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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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FORM 10-Q

|       |  |                                                                                          
|------ |  | -----------------------------------------------------------------------------------------
|(XBOX) |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
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|       |  | For the Quarterly Period Ended June 30, 2002                                             
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|(BOX)  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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|       |  |                                                                                          
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|       |  | 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   (XBOX)   No   (BOX)

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 |  |  |  | 51,175,060 as of July 31, 2002.



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TABLE OF CONTENTS



|                                                   |                                                                                               |                                                                                                        |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ |  |  |  |  |  | 
|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                                        
|INDEX TO EXHIBITS                                 
|EX-10.16.1 Amendment to Personal Service Agreement
|EX-99.1 Certification Pursuant to 18 USC Sec. 1350



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##### 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 June 30, 2002 (unaudited)                           |      | 3 
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2002
(unaudited) |      | 4 
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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                                 |      | 12
|          
|          
|          
|          
|           |  | Additional Risk Factors that May Affect Our Operating Results and The Market Price of Our Common Stock                |      | 19
|          
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |      | 27
|          
|          
|          
|          
|PART II    |  | OTHER INFORMATION                                                                                                     |      |   
|          
|          
|          
|          
|Item 1.    |  | Legal Proceedings                                                                                                     |      | 28
|          
|          
|          
|          
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                             |      | 28
|          
|          
|          
|          
|Item 3.    |  | Defaults Upon Senior Securities                                                                                       |      | 28
|          
|          
|          
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                   |      | 28
|          
|          
|          
|          
|Item 5.    |  | Other Information                                                                                                     |      | 28
|          
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                      |      | 29
|          
|          
|          
|          
|SIGNATURES |  | 30                                                                                                                   

2



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##### 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 |          | June 30, 2002
|                                            |                                                                                                                                                                             |   |                   |          |              
|Assets                                      |                                                                                                                                                                             |   |                   |          |               |   |             |         
|                                           
|                                           
|                                           
|                                           
|Current assets:                             |                                                                                                                                                                             |   |                   |          |               |   |             |         
|                                           
|                                           
|                                           
|                                           
|                                            | Cash and cash equivalents                                                                                                                                                   |   | $                 | 34,222   |               |   | $           | 27,958   |  
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts receivable, net of allowance for doubtful accounts of $775 and $900 at
December 31, 2001 and June 30, 2002, respectively                                           |   |                   | 5,517    |               |   |             | 8,949    |  
|                                           
|                                           
|                                           
|                                           
|                                            | Due from affiliate                                                                                                                                                          |   |                   | 993      |               |   |             | 239      |  
|                                           
|                                           
|                                           
|                                           
|                                            | Prepaid expenses and other current assets                                                                                                                                   |   |                   | 1,786    |               |   |             | 1,563    |  
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|                                            | Total current assets                                                                                                                                                        |   |                   | 42,518   |               |   |             | 38,709   |  
|                                           
|                                           
|                                           
|                                           
|Property and equipment, net                 |                                                                                                                                                                             |   | 27,959            |          |               |   | 27,690      |         
|                                           
|                                           
|                                           
|                                           
|Goodwill                                    |                                                                                                                                                                             |   | 38,652            |          |               |   | 45,587      |         
|                                           
|                                           
|                                           
|                                           
|Other assets                                |                                                                                                                                                                             |   | 1,123             |          |               |   | 1,241       |         
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|Total Assets                                |                                                                                                                                                                             | $ | 110,252           |          |               | $ | 113,227     |         
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|Liabilities and Stockholders Equity        |                                                                                                                                                                             |   |                   |          |               |   |             |         
|                                           
|                                           
|                                           
|                                           
|Current liabilities:                        |                                                                                                                                                                             |   |                   |          |               |   |             |         
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts payable                                                                                                                                                            |   | $                 | 5,428    |               |   | $           | 6,338    |  
|                                           
|                                           
|                                           
|                                           
|                                            | Current portion of long-term debt                                                                                                                                           |   |                   | 1,893    |               |   |             | 1,671    |  
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued expenses                                                                                                                                                            |   |                   | 1,265    |               |   |             | 1,060    |  
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued vacation                                                                                                                                                            |   |                   | 659      |               |   |             | 868      |  
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued bonuses                                                                                                                                                             |   |                   | 9        |               |   |             | 830      |  
|                                           
|                                           
|                                           
|                                           
|                                            | Current portion of restructuring reserve                                                                                                                                    |   |                   | 662      |               |   |             | 850      |  
|                                           
|                                           
|                                           
|                                           
|                                            | Current portion of deferred revenue                                                                                                                                         |   |                   | 1,035    |               |   |             | 1,096    |  
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|                                            | Total current liabilities                                                                                                                                                   |   |                   | 10,951   |               |   |             | 12,713   |  
|                                           
|                                           
|                                           
|                                           
|Long-term debt, less current portion        |                                                                                                                                                                             |   | 3,064             |          |               |   | 2,222       |         
|                                           
|                                           
|                                           
|                                           
|Restructuring reserve, less current portion |                                                                                                                                                                             |   | 914               |          |               |   | 773         |         
|                                           
|                                           
|                                           
|                                           
|Deferred revenue, less current portion      |                                                                                                                                                                             |   | 516               |          |               |   |            |         
|                                           
|                                           
|                                           
|                                           
|Other                                       |                                                                                                                                                                             |   | 39                |          |               |   | 30          |         
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|Total Liabilities                           |                                                                                                                                                                             |   | 15,484            |          |               |   | 15,738      |         
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|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 51,124,998
shares issued and outstanding at December 31, 2001 and June 30, 2002, respectively |   |                   | 72       |               |   |             | 77       |  
|                                           
|                                           
|                                           
|                                           
|                                            | Additional paid-in capital                                                                                                                                                  |   |                   | 267,064  |               |   |             | 275,356  |  
|                                           
|                                           
|                                           
|                                           
|                                            | Deferred stock-based compensation                                                                                                                                           |   |                   | (3,823   | )             |   |             | (5,629   | )
|                                           
|                                           
|                                           
|                                           
|                                            | Accumulated deficit                                                                                                                                                         |   |                   | (168,545 | )             |   |             | (172,315 | )
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|                                            | Total Stockholders Equity                                                                                                                                                  |   |                   | 94,768   |               |   |             | 97,489   |  
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  
|                                            | Commitments and contingencies                                                                                                                                               |   |                   |          |               |   |             |          |  
|                                           
|                                           
|                                           
|                                           
|                                            | Total Liabilities and Stockholders Equity                                                                                                                                  |   | $                 | 110,252  |               |   | $           | 113,227  |  
|                                            |                                                                                                                                                                             |   |                   |          |               |   |             |          |  

See accompanying notes to condensed consolidated financial statements.

3



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##### Table of Contents






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

|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |        |        |  
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------- | ---------------- | ------ | ----- | ------ | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | -
|                                                                       |                                                                                                                                     |                          |         | Three Months Ended |         | Six Months Ended
|                                                                       |                                                                                                                                     |                          |         | June 30,           |         | June 30,        
|                                                                       |                                                                                                                                     |                          |         |                    |         |                 
|                                                                       |                                                                                                                                     |                          |         | 2001               |         | 2002             |        | 2001  |        | 2002
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |     
|Revenue                                                                |                                                                                                                                     | $                        | 9,110   |                    |         | $                | 15,388 |       |        | $    | 18,127  |        |         | $ | 29,265 |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Cost of revenue:                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | (exclusive of stock-based compensation expense of
$54, $49, $115 and $98, respectively, shown below)                                |                          |         | 5,642              |         |                  |        | 7,302 |        |      |         | 11,770 |         |   |        | 14,231 |       
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|Gross profit                                                           |                                                                                                                                     |                          | 3,468   |                    |         |                  | 8,086  |       |        |      | 6,357   |        |         |   | 15,034 |       
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|Operating expenses:                                                    |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Sales and marketing (exclusive of stock-based
compensation expense of $122, $74, $290 and $151,
respectively, shown below)          |                          |         | 4,487              |         |                  |        | 4,808 |        |      |         | 11,176 |         |   |        | 9,010  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Research and development (exclusive of stock-based
compensation expense of $165, $156, $307 and
$314, respectively, shown below)    |                          |         | 1,211              |         |                  |        | 2,129 |        |      |         | 2,720  |         |   |        | 4,112  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | General and administrative, (exclusive of
stock-based compensation expense of $696, $508,
$721 and $873, respectively, shown below) |                          |         | 1,771              |         |                  |        | 1,897 |        |      |         | 4,049  |         |   |        | 3,707  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Amortization of goodwill                                                                                                            |                          |         | 6,626              |         |                  |        |      |        |      |         | 13,252 |         |   |        |       |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Stock-based compensation expense                                                                                                    |                          |         | 1,037              |         |                  |        | 787   |        |      |         | 1,433  |         |   |        | 1,436  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Asset impairment charges                                                                                                            |                          |         | 2,794              |         |                  |        |      |        |      |         | 2,794  |         |   |        |       |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Restructuring charges (reversals) and contract termination
expenses                                                                 |                          |         | (1,326             | )       |                  |        | 412   |        |      |         | 1,255  |         |   |        | 584    |       
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|                                                                       |                                                                                                                                     | Total operating expenses |         |                    | 16,600  |                  |        |       | 10,033 |      |         |        | 36,679  |   |        |        | 18,849 |  
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|                                                                       |                                                                                                                                     | Loss from operations     |         |                    | (13,132 | )                |        |       | (1,947 | )    |         |        | (30,322 | ) |        |        | (3,815 | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other income (expense)                                                 |                                                                                                                                     |                          | 200     |                    |         |                  | 26     |       |        |      | (591    | )      |         |   | 45     |       
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|Net loss                                                               |                                                                                                                                     | $                        | (12,932 | )                  |         | $                | (1,921 | )     |        | $    | (30,913 | )      |         | $ | (3,770 | )     
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|Net loss per share-basic and diluted                                   |                                                                                                                                     | $                        | (0.27   | )                  |         | $                | (0.04  | )     |        | $    | (0.66   | )      |         | $ | (0.08  | )     
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       
|Weighted average number of common shares
outstanding-basic and diluted |                                                                                                                                     |                          | 47,087  |                    |         |                  | 50,304 |       |        |      | 47,025  |        |         |   | 49,369 |       
|                                                                       |                                                                                                                                     |                          |         |                    |         |                  |        |       |        |      |         |        |         |   |        |       

See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents






RAINDANCE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(Unaudited)

|                                                                                       |  |                  |         |      |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---- |  | - | ------ | -
|                                                                                       |  | Six months ended
|                                                                                       |  | June 30,        
|                                                                                       |  |                 
|                                                                                       |  | 2001             |         | 2002
|                                                                                       |  |                  |         |     
|Cash flows from operating activities:                                                  |  |                  |         |      |  |   |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Net loss                                                                               |  | $                | (30,913 | )    |  | $ | (3,770 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Adjustments to reconcile net loss to net cash provided (used) by operating activities: |  |                  |         |      |  |   |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Depreciation and amortization                                                          |  |                  | 17,993  |      |  |   | 5,132  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Loss on disposition of short-term investment                                           |  |                  | 1,195   |      |  |   |       |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Restructuring charges, contract termination expenses and asset impairment charges      |  |                  | 4,150   |      |  |   | 584    |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Stock-based compensation                                                               |  |                  | 1,433   |      |  |   | 1,436  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other                                                                                  |  |                  | 166     |      |  |   | 28     |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Changes in operating assets and liabilities:                                           |  |                  |         |      |  |   |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accounts receivable                                                                    |  |                  | (1,061  | )    |  |   | (2,777 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Prepaid expenses and other current assets                                              |  |                  | 1,201   |      |  |   | 323    |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other assets                                                                           |  |                  | 410     |      |  |   | 554    |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accounts payable and accrued expenses                                                  |  |                  | (4,883  | )    |  |   | 60     |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Deferred revenue                                                                       |  |                  | (596    | )    |  |   | (382   | )
|                                                                                       |  |                  |         |      |  |   |        |  
|Net cash provided (used) by operating activities                                       |  |                  | (10,905 | )    |  |   | 1,188  |  
|                                                                                       |  |                  |         |      |  |   |        |  
|Cash flows from investing activities:                                                  |  |                  |         |      |  |   |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Purchase of property and equipment                                                     |  |                  | (1,502  | )    |  |   | (4,414 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from disposition of equipment                                                 |  |                  | 61      |      |  |   | 3      |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cash paid for acquisition of InterAct, net of cash received                            |  |                  |        |      |  |   | (2,772 | )
|                                                                                       |  |                  |         |      |  |   |        |  
|Net cash used by investing activities                                                  |  |                  | (1,441  | )    |  |   | (7,183 | )
|                                                                                       |  |                  |         |      |  |   |        |  
|Cash flows from financing activities:                                                  |  |                  |         |      |  |   |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from issuance of common stock                                                 |  |                  | 1       |      |  |   | 796    |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Payments on debt                                                                       |  |                  | (735    | )    |  |   | (1,065 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other                                                                                  |  |                  | 13      |      |  |   |       |  
|                                                                                       |  |                  |         |      |  |   |        |  
|Net cash used by financing activities                                                  |  |                  | (721    | )    |  |   | (269   | )
|                                                                                       |  |                  |         |      |  |   |        |  
|Decrease in cash and cash equivalents                                                  |  |                  | (13,067 | )    |  |   | (6,264 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cash and cash equivalents at beginning of period                                       |  |                  | 43,311  |      |  |   | 34,222 |  
|                                                                                       |  |                  |         |      |  |   |        |  
|Cash and cash equivalents at end of period                                             |  | $                | 30,244  |      |  | $ | 27,958 |  
|                                                                                       |  |                  |         |      |  |   |        |  
|Supplemental cash flow information  interest paid in cash                             |  | $                | 106     |      |  | $ | 315    |  
|                                                                                       |  |                  |         |      |  |   |        |  
|Supplemental disclosure of non-cash investing and financing activities:                |  |                  |         |      |  |   |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accounts payable incurred for purchases of property and equipment                      |  | $                | 48      |      |  | $ | 386    |  
|                                                                                       |  |                  |         |      |  |   |        |  
|Exchange of investment for forgiveness of debt                                         |  | $                | 157     |      |  | $ |       |  
|                                                                                       |  |                  |         |      |  |   |        |  

See accompanying notes to condensed consolidated financial statements.

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



|(1) |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|--- |  | ------------------------------------------
|   
|(a) |  | Basis of presentation                     

Raindance Communications, Inc., (the Company), was incorporated under
the laws of the State of Delaware on April 17, 1997. 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 June
30, 2002 and for the three and six months ended June 30, 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
and six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the full year.

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



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

Cash and cash equivalents consist of cash held in bank deposit accounts
and short-term, highly liquid investments purchased with maturities of three
months or less at the date of purchase. Cash equivalents at June 30, 2002
consist of money market accounts at three financial institutions.



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

Included in other assets is $0.5 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



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##### 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 consists of one reporting
unit. The Companys initial assessment of goodwill 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. There can be no assurances
that the Companys goodwill will not be impaired in the future. The
reconciliation of reported net loss and reported net loss per share and
adjusted net loss and adjusted net loss per share, which represents the effect
of adopting SFAS 142, is as follows (in thousands, except per share amounts):

|                                                |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  
|----------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                |  | Three months ended |         | Six months ended
|                                                |  |                    |         |                 
|                                                |  | June 30,           |         | June 30,        
|                                                |  |                    |         |                 
|                                                |  | 2001               |         | 2002             |  | 2001 |        | 2002
|                                                |  |                    |         |                  |  |      |        |     
|Net loss                                        |  | $                  | (12,932 | )                |  | $    | (1,921 | )    |  | $ | (30,913 | ) |  | $ | (3,770 | )
|                                               
|                                               
|                                               
|                                               
|Add back: goodwill amortization                 |  |                    | 6,626   |                  |  |      |       |      |  |   | 13,252  |   |  |   |       |  
|                                                |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Adjusted net loss                               |  | $                  | (6,306  | )                |  | $    | (1,921 | )    |  | $ | (17,661 | ) |  | $ | (3,770 | )
|                                                |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Net loss per share  basic and diluted          |  | $                  | (0.27   | )                |  | $    | (0.04  | )    |  | $ | (0.66   | ) |  | $ | (0.08  | )
|                                               
|                                               
|                                               
|                                               
|Add back: goodwill amortization                 |  |                    | 0.14    |                  |  |      |       |      |  |   | 0.28    |   |  |   |       |  
|                                                |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Adjusted net loss per share  basic and diluted |  | $                  | (0.13   | )                |  | $    | (0.04  | )    |  | $ | (0.38   | ) |  | $ | (0.08  | )
|                                                |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  



|(f) |  | Revenue Recognition
|--- |  | -------------------

Revenue for our Web and Phone Conferencing service is generally based upon
the actual time that each participant is on the phone or logged onto the Web.
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) |  | Net Loss Per Share
|--- |  | ------------------

Net loss per share is presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share(SFAS 128). Under SFAS 128,
basic earnings (loss) per share (EPS) excludes dilution for potential common
stock and is

7



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##### Table of Contents



computed by dividing net income or loss attributable to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Potential common shares are comprised of shares of common stock issuable
upon the exercise of stock options and warrants and are computed using the
treasury stock method. Basic and diluted EPS are the same for the three and six
months ended June 30, 2001 and 2002 as all potential common stock instruments
are antidilutive.

The following table sets forth the calculation of net loss per share for
the three and six months ended June 30, 2001 and 2002 (in thousands, except per
share amounts):

|                                       |                                                                     |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |        | 
|-------------------------------------- | ------------------------------------------------------------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | 
|                                       |                                                                     |   | Three months ended |        | Six months ended
|                                       |                                                                     |   |                    |        |                 
|                                       |                                                                     |   | June 30,           |        | June 30,        
|                                       |                                                                     |   |                    |        |                 
|                                       |                                                                     |   | 2001               |        | 2002             |   | 2001   |        | 2002
|                                       |                                                                     |   |                    |        |                  |   |        |        |     
|Net loss                               |                                                                     | $ | (12,932            | )      |                  | $ | (1,921 | )      |      | $ | (30,913 | )      |  | $ | (3,770 | )     
|                                       |                                                                     |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|Common shares outstanding:             |                                                                     |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Historical common shares outstanding at beginning of period         |   |                    | 47,075 |                  |   |        | 48,694 |      |   |         | 46,835 |  |   |        | 48,130 | 
|                                      
|                                      
|                                      
|                                      
|                                       | Weighted average common shares issued during period                 |   |                    | 12     |                  |   |        | 1,610  |      |   |         | 190    |  |   |        | 1,239  | 
|                                       |                                                                     |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|                                       | Weighted average common shares at end of period  basic and diluted |   |                    | 47,087 |                  |   |        | 50,304 |      |   |         | 47,025 |  |   |        | 49,369 | 
|                                       |                                                                     |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|Net
loss per share  basic and diluted |                                                                     | $ | (0.27              | )      |                  | $ | (0.04  | )      |      | $ | (0.66   | )      |  | $ | (0.08  | )     
|                                       |                                                                     |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       

The following potential common shares have been excluded from the
computation of diluted net loss per share as of June 30, 2001 and 2002 because
their effect would have been antidilutive:

|                                     |  |                |           |      |  |  |           | 
|------------------------------------ |  | -------------- | --------- | ---- |  |  | --------- | 
|                                     |  | As of June 30,
|                                     |  |               
|                                     |  | 2001           |           | 2002
|                                     |  |                |           |     
|Shares issuable under stock options  |  |                | 8,104,438 |      |  |  | 8,838,342 | 
|                                    
|                                    
|                                    
|                                    
|Shares issuable pursuant to warrants |  |                | 652,790   |      |  |  | 652,790   | 

The weighted-average exercise price of stock options outstanding as of
June 30, 2001 and 2002 was $3.46 and $3.48, respectively. The weighted-average
exercise price of warrants outstanding as of June 30, 2001 and 2002 was $ 7.35.



|(2) |  | JOINT VENTURES AND ACQUISITIONS
|--- |  | -------------------------------

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 loaned 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 is being liquidated and its operations have ceased.
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 from the liquidation. 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. The Company received cash of $0.2
and $0.6 million in the first and second quarters of 2002, respectively. The
remaining receivable of approximately $0.2 million is reflected in the balance
sheet in current assets as due from affiliate.

On April 17, 2002, the Company entered into a definitive agreement to
acquire substantially all of the assets of InterAct Conferencing, LLC
(InterAct), a nationwide reseller of audio and web conferencing services. On
April 30, 2002, the Company completed the acquisition. As a result of the
acquisition, the Company expanded its sales force. In addition, the acquisition
positively impacted revenue and reduced net loss for the quarter. In connection
with the acquisition, the Company also assumed certain liabilities of InterAct
as of April 30, 2002, consisting primarily of accounts payable and a $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 are included in the Companys consolidated
financial statements.

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##### Table of Contents



The aggregate purchase consideration paid to InterAct was $7.9 million,
which is comprised of $3.8 million in cash, 1,200,982 shares of the Companys
common stock valued at $4.0 million and $0.1 million of acquisition related
expenses. $750,000 of the cash consideration is being held in escrow by the
Company for six months from the acquisition date and is reflected in accounts
payable at June 30, 2002. In addition, 997,599 shares of the Companys common
stock were deemed to be compensation for future services. Accordingly, the
Company recorded $3.4 million in deferred stock-based compensation, which will
be expensed over three years. The value of the common stock issued was
determined based on the average market price of the Companys common stock over
the three-day period before and after the terms of the acquisition were agreed
upon and announced. The acquisition has been accounted for using the purchase
method. Accordingly, the results of operations of InterAct subsequent to April
30, 2002 have been included in the Companys statements of operations for the
three and six months ended June 30, 2002. The purchase consideration
allocation is as follows:

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

The summary table below, prepared on an unaudited pro forma basis,
combines the Companys consolidated results of operations with InterActs
results of operations as if the acquisition took place on January 1, 2001 (in
thousands, except per share data).

|                                     |  |                           |         |      |  |   |        |  
|------------------------------------ |  | ------------------------- | ------- | ---- |  | - | ------ | -
|                                     |  | Six Months Ended June 30,
|                                     |  |                          
|                                     |  | 2001                      |         | 2002
|                                     |  |                           |         |     
|Revenue                              |  | $                         | 19,304  |      |  | $ | 30,774 |  
|                                    
|                                    
|                                    
|                                    
|Net loss                             |  |                           | (30,711 | )    |  |   | (3,600 | )
|                                    
|                                    
|                                    
|                                    
|Basic and diluted net loss per share |  |                           | (0.65   | )    |  |   | (0.07  | )

The pro forma results for the six months ended June 30, 2001 and June 30,
2002 combine the Companys results for the six months ended June 30, 2001 and
June 30, 2002, respectively, with the results of InterAct for the period from
January 1, 2001 through June 30, 2001 and January 1, 2002 through April 30,
2002. The pro forma results are not necessarily indicative of the results of
operations that would have occurred if the acquisition had been consummated on
January 1, 2001. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that might be achieved from the
combined operations.



|(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 and second quarters of
2002, the Company recorded charges of $0.2 and $0.4 million, respectively,
associated with offices that remain vacant while the Company continues its
efforts to sublease these facilities.

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

|                                   |  |                   |       |             |  |               |     |               |  |                 |     |  |  |   |       | 
|---------------------------------- |  | ----------------- | ----- | ----------- |  | ------------- | --- | ------------- |  | --------------- | --- |  |  | - | ----- | 
|                                   |  |                   |       |             |  | Restructuring |     |               |  |                 |     |  |  |  
|                                   |  | Reserve Balance   |       | Reserve     |  |               |     |               |  | Reserve Balance
|                                   |  | December 31, 2001 |       | Adjustments |  | Payments      |     | June 30, 2002
|                                   |  |                   |       |             |  |               |     |              
|Closure of remote sales facilities |  | $                 | 1,576 |             |  | $             | 584 |               |  | $               | 537 |  |  | $ | 1,623 | 
|                                   |  |                   |       |             |  |               |     |               |  |                 |     |  |  |   |       | 

At June 30, 2002, the Companys restructuring reserves totaled $1.6
million, of which $0.9 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 June 30, 2002, the Company has
been successful in subleasing five facilities and terminating four facility
lease commitments.

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Future minimum sublease receivables for the five subleased facilities, as
of June 30, 2002, approximate $1.9 million that will be received through August
2005. As of June 30, 2002, the facility reserve was comprised of commitments
associated with five offices. The minimum lease payments for the five offices
total approximately $76,000 per month and total future minimum lease payments
approximate $2.0 million at June 30, 2002. 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 sublease or otherwise terminate its lease
obligations in certain cities. 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 five 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 executive officers or 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 five offices. Through June 30, 2002, we have
been successful in terminating four facility leases and subleasing five
facilities. Total future minimum lease payments, not including any reductions
for subleases and other potential reductions, under all operating leases,
approximate $12.3 million at June 30, 2002. Future minimum sublease
receivables for the five subleased facilities, as of June 30, 2002, approximate
$1.9 million to be received by the Company through August 2005.



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

The Company has commitments for bandwidth usage and telephony services
with various service providers. The total commitment as of June 30, 2002 is
approximately $35.9 million to be expended through 2005. Some of these
agreements may be amended to either increase or decrease the minimum
commitments during the life of the contract.



|(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 June 30, 2002, the Companys liability would be approximately $337,500 if
the officer was terminated under certain conditions set forth in the agreement.



|(d) |  | 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 three and six months ended June 30, 2002, the Company recorded
sales to Qwest Communications International, Inc. (Qwest), of 12.9% and 14.6%,
respectively, of total revenue. The receivable due from Qwest at June 30, 2002,
all of which was current, was $1.3 million or 12.9% of the Companys total
accounts receivable balance.

10



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##### Table of Contents





|(6) |  | OFFICER LOANS
|--- |  | -------------

The Company has an unsecured note receivable dated September 7, 2000 due
from its Chief Technology Officer in the face amount of $50,000. The note is
due September 7, 2005 and bears interest at 6.22%. The balance of the
obligation, including accrued interest, at June 30, 2002 was $55,436. This
amount is included in the balance sheet in other assets.

The Company has an unsecured note receivable dated January 24, 2001 due
from its President and Chief Executive Officer in the face amount of $100,000.
The note is due January 24, 2003 and bears interest at 8.00%. The balance of
the obligation, including accrued interest, at June 30, 2002 was $111,419. This
amount is included in the balance sheet in prepaid expenses and other current
assets.



|(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.

11



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##### 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 June 30,
2002, we had an accumulated deficit of $172.3 million. Our net loss was $12.9
million and $1.9 million for the three months ended June 30, 2001 and 2002,
respectively, and $30.9 million and $3.8 million for the six months ended June
30, 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 deferred
stock-based 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 17, 2002, we entered into a definitive agreement to acquire
substantially all of the assets of InterAct Conferencing, LLC (InterAct), a
nationwide reseller of audio and web conferencing services. On April 30, 2002,
we completed the acquisition. As a result of the acquisition we have expanded
our sales force. The acquisition also has positively impacted revenue and
reduced our net loss for the quarter. In connection with the acquisition, we
also assumed certain liabilities of InterAct as of April 30, 2002, consisting
primarily of 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 are
included in our consolidated financial statements. The aggregate purchase
consideration paid to InterAct was approximately $7.9 million, including $3.8
million in cash, 1,200,982 shares of our common stock valued at $4.0 million
and $0.1 million in acquisition related expenses. In addition, 997,599 shares
of the Companys common stock were deemed to represent contingent purchase
consideration and accordingly, the Company recorded $3.4 million in deferred
stock-based compensation, which will be expensed over three years. The value of
the common stock issued was determined based on the average market price of our
common stock over the three-day period before and after the terms of the
acquisition were agreed upon and announced. The purchase price of $7.9 million
was allocated as follows: $1.0 million was allocated to the net assets acquired
and $6.9 million was allocated to goodwill.

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 99% and 95% of our total revenue for the
three and six months ended June 30, 2001, respectively. As part of the
restructuring announced in January 2001, we indicated our intent to

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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 and six months
ended June 30, 2002. The following describes how we recognize revenue for the
services we have offered in 2001 and 2002.



| |  | Web and Phone Conferencing Revenue. Revenue for our Web and Phone
Conferencing service is generally based upon the actual time that each
participant is on the phone or logged onto the Web. 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 2002, will accommodate our revenue projections through 2002.
We have a limited number of sources for our telephony services. One of our
suppliers is WorldCom, which filed for Chapter 11 bankruptcy protection in July
2002. If WorldCom were to terminate or interrupt services, we would experience
difficulties in obtaining alternative sources on commercially reasonable terms,
if at all, and would experience an increase in our variable telephony cost.

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 capitalized $119,000 and
$117,000 of internally developed software in the first and second quarters of
2002, respectively. We

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expect to continue to make investments in research and development and
anticipate that these expenditures 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.

Since our inception, we have used stock-based compensation for employees,
consultants and members of our board of directors to attract and retain strong
business and technical personnel. During the three and six months ended June
30, 2002 we recorded $3.5 million and $3.6 million of deferred stock-based
compensation, respectively, and we expensed $0.8 million and $1.4 million
related to stock-based compensation, respectively. $3.4 million of the deferred
stock-based compensation we recorded in the second quarter of 2002 relates to
997,599 shares of common stock issued simultaneously with the closing of the
InterAct acquisition, which is being held in escrow and is scheduled to be
released in equal one-third increments and will be expensed over three years,
beginning in May 2002. The stock held in escrow is contingent upon certain
employment obligations of Carolyn Bradfield, the President and Chief Executive
Officer of InterAct. The value of these escrowed shares was determined based on
the average market price of our common stock over the three-day period before
and after the terms of the acquisition were agreed upon and announced.
Additionally, we also reversed $0.3 million and $0.4 million of deferred
stock-based compensation related to the cancellation of unvested stock options
for the three and six months ended June 30, 2002. 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 $1.5 million over the
remainder of 2002, $2.5 million in 2003, $1.2 million in 2004 and $0.4 million
in 2005 for common stock issued or stock options awarded to our employees or
members of our board of directors through June 30, 2002, under our stock
compensation plans and the common stock held in escrow as a result of the
InterAct acquisition.

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 June 30, |         | Six Months Ended June 30,
|                                                                                |  |                             |         |                          
|                                                                                |  | 2001                        |         | 2002                      |  | 2001 |        | 2002
|                                                                                |  |                             |         |                           |  |      |        |     
|Net loss                                                                        |  | $                           | (12,932 | )                         |  | $    | (1,921 | )    |  | $ | (30,913 | ) |  | $ | (3,770 | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Add: Amortization of goodwill                                                   |  |                             | 6,626   |                           |  |      |       |      |  |   | 13,252  |   |  |   |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Add: Stock-based compensation expense                                           |  |                             | 1,037   |                           |  |      | 787    |      |  |   | 1,433   |   |  |   | 1,436  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Add: Loss on sale of common stock                                               |  |                             |        |                           |  |      |       |      |  |   | 1,195   |   |  |   |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Add: Asset impairment charges                                                   |  |                             | 2,794   |                           |  |      |       |      |  |   | 2,794   |   |  |   |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|(Less) Add: Restructuring charges (reversals) and
contract termination expenses |  |                             | (1,326  | )                         |  |      | 412    |      |  |   | 1,255   |   |  |   | 584    |  
|                                                                                |  |                             |         |                           |  |      |        |      |  |   |         |   |  |   |        |  
|Loss before amortization and charges                                            |  | $                           | (3,801  | )                         |  | $    | (722   | )    |  | $ | (10,984 | ) |  | $ | (1,750 | )
|                                                                                |  |                             |         |                           |  |      |        |      |  |   |         |   |  |   |        |  

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 each of the quarters of
2001. As a result of this new accounting standard, which became

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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 and six months ended
June 30, 2001 as compared with the three and six months ended June 30, 2002,
our net loss decreased by $11.0 million and by $27.1 million, respectively.
For the three months and six months ended June 30, 2001 as compared with the
three and six months ended June 30, 2002, our LBAC decreased by $3.1 million
and by $9.2 million, respectively.

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 $2.9 million and $10.9 million for
the three and six months ended June 30, 2001, respectively, and net cash
provided by operations was $0.8 million and $1.2 million for the three and six
months ended June 30, 2002, respectively; net cash used by investing activities
was $0.9 million and $1.4 million for the three and six months ended June 30,
2001, respectively, and $5.1 million and $7.2 million for the three and six
months ended June 30, 2002, respectively; net cash used by financing activities
was $0.4 million and $0.7 million for the three and six months ended June 30,
2001, respectively, and $0.2 million and $0.3 million for the three and six
months ended June 30, 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.

Results of Operations

Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended June 30, 2001

Revenue.Total revenue increased by $6.3 million from $9.1 million for the
quarter ended June 30, 2001 to $15.4 million for the quarter ended June 30,
2002. Total revenue increased by $11.2 million from $18.1 million for the six
months ended June 30, 2001 to $29.3 million for the six months ended June 30,
2002. The increase was primarily due to increased customer account penetration
and the addition of new customers, including the customers we acquired as a
result of the acquisition of InterAct in the second quarter of 2002.
Additionally, we amended a contract with one of our customers to reflect
increased utilization of our services by this customer. The effect of this
amendment will terminate an existing agreement early on September 30, 2002. As
such, we recorded $0.8 million in revenue from this customer in the second
quarter of 2002 and expect to record a similar amount in the third quarter of
2002. Any future revenue derived from this customer is expected to be based on
usage of our services. Since the restructuring announced in January 2001, we
have focused 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 $1.7 million from $5.6 million
for the three months ended June 30, 2001 to $7.3 million for the three months
ended June 30, 2002. Cost of revenue increased $2.4 million from $11.8 million
for the six months ended June 30, 2001 to $14.2 million for the six months
ended June 30, 2002. Depreciation expense decreased $0.4 million for the
quarter ended June 30, 2002 over the quarter ended June 30, 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 $2.1
million for the quarter ended June 30, 2002 over the quarter ended June 30,
2001. This increase resulted from additional telephony charges consistent with
increased use of our Web and Phone Conferencing service. Depreciation expense
decreased $1.1 million for the six months ended June 30, 2002 over the six
months ended June 30, 2001 primarily due to the write-down of particular assets
to their fair value in the second quarter of 2001. Telecommunication costs
increased $4.1 million for the six months ended June 30, 2002 over the six
months ended June 30, 2001, consistent with increased use of our Web and Phone
Conferencing service. Maintenance and repairs expense decreased $0.6 million
for the six months ended June 30, 2002 over the six months ended June 30, 2001.
This decrease resulted primarily from 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 increased $0.3 million
from $4.5 million for the three months ended June 30, 2001 to $4.8 million for
the three months ended June 30, 2002. Sales and marketing expense decreased
$2.2 million from $11.2 million for the six months ended June 30, 2001 to $9.0
million for the six months ended June 30, 2002.

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Expenses related to advertising and promotion decreased $0.2 million for
the three months ended June 30, 2002 over the same period in 2001. In the
second quarter of 2001 we incurred $0.3 million in expenses related to our name
change. Personnel and payroll related expenses increased $0.6 million from the
three months ended June 30, 2001 as compared to the three months ended June 30,
2002 due to increased headcount associated with the Companys acquisition of
InterAct in April 2002. Allocated depreciation expense increased $0.4 million
from the three months ended June 30, 2001 to the three months ended June 30,
2002 also on account of increased sales and marketing headcount. Expenses
related to advertising and promotion decreased $1.7 million for the six months
ended June 30, 2002 from the six months ended June 30, 2001. For the six
months ended June 30, 2001 we incurred $0.6 million in expenses related to our
name change. Expenses related to outside services decreased $0.6 million for
the six months ended June 30, 2002 from the six months ended June 30, 2001.
Offsetting these decreases, allocated depreciation expense increased $0.7
million for the six months ended June 30, 2002 from the six months ended June
30, 2001 on account of increased headcount.

Research and Development.Research and development expense increased $0.9
million from $1.2 million for the three months ended June 30, 2001 to $2.1
million for the three months ended June 30, 2002. Research and development
expense increased $1.4 million from $2.7 million for the six months ended June
30, 2001 to $4.1 million for the six months ended June 30, 2002. Personnel and
payroll related expenses increased $0.5 million for the three months ended June
30, 2002 from the three months ended June 30, 2001 as a result of an increase
in headcount and salaries. The remainder of the increase for the three months
ended June 30, 2002 over the three months ended June 30, 2001 is explained by a
$0.3 million increase in allocated depreciation and a $0.1 million increase in
maintenance and repairs. Personnel and payroll related expenses increased $0.6
million for the six months ended June 30, 2002 over the six months ended June
30, 2001. The remainder of the increase for the six months ended June 30, 2002
over the six months ended June 30, 2001 is related to allocated depreciation
and maintenance and repair expenses.

General and Administrative.General and administrative expense increased
$0.1 million from $1.8 million for the three months ended June 30, 2001 to $1.9
million for the three months ended June 30, 2002. General and administrative
expense decreased $0.3 million from $4.0 million for the six months ended June
30, 2001 to $3.7 million for the six months ended June 30, 2002. Bonuses and
depreciation expense increased slightly and were offset by a reduction in
outside services for the three months ended June 30, 2002 over the three months
ended June 30, 2001. Expenses related to outside services decreased $0.3
million for the six months ended June 30, 2002 over the six months ended June
30, 2001. In the first quarter of 2001, we incurred $0.2 million in royalty
expenses pertaining to a contract that was terminated during the quarter.
Offsetting this decrease, allocated depreciation increased $0.2 million for the
six months ended June 30, 2002 over the same period in 2001.

Amortization of Goodwill.Amortization of goodwill was $6.6 million and
$13.3 million for the three and six months ended June 30, 2001, respectively,
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. In
addition, we recorded $6.9 million in goodwill as a result of the InterAct
acquisition. At June 30, 2002, we had approximately $45.6 million in goodwill
which we will test for impairment on an annual basis.

Stock-Based Compensation Expense.Stock-based compensation expense
decreased $0.2 million from $1.0 million for the three months ended June 30,
2001 to $0.8 million for the three months ended June 30, 2002. Stock-based
compensation expense remained consistent for the six months ended June 30, 2001
and June 30, 2002. Prior to our initial public offering, options and stock
purchase rights were granted at less than the estimated initial public offering
price resulting in deferred compensation charges, which are being recognized
over vesting periods ranging from one to four years. $3.4 million of the
deferred stock-based compensation we recorded in the second quarter of 2002
relates to 997,599 shares of common stock issued simultaneously with the
closing of the InterAct acquisition, which are being held in escrow and are
scheduled to be released in equal one-third increments and will be expensed
over three years, beginning in May 2002.

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 and second
quarters of 2002, we recorded a charge of $0.2 million and $0.4 million,
respectively, associated with offices that remain

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vacant while we continue our efforts to sublease these facilities. At June
30, 2002, the restructuring reserves totaled $1.6 million, of which $0.9 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
June 30, 2002, we have been successful in subleasing five facilities and
terminating four facility lease commitments. As of June 30, 2002, the facility
reserve was comprised of commitments associated with five 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 sublease 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 five 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 $0.3 million from $0.4
million for the three months ended June 30, 2001 to $0.1 million for the three
months ended June 30, 2002. Interest income decreased $0.6 million from $0.9
million for the six months ended June 30, 2001 to $0.3 million for the six
months ended June 30, 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 and $0.2 for the three and six months ended June 30, 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 June 30, 2002, cash and cash equivalents were $28.0 million, a
decrease of $6.3 million compared with cash and cash equivalents held as of
December 31, 2001.

Net cash used in operations was $10.9 million and net cash provided by
operations was $1.2 million for the six months ended June 30, 2001 and 2002,
respectively. Cash used in operations decreased significantly from the first
six months of 2001 as compared to the first six months of 2002 as we generated
positive cash flows from operations in the first six months of 2002. The
improvement is due to a significant decrease in our operating loss, an increase
in accounts payable, a decrease in prepaid expenses and other assets partially
offset by lower non-cash expenses, an increase in accounts receivable and a
decrease in deferred revenue.

Net cash used by investing activities was $1.4 and $7.2 million for the
six months ended June 30, 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 six months 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.
Additionally, we paid, net of cash received, $2.8 million to InterAct in
connection with the acquisition of substantially all of their assets on April
30, 2002.

Net cash used by financing activities was $0.7 million for the six months
ended June 30, 2001 and $0.3 million for the six months ended June 30, 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 June 30, 2002, we had approximately $3.9 million in total debt
obligations outstanding, of which approximately $1.7 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 June 30, 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 $6.8 million. The
loan and security agreement is subject to compliance with covenants, including
minimum liquidity coverage, minimum quick ratio and maximum quarterly operating

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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 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 June 30, 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 $6.3 million in the first six months
of 2002, we generated positive cash flows from operations for the third
consecutive quarter. Looking ahead we expect both our debt service payments and
cash basis capital expenditures to increase in 2002 over 2001. Additionally, we
paid $2.8 million to InterAct in connection with the acquisition of
substantially all of their assets. We expect to expend $0.8 million in the
fourth quarter of 2002 when the escrowed funds in connection with the InterAct
transaction are released. 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. In the first and second
quarters of 2002, we recorded sales to Qwest Communications International, Inc.
of 16.6% and 12.9%, respectively, of total revenue. The receivable due from
Qwest at June 30, 2002, all of which was current, was $1.3 million or 12.9% 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. In the
six months ended June 30, 2002 we received approximately $0.8 million in cash.
We anticipate receiving, prior to December 31, 2002, the remaining balance of
approximately $0.2 million.

As of June 30, 2002, our purchase commitments for bandwidth usage and
telephony services were approximately $35.9 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 June 30, 2002 are approximately $12.3
million. We are in the process of attempting to sublease or otherwise minimize
our lease commitments with respect to five 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 June 30, 2002, we have been successful in terminating four
facility leases, thereby relieving ourselves of any future obligation, and we
have been successful in subleasing five facilities. Future minimum sublease
receivables for the five subleased facilities, as of June 30, 2002, approximate
$1.9 million that we expect to receive through August 2005.

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Our contractual obligations and commitments to make future payments as of
June 30, 2002 are as follows (in thousands):

|                                              |  |                        |        |             |  |           |        |           |  |              |        |  |  |   |       |  |  |   |       | 
|--------------------------------------------- |  | ---------------------- | ------ | ----------- |  | --------- | ------ | --------- |  | ------------ | ------ |  |  | - | ----- |  |  | - | ----- | 
|                                              |  | Payments Due by Period
|                                              |  |                       
|                                              |  | Total                  |        | Less than 1 |  | 2-3 years |        | 4-5 years |  | Over 5 years
|                                              |  |                        |        | year        |  |           |        |           |  |             
|                                              |  |                        |        |             |  |           |        |           |  |              |        |  |  |   |       |  |  |  
|Long-term debt                                |  | $                      | 3,893  |             |  | $         | 1,671  |           |  | $            | 2,222  |  |  | $ |      |  |  | $ |      | 
|                                             
|                                             
|                                             
|                                             
|Operating leases                              |  |                        | 12,289 |             |  |           | 2,822  |           |  |              | 4,940  |  |  |   | 2,627 |  |  |   | 1,900 | 
|                                             
|                                             
|                                             
|                                             
|Unconditional purchase obligations            |  |                        | 35,896 |             |  |           | 15,819 |           |  |              | 19,525 |  |  |   | 493   |  |  |   | 59    | 
|                                              |  |                        |        |             |  |           |        |           |  |              |        |  |  |   |       |  |  |   |       | 
|Total contractual obligations and commitments |  | $                      | 52,078 |             |  | $         | 20,312 |           |  | $            | 26,687 |  |  | $ | 3,120 |  |  | $ | 1,959 | 
|                                              |  |                        |        |             |  |           |        |           |  |              |        |  |  |   |       |  |  |   |       | 

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.




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.

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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 $172.3 million from our inception
through June 30, 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 $12.3 million in the four quarters ended June 30, 2002. Our quarterly
revenues ranged between $10.1 million and $15.4 million in the four quarters
ended June 30, 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 summer, Thanksgiving, December and New Year holidays. We
expect that our revenue during the summer vacation period and during these
holiday seasons will not grow at the same rates as compared to other periods of
the year because of decreased use of our services by business customers.

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

We purchase 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 also have a limited number of sources for our telephony
services. One of these suppliers is WorldCom, which filed for Chapter 11
bankruptcy protection in July 2002. If this supplier were to terminate or
interrupt services, we would experience difficulties in obtaining alternative
sources on commercially reasonable terms, if at all, or in integrating
alternative sources into our technology platform. We also rely on a single
supplier for the majority of our storage hardware, which store critical
operations data and maintain the

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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 second quarter of 2002, we
recorded sales to Qwest Communications International, Inc., which represented
12.9% of total 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 second quarter of 2002, we
commercially released our Web Conferencing Pro 5.3 service, an upgrade to the
prior 5.1 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 revenue 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.

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.

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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
revenue, 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.

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

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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 ability to
attract multi-national customers and cause our operating losses to increase.

We have attempted to expand into international markets and spent
significant financial and managerial resources to do so. In particular, we
formed a joint venture 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 attract multi-national customers. Further, 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;
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | 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.                                                            

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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 or liabilities 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. In particular, we have
extended our sales force substantially with the acquisition and have
transitioned the management of the sales force to the former Chief Executive
Officer of InterAct, located in our Georgia facility. We are not experienced in
managing facilities, people and operations in geographically diverse areas. 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 could adversely affect the
impact of the sales force if we are unsuccessful in the transition of its
management.

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;                                                      
|
| |  |  | 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

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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 reengineer them or seek
licenses to necessary intellectual property, which might not be available on
commercially reasonable terms or at all. As the number of competitors in our
market grows, there is an increased risk that the proprietary systems and
software upon which our services rely may be increasingly subject to
third-party infringement claims.

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

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

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

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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 intangible assets, 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
operations. However, we urge investors to carefully review the GAAP financial
information included as part of our Quarterly Reports on Form 10-Q, and 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;                                                
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | 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,

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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 June 30, 2002, we had long-term debt, including current portion, in the
aggregate amount of $3.9 million at an interest rate of 8% with payments due
through October 2004. A change in interest rates would not affect our
obligations related to long-term debt existing as of June 30, 2002, as the
interest payments related to that debt are fixed over the term of the debt. At
June 30, 2002, we had a $7.25 million revolving line of credit with a loan
value of $6.8 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 June 30, 2002, we may purchase
investments that may decline in value as a result of changes in equity markets
and interest rates.

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PART II. OTHER INFORMATION




Item 1.Legal Proceedings

From time to time, we have been subject to legal proceedings and claims in
the ordinary course of business. 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

On April 30, 2002, we issued an aggregate of 2,198,581 shares of our
common stock to InterAct Conferencing, LLC (InterAct) in connection with our
acquisition of substantially all of the assets of InterAct. We relied upon
Rule 506 under the Securities Act of 1933, as amended (the Securities Act),
and Section 4(2) of the Securities Act, as an exemption from the registration
requirements of the Securities Act for this issuance. In connection with the
issuance, InterAct and its members had access to information about our business
and common stock.

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: $38.2 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

An Annual Meeting of Stockholders of the Company was held on June 6, 2002.
The stockholders elected three Class II directors to serve for three-year
terms. The stockholders present in person or by proxy cast the following
number of votes in connection with the election of directors, resulting in the
election of all nominees:

|                    |  |           |            |                |  |  |         | 
|------------------- |  | --------- | ---------- | -------------- |  |  | ------- | 
|                    |  | Votes For |            | Votes Withheld
|                    |  |           |            |               
|Bradley A. Feld     |  |           | 43,945,554 |                |  |  | 171,129 | 
|                   
|                   
|                   
|                   
|Steven C. Halstedt  |  |           | 43,933,170 |                |  |  | 183,513 | 
|                   
|                   
|                   
|                   
|Patrick J. Lombardi |  |           | 43,942,653 |                |  |  | 174,030 | 

The stockholders ratified the appointment of KPMG LLP as the Companys
independent auditors for the fiscal year ended 2002 by the following vote:

|           |  |         |         |         |  |                  |        |  |  |  |   | 
|---------- |  | ------- | ------- | ------- |  | ---------------- | ------ |  |  |  | - | 
|For        |  | Against |         | Abstain |  | Broker Non-Votes
|           |  |         |         |         |  |                 
|43,483,392 |  |         | 596,256 |         |  |                  | 37,035 |  |  |  | 0 | 




Item 5.Other Information

None.

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Item 6.Exhibits and Reports on Form 8-K

(A.) Exhibits

|            |  |                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                         
|            |  |                                                                                                                                                                     
|10.16.1     |  | Amendment to Personal Services Agreement, dated June 26,
2002, between the Company and Paul Berberian.                                                              
|           
|           
|           
|           
|            |  |                                                                                                                                                                     
|           
|           
|           
|           
|99.1        |  | Chief Executive Officer and Chief Financial
Officer Certificate pursuant to Section 906 of the Public
Company Accounting Reform and Investor Protection Act of
2002.

(B.) Reports on Form 8-K



| |      
| | -----
| | None.

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SIGNATURES

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

|                      |  |                                |  |                                                      
|--------------------- |  | ------------------------------ |  | -----------------------------------------------------
|                      |  | RAINDANCE COMMUNICATIONS, INC.
|                     
|                     
|                     
|                     
|                      |  |                                |  |                                                      
|                     
|                     
|                     
|                     
|Date: August 14, 2002 |  | By:                            |  | /s/ Nicholas J. Cuccaro                              
|                      |  |                                |  |                                                      
|                      |  |                                |  | Chief Financial Officer
(Principal Financial Officer)

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INDEX TO EXHIBITS



|            |  |                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                         
|            |  |                                                                                                                                                                     
|10.16.1     |  | Amendment to Personal Services Agreement, dated June 26,
2002, between the Company and Paul Berberian.                                                              
|           
|           
|           
|           
|            |  |                                                                                                                                                                     
|           
|           
|           
|           
|99.1        |  | Chief Executive Officer and Chief Financial
Officer Certificate pursuant to Section 906 of the Public
Company Accounting Reform and Investor Protection Act of
2002.