002, cash and cash equivalents were $32.4 million, a
decrease of $1.8 million compared with cash and cash equivalents held as of
December 31, 2001.

Net cash used in operations was $8.0 and net cash provided by operations
was $0.4 million for the quarters ending March 31, 2001 and 2002, respectively.
Cash used in operations decreased significantly from the first quarter of 2001
as compared to the first quarter of 2002 as we generated positive cash flows
from operations in the first quarter of 2002. The improvement is due to a
significant decrease in our operating loss and an increase in accounts payable
partially offset by lower non-cash expenses and an increase in accounts
receivable.

Net cash used by investing activities was $0.5 and $2.1 million for the
quarters ending March 31, 2001 and 2002, respectively. Net cash used by
investing activities in 2001 and 2002 primarily related to capital expenditures
for equipment purchases. Capital expenditures increased significantly in the
first quarter of 2002 from 2001 as we purchased additional equipment to
increase our capacity in conjunction with increases in revenue. Overall, we
expect capital expenditures to increase in 2002 over 2001 due to planned
capital expenditures for equipment upgrades and additional capacity.

Net cash used by financing activities was $0.4 million for the quarter
ending March 31, 2001 and $0.1 million for the quarter ending March 31, 2002.
Cash used by financing activities in 2001 was primarily due to debt service
payments. Cash used by financing activities in 2002 was primarily due to debt
service payments offset by cash proceeds from the exercise of common stock
options.

As of March 31, 2002, we had approximately $4.4 million in total debt
obligations outstanding, of which approximately $1.6 million was current.

In October 2001, we entered into a loan and security agreement with a bank
that consisted of a $7.25 million revolving line of credit and a $5.0 million
term loan. Advances under the revolving line of credit are limited to $7.25
million or 80% of eligible accounts receivable as defined in the agreement.
The revolving line of credit is available through February 28, 2003. Advances
under the revolving line of credit may be repaid and re-borrowed at any time
prior to the maturity date. At March 31, 2002, we did not have an outstanding
balance under the revolving line of credit and the additional liquidity
available to us, based on eligible accounts receivable, was $6.1 million. The
loan and security agreement 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. Should we fail to comply with the loan and security agreement
covenants and we are unable to cure the covenant violation or obtain a waiver
of the covenant violation, we may
be unable to borrow under the revolving line of credit and also may be
forced to repay the outstanding balance on the term loan. The loan and security
agreement also prohibits us from paying any dividends without the banks prior
written consent. However, we have never paid any cash dividends on our common
stock and intend to retain all

15



---



##### Table of Contents



earnings, if any, for use in our business and do
not anticipate paying any cash dividends on our common stock in the foreseeable
future. We continually monitor our compliance with all loan covenants and at
March 31, 2002 we were in compliance with all loan covenants.

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.

Although our cash balance decreased $1.8 million in the first quarter of
2002, we generated positive cash flows from operations for the second
consecutive quarter. Looking ahead we expect both our debt service payments and
cash basis capital expenditures to increase in 2002 over 2001. Additionally, we
agreed to expend $3.8 million in cash as partial consideration for the purchase
of InterAct Conferencing, LLC. A partial payment of $3.0 million was paid in
the second quarter of 2002 and we expect to expend $0.8 million in the fourth
quarter of 2002. We also expect proceeds from the exercise of common stock
options, however, it is not possible to estimate what impact this will have
during 2002.

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. For the quarter ending March
31, 2002, we recorded sales to Qwest Communications International, Inc., which
represented 16.6% of total revenue. The receivable due from Qwest at March 31,
2002, all of which was current, was $1.5 million or 19.0% of our total accounts
receivable balance. We are currently working with Qwest to utilize its own
telephone network to deliver our services. When this transition takes place we
expect reduced revenue from Qwest with higher gross margins. 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.

In the third quarter of 2001, the board of directors of Evoke
Communications Europe unanimously approved a plan of liquidation and
dissolution and, as a result, Evoke Communications Europe is being liquidated
and its operations have ceased. We recorded an impairment charge of $1.8
million in 2001, which represented the excess of the note receivable from Evoke
Communications Europe over the cash and equipment we expect to receive. In the
fourth quarter of 2001, we received equipment valued at $1.8 million and in the
first quarter of 2002 we received approximately $0.2 million in cash. In April
2002, we received an additional $0.6 million in cash and we anticipate
receiving, prior to December 31, 2002, the remaining balance of approximately
$0.2 million.

As of March 31, 2002, our purchase commitments for bandwidth usage and
telephony services were approximately $39.8 million and will be expended over
the next four years. Some of these agreements may be amended to either increase
or decrease the minimum commitments during the lives of the contract.

We lease office facilities under various operating leases that expire
through 2009. A large number of these facilities are satellite sales offices
that typically average 3,000 square feet. Total future minimum lease payments,
under all operating leases, as of March 31, 2002 are approximately $12.0
million. We are in the process of attempting to sublease or otherwise minimize
our lease commitments with respect to seven offices, and to the extent we are
successful in subleasing or otherwise relieving ourselves of the lease
obligations, these facility lease commitments, net of any subleases, will
decrease. Through March 31, 2002, we have been successful in terminating four
facility leases, thereby relieving ourselves of any future obligation, and we
have been successful in subleasing four facilities. Future minimum sublease
receivables for the four subleased facilities, as of March 31, 2002,
approximate $1.8 million that we expect to receive through August 2005.
However, one subtenant representing approximately $1.0 million of this
receivable recently filed for protection under Chapter 11 of the United States
Bankruptcy Code. At this time, we do not know whether the subtenant will accept
or reject the sublease with us while in Chapter 11. If the sublease is
rejected, we will have to remarket the space and possibly incur additional
restructuring charges while we attempt to identify a new tenant, and it is
likely that we will also expend cash during this process. In addition, on April
30, 2002, in connection with the closing on the InterAct acquisition we also
assumed a facility lease obligation of approximately $0.7 million.

16



---



##### Table of Contents



Our contractual obligations and commitments to make future payments as of
March 31, 2002 are as follows (in thousands):

|                                              |  |                        |        |                  |  |           |        |           |  |              |        |  |  |   |        |  |  |   |       | 
|--------------------------------------------- |  | ---------------------- | ------ | ---------------- |  | --------- | ------ | --------- |  | ------------ | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                              |  | Payments Due by Period
|                                              |  |                       
|                                              |  | Total                  |        | Less than 1 year |  | 2-3 years |        | 4-5 years |  | Over 5 years
|                                              |  |                        |        |                  |  |           |        |           |  |             
|Long-term debt                                |  | $                      | 4,390  |                  |  | $         | 1,603  |           |  | $            | 2,787  |  |  | $ |       |  |  | $ |      | 
|Operating leases                              |  |                        | 12,014 |                  |  |           | 2,688  |           |  |              | 4,661  |  |  |   | 2,592  |  |  |   | 2,073 | 
|Unconditional purchase obligations            |  |                        | 39,811 |                  |  |           | 15,000 |           |  |              | 15,260 |  |  |   | 9,493  |  |  |   | 58    | 
|                                              |  |                        |        |                  |  |           |        |           |  |              |        |  |  |   |        |  |  |   |       | 
|Total contractual obligations and commitments |  | $                      | 56,215 |                  |  | $         | 19,291 |           |  | $            | 22,708 |  |  | $ | 12,085 |  |  | $ | 2,131 | 
|                                              |  |                        |        |                  |  |           |        |           |  |              |        |  |  |   |        |  |  |   |       | 

We expect that existing cash resources and the credit facility we obtained
in October 2001 will be sufficient to fund our anticipated working capital and
capital expenditure needs for at least the next twelve months. We expect our
cash flows will continue to improve and will eventually enable us to
consistently maintain positive cash flows from operations, and that existing
cash reserves will therefore be sufficient to meet our capital requirements
during this period. 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 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

Our critical accounting policies and estimates are included in our Form
10-K, filed on March 27, 2002.

17



---



##### Table of Contents






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, we expect significant continuing losses and we may never attain profitability.

If we do not achieve or sustain profitability in the future, we may be
unable to continue our operations. Our operating costs have exceeded our
revenue in each quarter since our inception in April 1997. We have incurred
cumulative net losses of approximately $170.4 million from our inception
through March 31, 2002 and we anticipate net losses through at least 2002. Our
revenue may not continue to grow and we may not achieve or maintain
profitability in the future. In addition, we expect to incur significant sales
and marketing, research and development, and general and administrative
expenses in the future. Accordingly, we must significantly increase our revenue
to achieve and maintain profitability and to continue our operations.

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 only began
commercially offering our Web and Phone Conferencing service in April 1999 and
our Web Conferencing Pro service in June 2000. In January 2001, we restructured
our company to focus solely on these 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.
Our business strategy may be unsuccessful and we may be unable to address the
risks we face in a cost-effective manner, if at all.

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 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 loss ranged between $1.8 million
and $12.9 million in the four quarters ended March 31, 2002. Our quarterly
revenues ranged between $9.1 million and $13.9 million

18



---



##### Table of Contents



in the four quarters
ended March 31, 2002. Many of the factors that may cause fluctuations in our
quarterly operating results are beyond our control, such as increased
competition and market demand for our services. 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.

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 spring, Thanksgiving, December and New Year holidays. We
expect that our revenue during these holiday seasons and during the summer
vacation period 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.

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

We purchase 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. Because we do not have any guaranteed supply arrangements with this
supplier, it may unilaterally increase its prices for these components, and as
a result, we could face higher than expected operating costs and impaired
operating results. In addition, this supplier could cease supplying us with
these components. We could also experience difficulties in obtaining
alternative sources on commercially reasonable terms, if at all, or in
integrating alternative components into our technology platform if our single
source ceased supplying us with these components. We also rely on a single
supplier for the majority of our storage hardware, which store critical
operations data and maintain the reliability of our services. If we are
required to find alternative sources for such equipment, we may experience
difficulty in integrating them into our infrastructure.

A high percentage of our revenue is attributable to repeat customers, including Qwest Communications International, Inc., 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 model. 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 become profitable 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.

Additionally, we target our services to large companies, including large
telecommunications companies, and as a result, we may experience an increase in
customer concentration. In particular, during the first quarter of 2002, Qwest
Communications accounted for 16.6% of our revenue, which subjects us to a
number of risks, including a credit risk that we may not be paid a material
portion of outstanding current or future accounts receivables from this
customer. 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.

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 the fourth quarter of 2001, we
commercially released our Web Conferencing Pro 5.0 service, an upgrade to the
prior 4.6 version of our Web Conferencing Pro service. We may not successfully
identify, develop and market Web Conferencing Pro and other new services 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 revenues to offset development costs, our net losses will increase
and we may not be able to achieve or sustain profitability. 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.

19



---



##### Table of Contents



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.

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 reduce our prices, or cause us to experience
reduced sales and margins, loss of market share and reduced acceptance of 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, 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 per-minute long distance 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, 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.                                                                                                                                                         

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

Because the Web conferencing market is relatively new and still evolving,
the prices for these services are subject to rapid and frequent changes. In
many cases, businesses provide their services at significantly reduced rates,
for free or on a trial basis in order to win customers. Due to competitive
factors and the rapidly changing marketplace, we may be required to
significantly reduce our pricing structure, which would negatively affect our
revenues, margins and our ability to achieve or sustain profitability.

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 achieve or sustain profitability.

20



---



##### Table of Contents



If our security system is breached, our business and reputation could suffer.

We must securely receive and transmit confidential information 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 in excess of customer demand. To rapidly
expand our operations and to add customers requires a significant increase in
the capacity of our infrastructure. To increase capacity, we may be required to
order equipment with substantial development and manufacturing lead times. 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 achieve or sustain profitability. 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.

Our failure to manage growth could cause substantial increases in our operating costs and harm our ability to achieve profitability and, therefore, decrease the value of our stock.

Despite our recent 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,
particularly as a result of our recent downsizing, 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
achieve or sustain profitability. 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 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 additional international expansion may not be successful, which could harm our strategy to expand internationally and cause our operating losses to increase.

We have expanded into international markets and spent significant
financial and managerial resources to do so. In particular, we formed a joint
venture European subsidiary with @viso Limited, a European-based venture
capital firm, to expand our operations to continental Europe and the United
Kingdom. Currently, this joint venture subsidiary is in the process of being
liquidated and will be dissolved. This decision may harm our strategy to expand
internationally, and we may not realize any value from the costs associated
with starting up this venture. In addition, we may be required 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
achieve or sustain profitability, thereby causing our stock price to decline.

If we continue to 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;
| | - |  | -------------------------------------------------------------------------------------------------

21



---



##### Table of Contents





| |  |  | 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.

We may not achieve any benefits from the acquisition of substantially all of the assets of InterAct Conferencing, LLC.

We may not be able to successfully integrate InterActs operations,
customers and personnel into our business. The 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 the acquisition that may harm our operating
results and key InterAct personnel may decide not to work for us. In addition,
as a result of the acquisition, we will have operations in multiple facilities
in geographically diverse areas. We are not experienced in managing facilities
and operations in geographically diverse areas. We may not sustain the
financial results that InterAct has achieved in the past because of integration
problems, changes that we are making to InterActs operations and the potential
loss of customers who may decide not to continue their relationship with us
after the acquisition.

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:



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

22



---



##### Table of Contents





| |  |  | incur debt;                                                       
| | - |  | ------------------------------------------------------------------
|
| |  |  | assume unknown or contingent liabilities; or                      
|
| |  |  | experience negative effects on our reported 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 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.

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 two patents
relating to the Web touring feature 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 the outcome could be uncertain.

We may be subject to claims alleging intellectual property infringement.

We may be subject to claims alleging that we have infringed upon third
party intellectual property rights. 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 re-engineer 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.

23



---



##### Table of Contents



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.

We rely on the adoption of multimedia technology by corporations and our ability to transmit our services through corporate security measures.

In order to adequately access the streaming aspects of our services, our
users generally must have multimedia personal computers with certain
microprocessor requirements, at least 28.8 kbps Internet access, a standard
media player and a sound card. For our Web Conferencing Pro services, minimum
requirements include a Java-enabled browser and a 56 kbps Internet connection.
If there are significant changes to Internet browsers that make them
incompatible with our Java-based Web Conferencing Pro service, we may be forced
to modify the software underlying this service, which may affect our ability to
deliver quality service in a timely manner, and our business would be harmed.
Installing and configuring the necessary multimedia components may require
technical expertise that some users do not possess. Furthermore, because of
bandwidth constraints on corporate intranets and concerns about security, some
information systems managers may block reception of multimedia within their
corporate environments. In order for users to receive multimedia over corporate
intranets, security measures and corporate firewalls, information systems
managers may need to reconfigure these intranets, security measures and
firewalls. Widespread adoption of multimedia technology depends on overcoming
these obstacles, improving voice and video quality and educating customers and
users in the use of media technology.

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 achieve or sustain profitability 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. In
2001 and thus far in 2002, only a small percentage of our customers of this
service used the Web in this way.

We Disclose Pro Forma Financial Information.

We prepare and release quarterly unaudited financial statements prepared
in accordance with generally accepted accounting principles (GAAP). We also
disclose and discuss certain pro forma financial information in the related
earnings release and investor conference call. This pro forma financial
information excludes certain non-cash expenses and other charges, consisting
primarily of the amortization of goodwill, stock-based compensation and
restructuring costs. We believe the disclosure of the pro forma financial
information helps investors more meaningfully evaluate the results of our
ongoing operations. However, we urge investors to carefully review the GAAP
financial information included as part of our Quarterly Reports on Form 10-Q,
or Annual Reports on Form 10-K, and our quarterly earnings releases and compare
that GAAP financial information with the pro forma 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;
| | - |  | ------------------------------------------

24



---



##### Table of Contents





| |  |  | copyright and other intellectual property rights;                                         
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | encryption;                                                                               
|
| |  |  | personal privacy concerns, including the use of cookies and individual user information;
|
| |  |  | e-commerce liability; and                                                                 
|
| |  |  | 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.

Internet-related stock prices are especially volatile and this volatility may depress our stock price.

The stock market in general and the stock prices of Internet-related
companies in particular have experienced extreme price and volume fluctuations.
This volatility is often unrelated or disproportionate to the operating
performance of these companies. Because we are an Internet-related company, we
expect our stock price to be similarly volatile. These broad market and
industry factors may reduce our stock price, regardless of our operating
performance.




Item 3.Quantitative and Qualitative Disclosures about Market Risk

At March 31, 2002, we had long-term debt, including current portion, in
the aggregate amount of $4.4 million with interest rates ranging from 8.0% to
8.4% with payments due through October 2004. A change in interest rates would
not affect our obligations related to long-term debt existing as of March 31,
2002, as the interest payments related to that debt are fixed over the term of
the debt. At March 31, 2002, we had a $7.25 million revolving line of credit
with a loan value of $6.1 million based on 80% of the underlying eligible
accounts receivable at quarter-end. 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 increase the interest expense
associated with future borrowings including any advances on our revolving line
of credit. We are exposed to foreign currency risks through an advance to 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.
Although we do not have any investments at March 31, 2002, we may purchase
investments that may decline in value as a result of changes in equity markets
and interest rates.

25



---



##### Table of Contents






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. Although we are not currently involved in any
material legal proceedings, we may in the future be subject to legal disputes.
Any claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources. We are not aware of any legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business.




Item 2.Changes in Securities and Use of Proceeds

After deducting expenses of our initial public offering in July 2000, we
received net offering proceeds of approximately $50.3 million. We have used the
net proceeds as follows: $32.9 million for operating expenses. The remainder of
the net proceeds is invested in short-term financial instruments.

No payments constituted direct or indirect payments to any of our
directors, officers or general partners or their associates, to persons owning
10% or more of any class of our equity securities or to any of our affiliates.




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. |  | Description                                                                                                                   
| | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                               
| | 2.3         |  | Asset Purchase Agreement by and among
Registrant, InterAct Conferencing, LLC and Carolyn Bradfield
dated as of April 17, 2002.



| | (B.) |  | Reports on Form 8-K
| | ---- |  | -------------------
|
| |      |  | None.              

26



---



##### Table of Contents






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: May 15, 2002 |  | By:                           | /s/ Nicholas J. Cuccaro                              
|                   |  |                               |                                                      
|                   |  |                               | Chief Financial Officer
(Principal Financial Officer)

27



---



##### Table of Contents





EXHIBIT INDEX



| | Exhibit No. |  | Description                                                                                                                   
| | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                               
| | 2.3         |  | Asset Purchase Agreement by and among
Registrant, InterAct Conferencing, LLC and Carolyn Bradfield
dated as of April 17, 2002.