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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934For the transition period from  to.
 Commission File Number: 000-31045 RAINDANCE COMMUNICATIONS, INC. (Exact Name of Registrant as specified in its charter)
 Delaware
    
    84-1407805(State or jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 1157 Century Drive
Louisville, CO 80027(Address, including zip code, of principal executive offices) (800) 878-7326(Registrants telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Common Stock, $0.0015 Par Value
    
    
    
    54,939,557 as of October 31, 2004.




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RAINDANCE COMMUNICATIONS, INC. INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Balance Sheets as of September 30, 2004 and
December 31, 2003 (unaudited)
    
    
    3Condensed Statements of Operations for the three and
nine months ended September 30, 2004 and 2003 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003 (unaudited)
    
    
    5Notes to the Condensed Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Additional Risk Factors that May Affect Our Operating
Results and The Market Price of Our Common Stock
    
    
    27Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4.
    
    Controls and Procedures
    
    
    39PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    40Item 3.
    
    Defaults Upon Senior
Securities
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security
Holders
    
    
    40Item 5.
    
    Other Information
    
    
    40Item 6.
    
    Exhibits
    
    
    40SIGNATURES AND CERTIFICATIONS
    
    
    42Amendment to Offer Letter - Donald F. Detampel, Jr.Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certifications of CEO and CFO Pursuant to Section 906
  Our website address is www.raindance.com. Our registration statement on
Form S-1, annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, as well as any amendments to those reports, are
available free of charge through our website as soon as reasonably practicable
after we file them with, or furnish them to, the SEC. Once at
www.raindance.com, go to Investor Center/SEC Filings and Financials. 2.




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PART I. FINANCIAL INFORMATION 
 Item 1.Financial Statements RAINDANCE COMMUNICATIONS, INC. 
 CONDENSED BALANCE SHEETS
 (In thousands, except share and per share data)
 (Unaudited)
 September 30,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    37,210
    
    
    $
    39,607Short-term investments
    
    
    5,021
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of $350 and $300 at
September 30, 2004 and December 31, 2003, respectively
    
    
    10,841
    
    
    
    8,958Due from affiliate
    
    
    
    
    
    
    86Prepaid expenses and other current assets
    
    
    2,023
    
    
    
    1,679Due from employees
    
    
    16
    
    
    
    14Total current assets
    
    
    55,111
    
    
    
    50,344Property and equipment, net
    
    
    19,847
    
    
    
    25,752Goodwill
    
    
    45,587
    
    
    
    45,587Due from employees
    
    
    2
    
    
    
    2Other assets
    
    
    584
    
    
    
    872Total Assets
    
    $
    121,131
    
    
    $
    122,557Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    8,963
    
    
    $
    7,598Current portion of long-term debt
    
    
    174
    
    
    
    1,314Accrued expenses
    
    
    330
    
    
    
    573Accrued compensation
    
    
    2,507
    
    
    
    2,694Accrued severance obligation
    
    
    410
    
    
    
    596Current portion of restructuring reserve
    
    
    258
    
    
    
    278Deferred revenue
    
    
    286
    
    
    
    112Total current liabilities
    
    
    12,928
    
    
    
    13,165Long-term debt, less current portion
    
    
    
    
    
    
    1,227Restructuring reserve, less current portion
    
    
    
    
    
    
    187Other
    
    
    
    
    
    
    56Total Liabilities
    
    
    12,928
    
    
    
    14,635Stockholders Equity:Common stock, par value $.0015; 130,000,000 shares authorized; 54,922,154 and 53,784,427
shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively
    
    
    82
    
    
    
    81Additional paid-in capital
    
    
    280,529
    
    
    
    278,440Deferred stock-based compensation
    
    
    (1,085
    )
    
    
    (2,247
    )Accumulated deficit
    
    
    (171,323
    )
    
    
    (168,352
    )Total Stockholders Equity
    
    
    108,203
    
    
    
    107,922Commitments and contingenciesTotal Liabilities and Stockholders Equity
    
    $
    121,131
    
    
    $
    122,557
 See accompanying notes to condensed financial statements. 3.




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RAINDANCE COMMUNICATIONS, INC. 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue:Service
    
    $
    18,408
    
    
    $
    16,959
    
    
    $
    57,319
    
    
    $
    49,233Software
    
    
    
    
    
    
    1,056
    
    
    
    
    
    
    
    1,056Total Revenue
    
    
    18,408
    
    
    
    18,015
    
    
    
    57,319
    
    
    
    50,289Cost of revenue:Service
    
    
    8,431
    
    
    
    7,394
    
    
    
    26,032
    
    
    
    20,745Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total cost of revenue (exclusive of stock-based compensation expense of
$0, $26, $2 and $85, respectively, shown below)
    
    
    8,431
    
    
    
    7,394
    
    
    
    26,032
    
    
    
    20,745Gross profit
    
    
    9,977
    
    
    
    10,621
    
    
    
    31,287
    
    
    
    29,544Operating expenses:Sales and marketing (exclusive of stock-based
compensation expense of $7, $23, $25 and $161,
respectively, shown below)
    
    
    6,005
    
    
    
    4,644
    
    
    
    18,795
    
    
    
    13,949Research and development (exclusive of stock-based
compensation expense of $46, $163, $115 and
$534, respectively, shown below)
    
    
    2,618
    
    
    
    2,159
    
    
    
    7,771
    
    
    
    5,877General and administrative (exclusive of
stock-based compensation expense of $81, $467,
$1,930 and $1,458, respectively, shown below)
    
    
    1,699
    
    
    
    1,993
    
    
    
    5,736
    
    
    
    5,411Stock-based compensation expense
    
    
    134
    
    
    
    679
    
    
    
    2,072
    
    
    
    2,238Total operating expenses
    
    
    10,456
    
    
    
    9,475
    
    
    
    34,374
    
    
    
    27,475Income (loss) from operations
    
    
    (479
    )
    
    
    1,146
    
    
    
    (3,087
    )
    
    
    2,069Other income, net
    
    
    87
    
    
    
    6
    
    
    
    116
    
    
    
    35Net income (loss)
    
    $
    (392
    )
    
    $
    1,152
    
    
    $
    (2,971
    )
    
    $
    2,104Net income (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04Diluted
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04Weighted average number of common shares outstanding:Basic
    
    
    54,079
    
    
    
    53,565
    
    
    
    53,831
    
    
    
    53,135Diluted
    
    
    54,079
    
    
    
    55,320
    
    
    
    53,831
    
    
    
    54,733
 See accompanying notes to condensed financial statements. 4.




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RAINDANCE COMMUNICATIONS, INC. 
 CONDENSED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (Unaudited)
 Nine months endedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (2,971
    )
    
    $
    2,104Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    8,431
    
    
    
    7,715Stock-based compensation
    
    
    2,072
    
    
    
    2,238Other
    
    
    50
    
    
    
    36Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,883
    )
    
    
    (1,337
    )Prepaid expenses and other current assets
    
    
    (1,107
    )
    
    
    (828
    )Other assets
    
    
    64
    
    
    
    (58
    )Accounts payable and accrued expenses
    
    
    718
    
    
    
    1,025Deferred revenue
    
    
    174
    
    
    
    (307
    )Net cash provided by operating activities
    
    
    5,548
    
    
    
    10,588Cash flows from investing activities:Purchase of property and equipment
    
    
    (2,067
    )
    
    
    (6,882
    )Proceeds from disposition of equipment
    
    
    18
    
    
    
    29Purchase of investments
    
    
    (11,242
    )
    
    
    Proceeds from sale of investments
    
    
    6,220
    
    
    
    Cash received from
affiliate
    
    
    77
    
    
    
    Change in restricted cash
    
    
    236
    
    
    
    194Net cash used in investing activities
    
    
    (6,758
    )
    
    
    (6,659
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    1,180
    
    
    
    1,077Payments on debt
    
    
    (2,367
    )
    
    
    (873
    )Net cash provided by (used in) financing activities
    
    
    (1,187
    )
    
    
    204Increase (decrease) in cash and cash equivalents
    
    
    (2,397
    )
    
    
    4,133Cash and cash equivalents at beginning of period
    
    
    39,607
    
    
    
    31,699Cash and cash equivalents at end of period
    
    $
    37,210
    
    
    $
    35,832Supplemental
cash flow information - interest paid in cash
    
    $
    64
    
    
    $
    126Supplemental disclosure of non-cash investing and financing activities:Accounts payable incurred for purchases of property and equipment
    
    $
    216
    
    
    $
    520Debt incurred for purchases of property and equipment
    
    $
    
    
    
    $
    686
 See accompanying notes to condensed financial statements. 5.




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RAINDANCE COMMUNICATIONS, INC. 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation Raindance Communications, Inc., (the Company), was incorporated under
the laws of the State of Delaware on April 17, 1997. The Company provides
communication services for everyday business meetings and events. The Companys
continuum of interactive services includes Reservationless Conferencing for
reservationless automated audio conferencing with simple web controls and
presentation tools, Web Conferencing Pro, which allows users to integrate
reservationless automated audio conferencing with advanced web interactive
tools such as application sharing, web touring and online whiteboarding,
Raindance Meeting Edition, released in March 2004, which allows users to
integrate reservationless automated audio conferencing with advanced web
interactive tools and video technology into one multi-media conferencing
solution, Operator Assisted Conferencing, and Unlimited Conferencing. The
Company operates in a single segment. The accompanying condensed financial statements as of September 30, 2004
and for the three and nine months ended September 30, 2004 and 2003 are
unaudited and have been prepared in accordance with generally accepted
accounting principles on a basis consistent with the December 31, 2003 audited
financial statements and include normal recurring adjustments which are, in the
opinion of management, necessary for a fair statement of the results of these
periods. These condensed statements should be read in conjunction with our
financial statements and notes related thereto included in our Form 10-K
(Commission File No. 000-31045), filed on March 12, 2004. Operating results for
the three and nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the full year. The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ materially from those estimates.
Significant estimates are used in these financial statements to determine the
allowance for doubtful accounts, useful lives of depreciable tangible and all
intangible assets, the valuation allowance for deferred tax assets and
restructuring charges and reserves. (b) Cash, Cash Equivalents and Investments in Debt Securities Cash and cash equivalents consist of cash held in bank deposit accounts
and short-term, highly liquid investments purchased with original maturities of
three months or less at the date of purchase. Cash equivalents at September 30,
2004 consist of money market accounts at three financial institutions.
Short-term investments consist of a United States government note and a
certificate of deposit. The Companys investments consist of available-for-sale debt securities
whose costs approximate fair value and, accordingly, there are no unrealized
gains or losses. September 30, 2004
    
    December 31, 2003Cost and approximate fair value of
available-for-sale debt securities:United States Treasury note
    
    $
    4,998
    
    
    $
    Certificate of deposit
    
    
    23
    
    
    
    Total available-for-sale debt securities
    
    $
    5,021
    
    
    $
    
 All of the Companys available-for-sale debt securities have contractual
maturities of one year or less. 6.




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(c) Restricted Cash Included in other assets is restricted cash, which is negligible and $0.3
million at September 30, 2004 and 2003, respectively. 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 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 the
related lease terms or their estimated useful lives. Upon retirement or sale,
the cost of the assets disposed and the related accumulated depreciation is
removed from the accounts and any resulting gain or loss is included in
operations in the period realized. (e) Goodwill The Company follows the provisions of Statement of Financial Accounting
Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. With
regard to the realizability of the Companys carrying amount of goodwill, SFAS
142 requires that goodwill not be amortized, but instead be reviewed for
impairment at least annually. The Company consists of one reporting unit. In
accordance with SFAS 142, the Company performed, as of March 31, 2004, the
annual reassessment and impairment test, which indicated that the fair value of
the reporting unit exceeded the goodwill carrying value; and therefore, at that
time, goodwill was not deemed to be impaired. There have been no subsequent
indicators of impairment. There can be no assurances that the Companys
goodwill will not be impaired in the future. (f) Fair Value of Financial Instruments and Concentrations of Credit Risk The carrying amounts of certain of the Companys financial instruments,
including cash and cash equivalents, accounts receivable and accounts payable,
approximate fair value because of the short-term nature of these instruments.
Because the interest rates on the Companys note payable obligation reflect
market rates and terms, the fair value of this instrument approximates the
carrying amount. Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. The Companys cash and cash equivalents
are held with financial institutions that the Company believes to be of high
credit standing. Investment policies have been implemented that limit the
purchases of investments to investment grade securities. The Companys customer
base consists of a large number of geographically dispersed customers
diversified across several industries. No single customer accounted for greater
than 10% of revenue in the first, second or third quarters of 2004; however,
one customer represented 10.2% of the Companys accounts receivable at
September 30, 2004. The receivable due from Qwest Communications International,
Inc. at September 30, 2004 was $1.1 million. (g) Revenue Recognition Revenue for the Companys Reservationless Conferencing service is
generally based upon the actual time that each participant is on the phone or
logged onto the web. For example, a customer is charged a per-minute, per-user
fee for each participant listening and viewing a live or recorded simulcast. In
addition, the Company charges customers a one-time fee to upload visuals for a
phone conference or a recorded simulcast. The Company recognizes usage revenue
from its Reservationless Conferencing service in the period the call or
simulcast of the call is completed. The Company recognizes revenue associated
with any initial set-up fees ratably over the term of the contract. Revenue for the Companys Web Conferencing Pro service is derived from
subscription and usage fees in addition to event fees or, in more limited
cases, a software license fee. Revenue from subscriptions is recognized monthly
regardless of usage, while usage fees are based upon either connections or
minutes used. Event fees are generally hourly charges that are recognized as
the events take place. The Company recognizes revenue associated with any
initial set-up fees ratably over the term 7.




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of the contract. Revenue from software license agreements is either
recognized upon shipment of the software when all the following criteria have
been met: persuasive evidence of an arrangement exists, delivery has occurred,
the fee is fixed or determinable, collectibility is probable, and
vendor-specific objective evidence is available for the fair value of all
undelivered elements, or recognized ratably over the software support period if
the Company does not have vendor-specific objective evidence for an undelivered
element. Revenue for the Companys Raindance Meeting Edition service is derived
from subscription and usage fees. Revenue from subscriptions is recognized
monthly regardless of usage, while usage fees are based upon either connections
or minutes used. The Company recognizes revenue associated with any initial
set-up fees ratably over the term of the contract. Revenue for the Companys Operator Assisted Conferencing service is
generally based upon the actual time that each participant is on the phone. In
addition, the Company charges customers a fee for additional services such as
call taping, digital replay, participant lists and transcription services. The
Company recognizes usage revenue and related fees from our Operator Assisted
Conferencing service in the period the call is completed. Revenue from the Companys Unlimited Conferencing service is derived from
a flat, fixed charge per month depending on the conference size limit selected
by the customer. The fixed monthly charge is recognized as revenue each month. (h) Software Development Costs Costs incurred in the engineering and development of the Companys
services is expensed as incurred, except certain software development costs.
Costs associated with the development of software to be marketed externally are
expensed prior to the establishment of technological feasibility as defined in
Statement of Financial Accounting Standard No. 86 (SFAS 86), Accounting for
the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed, and
capitalized thereafter. To date, the Companys software development has been
completed concurrent with attaining technological feasibility and, accordingly,
all software development costs incurred to which SFAS 86 is applicable have
been charged to operations as incurred in the accompanying financial
statements. The Company capitalizes certain qualifying computer software costs
incurred during the application development stage in accordance with Statement
of Position 98-1 Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use (SOP 98-1) issued by the American Institute of
Certified Public Accountants, which was adopted by the Company as of January 1,
1999. These costs are amortized using the straight-line method over the
softwares estimated useful life. Based on plans regarding the external
distribution of software developed in the third quarter of 2003, the Company
changed its accounting treatment of costs associated with the development of
Raindance Meeting Edition from SOP 98-1 to SFAS 86. Since the second quarter of
2001, the Company had capitalized $2.8 million in costs associated with
Raindance Meeting Edition, $1.3 million of which was related to internal
development and $1.5 million of which was related to contract development. The
Company began amortization when Raindance Meeting Edition was released in March
2004. (i) Net Income (Loss) Per Share Net income (loss) per share is presented in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share(SFAS 128). Under
SFAS 128, basic earnings (loss) per share (EPS) excludes dilution for potential
common stock and is computed by dividing net income or loss by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Potential common shares are comprised of shares of common stock issuable upon
the exercise of stock options and warrants and restricted stock subject to
vesting restrictions and is computed using the treasury stock method. The following table sets forth the calculation of net income (loss) per share
for the three and nine months ended September 30, 2004 and 2003 (in thousands,
except per share amounts): 8.




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (392
    )
    
    $
    1,152
    
    
    $
    (2,971
    )
    
    $
    2,104Common shares outstanding:Historical common shares outstanding at beginning of period
    
    
    53,906
    
    
    
    53,293
    
    
    
    53,234
    
    
    
    51,896Weighted average common shares issued during period
    
    
    173
    
    
    
    272
    
    
    
    597
    
    
    
    1,239Weighted average common shares at end of period  basic
    
    
    54,079
    
    
    
    53,565
    
    
    
    53,831
    
    
    
    53,135Effect of dilutive common stock options and warrants
    
    
    
    
    
    
    1,755
    
    
    
    
    
    
    
    1,598Weighted average common shares at end of period  diluted
    
    
    54,079
    
    
    
    55,320
    
    
    
    53,831
    
    
    
    54,733Net income (loss) per share  basic
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04Net income (loss) per share  diluted
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
 As of September 30, 2004 and 2003, 675,000 and 750,000 shares,
respectively, of issued and outstanding restricted stock have been excluded
from the calculation of basic earnings per share due to vesting restrictions
(see Note 3) and, if applicable, have been included in diluted earnings per
share. The following common stock options and warrants have been excluded from
the computation of diluted net income (loss) per share for the three and nine
months ended September 30, 2004 and 2003 because their effect would have been
antidilutive: Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Shares issuable under stock options
    
    
    9,374,167
    
    
    
    4,237,504
    
    
    
    7,960,251
    
    
    
    5,449,961Shares issuable pursuant to warrants
    
    
    20,017
    
    
    
    20,017
    
    
    
    20,017
    
    
    
    20,017
 (j) Stock-based Compensation The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees", and related interpretations. As such, compensation
expense is recorded on the date of grant to the extent that the current market
price of the underlying stock exceeds the exercise price, which is the
intrinsic value method. Under SFAS 123, Accounting for Stock-Based
Compensation,entities are permitted to recognize as expense, over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB Opinion 25 and provide pro forma net income (loss)
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion 25 and provide the pro forma disclosures
required by SFAS 123. All stock-based awards to non-employees are accounted for
at their fair value in accordance with SFAS 123 and related interpretations. Stock compensation expense is comprised of the following: (a) the
amortization of deferred compensation resulting from the grant of stock options
or shares of restricted stock to employees at exercise or sale prices deemed to
be less than fair value of the common stock at grant date, net of forfeitures
related to such employees who terminated service while possessing unvested
stock options, as these terminated employees have no further service
obligations; (b) the intrinsic value of modified stock options or restricted
stock awards, measured at the modification date, for the number of awards that,
absent the modification, would have expired un-exercisable; (c) the intrinsic
value of restricted stock awards to employees and directors, and (d) deferred
stock-based compensation associated with the acquisition of InterAct
Conferencing, LLC. The following table summarizes information as to reported results under
the Companys intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition provisions of SFAS
123 had been applied for the three and nine months ended September 30, 2004 and
2003, respectively (in thousands, except per share amounts): 9.




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    (392
    )
    
    $
    1,152
    
    
    $
    (2,971
    )
    
    $
    2,104Add: Stock-based employee compensation expense
attributable to common stock options
    
    
    
    
    
    
    290
    
    
    
    70
    
    
    
    1,119Deduct: Stock-based employee compensation
expense attributable to common stock options
determined under fair value based method
    
    
    (1,378
    )
    
    
    (1,442
    )
    
    
    (4,566
    )
    
    
    (5,782
    )Net (loss), as adjusted
    
    $
    (1,770
    )
    
    $
    
    
    
    $
    (7,467
    )
    
    $
    (2,559
    )Income (loss) per share  basic, as reported
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04Income (loss) per share  diluted, as reported
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04(Loss) per share  basic, as adjusted
    
    $
    (0.03
    )
    
    $
    (0.00
    )
    
    $
    (0.14
    )
    
    $
    (0.05
    )(Loss) per share  diluted, as adjusted
    
    $
    (0.03
    )
    
    $
    (0.00
    )
    
    $
    (0.14
    )
    
    $
    (0.05
    )
 The per share weighted-average fair value of stock options granted during
the three months ended September 30, 2004 and 2003 was $1.58 and $2.35,
respectively, and the per share weighted-average fair value of stock options
granted during the nine months ended September 30, 2004 and 2003 was $2.47 and
$1.78, respectively, using the Black-Scholes option pricing model. The Company
used the following weighted average assumptions in determining the fair value
of options granted during the three months ended September 30, 2004 and 2003: September 30,2004
    
    2003Expected life (years)
    
    
    5
    
    
    
    4Risk-free interest rate
    
    
    3.38
    %
    
    
    2.85
    %Expected volatility
    
    
    196
    %
    
    
    126
    %Expected dividend yield
    
    None
    
    None
 (2) DEBT On October 9, 2001, the Company entered into a loan and security agreement
with a bank that was subsequently amended effective December 31, 2002. On
October 12, 2001, the Company received $5.0 million pursuant to the term loan
component of the loan and security agreement. The term loan was scheduled to be
repaid with monthly principal payments of approximately $0.1 million plus
interest at 5.25% with the final payment due in January 2006. Advances under
the revolving line of credit component of the loan and security agreement were
limited to $12.5 million or 90% of eligible accounts receivable as defined in
the agreement. The revolving line of credit was available through January 26,
2004. Advances under the revolving line of credit may have been repaid and
re-borrowed at any time prior to the maturity date. The loan and security
agreement were collateralized by substantially all tangible and intangible
assets of the Company and were subject to compliance with covenants, including
minimum liquidity coverage, minimum quick ratio and maximum quarterly operating
losses adjusted for interest, taxes, depreciation, amortization and other
non-cash charges. The Company was also prohibited from paying any dividends
without the banks prior written consent. In April 2004, the balance due under
this agreement (exclusively related to the term loan) of $1.8 million was paid
in full. In April 2004, the Company entered into a credit agreement with a bank for
a revolving line of credit, which expires in April 2006. Outstanding advances
under the revolving line of credit are limited to $15.0 million. Advances under
the revolving line of credit bear interest at 0.5% below the banks prime rate
and may be repaid and re-borrowed at any time prior to the maturity date. At
September 30, 2004, the Company did not have an outstanding balance under the
revolving line of credit, however $0.2 million of the available balance of the
line of credit was securing various letters of credit. The credit 10.




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agreement is collateralized by substantially all tangible and intangible
assets of the Company and is subject to compliance with covenants, including
minimum liquidity coverage, minimum tangible net worth and positive adjusted
EBITDA defined as quarterly net income (loss) adjusted for interest, taxes,
depreciation, amortization and other non-cash charges. The Company is also
prohibited from paying any dividends without the banks prior written consent.
At September 30, 2004, the Company was in compliance with all of the financial
loan covenants. On May 29, 2003, the Company entered into a loan agreement with a vendor,
in the amount of $0.7 million, to finance certain fixed assets. The loan is
scheduled to be repaid with quarterly principal payments of approximately $0.1
million plus interest at 2.5% with the final payment due in April 2005. At
September 30, 2004, the balance due under this agreement is $0.2 million, all
of which is current. (3) COMMON STOCK PLANS (a) Stock Options In February 2000, the Company adopted the 2000 Equity Incentive Plan that
amended and restated the 1997 stock option/stock issuance plan. Under the plan,
up to an aggregate of 17,274,814 shares are reserved for issuance, including
shares reserved pursuant to the plans evergreen provisions. At September 30,
2004, there were 2,644,886 shares available for future issuance under the plan.
Pursuant to the plan, the Companys Board of Directors may issue common stock
and grant incentive and non-statutory stock options to employees, directors and
consultants. Incentive and non-statutory stock options generally have ten-year
terms and vest over four years. The Company utilizes APB Opinion 25 in accounting for its plans. In
February 2003, the Companys Board of Directors approved an Executive
Performance-Based Compensation Arrangement, pursuant to which the Company
granted 750,000 shares of restricted stock to certain executives and key
employees under the plan. The restricted stock grants cliff vest in six years
and include accelerated vesting if certain financial or product-based
performance milestones are achieved. The stock-based compensation charge
associated with these grants was $1.2 million and is being recorded as an
expense ratably over six years, with such charges being accelerated if it
becomes apparent that the financial or product-based performance milestones are
deemed probable of being achieved. In addition, pursuant to this arrangement,
$4.7 million of cash compensation was approved and will become payable upon the
achievement of such financial or product-based milestones, or, generally in the
Boards discretion, upon a change in control of the Company. However, the
Companys former President and Chief Executive Officers employment terminated
effective December 31, 2003, which triggered the reversal of the deferred
portion of the Companys restricted stock grant compensation expense in the
amount of $0.3 million related to the cancellation of 200,000 shares of
restricted common stock, and reduced the Companys cash compensation commitment
by $1.5 million. In the third quarter of 2004 the Company determined that a
product-based revenue milestone will likely be achieved in 2005 and,
accordingly, the Company began accruing a $0.3 million bonus payable upon the
achievement of the milestone and accelerated the stock compensation charge
associated with 150,000 shares of restricted common stock subject to
accelerated vesting upon the achievement of the milestone. On January 28, 2004, the Company announced the hiring of Donald F.
Detampel, Jr. as President and Chief Executive Officer. Simultaneously with the
commencement of Mr. Detampels employment, the Company issued a stock option
grant to Mr. Detampel for 2,000,000 shares of common stock with an exercise
price of $3.28 per share. The Company also issued 275,000 shares of restricted
stock to Mr. Detampel which vest as follows: 50,000 shares were immediately
vested, 100,000 shares vest after the completion of 24 months of continuous
service and 125,000 shares vest after the completion of 37 months of continuous
service. The value of the restricted stock was $3.30 per share and the Company
recorded $0.9 million in deferred stock-based compensation expense in January
2004, which is being amortized as an expense over the applicable vesting
period. On August 20, 2004, this agreement was amended to include acceleration
of all unvested shares of restricted stock in the event of a change in control
of the Company as defined in the agreement. If a change in control were to
occur, an additional stock-based compensation charge of $1.48 per share would
be incurred on all shares to which the vesting acceleration applies. 11.




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Stock option activity in the Companys 2000 Equity Incentive Plan during
the nine months ended September 30, 2004 and 2003 was as follows: Nine Months Ended September 30,2004
    
    2003Number of
    
    Weighted Average
    
    Number of
    
    Weighted AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceBalance, beginning of period
    
    
    9,065,887
    
    
    $
    3.09
    
    
    
    8,229,267
    
    
    $
    3.40Granted at fair value
    
    
    1,102,295
    
    
    
    2.35
    
    
    
    1,223,850
    
    
    
    2.10Granted at greater than fair value
    
    
    2,000,000
    
    
    
    3.28
    
    
    
    
    
    
    
    Exercised
    
    
    (269,536
    )
    
    
    0.99
    
    
    
    (171,720
    )
    
    
    1.59Cancelled
    
    
    (617,307
    )
    
    
    3.33
    
    
    
    (840,927
    )
    
    
    4.65Balance, end of period
    
    
    11,281,339
    
    
    
    3.09
    
    
    
    8,440,470
    
    
    
    3.12
 The following table summarizes information about stock options outstanding
under the Companys 2000 Equity Incentive Plan at September 30, 2004: Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Contractual
    
    Average
    
    Number of
    
    AverageExercise Prices
    
    Outstanding
    
    Life
    
    Exercise Price
    
    Options
    
    Exercise Price$0.15    1.63
    
    
    1,935,695
    
    
    
    6.2
    
    
    $
    1.17
    
    
    
    1,669,802
    
    
    $
    1.151.64    2.56
    
    
    2,550,890
    
    
    
    7.7
    
    
    
    2.16
    
    
    
    1,467,259
    
    
    
    2.282.57    3.00
    
    
    1,876,600
    
    
    
    8.5
    
    
    
    2.69
    
    
    
    679,681
    
    
    
    2.703.01    3.28
    
    
    2,199,666
    
    
    
    9.2
    
    
    
    3.27
    
    
    
    114,883
    
    
    
    3.133.30    3.49
    
    
    1,090,439
    
    
    
    7.6
    
    
    
    3.48
    
    
    
    786,130
    
    
    
    3.483.51  10.80
    
    
    1,628,049
    
    
    
    6.2
    
    
    
    6.78
    
    
    
    1,475,957
    
    
    
    7.0311,281,339
    
    
    
    7.7
    
    
    
    3.09
    
    
    
    6,193,712
    
    
    
    3.32
 In addition, the Company has sold or granted to employees, directors and
consultants for services rendered an aggregate of 1,453,399 shares of common
stock through stock grants under the plan at prices and values ranging from
$0.15 to $10.80 per share. This amount includes the 550,000 shares granted
pursuant to the Executive Performance-Based Compensation Arrangement and the
275,000 shares granted to Mr. Detampel. Pursuant to the Companys acquisition of Contigo Software, Inc. in June
2000, the Company assumed certain stock option plans and the outstanding stock
options of Contigo (assumed plans). Stock options under the assumed plans
have been converted into the Companys stock options and adjusted to reflect
the conversion ratio as specified by the applicable acquisition agreement, but
are otherwise administered in accordance with the terms of the assumed plans.
Stock options under the assumed plans generally vest over three years and
expire ten years from date of grant. No additional stock options are expected
to be granted under the assumed plans. No shares were exercised in the assumed
plans during the three months ended September 30, 2004 and 162,020 options
remain outstanding. 12.




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##### Table of Contents



The following table summarizes information about stock options outstanding
under the Companys assumed plans at September 30, 2004: Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Contractual
    
    Average
    
    Number of
    
    AverageExercise Prices
    
    Outstanding
    
    Life
    
    Exercise Price
    
    Options
    
    Exercise Price$0.72  2.72
    
    
    41,706
    
    
    
    4.4
    
    
    $
    1.31
    
    
    
    41,706
    
    
    $
    1.313.92  3.92
    
    
    100,563
    
    
    
    5.3
    
    
    
    3.92
    
    
    
    100,563
    
    
    
    3.926.08  6.08
    
    
    19,751
    
    
    
    5.4
    
    
    
    6.08
    
    
    
    19,751
    
    
    
    6.08162,020
    
    
    
    5.1
    
    
    
    3.51
    
    
    
    162,020
    
    
    
    3.51
 (b) Employee Stock Purchase Plan In February 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan (ESPP). The ESPP allows participating employees to purchase
shares of common stock at a 15% discount from the market value of the stock as
determined on specific dates at six-month intervals. The total common shares
available for issuance pursuant to the ESPP are 6,008,148, including shares
reserved pursuant to the plans evergreen provision. In February 2004, 281,752
shares were purchased by employees at an average price of $1.99 per share. In
August 2004, 302,625 shares were purchased by employees at an average price of
$1.16 per share. At September 30, 2004, 3,426,781 shares were reserved for
future issuance. At September 30, 2004 approximately $120,000 in payroll
deductions has been withheld from employees for future purchases under the
plan, which will be at an approximate average price of $1.16 per share assuming
the automatic restart provisions of the plan are not invoked for the next
scheduled purchase date in February 2005. The ESPP is a qualified plan under
the applicable section of the Internal Revenue Code and accordingly, no
compensation expense has been recognized for purchases under the plan. (4) RESTRUCTURING Restructuring reserves and activity for the first nine months of 2004 are
detailed below (in thousands): RestructuringReserve Balance
    
    Reserve
    
    
    
    
    
    Reserve BalanceDecember 31, 2003
    
    Adjustments
    
    Payments
    
    September 30, 2004Lease obligations, net of anticipated sublease income
    
    $
    465
    
    
    $
    
    
    
    $
    (207
    )
    
    $
    258
 At September 30, 2004, the Companys restructuring reserves totaled $0.3
million, all of which is current and solely relates to lease costs, which will
be relieved as payments are made. The Company has adjusted its restructuring
reserves in the past based on what it believed would be the most probable
outcome. The actual cost savings that the Company anticipated as a result of
this restructuring effort have been realized, with the exception of the
restructuring costs associated with the closure of remote sales facilities. Due
to the real estate market that existed, it took the Company longer than
expected to sublease or otherwise terminate its lease obligations in certain
cities. The Company will continue to monitor and adjust, as warranted, its
restructuring reserve associated with remote sales facilities based on current
facts and circumstances. At September 30, 2004, all facilities subject to the
restructuring and included in the restructuring reserve have been subleased.
However, the Company may be required to record additional restructuring charges
on certain subleased offices if subtenants default on these commitments. Future
minimum sublease receivables for all subleased facilities, as of September 30,
2004, approximate $1.0 million, which are scheduled to be received through
September 2005. (5) COMMITMENTS AND CONTINGENCIES (a) Operating Lease Commitments The Company leases office facilities under various operating leases that
expire through 2009. In the quarter ended 13.




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September 30, 2004, two of the office facilities were leased from entities
that are controlled by former executive officers or directors of the Company.
Most of the remaining facilities are satellite sales offices. Total future
minimum lease payments, not including any reductions for subleases, under all
operating leases, approximate $6.0 million at September 30, 2004. (b) Purchase Commitments The Company has commitments for bandwidth usage and telephony services
with various service providers. The total commitment as of September 30, 2004
was approximately $14.7 million to be expended through May 2006. Some of these
agreements may be amended to either increase or decrease the minimum
commitments during the life of the contract. In September 2003, the Company entered into an agreement with its primary
conferencing bridge provider pursuant to which the Company made a commitment to
purchase a defined amount of equipment through December 2005. This commitment
was contingent on certain VoIP technology functionality being available in the
equipment by May 12, 2004, which did not occur. As a result, the Company
notified the conferencing bridge provider that it terminated its remaining
commitment, as well as the agreement for material breach. The Companys vendor
has disputed this position. The total remaining commitment that the Company
terminated as of September 30, 2004 was approximately $6.1 million. (c) Employment Commitments In February 2003, the Companys Board of Directors approved an Executive
Performance-Based Compensation Arrangement. Pursuant to this arrangement, at
September 30, 2004, $3.0 million of cash compensation will become payable in
the future upon the achievement of certain financial or product-based
milestones, or, generally at the Boards discretion, upon a change in control
of the Company. $0.5 million relates to product-based milestones that must be
achieved before February 19, 2006. In the third quarter of 2004 the Company
determined that one of the product-based revenue milestones will likely be
achieved in 2005 and, accordingly, the Company began accruing a $0.3 million
bonus directly related to, and payable on the achievement of, this milestone.
$2.5 million relates to financial milestones that must be achieved before
February 19, 2007. In January 2004, the Company entered into an employment agreement with its
new President and Chief Executive Officer. The agreement continues until
terminated by either the executive or the Company, and provides for a
termination payment under certain circumstances. The maximum amount payable
upon termination pursuant to the agreement is $0.3 million. In addition, the Company has a letter agreement with three of its
executive officers, which would require the Company to pay $0.3 million if the
executive officers were terminated under certain conditions set forth in the
agreements. (d) Severance Commitments In October 2003, the Company entered into a separation agreement with its
former President and Chief Executive Officer pursuant to which the Company
recognized approximately $0.6 million in the fourth quarter of 2003 related to
severance costs. The unpaid severance commitment at September 30, 2004 is $0.4
million. (e) Legal and Tax Contingencies On May 17, 2004, a complaint was filed against the Company by iTalk, LLC
in the District Court of Boulder County, Colorado alleging breach of contract
and unjust enrichment, seeking damages and injunctive relief. The complaint
does not quantify any monetary damages. On June 30, 2004, the Company filed a
motion to dismiss the claims for failure to state a claim upon which relief can
be granted. On July 29, 2004, iTalk filed a response, opposing such motion. On
August 24, 2004, the Company filed a reply in support of its motion to dismiss.
On September 24, 2004, the court denied the motion to dismiss. On October 4,
2004, the Company answered iTalks complaint. The Company disputes plaintiffs
claims and intends to defend against them vigorously. In addition, from time to
time, the Company has been subject to legal proceedings and claims in the
ordinary course of business. Any claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources. The
Company is not aware of any legal proceedings or claims that it believes will
have, individually or in the aggregate, a material adverse effect on its
business. 14.




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The Company is involved in tax proceedings in the ordinary course of
business. The Company periodically assesses its liabilities and contingencies
in connection with these matters based upon the latest information available.
For those matters where it is probable that the Company has incurred a loss and
the loss or range of loss can be reasonably estimated, it has recorded reserves
in the financial statements. In other instances, the Company is unable to make
a reasonable estimate of any liability because of the uncertainty related to
both the probable outcome and amount or range of loss. As additional
information becomes available, the Company adjusts its assessments. The Company is currently responding to an Internal Revenue Service inquiry
related to federal excise taxes applicable to telecommunications carriers and
is currently undergoing a sales tax audit by the Commonwealth of Massachusetts,
Department of Revenue. The Company currently does not collect sales or other
taxes on the sale of its services. The Company may be required to pay sales or
other taxes on past sales of services and may be unable to collect sales or
other taxes for past sales of services to customers and, therefore would have
to pay such taxes out of its own funds. The Commonwealth of Massachusetts,
Department of Revenue has assessed the Company sales tax from April 1999
through May 2004. The Company disagrees with the position of the Department of
Revenue and has filed a formal protest to the assessment. No provision has been
made in the financial statements for the proposed tax, interest and penalty
because the ultimate liability, if any, cannot be reasonably estimated. The
assessment including tax, interest and penalties approximates $0.2 million.
Based on the Companys review of the latest information available associated
with the Internal Revenue Service inquiry management believes the ultimate
resolution of this examination will not result in a material adverse effect to
the Companys financial position or results of operations. (6) PROPOSED ACCOUNTING PRONOUNCEMENTS In March 2004, the FASB issued an Exposure Draft titled Share-Based
Payment: an amendment of FASB Statements No. 123 and 95. The Exposure Draft
would require the recognition of the fair value of all share-based payments as
compensation expense over the applicable vesting periods. The Exposure Draft is
not final and the content of the Draft and its eventual effective date are
still subject to revision. The proposed effective date of the Exposure Draft
has recently been extended from fiscal periods beginning after December 15,
2004 to fiscal periods beginning after June 15, 2005. We are currently
assessing the impact the Exposure Draft would have on our financial position
and results of operations and expect to record additional stock-based
compensation once the Exposure Draft becomes effective. 15.




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Item 2.Managements Discussion and Analysis of Financial Condition and Results
of Operations This Report onForm 10-Qcontains forward-looking statements, including
without limitation, statements containing the words believes, anticipates,
expects, and words of similar import and statements regarding our strategy,
financial performance, and our operations that involve risks and uncertainties.
Our actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the subsection entitled Additional
Risk Factors that May Affect Our Operating Results and The Market Price of Our
Common Stock. Readers are urged to carefully review and consider the various
disclosures made in this report and in our other reports filed with the SEC
that attempt to advise interested parties of certain risks and factors that may
affect our business. This analysis should be read in conjunction with our
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 12, 2004. You should also read
this analysis in conjunction with our condensed financial statements and
related notes that begin on page 3. Our reports are available free of charge through our website as soon as
reasonably practicable after we file them with, or furnish them to, the SEC.
Our website address is www.raindance.com. Once at www.raindance.com, go to
Investor Center/SEC Filings and Financials. Overview We provide remote communication services for everyday business meetings
and events. Virtually all of our communication services are based on
proprietary architecture that integrates traditional telephony technology with
real-time interactive web tools. Our continuum of interactive services includes
Raindance Meeting Edition, Reservationless Conferencing, Web Conferencing Pro,
Operator Assisted Conferencing and Unlimited Conferencing. Raindance Meeting
Edition, which was released in March 2004, is our next-generation communication
service that integrates audio, web and multi-point desktop video technology
into one multi-media conferencing solution. Reservationless Conferencing
provides for automated reservationless audio conferencing with simple web
controls and presentation tools. Web Conferencing Pro allows users to integrate
reservationless automated audio conferencing with advanced web interactive
tools over the web such as application sharing, web touring and online
whiteboarding. Operator Assisted Conferencing provides customers with operator
assistance during high profile conferencing events and additional services such
as call taping, digital replay and transcription, which we often bundle with
our Web Conferencing Pro service. Unlimited Conferencing offers unlimited local
toll access to our reservationless conferencing service for a fixed monthly
rate. We sell these services to businesses in various markets as well as to
resellers of conferencing and communications services, through our direct and
indirect sales channels. Our business model is largely usage-based, which
generally means that our customers only pay for the services that they use. We
also offer our customers monthly subscription rates based on a fixed number of
concurrent users. As of September 30, 2004, we had an accumulated deficit of $171.3 million.
Our net loss was $0.4 million and our net income was $1.2 million for the three
months ended September 30, 2004 and 2003, respectively. Our net loss was $3.0
million and our net income was $2.1 million for the nine months ended September
30, 2004 and 2003, respectively. Although we had achieved quarterly net income
for five consecutive quarters ending December 31, 2003, we incurred net losses
in the first three quarters of 2004 and we expect to continue to incur net
losses in the near term, particularly due to an anticipated increase in sales
and marketing expenditures to support the recent release of Raindance Meeting
Edition. We also have experienced an increase in our research and development
costs in 2004 due to a change in accounting treatment of our software
development costs, which also contributed, and will contribute, to these net
losses. We anticipate that our stock-based compensation expense will increase
significantly in the second half of 2005 due to proposed changes in accounting
rules and regulations. While our business model is largely usage-based, which generally means
that our customers only pay for the services they use, our non-usage revenue,
such as from subscriptions and software licenses, may fluctuate based on the
timing of new subscription agreements, the expiration and renewal of existing
agreements and the timing of and revenue recognition associated with software
licenses. This fluctuation can significantly impact our financial results,
particularly revenue, gross margins and net income or loss because these
subscriptions and software licenses have virtually no variable cost of revenue
expense. Such opportunities to license our software have arisen infrequently
and are difficult to predict, and currently we do not anticipate any software
license revenue in the near term. For example, we recognized $1.1 million in
software revenue in the third quarter of 16.




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2003 associated with the sale of a Web Conferencing Pro license and we
also recognized $2.9 million in revenue in the fourth quarter of 2003
associated with this same license. As a result, the impact this revenue has had
on our business and financial results in the past is not consistent and should
not be relied upon as indicative of our future performance. In the quarter
ended September 30, 2004, 8.9% of our revenue was non-usage based as compared
to 14.1% in the quarter ended September 30, 2003. We expect our non-usage based
revenue to approximate 7.5% to 9.5% of our total revenue in the fourth quarter
of 2004. The following describes how we recognize revenue for the services we offer:  
    
    Raindance Meeting Edition.Revenue for our Raindance Meeting Edition service is derived from subscription and usage fees.
Revenue from subscriptions is recognized monthly regardless of usage, while usage fees are based upon either connections or
minutes used. We recognize usage revenue from our Raindance Meeting Edition services in the period the meeting is
completed. We recognize revenue associated with any initial set-up fees ratably over the term of the contract.  
    
    Reservationless Conferencing Revenue. Revenue for our Reservationless Conferencing service is generally based upon the
actual time that each participant is on the phone or logged onto the web. For example, a customer is charged a per-minute,
per-user fee for each participant listening and viewing a live or recorded simulcast. In addition, we charge customers a
one-time fee to upload visuals for a phone conference or a recorded simulcast. We recognize usage revenue from our
Reservationless Conferencing services in the period the call or simulcast of the call is completed. We recognize revenue
associated with any initial set-up fees ratably over the term of the contract.  
    
    Web Conferencing Pro Revenue. Revenue for our Web Conferencing Pro service is derived from subscription and usage fees in
addition to event fees or, in more limited cases, a software license fee. Revenue from subscriptions is recognized monthly
regardless of usage, while usage fees are based upon either connections or minutes used. Event fees are generally hourly
charges that are recognized as the events take place. We recognize revenue associated with any initial set-up fees ratably
over the term of the contract. Revenue from software license agreements is either recognized upon shipment of the software
when all the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred, the fee
is fixed or determinable, collectibility is probable, and vendor-specific objective evidence is available for the fair
value of all undelivered elements, or recognized ratably over the software support period if we do not have vendor-specific
objective evidence for all undelivered elements.  
    
    Operator Assisted Revenue. Revenue for our Operator Assisted Conferencing service is generally based upon the actual time
that each participant is on the phone. In addition, we charge customers a fee for additional services such as call taping,
digital replay, participant lists and transcription services. We recognize usage revenue and related fees from our Operator
Assisted Conferencing service in the period the call is completed.  
    
    Unlimited Conferencing. Revenue from Unlimited Conferencing is derived from a flat, fixed charge per month depending on the
conference size limit selected by the customer. The fixed monthly charge is recognized as revenue each month. Our cost of revenue consists primarily of telecommunication expenses,
depreciation of network and data center equipment, amortization of certain
software including internally developed software, Internet access fees and fees
paid to network providers for bandwidth, equipment maintenance contract
expenses, compensation and benefits for operations personnel and allocated
overhead. Our telecommunication expenses are variable and directly correlate to
the use of our services and primarily are incurred when our customers use our
Reservationless Conferencing service. A change in our mix of Reservationless
Conferencing and Web Conferencing Pro or Raindance Meeting Edition revenue will
affect our gross profit, as our cost of revenue is typically higher on our
Reservationless Conferencing service as a result of price compression for this
service. Our depreciation, Internet access and bandwidth expenses, equipment
maintenance expenses and compensation expenses generally increase as we
increase our capacity and build our infrastructure. We plan to continue to
make investments in our infrastructure; however, we expect capital expenditures
in the remainder of 2004 to be lower than the capital expenditures during the
same period in 2003 due to the investments that we have made to increase our
capacity and associated with the release of Raindance Meeting Edition that we
do not expect to recur in 2004. We expect that our cost of revenue will
decrease in the fourth quarter of 2004 due to a corresponding decrease in
revenue primarily due to holiday seasonality. We expect that our current
capacity and infrastructure, coupled with the capital expenditures we have made
and we expect to make, will accommodate our needs through the end of 2004 and
the first half of 2005. 17.




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We incur sales and marketing expenses that consist primarily of the
salaries, commissions and benefits for our sales and marketing personnel,
remote sales offices expenses, product and market research, sales lead
generation and telemarketing expenses and allocated overhead. We expect sales
and marketing expenses to increase in absolute dollars and as a percentage of
revenue as we expand our sales force and increase our marketing initiatives in
the fourth quarter of 2004 to support our services and primarily our release of
Raindance Meeting Edition. We incur research and development expenses that consist primarily of
salaries and benefits for research and development personnel, equipment
maintenance contract expenses and allocated overhead. We expense research and
development costs as they are incurred, except for certain capitalized costs
associated with internally developed software. We capitalized $0.1 million of
internally developed software in the first, second and third quarters of 2004,
respectively, and we capitalized $0.4 million of internally developed software
in the first quarter of 2003 and $0.2 million of internally developed software
in both the second and third quarters of 2003, respectively. We expect to
continue to capitalize costs associated with internally developed software in
2004; however, we expect to see a decrease in capitalized costs in 2004 as
compared to 2003 because we will no longer capitalize costs associated with
Raindance Meeting Edition. Based on plans developed in the third quarter of
2003 regarding the external distribution of software, we changed the accounting
treatment of costs associated with the development of Raindance Meeting Edition
from SOP 98-1 to SFAS 86. Since the second quarter of 2001 we had capitalized,
pursuant to SOP 98-1, $2.8 million in costs associated with Raindance Meeting
Edition, $1.3 million of which was related to internal development and $1.5
million of which was related to contract development. We also expect to
continue to make investments in research and development and anticipate that
these expenditures will increase in absolute dollars in the fourth quarter of
2004. We incur general and administrative expenses that consist primarily of
expenses related to finance, human resources, administrative and general
management activities, including legal, accounting and other professional fees,
in addition to other general corporate expenses. We expect general and
administrative expenses to increase in terms of absolute dollars and as a
percentage of revenue in the fourth quarter of 2004 as we incur consulting and
audit fees associated with our Sarbanes-Oxley compliance. Since our inception, we have used stock-based compensation for employees,
consultants and members of our Board of Directors to attract and retain strong
business and technical personnel. During the three months ended September 30,
2004 and 2003, we did not record any deferred stock-based compensation;
however, during the nine months ended September 30, 2004 and 2003, we recorded
$0.9 million and $1.2 million, respectively, of deferred stock-based
compensation. We also expensed $0.1 million and $0.7 million related to
stock-based compensation in the three months ended September 30, 2004 and 2003,
respectively, and we expensed $2.1 million and $2.2 million related to
stock-based compensation in the nine months ended September 30, 2004 and 2003,
respectively. The $0.9 million of deferred stock-based compensation for the
nine months ended September 30, 2004 relates to the issuance of 275,000 shares
of restricted stock to our new President and Chief Executive Officer in January
2004, of which 50,000 shares were immediately vested; 100,000 shares vest after
the completion of 24 months of continuous service and 125,000 shares vest after
the completion of 37 months of continuous service. This agreement was amended
in August 2004 to include acceleration of all unvested shares of restricted
stock in the event of a change in control of the Company, as defined in the
agreement. The $1.2 million of the deferred stock-based compensation for the
nine months ended September 30, 2003 relates to 750,000 shares of restricted
stock issued in February 2003 to certain executives and key employees under our
Executive Performance-Based Compensation Arrangement, as approved by the Board
of Directors in February 2003. The restricted stock will vest in full on the
sixth anniversary of its issuance, subject to accelerated vesting upon the
achievement of certain financial or product-based performance milestones, or,
generally at the Boards discretion, upon a change in control of the Company.
Accordingly, the $1.2 million deferred stock-based compensation charge is being
expensed ratably over six years, which charges will be accelerated when it
becomes apparent that the financial or product-based milestones are deemed
probable of being achieved. However, the resignation of the Companys former
President and Chief Executive Officer effective December 31, 2003 and the
resulting cancellation of 200,000 shares of restricted stock granted to him
under the plan triggered the reversal of the unamortized portion of his
restricted stock grant compensation expense in the amount of $0.3 million. In
the third quarter of 2004 we determined that one of the product-based revenue
milestones will likely be achieved in 2005 and, accordingly, we have
accelerated the stock compensation charge associated with 150,000 shares of
restricted common stock directly related to, and subject to accelerated vesting
upon the achievement of, this specific milestone. Stock-based compensation
amounts are based on the excess of the fair value of our common stock on the
date of grant or sale over the option exercise price or stock purchase price.
Compensation expense related to stock options is amortized over the vesting
period of the options, which generally is four years. In connection with the
acquisition of InterAct, we recorded $3.4 million of deferred stock-based
compensation related 18.




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to the issuance of 997,599 shares of common stock simultaneously with the
closing of the InterAct acquisition, which are being held in escrow and are
released annually in equal one-third increments beginning in May 2003.
Accordingly, the deferred stock-based compensation related to the 997,599
shares was being expensed over three years, which began in May 2002. The
release of the stock from escrow is contingent upon the satisfaction of certain
employment obligations, which were satisfied, to us by Carolyn Bradfield, the
former president and chief executive officer of InterAct. In June 2004, our
former Senior Vice President of Sales, Carolyn Bradfield, left the Company,
and, as a result, we recorded a $0.9 million stock compensation charge related
to the unrecognized deferred stock-based compensation associated with the
escrowed shares of restricted stock. The value of these escrowed shares was
determined based on the average market price of our common stock over the
three-day period before and after the terms of the acquisition were agreed upon
and announced. Assuming that no additional shares of restricted stock will be
forfeited or granted, assuming there is no change in control of the Company,
and assuming no incremental stock-based compensation expense related to
Financial Accounting Standards Board (FASB) exposure draft titled Share-Based
Payment: an amendment of FASB No. 123 and 95,we expect to incur stock-based
compensation expense of approximately $0.1 million in the remainder of 2004,
$0.5 million in 2005, $0.2 million in 2006, and $0.1 million in both 2007 and
2008, respectively, for common stock issued or stock options awarded to our
employees and members of our Board of Directors under our equity plans through
September 30, 2004. Other Data  Non-GAAP Financial Measure We evaluate operating performance based on several factors, including our
primary internal financial measure of earnings before interest, taxes,
depreciation, amortization and stock-based compensation expense (adjusted
EBITDA). This analysis eliminates the effects of considerable amounts of
depreciation and stock-based compensation. Since our initial public offering,
we have reported adjusted EBITDA; a financial measure that is not defined by
generally accepted accounting principles (GAAP). The calculation of adjusted EBITDA is as follows (in thousands): Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (392
    )
    
    $
    1,152
    
    
    $
    (2,971
    )
    
    $
    2,104Add: depreciation, amortization and other
income, net
    
    
    2,754
    
    
    
    2,534
    
    
    
    8,315
    
    
    
    7,680Add: stock-based compensation expense
    
    
    134
    
    
    
    679
    
    
    
    2,072
    
    
    
    2,238Adjusted EBITDA
    
    $
    2,496
    
    
    $
    4,365
    
    
    $
    7,416
    
    
    $
    12,022
 Although we had achieved quarterly net income for five consecutive
quarters ended December 31, 2003, we recorded net losses in the first three
quarters of 2004 partially due to the increase in sales and marketing
expenditures to support the release of Raindance Meeting Edition. Our research
and development costs also increased in the first three quarters of 2004 over
comparable periods in 2003 due to a change in accounting treatment of our
software development costs, which will also contribute to net losses in the
near term. Additionally, our cost of revenue increased in 2004 primarily due
to an increase in variable costs as a result of an increase in revenue. For
the three months ended September 30, 2004, as compared with the three months
ended September 30, 2003, our net income decreased by $1.5 million, resulting
in a $0.4 million net loss for the current quarter. For the nine months ended
September 30, 2004, as compared with the nine months ended September 30, 2003,
our net income decreased by $5.1 million, resulting in a $3.0 million net loss
for the current period. For the three months ended September 30, 2004, as
compared with the three months ended September 30, 2003, adjusted EBITDA
decreased by $1.9 million. For the nine months ended September 30, 2004, as
compared with the nine months ended September 30, 2003, adjusted EBITDA
decreased by $4.6 million. Adjusted EBITDA should be considered in addition to, not as a substitute
for, net income (loss) and other measures of financial performance reported in
accordance with GAAP. We believe that adjusted EBITDA is a useful performance
metric for our investors and is a measure of operating performance and
liquidity that is commonly reported and widely used by financial and industry
analysts, investors and other interested parties because it eliminates
significant non-cash charges to earnings. In addition, 19.




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many sophisticated financial institutions and banks use adjusted EBITDA as
a performance metric in their lending practices. For example, adjusted EBITDA
is used by our bank to determine our compliance with a financial covenant
articulated in our credit agreement. However, adjusted EBITDA as used by us may
not be comparable to similarly titled measures reported by other companies. The funds depicted by adjusted EBITDA are not available for our
discretionary use due to debt service, debt maturities and other commitments
that we have made. Cash flow calculated in accordance with GAAP is as follows:
net cash provided by operations was $2.9 million and $3.9 million for the three
months ended September 30, 2004 and 2003, respectively, and $5.5 million and
$10.6 million for the nine months ended September 30, 2004 and 2003,
respectively; net cash provided by investing activities was $0.9 million and
net cash used by investing activities was $3.4 million for the three months
ended September 30, 2004 and 2003, respectively, and net cash used by investing
activities was $6.8 million and $6.7 million for the nine months ended
September 30, 2004 and 2003, respectively; net cash provided by financing
activities was $0.2 million for both the three months ended September 30, 2004
and 2003, respectively, and net cash used by financing activities was $1.2
million and net cash provided by financing activities was $0.2 million for the
nine months ended September 30, 2004 and 2003, respectively. Results of Operations Three and Nine Months Ended September 30, 2004 Compared to Three and Nine
Months Ended September 30, 2003 Revenue.Total revenue increased by $0.4 million to $18.4 million for the
three months ended September 30, 2004 from $18.0 million for the three months
ended September 30, 2003. Total revenue increased by $7.0 million to $57.3
million for the nine months ended September 30, 2004 from $50.3 million for the
nine months ended September 30, 2003. The increase was due in part to the
addition of new customers and an increase in usage from our existing customer
base, which was partially offset by pricing pressure we are experiencing for
some of our services, particularly our Reservationless Conferencing service. We
also recognized $1.1 million in revenue in the third quarter of 2003 associated
with the sale of a Web Conferencing Pro license and we recognized $2.9 million
in revenue in the fourth quarter of 2003 associated with this same license.
Opportunities to license our software have traditionally arisen infrequently,
are difficult to predict and we do not currently have any software licensing
revenue projected in the near term. Total minutes attributable to our
usage-based services were 184.3 million and 168.2 million for the three months
ended September 30, 2004 and 2003, respectively, which represents a 9.5%
increase in minutes quarter over quarter. Usage-based revenue increased by 8.4%
in the third quarter of 2004 from the third quarter of 2003, which indicates
that our average price per usage based minute declined by approximately 1.0% or
..0009 cents per minute quarter over quarter. Total minutes attributable to our
usage-based services were 583.0 million and 465.0 million for the nine months
ended September 30, 2004 and 2003, respectively, which represents a 25.4%
increase in minutes period over period. Usage-based revenue increased by 16.6%
in the first nine months of 2004 from the first nine months of 2003, which
indicates that our average price per usage based minute declined by
approximately 7.0% or .0068 cents per minute period over period. We expect
this trend to continue in the foreseeable future. Cost of Revenue.Cost of revenue increased $1.0 million to $8.4 million
for the three months ended September 30, 2004 from $7.4 million for the three
months ended September 30, 2003. Cost of revenue increased $5.3 million to
$26.0 million for the nine months ended September 30, 2004 from $20.7 million
for the nine months ended September 30, 2003. Telecommunications costs
increased $0.2 million for the quarter ended September 30, 2004 over the
quarter ended September 30, 2003 due to an increase in minutes from our
Reservationless Conferencing service, partially offset by reduced fixed
internet costs on our fixed telephony circuits. Total depreciation expense
increased $0.5 million for the quarter ended September 30, 2004 over the
quarter ended September 30, 2003 due to additional hardware and software being
placed into service in 2003 and 2004, including capitalized Raindance Meeting
Edition development costs, as well as an increase in allocated depreciation due
to increased headcount over the same period in the previous year. Expenses
associated with our Operator Assisted Conferencing service increased $0.3
million in the current quarter, which coincides with our growth in revenue from
this service. Telecommunications costs increased $3.0 million for the nine
months ended September 30, 2004 over the nine months ended September 30, 2003
due to an increase in minutes from our Reservationless Conferencing service,
partially offset by reduced fixed internet costs on our fixed telephony
circuits. Total depreciation expense increased $1.7 million for the nine months
ended September 30, 2004 due to additional hardware and software being placed
into service in 2003 and 2004, including capitalized Raindance Meeting Edition
development costs, as well as an increase in allocated depreciation due to
increased headcount over the same period in the previous year. Expense
associated with our Operator Assisted Conferencing service increased $0.8
million in the current year, which coincides with our growth in revenue from
this service. Conversely, maintenance and repairs expense decreased $0.2
million for the nine months ended September 30, 20.




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2004 from the nine months ended September 30, 2003. The primary drivers
that affect our gross profit are changes in our telephony and fixed internet
costs and a general improvement in our infrastructure utilization, all of which
are or may be partially offset by pricing pressure we are experiencing on the
sale of our Reservationless Conferencing service. In addition, our gross profit
is higher on our web-based services, namely Web Conferencing Pro and Raindance
Meeting Edition and to the extent we are successful in selling more web-based
services, we would expect our overall gross profit to increase. We define
multi-media revenue as revenue generated from a collaboration event where more
than one media type is used, such as an event that combines audio and web
conferencing or an event that combines audio, web and video conferencing using
Raindance Meeting Edition. Multi-media revenue excludes all service revenue
attributable to audio-only conferencing. Third-quarter 2004 multi-media revenue
was $3.2 million compared to $2.8 million in the comparable period a year ago.
Our gross profit margins are typically higher on multi-media events as compared
to audio-only events. Sales and Marketing.Sales and marketing expense increased $1.4 million to
$6.0 million for the three months ended September 30, 2004 from $4.6 million
for the three months ended September 30, 2003. Sales and marketing expense
increased $4.9 million to $18.8 million for the nine months ended September 30,
2004 from $13.9 million for the nine months ended September 30, 2003. Bad
debt expense increased $0.1 million for the three months ended September 30,
2004 as compared to the three months ended September 30, 2003 based on an
analysis of the bad debt reserve required at September 30, 2004. Commissions
expense increased $0.1 million for the three months ended September 30, 2004 as
compared to the three months ended September 30, 2003 in connection with an
increase in revenues in the current quarter. Personnel and payroll related
expenses increased $0.4 million for the three months ended September 30, 2004
as compared to the three months ended September 30, 2003 due to increased
headcount in 2004 as compared to 2003. Expenses related to advertising, lead
generation, and market research increased $0.2 million, $0.3 million and $0.1
million, respectively, for the three months ended September 30, 2004 as
compared to the three months ended September 30, 2003 due to an overall
increase in marketing initiatives, some of which directly relate to the release
of Raindance Meeting Edition which occurred in March 2004. Outside service
expense increased $0.1 million in the current quarter over the same quarter in
the previous year due to consulting services utilized in connection with the
sales organization restructuring. Offsetting these increases, depreciation
expense decreased $0.1 million for the three months ended September 30, 2004 as
compared with the three months ended September 30, 2003 primarily due to a
change in the methodology used to allocate depreciation between departments.
Commissions expense increased $0.3 million for the nine months ended September
30, 2004 as compared to the nine months ended September 30, 2003 in connection
with an increase in revenues in the current year. Bad debt expense increased
$0.3 million for the nine months ended September 30, 2004 as compared to the
nine months ended September 30, 2003 based on an analysis of the bad debt
reserve required at September 30, 2004. Personnel and payroll related expenses
increased $1.4 million for the nine months ended September 30, 2004 as compared
to the nine months ended September 30, 2003 due to increased headcount in the
first three quarters of 2004 as compared to the first three quarters of 2003.
Expenses related to advertising, lead generation, market research, promotion
and sales tools increased $0.2 million, $0.6 million, $0.5 million, $0.1
million and $0.2 million, respectively, for the nine months ended September 30,
2004 as compared to the nine months ended September 30, 2003 due to an overall
increase in marketing initiatives, some of which directly relate to the release
of Raindance Meeting Edition which occurred in March 2004. Additionally, trade
show expenses and travel expenses have each increased $0.2 million period over
period due to an overall increase in marketing and sales initiatives. Outside
service expense increased $1.5 million in the first nine months of 2004 over
the same period in the previous year due to consulting services utilized in
connection with the sales organization restructuring. Offsetting these
increases, depreciation expense decreased $0.7 million for the nine months
ended September 30, 2004 as compared with the nine months ended September 30,
2003 primarily due to a change in the methodology used to allocate depreciation
between departments. Research and Development.Research and development expense increased $0.4
million to $2.6 million for the three months ended September 30, 2004 from $2.2
million for the three months ended September 30, 2003. Research and
development expense increased $1.9 million to $7.8 million for the nine months
ended September 30, 2004 from $5.9 million for the nine months ended September
30, 2003. Personnel and payroll related expenses increased $0.3 million for
the three months ended September 30, 2004 over the three months ended September
30, 2003 due to increased headcount in connection with the development of
Raindance Meeting Edition that was released in March 2004, as well as a
decrease in capitalized internally-developed software. Based on plans
developed in the third quarter of 2003 regarding the external distribution of
software, we changed the accounting treatment of costs associated with the
development of Raindance Meeting Edition from SOP 98-1 to SFAS 86, and as a
result, we expect personnel and payroll related expenses and outside services
expense to increase in 2004 as compared to 2003. Accordingly, outside services
increased $0.3 million for the three months ended September 30, 2004 as
compared to the three months ended September 30, 2003. There was a slight
variance in other expenses; including a $0.1 million decrease in depreciation
expense for the three months ended September 30 2004 as 21.




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compared to the three months ended September 30, 2003 due to a change in
the methodology used to allocate depreciation between departments. There was
also a $0.1 million decrease in bonus expense quarter over quarter based on the
achievement of a product-based milestone with the release of Raindance Meeting
Edition in March 2004 which triggered the payout of a cash commitment being
accrued over the previous year, partially offset by the commencement of a bonus
accrual in the third quarter of 2004 related to a product-based milestone
expected to be achieved in 2005. Personnel and payroll related expenses
increased $1.1 million for the nine months ended September 30, 2004 over the
nine months ended September 30, 2003, due to increased headcount in connection
with the development of Raindance Meeting Edition that was released in March
2004, as well as a decrease in capitalized internally-developed software on
account of the change in accounting treatment of these costs as mentioned
above. Accordingly, outside services increased $1.2 million for the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003. Conversely, there was a $0.2 million decrease in depreciation expense
for the nine months ended September 30 2004 as compared to the nine months
ended September 30, 2003 due to a change in the methodology used to allocate
depreciation between departments. There was also a $0.2 million decrease in
bonus expense for the nine months ended September 30, 2004 as compared with the
nine months ended September 30, 2003 based on the achievement of a product
based milestone with the release of Raindance Meeting Edition in March 2004
which triggered the payout of a cash commitment being accrued over the previous
year, partially offset by the commencement of a bonus accrual in the third
quarter of 2004 related to a product-based milestone expected to be achieved in
2005. General and Administrative.General and administrative expense decreased
$0.3 million to $1.7 million for the three months ended September 30, 2004 as
compared to $2.0 million for the three months ended September 30, 2003.
General and administrative expense increased $0.3 million to $5.7 million for
the nine months ended September 30, 2004 as compared to $5.4 million for the
nine months ended September 30, 2003. Legal expenses decreased $0.3 million
for the three months ended September 30, 2004 as compared to the three months
ended September 30, 2003 due to the accrual of a $0.3 million loss contingency
pertaining to a patent infringement suit in the third quarter of 2003, which
was subsequently paid in the fourth quarter of 2003 and the first quarter of
2004. Outside services expense increased $0.5 million for the nine months
ended September 30, 2004 as compared to the nine months ended September 30,
2003 as a result of consultants we engaged to assist us with our Sarbanes-Oxley
compliance and certain strategic initiatives. Legal expenses decreased $0.4
million for the three months ended September 30, 2004 as compared to the three
months ended September 30, 2003 due to the accrual of a $0.3 million loss
contingency pertaining to a patent infringement suit in the third quarter of
2003, which was subsequently paid in the fourth quarter of 2003 and the first
quarter of 2004. There were slight fluctuations in other expenses, including
amortization, accounting fees, salaries and allocated depreciation expense for
the nine months ended September 30, 2004 as compared to the same period in the
previous year. Stock-Based Compensation Expense.Stock-based compensation expense
decreased $0.6 million to $0.1 million for the three months ended September 30,
2004 from $0.7 million for the three months ended September 30, 2003.
Stock-based compensation expense decreased $0.1 million to $2.1 million for the
nine months ended September 30, 2004 as compared to $2.2 million for the nine
months ended September 30, 2003. 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 were
being recognized over the applicable vesting periods, which generally were four
years. As of May 2004, all of these options were fully vested and therefore all
associated stock-based compensation expense has been recognized. During the
three months ended September 30, 2004 and 2003, we did not record any deferred
stock-based compensation; however, during the nine months ended September 30,
2004 and 2003, we recorded $0.9 million and $1.2 million, respectively, of
deferred stock-based compensation. The $0.9 million of deferred stock-based
compensation recorded in the first quarter of 2004 relates to the issuance of
275,000 shares of restricted stock to our new President and Chief Executive
Officer in January 2004, of which 50,000 shares were immediately vested;
100,000 shares vest after the completion of 24 months of continuous service and
125,000 shares vest after the completion of 37 months of continuous service.
This agreement was amended in August 2004 to include acceleration of all
unvested shares of restricted stock in the event of a change in control of the
Company, as defined in the agreement. The $1.2 million of deferred stock-based
compensation recorded in the first quarter of 2003 relates to 750,000 shares of
restricted stock issued in February 2003 to certain executives and key
employees under our Executive Performance-Based Compensation Arrangement, as
approved by the Board of Directors in February 2003. The restricted stock will
vest in full on the sixth anniversary of its issuance, subject to accelerated
vesting upon the achievement of certain financial or product-based performance
milestones, or, generally at the Boards discretion, upon a change in control
of the Company. Accordingly, the $1.2 million deferred stock-based compensation
charge is being expensed ratably over six years, which charges will be
accelerated when it becomes apparent that the financial or product-based
milestones are deemed probable of being achieved. However, the resignation of
the Companys former President and Chief Executive Officer 22.




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effective December 31, 2003 and the resulting cancellation of 200,000
shares of restricted stock granted to him under the plan triggered the reversal
of the unamortized portion of his restricted stock grant compensation expense
in the amount of $0.3 million. In the third quarter of 2004 we determined that
one of the product-based revenue milestones will likely be achieved in 2005
and, accordingly, we have accelerated the stock compensation charge associated
with 150,000 shares of restricted common stock directly related to, and subject
to accelerated vesting upon the achievement of, this specific milestone.
Stock-based compensation amounts are based on the excess of the fair value of
our common stock on the date of grant or sale over the option exercise price or
stock purchase price. Compensation expense related to stock options is
amortized over the vesting period of the options, which generally is four
years. In connection with the acquisition of InterAct, we recorded $3.4 million
of deferred stock-based compensation related to the issuance of 997,599 shares
of common stock simultaneously with the closing of the InterAct acquisition,
which are being held in escrow and are released annually in equal one-third
increments beginning in May 2003. Accordingly, the deferred stock-based
compensation related to the 997,599 shares was being expensed over three years,
which began in May 2002. The release of the stock from escrow was contingent
upon the satisfaction of certain employment obligations, which were satisfied,
to us by Carolyn Bradfield, the former president and chief executive officer of
InterAct. In June 2004, our former Senior Vice President of Sales, Carolyn
Bradfield, left the Company, and, as a result, we recorded a $0.9 million stock
compensation charge related to the unrecognized deferred stock-based
compensation associated with the escrowed shares of restricted stock. 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. Other Income, net.Interest income remained flat at $0.1 million and $0.2
million for the three and nine months ended September 30, 2004 and 2003,
respectively. Interest expense remained negligible for the three months ended
September 30, 2004 and 2003, respectively, and also remained flat at $0.1
million for the nine months ended September 30, 2004 and 2003, respectively,
decreasing slightly throughout the current year as we continue to pay down our
debt service obligations. Liquidity and Capital Resources As of September 30, 2004, cash, cash equivalents and investments were
$42.2 million, an increase of $2.6 million compared with cash, cash equivalents
and investments of $39.6 held as of December 31, 2003. Net cash provided by operations was $5.5 million and $10.6 million for the
nine months ended September 30, 2004 and 2003, respectively. Cash provided by
operations decreased significantly for the first nine months of 2004 as
compared to the first nine months of 2003 primarily due to a net loss of $3.0
million for the nine months ended September 30, 2004 as compared to net income
of $2.1 million for the nine months ended September 30, 2003. The decrease is
also explained by an increase in accounts receivable, prepaid expenses and
other current assets and decreases in accrued expenses and compensation,
partially offset by an increase in accounts payable and deferred revenue. Net cash used by investing activities was $6.8 million and $6.7 million
for the nine months ended September 30, 2004 and 2003, respectively. $11.2
million of the net cash used in investing activities for the nine months ended
September 30, 2004 related to the purchase of investments, offset by $6.2
million in proceeds from the sale of investments. Additionally, there was $0.2
million provided by investing activities for the nine months ended September
30, 2004 due to the release of restricted cash in the current year. The
remainder of the net cash used by investing activities in the first nine months
of 2004 and 2003 primarily related to capital expenditures for equipment
purchases in anticipation of the release of Raindance Meeting Edition and
additional conferencing capacity, offset slightly by proceeds from the
disposition of fixed assets and a payment from an affiliated entity. Overall,
we expect capital expenditures in the remainder of 2004 to be lower than the
capital expenditures during the same period in 2003 due to the investments that
we have made to increase our capacity and associated with the release of
Raindance Meeting Edition that we do not expect to recur in 2004. Net cash used by financing activities was $1.2 million for the nine months
ended September 30, 2004 and net cash provided by financing activities was $0.2
million for the nine months ended September 30, 2003. Cash used by financing
activities in the first nine months of 2004 was due to debt service payments,
including the early repayment of our outstanding term loan in April 2004,
offset by cash proceeds from the exercise of common stock options and employee
stock purchase plan purchases. Cash provided by financing activities in the
first nine months of 2003 was due to cash proceeds from the exercise of common
stock options and employee stock purchase plan purchases, offset by debt
service payments. 23.




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As of September 30, 2004, we had approximately $0.2 million in total debt
obligations outstanding, all of which was current. Effective December 31, 2002, we amended the terms of a loan and security
agreement that we originally entered into on October 9, 2001. We renewed and
increased the revolving line of credit and refinanced the term loan. In
connection with refinancing the term loan, the current outstanding balance was
scheduled to be repaid with monthly principal payments of approximately $0.1
million plus interest at 5.25% over 36 months, with the final payment due in
January 2006. Advances under the revolving line of credit were limited to $12.5
million or 90% of eligible accounts receivable as defined and adjusted in the
agreement. The revolving line of credit was available through January 26,
2004. Advances under the revolving line of credit may have been repaid and
re-borrowed at any time prior to the maturity date. The loan and security
agreement was collateralized by substantially all of our tangible and
intangible assets and was subject to compliance with covenants, including
minimum liquidity coverage, minimum quick ratio and maximum quarterly operating
losses adjusted for interest, taxes, depreciation, amortization and other
non-cash charges. We were also prohibited from paying any dividends without the
banks prior written consent. In April 2004, the balance due under this
agreement (exclusively related to the term loan) of $1.8 million was paid in
full. In addition, in May 2003, we entered into a loan agreement with a
vendor, in the amount of $0.7 million, to finance certain fixed assets. The
loan is being repaid with quarterly principal payments of approximately $0.1
million plus interest at 2.5% with the final payment due in April 2005. At
September 30, 2004, the balance due under this agreement was $0.2 million, all
of which was current. In April 2004 we entered into a credit agreement with
another bank for a revolving line of credit, which expires in April 2006.
Outstanding advances under the revolving line of credit are limited to $15.0
million. Advances under the revolving line of credit bear interest at 0.5%
below the banks prime rate and may be repaid and re-borrowed at any time prior
to the maturity date. At September 30, 2004, the Company did not have an
outstanding balance under the revolving line of credit, however $0.2 million of
the line of credit was securing letters of credit. The credit agreement is
collateralized by substantially all of our tangible and intangible assets and
is subject to compliance with covenants, including minimum liquidity coverage,
minimum tangible net worth and positive adjusted EBITDA defined as quarterly
net income (loss) adjusted for interest, taxes, depreciation, amortization and
other non-cash charges. We are also prohibited from paying any dividends
without the banks prior written consent. At September 30, 2004, we were in
compliance with all financial 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. We have generated positive cash flows from operations for twelve
consecutive quarters. While we expect to continue to generate positive cash
flows from operations in the near term, such cash flows may be less than the
amounts recorded in prior quarters due to an anticipated increase in sales and
marketing expenditures in connection with the release of Raindance Meeting
Edition and an increase in research and development expenses. Looking ahead,
our debt service payments will decrease in the remainder of 2004 as compared to
2003 primarily due to the early repayment of our term loan and we expect
capital expenditures in the remainder of 2004 to be less than the comparable
period in 2003. We also expect proceeds from the exercise of common stock
options; however, it is not possible to estimate the impact those proceeds will
have on our cash flow in the fourth quarter of 2004. 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. No single customer accounted
for greater than 10% of our total revenue in the first three quarters of 2004.
At September 30, 2004, the Company had a receivable due from Qwest
Communications International, Inc. of $1.1 million or 10.2% of the Companys
total accounts receivable balance at such date. Our five largest customers
represented $4.2 million or 23.0% of our total third quarter 2004 revenue and
also represented $2.5 million or 22.4% of our total accounts receivable balance
at September 30, 2004. The sixth through twenty-fifth largest customers
represented $2.6 million or 14.3% of our total third quarter 2004 revenue. A
significant change in the liquidity or financial position of one of our larger
customers could have a material adverse impact on our operating cash flows. In
addition, a decrease in their use of our services may adversely impact our
future operating results. For example, Oracle Corporation, whose purchases
accounted for a significant portion of our revenue in the second quarter of
2004, significantly reduced its use of our conferencing services as it
completed the transition of substantially all of its conferencing to an
internal conferencing system in the third quarter. As such, we experienced a
reduction of approximately $1.0 million in revenue from Oracle in the third
quarter of 2004 as compared to the second quarter of 2004 due to this
transition. 24.




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As of September 30, 2004, our purchase commitments for bandwidth usage and
telephony services and equipment were approximately $14.7 million and will be
expended over the next two years. Some of these agreements may be amended to
either increase or decrease the minimum commitments during the lives of the
respective contracts. In September 2003 we entered into an agreement with our
primary conferencing bridge provider pursuant to which we made a commitment to
purchase a certain amount of equipment through December 2005. This commitment
was contingent on certain functionality being available in the equipment by May
12, 2004, which did not occur. As a result, we notified the conferencing bridge
provider that we terminated our remaining commitment, as well as the agreement
for material breach. Our vendor has disputed this position. The total remaining
commitment that we terminated as of September 30, 2004 was approximately $6.1
million. We lease office facilities under various operating leases that expire
through 2009. Total future minimum lease payments, under all operating leases,
as of September 30, 2004, are approximately $6.0 million. We have subleased six
of these facilities and future minimum sublease receivables for all subleased
facilities, as of September 30, 2004, approximate $1.0 million that we expect
to receive through September 2005. Our contractual obligations and commitments to make future payments as of
September 30, 2004 are as follows (in thousands): Payments Due by PeriodTotal
    
    Less than 1 year
    
    2-3years
    
    4-5 years
    
    Over 5 yearsDebt
    
    $
    174
    
    
    $
    174
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases, exclusive of sublease receivables
    
    
    6,036
    
    
    
    2,136
    
    
    
    2,232
    
    
    
    1,668
    
    
    
    Purchase obligations
    
    
    14,674
    
    
    
    6,924
    
    
    
    7,750
    
    
    
    
    
    
    
    Total contractual obligations and commitments
    
    $
    20,884
    
    
    $
    9,234
    
    
    $
    9,982
    
    
    $
    1,668
    
    
    $
    
 Not included in the contractual commitments schedule above are employment
commitments we have made to certain current and former officers of the Company.
See Notes 5(c) and 5(d) to the financial statements. Typically, the amount that
may be paid and the timing of such a payment are not known with certainty. At
September 30, 2004 our total employment-related commitments were approximately
$4.0 million. Not included in the contractual commitments schedule above is the
equipment purchase commitment we terminated in the second quarter of 2004. See
Note 5(b) to the financial statements. Our vendor has disputed our position
with respect to the termination. The total remaining commitment that we
terminated as of September 30, 2004 was approximately $6.1 million, which would
have been required to be expended in 2005. We currently anticipate that existing cash resources and our new revolving
line of credit facility will be sufficient to fund our anticipated working
capital and capital expenditure needs for at least the next twenty-four months.
We base our expenses and expenditures in part on our expectations of future
revenue levels. If our revenue for a particular period is lower than expected,
we may take steps to reduce 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, borrow on our revolving line of credit or obtain additional debt
financing. Additional financing may not be available at all or, if available,
may not be obtainable on terms favorable to us. If we are unable to obtain
additional financing, we may be required to reduce the scope of our planned
technology and product development and sales and marketing efforts, which could
harm our business, financial condition and operating results. Additional
financing may also be dilutive to our existing stockholders. Critical Accounting Policies and Estimates We prepare our financial statements in conformity with accounting
principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the periods presented. Actual results could differ from those estimates.
Our significant accounting policies are described in Note 1 to the financial
statements. Not all of these significant accounting policies require us to make
difficult subjective or complex judgments or 25.




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estimates. An accounting estimate is considered to be critical if it meets
both of the following criteria: the estimate requires assumptions about matters
that are highly uncertain at the time the accounting estimate is made; and
different estimates reasonably could have been used or changes in the estimate
that are reasonably likely to occur from period to period may have a material
impact on our financial condition and results of operations. Our critical
accounting estimates include the accounts receivable allowance for doubtful
accounts, useful lives of depreciable and intangible assets and their
recoverability, the assessment of goodwill and its recoverability, the
valuation allowance for deferred tax assets and restructuring charges and
reserves. Our critical accounting policies and estimates are included in our Form
10-K, filed on March 12, 2004. 26.




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Additional Risk Factors That May Affect Our Operating Results and The Market
Price Of Our Common Stock You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the
trading price of our common stock could decline, and you may lose all or part
of your investment. You should not rely on forward-looking statements because they are inherently
uncertain. This document contains certain forward-looking statements that involve
risks and uncertainties. We use words such as anticipate, believe,
expect, future, intend, plan and similar expressions to identify
forward-looking statements. These statements are only predictions. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this document. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us and described on
the following pages and elsewhere in this document. We assume no obligation to
update the forward-looking statements included in this document. We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
below, as well as any cautionary language in this document, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this document
could have a material adverse effect on our business, operating results,
financial condition and stock price. We have a history of losses and we expect to continue to incur net losses. Our operating costs have exceeded our revenue in each year since our
inception in April 1997, except for the fiscal year 2003. We have incurred
cumulative net losses of approximately $171.3 million from our inception
through September 30, 2004 and we expect to have additional net losses in the
future. We expect to incur net losses in the near term as we expand our sales
force, increase marketing expenditures and continue to invest in research and
development efforts. In addition, our anticipated net losses may increase in
the future if existing or future competitors decrease our market share, if
price pressure increases, if our next-generation services do not achieve
widespread market acceptance, if such services reduce our revenue from our
existing services, if our revenue from web-related services does not
substantially increase, or if we are unable to increase our market share as the
web conferencing market grows. If our net losses in the future increase more
than we anticipate, we may not be able to maintain or increase our sales and
marketing, research and development, or other operating expenses, and as a
result, we may be unable to continue our operations as currently planned.
Accordingly, we must significantly increase our revenue, which may be difficult
for us to do. We have a limited operating history, which makes it difficult to evaluate our
business. We have a limited operating history and you should not rely on our recent
results as an indication of our future performance. We were incorporated in
April 1997 and first recorded revenue in January 1998. We began commercially
offering our Reservationless Conferencing service in April 1999, our Web
Conferencing Pro service in June 2000, our Operator Assisted Conferencing
service in the first quarter of 2003 and Raindance Meeting Edition in March
2004. In January 2001, we restructured our company to focus solely on our web
conferencing services. In connection with this restructuring, we made
significant changes to our services and growth strategies, our sales and
marketing plans, and other operational matters, including a significant
reduction in our employee base. As a result, we have a limited relevant
operating history and it may be difficult to evaluate an investment in our
company, and we cannot be certain that our business model and future operating
performance will yield the results that we intend. In addition, the rapidly
changing nature of the web conferencing market makes it difficult or impossible
for us to predict future results, and you should not expect our future revenue
growth to equal or exceed our recent growth rates. There are a number of
factors described in this section that could cause fluctuations in our
operating results in any particular period. If any of these risks are not
within our control or we are otherwise unable to address these risks in a
cost-effective manner or at all, our operating results will be harmed. 27.




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We may fail to meet market expectations because of fluctuations in our
quarterly operating results, which would cause our stock price to decline. As a result of our limited operating history, increased competition, the
rapidly changing market for our services, price pressure and the other risks
described in this section, our quarterly operating results have varied
significantly from period to period in the past and are likely to continue to
vary significantly in future periods. For example, our quarterly net income and
net loss ranged between $1.4 million net income and $1.9 million net loss in
the four quarters ended September 30, 2004. Our quarterly revenue ranged
between $20.3 million and $18.4 million in the four quarters ended September
30, 2004. Many of the factors that may cause fluctuations in our quarterly
operating results are beyond our control, such as increased competition,
pricing pressure and market demand for our services. Our ability to license
software may also contribute to such fluctuations, as licensing opportunities
have traditionally arisen infrequently, are difficult to predict, and
currently, we do not have any software licensing revenue projected.
Additionally, we expect our results will fluctuate based on seasonal sales
patterns. Our operating results have shown decreases in our usage-based
services around certain times, such as spring, summer, Thanksgiving, December
and New Year holidays. We expect that our revenue during these seasons will not
grow at the same rates as compared to other periods of the year because of
decreased use of our services by business customers. As a result of these
factors and other risks described in this section, our quarterly operating
results are difficult to predict and may not meet the expectations of
securities analysts or investors. If this occurs, the price of our common stock
would decline. A high percentage of our revenue is attributable to repeat customers, none of
whom are obligated to continue to use our services. The failure of continued
use of our services by existing customers could harm our operating results and
cause our stock price to decline. A high percentage of our revenue is attributable to repeat customer usage
of our services. Our customers are not obligated to continue to use our
services as we provide our services largely on a usage-based pricing model. For
example, in the quarter ended September 30, 2004, 91.1% of our revenue was
usage-based. In addition, customers have no obligation to renew subscription
contracts with us. As a result, our inability to retain existing customers and
sustain or increase their usage of our services could result in lower than
expected revenue, and therefore, increase our anticipated net losses, 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 has caused, and will continue to cause, a decrease in our gross margins.
The reasons we have lost customers have included the failure of our software or
systems to meet customers performance expectations or requirements, customers
decision to purchase competitive products or services for reasons such as
greater brand recognition and broader features and functionality, or the lack
of significant efforts required to educate our customers about the benefits of
our services. A significant portion of our revenue is attributable to large customers that
have no obligation to continue to use our services. We target our services to large companies and as a result, we may
experience an increase in customer concentration. For example, our top five
customers accounted for 23.0% and 25.2% of our revenue in the quarters ended
September 30, 2004 and 2003, respectively. The sixth through twenty-fifth
largest customers represented 14.3% of our total third quarter 2004 revenue.
These large customers have no obligation to continue to use our services. For
example, Oracle Corporation was a large customer of ours, representing 5.1% of
our revenue in the second quarter of 2004, and has significantly reduced the
use of our services as it completed its transition of substantially all of its
conferencing to an internal conferencing system in the third quarter of 2004.
If any of our large customers stop using our services or are unable to pay
their debts as they become due, our operating results will be harmed, our
revenue will be negatively impacted, and our anticipated net losses would
increase. We have a receivable due from Qwest Communications International,
Inc. at September 30, 2004, which was approximately $1.1 million or 10.2% of
the Companys total accounts receivable balance. We anticipate that our operating expenses will increase, and if our revenue
does not increase, our operating results will be negatively impacted. We anticipate incurring significant sales and marketing, research and
development and other operating expenses, particularly as we continue
developing our next-generation services and architecture. We project expenses
in part on our estimates of future revenue. If our revenue for a particular
period is lower than we expect, we may be unable to reduce our operating
expenses for that period or at all, in which case our operating results would
be negatively impacted, and our anticipated net losses may increase. 28.




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We have experienced significant pricing pressure for our Reservationless
Conferencing services, which is expected to continue and has negatively
impacted our revenues, gross margins and anticipated net losses. The prices for our services are subject to rapid and frequent changes. For
example, our average price per usage based minute declined by 7.0% in the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003. In many cases, competitors provide their services at significantly
reduced rates, for free or on a trial basis in order to win customers. In
addition, telecommunications providers enjoy lower telephony costs as a result
of their ownership of the underlying telecommunications network. As a result,
these carriers can offer services similar to ours at substantially reduced
prices. Due to competitive factors and the rapidly changing marketplace, we
have reduced our pricing in many circumstances and expect we will be required
to further reduce our pricing structure in the future. Audio conferencing-only
revenue constituted 82.7% of our revenue in the third quarter of 2004 and we
expect that audio-conferencing-only revenue will continue to constitute the
vast majority of our revenue in the near term. As such, significant pricing
pressure has negatively impacted, and will continue to negatively impact, our
revenue, margins and anticipated net losses. 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, we recently released our Raindance Meeting
Edition service and our SwitchTower technology in March 2004; however, we will
need to release additional features, functionalities and services to remain
competitive in the market. Many companies, including some of our competitors
are utilizing less costly resources in China and India to develop their
products and services. As a result, our competitors are able to develop
superior products, services and features more quickly and more cost-effectively
than we can. If the services and features we develop fail to achieve widespread
market acceptance or fail to generate significant revenue to offset development
costs, our anticipated net losses may increase. 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. 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. Our next-generation services may impact the revenue we receive from existing
services. Our Raindance Meeting Edition and other next-generation services may
negatively impact the revenue we receive for our existing services,
particularly our Web Conferencing Pro services. While we intend to continue to
sell our Web Conferencing Pro services, this service may lose market share due
to the vast majority of our resources being expended on our next-generation
services. In the event that we are unable to develop our next-generation
services in a timely manner, and if such next-generation services do not
generate significant revenue to offset any declining revenue from Web
Conferencing Pro services, our financial performance could be negatively
affected, particularly revenue, gross margins and net losses. Competition in the web conferencing services market is intense and we may be
unable to compete successfully, particularly as a result of recent
announcements from large software companies. The market for web conferencing services is relatively new, rapidly
evolving and intensely competitive. Competition in our market will continue to
intensify and may force us to further reduce our prices, or cause us to
experience reduced sales, revenue and margins, loss of market share and reduced
acceptance of our services. As an integrated provider of web and audio
conferencing services, we compete with stand-alone providers of web
conferencing and traditional teleconferencing services. In the web
conferencing services market our principle competitors include Centra Software,
Cisco Systems, Genesys, IBM, Macromedia, Microsoft and WebEx. Our principle
competitors in the teleconferencing market include AT&T, Global Crossing, MCI,
PTEK, Worldcom, Sprint and West Corporation. Some of our competitors have
entered or expanded their positions in the conferencing services market by
acquiring one of our competitors. For example, Microsoft acquired Placeware,
Cisco Systems acquired Latitude Communications, and West Corporation acquired
Intercall. As a result of these acquisitions, these large companies may expend
significantly greater resources developing and enhancing conferencing services
and/or software that 29.




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directly compete with our offerings, and because these companies can
leverage widespread use of their product and services by existing customers to
capture market share in the conferencing market, our market share as well as
our revenue may significantly decline. In addition, some large software
companies, such as Oracle and Macromedia, are also providing web conferencing
products in addition to their software offerings. These companies may expend
significantly greater resources developing, enhancing and marketing their web
conferencing products, and as a result, our market share and revenue may
significantly decline. In addition, Oracle was a large customer of ours and
significantly reduced its use of our services as it substantially completed the
transition to an internal conferencing system in the third quarter of 2004. 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 telephony costs as a result of their
ownership of the underlying telecommunication network. Many more companies have
entered and will continue to enter this market and invest significant resources
to develop conferencing services that compete with ours. These current and
future competitors may also offer or develop products or services that perform
better than ours and as a result capture market share that may reduce our share
as well as our revenue. In addition, acquisitions or strategic partnerships involving our current
and potential competitors could harm us in a number of ways. For example:  
    
    competitors could acquire or partner with companies with which we have
distribution relationships and discontinue our partnership, resulting
in the loss of distribution opportunities for our services;
    
    a competitor could be acquired by or enter into a strategic
relationship with a party that has greater resources and experience
than we do, such as the Microsoft/Placeware and Cisco/Latitude
acquisitions, 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,
such as the acquisition of Voyant Technologies, our primary
conferencing bridge supplier, by Polycom, Inc. Our sales cycle makes it difficult to predict our quarterly operating results. Our sales cycle varies from several weeks to several months depending on
the type and size of customer approached. Oftentimes, potential customers
require approvals from multiple decision makers within their organizations. In
addition, since most of our services are provided on a usage-based pricing
model, it generally takes several weeks or months before our services are
ramped for use within an organization. We also have experienced long sales
cycles because we need to educate customers on the benefits of our web
conferencing services, particularly Raindance Meeting Edition. These variables
make it difficult for us to predict if and when our services will be adopted
and used by our customers. As a result, our quarterly operating results are
difficult to predict. We have limited marketing, branding and lead-generation efforts, which may not
be successful. We believe that significant marketing efforts are required to achieve
brand recognition, to educate customers and potential customers on the benefits
of our services, and to increase adoption of our services. We have limited
resources, however, to support marketing, branding and lead generation efforts.
As such, our current and planned marketing efforts may not be sufficient or
successful to achieve the results we intend. As a result, our business may be
harmed. In the third and fourth quarters of 2003, we recognized a significant portion
of our revenue from a non-recurring software license. We recognized $1.1 million and $2.9 million in revenue in the third and
fourth quarters of 2003, respectively, associated with the sale of a Web
Conferencing Pro license to Voyant Technologies, which was acquired by Polycom.
The software license fees associated with this license will not recur.
Licensing opportunities have traditionally arisen infrequently, are difficult
to predict and currently we do not have any significant software licensing
revenue projected in the near term. In 30.




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addition, by licensing software we may have created an opportunity for
Voyant/Polycom to compete against us, which may reduce our market share, harm
our competitive position, and create further price pressure. As a result, our
operating and financial performance may be harmed. Our business and operating results may suffer if we fail to establish
distribution relationships or if our distribution partners do not successfully
market and sell our services. For the quarter ended September 30, 2004, 20.5% of our revenue was
attributable to our indirect service customers. These customers may not be
obligated to distribute our services through their sales channels. In
addition, these customers may not be obligated to continue to use our services
or renew any subscription agreements with us. As a result, we cannot
anticipate the amount of revenue we will derive from these relationships in the
future. Our inability to retain these customers and sustain or increase their
distribution of our services could result in significant reductions in our
revenue or we may be required to reduce the price they pay for our services,
and therefore, reduce our margins and increase our anticipated net losses. If we fail to establish new distribution relationships in a timely manner
or if our distribution partners do not successfully distribute our services,
our ability to achieve widespread adoption for our services will suffer and our
business and operating results will be harmed. Establishing these distribution
relationships can take several months or more. In some cases, our service
limitations, such as our inability to offer branding capabilities to our
resellers, has prevented us and will continue to prevent us from establishing
distribution relationships, Additionally, since the vast majority our
contracts with our distribution partners are usage-based, it typically takes
several months or longer before our distribution arrangements generate revenue.
Our distribution partners are not prohibited from offering and reselling the
products and services of our competitors and may choose to devote greater
resources to marketing and supporting the products and services of our
competitors. We depend on single source suppliers for conferencing bridges and a limited
number of sources for telephony services, the loss of which could cause
significant delays and increased costs in providing services to our existing
and prospective customers. We purchase substantially all of our conferencing bridges from a single
supplier, Voyant Technologies, which was acquired by Polycom. Any extended
reduction, interruption or discontinuation in the supply of these bridges would
cause significant delays and increased costs in providing services to our
existing and prospective customers. These bridges form the basis of our audio
conferencing infrastructure, upon which the majority of our services rely. In
order to continue to expand our infrastructure capacity, we must purchase
additional components from this supplier. In September 2003 we entered into an
agreement with Voyant Technologies pursuant to which we made a commitment to
purchase a certain amount of equipment through December 2005. This commitment
was contingent on certain VoIP technology functionality being available in the
equipment by May 12, 2004, which did not occur. As a result, we notified Voyant
Technolgies that we have terminated our remaining purchase commitment.
Additionally, we terminated the agreement for material breach. Voyant
Technologies has disputed our position and has threatened litigation against
us. Litigation could require us to spend significant amounts of time and money
to defend ourselves regardless of merit. If any of these claims were to
prevail, we could be forced to pay damages, comply with injunctions and divert
management attention and resources. Furthermore, if we are required to find
alternative sources for these bridges, we may experience difficulty in
integrating them into our infrastructure and we could be required to expend
significant money and resources, which may harm our operating results. We also have a limited number of sources for our telephony services,
particularly due to the current routed architecture of our audio conferencing
network upon which the majority of our services rely. If these suppliers were
to terminate or interrupt their services, we may experience difficulties in
obtaining alternative sources on commercially reasonable terms or in
integrating alternative sources into our technology platform. In addition, if
we were required to obtain these services from alternative sources, our cost of
sales may substantially increase due to the limited amount of suppliers. Due to increased price compression in the conferencing industry, we may be
required to alter the architecture of our audio conferencing network. We have architected our audio conferencing network with conferencing
bridges and telephony services to automatically route calls into conferences.
While more reliable, the cost of this routed architectural approach is more
expensive than a non-routed architecture. For example, the cost of purchasing
routed telephony services is more expensive than it would be to purchase 31.




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non-routed telephony services. In addition, our costs of purchasing
routed telephony services have not decreased at the same rate as our prices
have for Reseverationless Conferencing, our audio conferencing service. As a
result of this trend, our margins have declined and our net losses have
increased and both may continue to do so. In order to reduce costs, we may be
required to alter the architecture of our audio conferencing network to a
non-routed network in order to take advantage of lower priced telephony
services. This would be expensive as we would be required to purchase
non-routed conferencing bridges, as well as time-consuming, and we could
experience technical difficulties and delays in doing so. Our transition to VoIP technology is subject to significant risks, delays and
costs. We recently announced that we intend to transition some of our long
distance telephony traffic onto a VoIP platform. As a result of this change,
we become subject to significant risks, delays and costs. The costs associated
with a transition to a new service provider are substantial. For example, we
have reengineered our systems and infrastructure to accommodate our new service
provider, and expect to continue to do so, which is both expensive and
time-consuming. In addition, we have experienced disruptions and delays in this
transition. For example, our primary bridge conferencing vendor did not have
certain functionality available in conferencing bridges required for this
transition in the time periods we initially anticipated. As such, we expect
our transition to a widespread VoIP platform to be delayed. There also may be
unforeseen circumstances as a result of this transition that may cause delays
in transitioning our long distance telephony traffic. As a result of these
delays, our anticipated net losses may increase. Any interruption in the
delivery of our services may cause a loss of revenue and a loss of customers. 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, we have experienced disruptions and delays in our services in the
past due to service disruptions from these providers. Any interruption in the
delivery of our services would likely cause a loss of revenue and a loss of
customers. Our business will suffer if our systems or services fail or become unavailable. A reduction in the performance, reliability or availability of our systems
or services 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. For example, usage of our Web Conferencing Pro
service depends on computers being enabled with certain Java technology. There
are new computers being shipped without Microsofts operating systems
incorporating this Java technology. As such, our Web Conferencing Pro services
will not work on these computers unless the user downloads the Java technology
separately, which may be impracticable and expensive. 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 or if our systems or services become unavailable. Our customers
depend on the reliability of our services and we may lose customers if we fail
to provide reliable services for even a single communication event. We maintain our primary data facility and hosting servers at our
headquarters in Louisville, Colorado, and two secondary data facilities in the
Denver, Colorado metropolitan area. 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 increase our anticipated net losses. 32.




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Our services are often used to share confidential and sensitive information
and, as a result, if our security system is breached, our business and
reputation could suffer. We must securely receive and transmit confidential information for our
customers over public networks and maintain that information on internal
systems. Our failure to prevent security breaches could damage our reputation,
and expose us to risk of loss or liability. If we fail to provide adequate
security measures to protect the confidential information of our customers, our
customers may refrain from using our services or potential customers may not
choose to use our services, and as a result, our operating results would be
harmed. Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays or
loss of data. We may be required to expend significant capital and other
resources to protect against security breaches or to alleviate problems caused
by any breach. In addition, our internal systems are accessible to a number of
our employees. Although each of these employees is subject to a confidentiality
agreement, we may be unable to prevent the misappropriation of this
information. If we do not increase the capacity of our infrastructure in excess of customer
demand, customers may experience service problems and choose not to use our
services. The amount of conferencing events we host has increased significantly. We
must continually increase our capacity consistent with our growth in usage. We
generally maintain between 50% and 60% capacity based on average usage. To
accommodate increased customer usage and rapidly expand our operations requires
a significant increase in the capacity of our infrastructure. To increase
capacity, we may need to order equipment with substantial development and
manufacturing lead times, which can sometimes be several months or longer. If
we fail to increase our capacity in a timely and efficient manner, customers
may experience service problems, such as busy signals, improperly routed
conferences, and interruptions in service. Service problems such as these would
harm our reputation, cause us to lose customers and decrease our revenue, and
therefore increase our anticipated net losses. 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 sustain profitability on a consistent basis or at
all and, therefore, decrease the value of our stock. Despite our restructuring in January 2001, which resulted in, among other
things, a significant reduction in the size of our workforce, we have rapidly
expanded since inception, and will continue to expand our operations and
infrastructure. This expansion has placed, and will continue to place, a
significant strain on our managerial, operational and financial resources and
we may not effectively manage this growth. Rapidly expanding our business would
require us to invest significant amounts of capital in our operations and
resources, which would substantially increase our operating costs. As a result,
our failure to manage our growth effectively could cause substantial increases
in our operating costs without corresponding increases in our revenue, thereby
increasing our anticipated net losses. Also, our management may have to divert
a disproportionate amount of its attention away from our day-to-day activities
and devote a substantial amount of time to managing growth. In order to rapidly
expand our business we may need to raise additional funds. Any future financing
we require may not be available on a timely basis, in sufficient amounts or on
terms acceptable to us. If we cannot obtain adequate funds, we may not be able
to compete effectively. If we do not expand to provide services internationally, our ability to attract
and retain multi-national customers will be harmed and as a result our business
and operating results may be harmed. We have attempted to expand into international markets and spent
significant financial and managerial resources to do so. In particular, we
formed a joint venture with @viso Limited, a European-based venture capital
firm, to expand our operations to continental Europe and the United Kingdom.
This joint venture failed and was recently liquidated and dissolved. We have
lost opportunities to attract and retain multi-national customers due to our
failure to expand and provide services internationally. As a result, our
business and operations have been harmed. If we expand internationally, either alone or with a partner, we would be
required to spend additional financial and managerial resources that may be
significant. We have limited experience in international operations and may not
be able to compete effectively in international markets. We face certain risks
inherent in conducting business internationally, such as:  
    
    difficulties in establishing and maintaining distribution channels and partners for our services; 33.




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
    
    varying technology standards from country to country;
    
    uncertain protection of intellectual property rights;
    
    inconsistent regulations and unexpected changes in regulatory requirements;
    
    difficulties and costs of staffing and managing international operations;
    
    linguistic and cultural differences;
    
    fluctuations in currency exchange rates;
    
    difficulties in collecting accounts receivable and longer collection periods;
    
    imposition of currency exchange controls; and
    
    potentially adverse tax consequences. In addition, our expansion into international markets may require us to
develop specific technology that will allow our current systems to work with
international telephony systems. We may not develop this technology in a timely
manner, in a way to prevent service disruptions or at all. We may 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. We may pursue additional business relationships through acquisitions,
joint ventures, or other investment prospects, which may not be successful, and
we may not realize the benefits of any acquisition, joint venture, or other
investment. We have limited experience in acquisition activities and may have to
devote substantial time and resources in order to complete acquisitions. There
may also be risks of entering markets in which we have no or limited prior
experience. Further, these potential acquisitions, joint ventures and
investments entail risks, uncertainties and potential disruptions to our
business. For example, we may not be able to successfully integrate a companys
operations, technologies, products and services, information systems and
personnel into our business. An acquisition may further strain our existing
financial and managerial controls, and divert managements attention away from
our other business concerns. There may also be unanticipated costs associated
with an acquisition that may harm our operating results and key personnel may
decide not to work for us. These risks could harm our operating results and
cause our stock price to decline. In addition, if we were to make any acquisitions, we could, for example:  
    
    issue equity securities that would dilute our stockholders;
    
    expend cash;
    
    incur debt;
    
    assume unknown or contingent liabilities; and
    
    experience negative effects on our results of operations. Our Reservationless 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 Reservationless Conferencing service is not subject to
regulation by the Federal Communications Commission (FCC) or any state public
service commission because the services integrate traditional voice
teleconferencing and added value Internet services. The FCC and state public
service commissions, however, may require us to submit to traditional 34.




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telecommunications carrier regulations for our Reservationless
Conferencing service under the Communications Act of 1934, as amended, and
various state laws or regulations as a provider of telecommunications services.
For example, we recently received a letter from the FCC Investigations and
Hearing Division of the Enforcement Bureau regarding filing requirements of
telecommunications carriers. 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 Reservationless Conferencing
service, which constitutes the vast majority of our revenue, until we have
obtained various federal and state licenses and filed tariffs. We believe we
would be able to obtain those licenses, although in some states, doing so could
significantly delay our ability to provide services. We also would be required
to comply with other aspects of federal and state laws and regulations.
Subjecting our Reservationless 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 five patents
relating to features of our Web Conferencing Pro service. These measures may
not be adequate to safeguard the technology underlying our web conferencing
services and other intellectual property. Unauthorized third parties may copy
or infringe upon aspects of our technology, services or other intellectual
property. Other than the patents that we own, our proprietary systems are not
currently protected by any patents and we may not be successful in our efforts
to secure patents for our proprietary systems. Regardless of our efforts to
protect our intellectual property, our competitors and others may be able to
develop similar systems and services without infringing on any of our
intellectual property rights. In addition, employees, consultants and others
who participate in the development of our proprietary systems and services may
breach their agreements with us regarding our intellectual property and we may
not have any adequate remedies. Furthermore, the validity, enforceability and
scope of protection for intellectual property such as ours in Internet-related
industries are uncertain and still evolving. We also may not be able to
effectively protect our intellectual property rights in certain countries. In
addition, our trade secrets may become known through other means not currently
foreseen by us. If we resort to legal proceedings to enforce our intellectual
property rights, the proceedings could be burdensome and expensive, and as a
result, increase our anticipated net losses. Additionally, in any litigation
the outcome is uncertain. We have been sued for patent infringement in the past and may be subject to
additional claims alleging patent and intellectual property infringement in the
future. We have been sued for patent infringement and may be subject to additional
claims alleging patent and intellectual property infringement in the future. In
August 2003, a lawsuit was filed by Edisync Systems, LLC against us and some of
our competitors alleging patent infringement. In December 2003, we entered into
a definitive settlement agreement with the plaintiff, pursuant to which we paid
$0.3 million. In addition, we may be subject to other claims alleging patent
and intellectual property infringement in the future. 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. We have been sued for breach of contract and unjust enrichment and may be
subject to additional claims. On May 17, 2004, a complaint was filed against us by iTalk, LLC in the
District Court of Boulder County, Colorado alleging breach of contract and
unjust enrichment, seeking damages and injunctive relief. The complaint does
not quantify any alleged monetary damages. On June 30, 2004, we filed a motion
to dismiss the claims for failure to state a claim upon which relief can be
granted. On July 29, 2004, iTalk filed a response, opposing such motion. On
August 24, 2004, Raindance filed a reply in support of our motion to dismiss.
On September 24, 2004, the court denied the motion to dismiss. On October 4,
2004, Raindance answered iTalks complaint. Raindance disputes plaintiffs
claims and intends to defend against them vigorously. In addition, we may be
subject to other litigation, including from employees or former employees.
Litigation 35.




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could require us to spend significant amounts of time and money to defend
ourselves regardless of merit. If any of these claims were to prevail, we could
be forced to pay damages, comply with injunctions and divert management
attention and resources. We may be subject to assessment of state 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. For example, we recently were audited by the Commonwealth
of Massachusetts, Department of Revenue claiming that our Reservationless
Conferencing service is subject to sales tax in the Commonwealth of
Massachusetts. We have formally protested this assessment and have requested a
hearing to determine whether we are liable for sales tax in that state, and if
so, the amount of such liability. Because we do not currently collect sales or
other taxes on the sale of our services, our total liability in the state of
Massachusetts could be as much as $0.2 million based on the position taken by
Massachusetts. Additionally, more states may claim that we are subject to an
assessment of sales or other taxes, in which case our total liability may
increase. We also received an inquiry from the Internal Revenue Service
related to federal excise taxes applicable to telecommunications carriers. Our
business would be harmed if one or more states or the Internal Revenue Service
were to require us to pay sales or other taxes on past sales of services,
particularly because we may be unable to go back to customers to collect sales
or other taxes for past sales and may have to pay such taxes out of our own
funds. Our business may be harmed if our services do not work with the various
hardware and software systems, including corporate security measures, used by
our customers. We currently provide services to customers with various hardware and
software systems, ranging from legacy to next-generation applications and
networking equipment. If our services are unable to support these diverse
platforms, and if we fail to modify our services to support new versions of
these applications and equipment, our services may fail to gain broad market
acceptance, which would cause our operating results to suffer. For example,
usage of our Web Conferencing Pro services depends on computers being enabled
with certain Java technology. There are new computers being shipped without
Microsofts operating systems incorporating this Java technology. As such, our
Web Conferencing Pro services will not work on these computers unless the user
downloads the Java technology separately, which may be impracticable and
expensive. Furthermore, because of bandwidth constraints on corporate
intranets and concerns about security, our customers and potential customers
may block reception of web services like ours within their corporate
environments. In order for customers to use our services, customers and users
may need to reconfigure their corporate intranets, security measures and
firewalls. Widespread adoption of our technology and services depends on
overcoming these obstacles. Our current stock compensation expense negatively impacts our earnings, and if
we are required to report the fair value of employee stock options as an
expense in conjunction with new accounting standards, our earnings will be
adversely affected, which may cause our stock price to decline. Under our current accounting practice, stock compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. As of September 30, 2004 we had
approximately $1.1 million in deferred equity-based compensation expense. We
expect this expense to be amortized over five years and to negatively impact
our earnings during that time. We recorded approximately $0.9 million of this
deferred stock-based compensation in January 2004 associated with the issuance
of 275,000 shares of restricted stock to our new President and Chief Executive
Officer. $0.5 million of this deferred equity-based compensation will be
recognized as an expense over the next year as certain restricted stock grants
vest. Regulatory authorities are currently reviewing various proposals that
would change the way stock options are reported. If we are required to report
all employee stock options as an expense based on a change in accounting
standards, our earnings will be negatively impacted, which may cause our stock
price to decline and increase our anticipated net losses. We disclose non-GAAP financial information. We prepare and release quarterly unaudited and annual audited financial
statements prepared in accordance with generally accepted accounting principles
(GAAP). We also disclose and discuss certain non-GAAP financial information
in the related earnings release and investor conference call. This non-GAAP
financial information excludes certain non-cash expenses, 36.




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consisting primarily of depreciation, the amortization of intangible
assets and stock-based compensation. We believe the disclosure of non-GAAP
financial information helps investors more meaningfully evaluate the results of
our operations. However, we urge investors to carefully review the GAAP
financial information included as part of our Quarterly Reports on Form 10-Q,
our Annual Reports on Form 10-K, and our quarterly earnings releases and
compare the GAAP financial information with the non-GAAP financial results
disclosed in our quarterly earnings releases and investor calls. Our corporate compliance program cannot guarantee that we are in compliance
with all potentially applicable regulations. As a publicly traded company we are subject to significant regulations,
including the Sarbanes-Oxley Act of 2002, some of which have either only
recently been adopted or are currently proposals subject to change. While we
have developed and instituted a corporate compliance program based on what we
believe are the current best practices and continue to update the program in
response to newly implemented or changing regulatory requirements, we cannot
assure that we are or will be in compliance with all potentially applicable
regulations. For example, we cannot assure that our management will not find a
material weakness in connection with its review of our internal control over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also
cannot assure that we could correct any such weakness to allow our management
to assess the effectiveness of our internal control over financial reporting as
of the end of our current fiscal year in time to enable our independent
registered public accounting firm to attest that such assessment will have been
fairly stated in our Annual Report on Form 10-K to be filed with the Securities
and Exchange Commission or attest that we have maintained effective internal
control over financial reporting as of the end of our current fiscal year. If
we fail to comply with any of these regulations we could be subject to a range
of regulatory actions, fines, or other sanctions or litigation. 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 or over VoIP networks. This, in turn,
could slow the growth in Internet use or VoIP networks and thereby decrease the
demand for our services. Several telecommunications carriers are advocating
that the Federal Communications Commission regulate the Internet and VoIP
networks in the same manner as other telecommunications services by imposing
access fees. Recent events suggest that the FCC may begin regulating the
Internet and VoIP networks in such a way. In addition, we operate our services
throughout the United States and state regulatory authorities may seek to
regulate aspects of our services as telecommunication activities. Other countries and political organizations are likely to impose or favor
more and different regulations than those that have been proposed in the United
States, thus furthering the complexity of regulation. The adoption of such laws
or regulations, and uncertainties associated with their validity and
enforcement, may affect the available distribution channels for and costs
associated with our services, and may affect the growth of the Internet or VoIP
networks. Such laws or regulations may therefore harm our business. Our stock price is volatile and this volatility may depress our stock price,
result in litigation or indicate that our goodwill is impaired, resulting in
further declines to our stock price. The stock market in general, and the stock price of our company in
particular, have experienced extreme price and volume fluctuations. For
example, between January 1, 2002 and September 30, 2004 our stock has traded as
high as $6.30 37.




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and as low as $1.20 on the Nasdaq National Market. The volatility of our
stock price can be due to factors such as, fluctuating operating results,
significant purchases and sales of our stock, announcements by us or our
competitors, changes in security analysts estimates of our performance, or our
failure to meet analysts expectations. Many of these factors are beyond our
control. In addition, broad market and industry factors may negatively impact
our stock price, regardless of our operating performance. Many companies that
have experienced volatility in their stock prices have been targets for
securities class action litigation. If we were subject to any such litigation,
we could be required to expend substantial costs and resources, which could
harm our business. Additionally, one of the factors that we consider in
determining a potential impairment of our goodwill is our stock market
capitalization. If our stock price declines and remains depressed for an
extended period of time, our reported goodwill could be materially adversely
impaired which would require us to write down our goodwill, and this charge may
cause our stock price to decline further. 38.




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Item 3.Quantitative and Qualitative Disclosures about Market Risk At September 30, 2004, the current portion of our long-term debt was $0.2
million. This balance due pertains to our loan agreement with a vendor and
will be repaid at a fixed interest rate of 2.5% with quarterly payments due
through April 2005. A change in interest rates would not affect our obligation
related to debt existing as of September 30, 2004, as the interest rate related
to this debt is fixed over the term. Increases in interest rates could,
however, increase the interest expense associated with future borrowings,
including any advances on our revolving line of credit. In April 2004 we
entered into a credit agreement with a bank for a $15.0 million revolving line
of credit that bears interest at 0.5% below the banks prime rate and matures
in April 2006, under which we would be exposed to the risk that a material
increase in interest rates could increase our interest expense to the extent
that we make any future draw downs on the revolving line of credit. We are
currently not exposed to foreign currency risks, however, we may also decide to
make future investments that will subject us to this risk, as well as
additional market risk. 
 Item 4.Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that we file under the
Securities Exchange Act of 1934, as amended (Exchange Act), is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure about our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act. Donald F. Detampel, Jr., our Chief Executive Officer and Nicholas J.
Cuccaro, our Chief Financial Officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the
period covered by this Form 10-Q. Based on that evaluation, they have concluded
that our disclosure controls and procedures are effective as of the end of such
period. Furthermore, there have been no changes in our internal controls over
financial reporting during the fiscal quarter ended September 30, 2004 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 39.




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PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings On May 17, 2004, a complaint was filed against us by iTalk, LLC in the
District Court of Boulder County, Colorado alleging breach of contract and
unjust enrichment, seeking damages and injunctive relief. The complaint does
not quantify any alleged monetary damages. On June 30, 2004, we filed a motion
to dismiss the claims for failure to state a claim upon which relief can be
granted. On July 29, 2004, iTalk filed a response, opposing such motion. On
August 24, 2004, Raindance filed a reply in support of our motion to dismiss.
On September 24, 2004, the court denied the motion to dismiss. On October 4,
2004, Raindance answered iTalks complaint. Raindance disputes plaintiffs
claims and intends to defend against them vigorously. In addition, from time
to time, we have been subject to legal proceedings and claims in the ordinary
course of business. Any claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. We are not aware
of any other legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds Stock Repurchase Program On August 31, 2004 our Board of Directors approved the repurchase of up to
$5,000,000 of our common stock, which we announced in a press release on
September 8, 2004. These repurchases will be made from time to time in open
market purchases at prevailing market prices, in negotiated transactions off
the market, or pursuant to a 10b5-1 plan adopted by the Company. The repurchase
program is expected to continue over the next twelve months unless modified by
our Board of Directors and will be funded out of working capital. We did not
repurchase any shares of our common stock during the quarter ended September
30, 2004. 
 Item 3.Defaults Upon Senior Securities None. 
 Item 4.Submission of Matters to a Vote of Security Holders None. 
 Item 5.Other Information None. 
 Item 6.Exhibits Exhibit No.
    
    Description10.18.1
    
    Amendment to Offer Letter, dated August 20, 2004, between
Registrant and Donald F. Detampel, Jr.31.1
    
    Certification pursuant to 18 U.S.C. Section
1350 by the Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed with
the Securities and Exchange Commission as Exhibit 31.1 to
the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004.31.2
    
    Certification pursuant to 18 U.S.C. Section
1350 by the Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed with
the Securities and Exchange Commission as Exhibit 31.2 to
the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004.
 40.




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Exhibit No.
    
    Description32.1
    
    Certifications pursuant to 18 U.S.C. Section
1350 by the Chief Executive Officer and Chief Financial
Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed with the Securities and
Exchange Commission as Exhibit 32.1 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2004.
 41.




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. RAINDANCE COMMUNICATIONS, INC.Date: November 9, 2004
    By:
    /s/ Nicholas J. CuccaroChief Financial Officer(Principal Financial Officer and Duly Authorized Officer) 42.




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##### Table of Contents



Exhibit Index Exhibit No.
    
    Description10.18.1
    
    Amendment to Offer Letter, dated August 20, 2004, between
Registrant and Donald F. Detampel, Jr.31.1
    
    Certification pursuant to 18 U.S.C. Section
1350 by the Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed with
the Securities and Exchange Commission as Exhibit 31.1 to
the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004.31.2
    
    Certification pursuant to 18 U.S.C. Section
1350 by the Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed with
the Securities and Exchange Commission as Exhibit 31.2 to
the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004.32.1
    
    Certifications pursuant to 18 U.S.C. Section
1350 by the Chief Executive Officer and Chief Financial
Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed with the Securities and
Exchange Commission as Exhibit 32.1 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2004.