We offer several on-demand web collaboration services. The term “on-demand web collaboration services” is a relatively new one in the software industry and can be better understood through the aid of the following explanatory paragraphs:

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“On-Demand”.     On-demand is a software industry term meaning that the software is hosted at the facility of a vendor, such as WebEx, and from that source is furnished online to customers as a service. A synonym for on-demand software is “software as a service” (SaaS) or a “hosted” service. On-demand is a relatively new way to provide software to computer users. The traditional—and currently still dominant—manner in which individual users or companies obtain access to software is through physical installation of the software at the customer’s facilities, which means either inserting a disc or downloading a file onto an individual computer or onto a computer server serving multiple computers, in either case after having obtained any necessary licenses to install and use the software. This physically-installed, licensed software is sometimes also called “on premise” or “perpetual license model” software.   •  

“ Web Collaboration Services”.     Web collaboration services are services that allow end-users to collaborate online. Examples of web collaboration include sharing software applications, documents, presentations and other content online, participating in large-scale events or programs, and coordinating projects, activities and tasks. Our web collaboration services permit users to engage in these, and related, collaboration activities through the use of a standard web browser. Our web collaboration services historically have enabled both individual professional and corporate employee users to engage in rich-media, interactive, real-time communications without the need to be in the same physical location, which we believe allows such users to be more productive and efficient. Originally, our principal product offering consisted of a basic on-demand collaboration service—the web meeting. Since then we have expanded our offerings to include more advanced web collaboration services that complement our basic web meeting service, WebEx Meeting Center. We sometimes also refer to such enhanced web collaboration services, which are designed for specific uses such as training, events, support and sales, as web applications. Our product names for such web applications include WebEx Training Center, WebEx Event Center, WebEx Support Center and WebEx Sales Center. A current business focus of ours is to continue to enhance and market our various web collaboration services including web meetings and web applications, to develop and deploy new services, to expand our sales and marketing organizations, and to expand our WebEx MediaTone Network. For many of our web collaboration services, web-based audio and video services, integrated telephony and session recording services are also available using standard devices such as telephones, computer web-cameras and microphones.

In addition to offering real-time web collaboration services, we offer a set of asynchronous collaboration services. These services, and the technology underlying them, were acquired in connection with our September 2005 acquisition of Intranets.com, Inc., a company headquartered in Burlington, Massachusetts (Intranets) which is now operating as our wholly-owned subsidiary under the name WebExOne, Inc. The term “asynchronous collaboration” means collaboration not occurring at the same time and includes capabilities such as shared document folders, shared calendars, task management, shared database applications, discussion forums, contact directories and e-mail. Each individual may access these shared resources at a time that is convenient for him or her, but may communicate with others in the group by actions such as reviewing and modifying documents, posting additional documents, sending and responding to task assignments, scheduling meetings and events, updating database entries, and sending and receiving e-mail. These new asynchronous services are offered in the same manner as our real-time web collaboration services, that is, provided as a service over the web and accessed through the user’s browser, without any requirement for the customer to purchase, install and manage its own hardware and software. This suite of asynchronous services is being marketed under the name WebEx WebOffice.

In expanding the suite of on-demand web collaboration services we offer to customers, we have branched out beyond web applications that are developed by us and accessed over our service delivery network. For example, we have developed a web collaboration service offering—the instant messaging service called AIM Pro Business Edition—that is accessed by and delivered to users through the network of internet service provider AOL, Inc.

A current business focus of ours is to extend our service offerings beyond mere web applications to a platform offering that can increase the breadth and effectiveness of a customer’s use of on-demand software applications generally, whether or not such applications are developed by us. We are developing a new platform, called WebEx Connect, which is designed to provide customers with (i) access to an online marketplace offering a variety of third party on-demand software applications, (ii) software called middleware, which enables interoperability among the customer’s on-demand and on-premise applications, and (iii) a portal called Connect Workspace through which a customer may access WebEx Connect applications.

We sell our services directly to our customers and indirectly through our resellers. We offer our services on a monthly subscription basis to our customers and on a discounted or pay-per-use basis through our resellers. Revenue from subscription services consists primarily of monthly committed subscription fees, which are based upon a fixed number of concurrent ports, or a fixed usage-based minimum commitment fee, or a flat-rate pricing arrangement with a fixed number of named hosts. Typically, our committed subscription contracts are for an initial non-cancelable term ranging from three to twelve months, and then automatically renew for additional periods unless terminated by either party. In addition, we obtain revenue from certain usage-based pricing arrangements including any of the following: usage in excess of the usage commitment or the subscribed concurrent ports, telephony, certain reseller arrangements, and individual pay-per-use services purchased directly from our website. We include within our usage-based revenue category certain non-recurring sources of revenue such as the fees we charge a customer who requests consulting or other forms of services performed by our professional services organization (sometimes called PSO work) related to the use of our web collaboration services.

Our Services and Technology Architecture

We have designed and developed our technology architecture to satisfy the interactive communications requirements of a broad range of customers. We provide a number of on-demand web collaboration services, including both real-time and asynchronous collaboration offerings. Our web collaboration services are delivered through our proprietary WebEx MediaTone Network. We also have developed a platform, called WebEx Connect, which we believe will add value to our customers’ use of on-demand web collaboration services generally. When commercially available, our WebEx Connect platform will host on-demand software applications developed by us as well as make available to customers software applications developed and delivered by third party software developers.

WebEx Collaboration Services.     Our suite of web collaboration services offers a broad range of features and functionalities.

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

WebEx Event Center.     WebEx Event Center offers business managers and executives a professionally managed web conferencing service for communications events such as press briefings, product announcements and marketing events. WebEx Event Center combines WebEx’s interactive meeting capabilities with planning, training, logistics management and real-time support services to provide a comprehensive service that reduces the customer effort involved in hosting a web seminar. WebEx Event Center includes online confirmation, notification, and instruction, customized attendee registration, high-resolution text and graphics, the ability to demonstrate a broad range of applications in real-time, audience feedback collection via polling, white board interaction, guided web browsing, live chat, recording and archiving of seminars for on-demand playback, and end user reports.   •  

WebEx Training Center.     WebEx Training Center is a web collaboration service that is designed for training and e-learning applications. With WebEx Training Center, users can coordinate training schedules from announcement to enrollment to follow-up, deliver live instruction from a variety of sources directly to learners’ desktops, and give presentations that include audio, video and interactive multimedia. WebEx Training Center allows users to administer comprehensive tests, organize multiple simultaneous breakout sessions, and record, edit, play back and archive entire sessions for future use.   •  

WebEx Sales Center.     WebEx Sales Center is a comprehensive online sales solution designed for sales professionals, both sales representatives seeking to engage prospects and close deals as well as sales managers seeking effective online tools with which to monitor their sales organizations. The WebEx Sales Center application permits sales representatives to conduct customized media-rich online sales presentations and demonstrations, invite specialists or other third-party experts to assist in the sales presentation regardless of the third party’s location, and then following the presentation maintain contact with the prospect via the WebEx Sales Center online communications portal. For sales managers, the WebEx Sales Center service is designed to improve sales operations with online sales call analysis and monitoring tools that can be integrated with other software applications such as sales force automation and customer relationship management, thereby helping the manager to track sales activities and resource allocation.   •  

WebEx Support Center.     WebEx Support Center is a suite of web-based support and system management services. These services, each available for purchase individually or in combination, are as follows:   •  

Remote Support.     WebEx Remote Support is primarily used by customer service organizations to provide remote hands-on support for system or software application problems. This service enables our customers to enhance the effectiveness of traditional telephone-based customer support by allowing their service agents to support end-users through a web browser, with no requirement for pre-installed software on either computer. The service incorporates a custom user interface to simplify support interactions for both the support agent and the end-user.   •  

Remote Access.     Our WebEx Remote Access service, formerly known as WebEx SMARTtech, enables customers to centrally manage and administer their company-wide computer networks through the use of a secure, web-based remote access network. WebEx Remote Access is designed to allow a computer-support organization within a company to install upgrades, perform maintenance, troubleshoot problems, and engage in proactive support on hundreds or even thousands of computers without the need of the individual computer user to be present at the machine. The web-based, remotely-administered and centralized computer support capabilities of WebEx Remote Access offer companies increased efficiency in managing their computer networks without the need to invest in expensive software and hardware upgrades and without compromising network security.   •  

System Management.     WebEx System Management, launched in January 2006, is a service that consists of five applications, or modules, that extend an enterprise’s ability to manage and secure its computer-related assets. WebEx System Management is designed to allow enterprises to provide every computer user with security updates and patches, to maintain compliance with regulatory and  

licensing requirements related to the enterprise’s computer use, and to distribute software updates to company assets anywhere via the Internet, including assets not directly connected to the company’s computer network. WebEx System Management also offers asset management services, including the ability to manage assets throughout the inventory lifecycle and to associate contact and financial information with managed assets.   •  

WebEx Enterprise Edition.     WebEx Enterprise Edition is a service that integrates five of WebEx’s currently available web collaboration services—WebEx Meeting Center, WebEx Event Center, WebEx Training Center, WebEx Sales Center and the WebEx Support Center suite of services—to create a single source for a customer’s enterprise communications. WebEx Enterprise Edition allows users to create a personalized “MyWebEx” meeting room with a unique URL that becomes a default meeting address for all web meetings. WebEx Enterprise Edition enables users to start meetings with a single click of the tool bar icon, allows users to access or share information securely in a web meeting where the content or application resides in an unattended remote computer, and enables users to integrate MyWebEx with the Microsoft Outlook application.   •  

WebEx Presentation Studio.     WebEx Presentation Studio is a service that gives customers the ability to create and deliver multimedia content for convenient, on-demand access via the Web. With WebEx Presentation Studio, users can create presentations that include, and integrate as desired, audio content, video content and digital presentation software content such as presentations created with Microsoft PowerPoint software. For example, WebEx Presentation Studio enables organizations to create and distribute sales presentations to sales personnel, capture and track sales leads from marketing and promotional presentations and deliver e-learning and training presentations to employees. Presentations created with WebEx Presentation Studio can be viewed over the Web or can be downloaded to a laptop or a personal digital assistant.   •  

WebEx PCNow.     WebEx PCNow is a service that allows the user to access a remote computer from any location in the world, with the user needing only a web browser and an Internet connection and without the user needing to open any ports in a firewall protecting the computer. For example, the PCNow user can run any application or access the entire desktop of her remote computer, transfer files to and from the remote computer, or print a document from the remote computer on a printer located at the user’s location. PCNow has several security features including end-to-end Secure Socket Layer (SSL) encryption, two levels of required authentication and each of the following: (i) the ability to blank the screen of the remote computer so no one can see what the user is doing, (ii) the ability to lock the keyboard and mouse of the remote computer so no one can interrupt the user’s use, and (iii) the ability to logout or screen-lock the remote computer after the user’s session is complete. We also offer a version of PCNow, called WebEx PCNow Enterprise, that can accommodate a larger number of users and is targeted to the large-sized corporate—sometimes called enterprise—market.   •  

WebEx MeetMeNow.     WebEx MeetMeNow is a web meeting service designed specifically for the individual professional. WebEx MeetMeNow, a simplified version of our Meeting Center service, offers users several of the basic features offered by Meeting Center including the ability (i) to launch meetings directly from the user’s desktop applications such as instant messaging, (ii) to invite prospective attendees to join a conference call, (iii) to share an entire desktop in real time, complete with rich annotation, and (iv) to pass control of documents or applications to any attendee in real time. WebEx MeetMeNow is offered online on a month-by-month or yearly subscription basis, requires no training and requires only minimal set-up time.   •  

WebEx WebOffice.     Offered as two separate business collaboration offerings, WebOffice Workgroup and WebOffice Personal, WebEx WebOffice integrates certain of WebEx’s asynchronous and real-time collaboration capabilities into one unified suite designed to help ses and professionals save time and money, and work more effectively. WebEx WebOffice Workgroup provides a complete collaboration suite including web meeting capability, a document manager, group calendar, database manager, task manager, a new e-mail functionality called WebEx Mail, and several other collaborative business tools, and is designed to meet the collaboration and web meeting needs of ses  

with five or more users. WebEx WebOffice Personal, tailored to the requirements of the individual professional, provides users with collaborative applications consisting of real-time meetings, document manager, task manager, online calendar, contact manager and WebEx Mail.   •  

WebEx AIM Pro Business Edition.     Developed in partnership with AOL, Inc., WebEx AIM Pro Business Edition is an advanced communications tool designed for business professionals. WebEx AIM Pro Business Edition offers both individual users and enterprises secure instant messaging (IM), including end-to-end encryption and user authentication security features, to an AIM (AOL Instant Messaging) network which reports a user base of approximately 70 million. WebEx AIM Pro Business Edition offers users instant access to chat, voice and video, with administrative control features, such as the ability to collect and report data relating to enterprise-wide IM activity, to satisfy customer internal control requirements.WebEx AIM Pro Business Edition features a portal free of advertising content that can be integrated with all WebEx on-demand collaboration services as well as with the Microsoft Outlook application. A key objective in developing the AIM Pro Business edition offering has been to drive usage of WebEx’s core web collaboration service offerings by functionally linking them, via a button, to the actual IM offering. Also available as add-ons to the purchase of one or more of these services are the following services: an audio conferencing service called WebEx Audio, a service for monitoring usage of WebEx services within an organization called WebEx GlobalWatch, an asynchronous add-on called WebEx Workspace which shares certain of the asynchronous features of the standalone WebEx WebOffice offering.

WebEx Connect Platform .     WebEx Connect is a software platform designed to increase the breadth and effectiveness of a customer’s use of on-demand software applications generally. WebEx Connect has been designed to address several software-usage challenges that businesses face. The key features that WebEx Connect offers, and each such feature’s current state of development and commercial availability, are described below:

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Online Marketplace Where Customers Can Obtain On-Demand Applications Developed by Third Parties.     One feature of the WebEx Connect service is an on-demand software marketplace, where customers can subscribe to one or more of a variety of on-demand software applications developed and offered by third parties—that is, not by WebEx—that could be useful in the customer’s business. These applications may be hosted either by WebEx as part of WebEx’s MediaTone Network or at a third party’s facility. A related planned feature is that, for the convenience of both the customer and the third-party web application vendor, WebEx will provide the billing services for customer purchases of third-party on-demand applications made through the WebEx Connect marketplace. WebEx has begun selling third-party applications as part of the initial phase of the WebEx Connect platform.   •  

Middleware to Build Interoperability among On-Demand and Traditional On-Premise Applications.     Currently, most on-demand software applications that a customer can subscribe to, such as an on-demand customer relationship management (CRM) application, do not interoperate well, if at all, with a corporate user’s existing on-premise software applications such as a database application, or with the customer’s other on-demand software applications. WebEx Connect will include software called middleware that will enable on-demand and on-premise applications to interoperate with each other. We believe that this ability of a customer’s on-demand and on-premise applications to interoperate with each other will increase the overall productivity benefit a customer receives from its software investment and usage. This feature of the WebEx Connect platform is still under development and is not part of our current WebEx Connect commercial offering.   •  

Client Software that Provides Access to WebEx Connect Applications.     Client software is software that allows a computer to access and work with software applications running on another computer, most often a server or some form of host computer. The WebEx Connect client, called Connect Workspace, is the access point—sometimes also called a portal—through which customers can access the various applications to which the customer has subscribed through WebEx Connect. For example, a  

customer running its enterprise CRM application can, through accessing the WebEx Connect portal, pull data from an on-premise database software application, thus enhancing the productivity of the customer’s use of the CRM application. This feature of the WebEx Connect platform is still under development and is not part of our current WebEx Connect commercial offering. As certain features of WebEx Connect are still under development and are not yet commercially available, we do not know when or to what extent we will be able to make available the platform containing all the functionalities described above. We are continuing to make investments both inside and outside of WebEx with the objective of making the WebEx Connect platform a web application ecosystem (i) to which an increasing number of third party web application providers will be drawn to offer their services, and (ii) in which customers can utilize their third party on-demand web applications more efficiently and productively in their business. We believe that this strategy of offering added value to our customers’ search for and use of on-demand web applications, through our new WebEx Connect service, will complement our core web meeting and web application service offerings.

WebEx MediaTone Network .    The WebEx MediaTone Network is a private, switched, web-based network that is designed to deliver scalable, secure, web collaboration services to our customers. The WebEx MediaTone Network is based on MediaTone, our proprietary information switching technology. Our MediaTone technology allows the WebEx MediaTone Network to handle high-speed data, voice and video communications, manage complex media types, and deliver advanced communications capabilities regardless of location across a wide variety of platforms, operating systems, devices, and browsers—in both wired and wireless configurations. The WebEx Connect platform, described above, will operate on the WebEx MediaTone Network. The WebEx MediaTone Network includes:

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a distributed network made up of dispersed communications switches, switching centers and dedicated network links designed to reduce latency issues and service interruptions even when participants are located in different countries;   –  

a network designed to be redundant, meaning that it is designed to detect equipment failures that might occur along the network that would cause a network outage and to remedy such failures by transferring network operations to alternate, functioning equipment located elsewhere on the network;   –  

a network that transmits, or “switches”, user content in real time through the network rather than the user’s content having to be loaded to, archived on, and downloaded from, a computer server;   –  

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

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

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

the ability to add capacity at any facility and otherwise manage heavy network traffic during peak usage periods, enabling each WebEx switching cluster to scale to meet changes in user demand;   –  

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

diagnostic software for troubleshooting and rapid problem resolution;   –  

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

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

the ability to support high-speed sharing of rich media content within Microsoft PowerPoint presentations, such as the sharing of embedded Adobe Systems Flash files, the sharing of streaming content such as Microsoft’s Media Player, and the sharing of previously-recorded WebEx meetings, in each instance with the ability to start, pause, stop, reverse and fast-forward the content;   –  

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

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

We sell our services directly to our customers and indirectly through our resellers. We offer our services on a monthly subscription basis to our customers and on a discounted basis through our resellers. Our services can also be purchased on a pay-per-use basis, either from our website directly or indirectly through certain of our resellers. Our customers purchase and use our services themselves while our resellers integrate and resell our services with their offerings. Some of our resellers are also end-user customers.

In 2006, we derived approximately 84% of our revenue from direct sales to customers. Typically, our direct sales contracts are for an initial non-cancelable term ranging from three to twelve months, and then automatically renew for some period unless terminated by either party. In 2006, we generated approximately 16% of our revenue from our resellers, including portals, software and service vendors and communications service providers. Software and service vendors have agreements to resell our services to end-users by marketing, and in some cases integrating, our services into their product or service offerings. Communications service providers typically resell our services in conjunction with their teleconferencing services. Our distribution agreements typically have terms of one to three years and are automatically renewed for additional one-year terms unless either party terminates the agreement with written notice at least 30 days prior to when the agreement would otherwise renew. In most of these agreements, the reseller purchases subscription or pay-per-use services from us and resells such services to end-user customers. Under these agreements, the amount of revenue we receive depends on the volume of business generated under the agreement.

Under our agreements with our resellers, we sell our services on a discounted basis to the reseller, which in turn marks up the price and sells the services to the end-user. In such cases, we contract directly with the reseller, and revenue is recognized on amounts charged to the reseller. We also have another type of distribution arrangement—known as a referral arrangement—in which a third party refers a potential customer to our direct sales force, which in turn seeks to enter into a contract directly with the potential customer. When a sale is made from us to a customer through a lead provided by a referral agent, the referral agent receives from us a percentage of the proceeds from the sale of WebEx services to the customer, and we categorize such revenue as revenue received from services sold directly to customers.

In 2006, sales of our standalone Meeting Center service, whether directly to our customers or indirectly through our resellers, accounted for approximately 34% of our revenue. In 2005 and 2004, respectively, sales of our standalone Meeting Center service accounted for approximately 40% and 50% of our revenue. This reduction in Meeting Center sales as a percentage of our total revenue may continue as we introduce new service offerings and as we increase revenue from services other than Meeting Center.

Third Party Software and Hardware

We license from third-party vendors software such as database, operating system, web server and voice-over-IP software, font technology. We purchase from third-party vendors hardware such as servers, routers, and audio-conference bridges. We believe that use of third-party vendors enables us to integrate current and emerging technologies into our proprietary service offerings. We purchase, or license, these third-party technologies from companies including BEA Systems (application servers), Bitstream (font technology), Cordys (software tools), Oracle (database technology), Rackable (servers), Sun Microsystems (servers), Symantec (file management), Pactolus (audio-conference bridge technology), Sonus (audio-conference bridge technology), Convidia (audio-conference bridge technology), GIPS (voice-over-IP), and Cybersource (credit card payment processing). We also purchase third party services that we resell to customers. For example, we purchase from a third party, Everdream, the service that we resell as WebEx System Management.

Research and Development

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

As of December 31, 2006, we had 835 employees engaged in research and development activities. Our research and development expenditures were approximately $53.8 million, $45.7 million and $34.4 million in 2006, 2005 and 2004, respectively. We expect to continue to devote significant resources to research and development for the foreseeable future.

A significant amount of our development and testing activity is conducted by our subsidiary in China (WebEx China). As of December 31, 2006, of the 813 employees in our WebEx China operations, 660 employees were engaged in research and development activities. We rely on WebEx China for a significant portion of our quality assurance, software development and other activities.

Sales and Marketing

Our sales efforts target a broad range of businesses, government agencies and non-profit organizations primarily through direct sales channels and, to a lesser extent, through indirect sales channels. Direct sales are generated through our internal sales force, while indirect sales are generated through agreements with our resellers. Our internal sales force uses our own WebEx services to maximize the effectiveness and efficiency of our direct sales channel. Our marketing programs include customer needs assessment and market analysis, service and platform marketing, brand awareness, advertising, public relations, lead generation, and educating organizations in our target markets.

We derive revenue from both U.S.-based and non U.S.-based customers. In 2006, 2005 and 2004, the percentage of revenues from U.S. customers was 85%, 87% and 88%, respectively. In 2006, 2005 and 2004, the percentage of revenues from our non-U.S. customers was 15%, 13% and 12%, respectively. As of December 31, 2006, we had 691 employees engaged in sales, customer care and marketing. Our sales and marketing expenditures were approximately $141.8 million, $102.7 million and $84.2 million in 2006, 2005 and 2004, respectively. We expect to continue to devote significant resources to sales and marketing.

Competition

The collaboration software and services market is intensely competitive, subject to rapid change and is significantly affected by new product and service introductions and other market activities of industry participants. Although we do not currently compete against any one entity with respect to all aspects of our services, we do compete with various companies with respect to specific elements of our on-demand web collaboration services. For example, we compete with providers of traditional communications technologies such as teleconferencing and videoconferencing, application software and tools companies including online application services providers, and web conferencing products and services such as Adobe Systems, Cisco Systems, Citrix Systems, Genesys S.A., IBM, Microsoft, Netviewer, NTR Global, Oracle, and Saba.

In addition to the above competitors, certain of our resellers offer competitive web conferencing, web application and other web collaboration services. One of our key resellers, Intercall, is a subsidiary of West Corporation which in April 2006 acquired our competitor Raindance. As a result of its acquisition of Raindance, Intercall could choose to increase its emphasis on offerings competitive with ours, or cease to offer some or all of our offerings, or both.

Competition from Microsoft for the collaboration software and services markets may adversely affect us. Microsoft has a product offering which is competitive with ours and which is called Microsoft Office Live

Meeting. Microsoft also has an offering called Office Live, which consists of a set of Internet-based software services. In January 2007, Microsoft began selling its new Windows Vista operating system, which includes a real-time web meeting feature, for up to ten persons, and related collaboration functionalities such as document sharing. Microsoft has also announced plans to offer web collaboration functionality in its Office Communications Server product scheduled for release later in 2007. Microsoft’s investment of development and marketing resources in products or services that compete directly with us and Microsoft’s integration of competitive technologies acquired from other companies may have an adverse impact on our business. More generally, Microsoft may attempt to leverage its dominant market position in the operating system, productivity application or browser markets, through technical integration or bundled offerings, to expand further its presence in these web collaboration markets. This expanded Microsoft presence in web collaboration markets could make it difficult for other vendors of web collaboration products and services, such as WebEx, to compete.

In addition, some competitors offer web collaboration products and services targeted at customers who are more price-conscious and are less concerned about functionality, scalability, integration and security features. Such offerings may make it more difficult for us to compete in that segment of the market and may cause some of our existing customers to switch to these competitors. In 2005, we introduced new services with lower entry prices that enable us to compete more effectively with such offerings. If our industry were to experience a general decline in prices and there were not a sufficient increase in volume to compensate for the price reductions, we might be forced to change the extent and type of resources we deploy in the selling of our services in an effort to maintain operating margins, such as switching to different sales practices. Finally, some of our competitors such as IBM and Cisco offer software products or products that are a combination of software and hardware that include web collaboration functionality. This type of web collaboration offering, sometimes called a customer premise or on-premise solution, allows customers to purchase such products, install them at their own facilities, and manage the products by themselves. If significant numbers of existing or potential customers determine that they would prefer to have their web conferencing or more advanced web collaboration needs met with these types of products, demand for WebEx services may decrease.

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

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service functionality, quality and performance;   –  

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

customer service and support;   –  

establishment of a significant base of customers and resellers;   –  

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

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

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

Intellectual Property

Our success depends in part upon our rights to proprietary technology. We rely on a combination of patent, copyright, trade secret, trademark and contractual protection to establish and protect our proprietary rights. We require our employees to enter into confidentiality and nondisclosure agreements upon commencement of employment. Before we will disclose any confidential aspects of our services, technology or business plans to customers, potential business partners and other non-employees, we routinely require such persons to enter into confidentiality and nondisclosure agreements. In addition, we require all employees, and those consultants

involved in the deployment of our services, to agree to assign to us any proprietary information, inventions or other intellectual property they generate, or come to possess, while employed by us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our services or technology. These precautions may not prevent misappropriation or infringement of our intellectual property.

The status of United States patent protection in the Internet industry is not well defined and will evolve as the U.S. Patent and Trademark Office grants additional patents. We currently have 29 issued patents. Our patents are in several areas including peer-to-peer connections to facilitate conferencing, document annotation, optimizing data transfer, graphical user interface for extracting video presentations, and remote collaboration systems involving multiple computers. We currently have over 75 patent applications pending in the United States Patent Office. We may seek additional patents in the future. We do not know if our patent applications or any future patent application will result in any patents being issued with the scope of the claims we seek, if such patents are issued at all. We do not know whether any patents we have received or may receive will be challenged, invalidated or be of any value. It is difficult to monitor unauthorized use of technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States, and our competitors may independently develop technology similar to ours. We will continue to seek patent and other intellectual property protections, when appropriate, for those aspects of our technology that we believe constitute innovations providing significant competitive advantages.

Third parties may infringe or misappropriate our patents or other proprietary intellectual property rights such as copyrights and trademarks. When we become aware of such infringement, we may take action including bringing legal action against such parties. Conversely, we may be subject to claims of alleged infringement of patents and other intellectual property rights of third parties. For example, in January 2007 lawsuits were filed in U.S. federal district court by Accolade Systems LLC against a number of companies, including us, alleging that the defendants’ services infringe one of plaintiff’s patents. In addition, we may be unaware of filed patent applications which have not yet been made public and which relate to our services. From time to time, we have received notices alleging that we infringe intellectual property rights of third parties. In such cases, we investigate the relevant facts, respond to the allegations and, where case facts and other conditions warrant, consider settlement options.

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

Employees

As of December 31, 2006, we had 2,189 full-time employees, including 835 in research and development, 691 in sales, customer care and marketing, 377 in operations, and 286 in general and administrative. As of December 31, 2006, 1,188 of our employees were based outside the United States, including 813 in China as part of our WebEx China subsidiary and 275 in India as part of our WebEx India subsidiary. None of our employees is covered by collective bargaining agreements. We believe our relations with our employees are good.

Available Information

Our website is located at http://www.webex.com. We make available, free of charge, on or through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports to be filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. In addition, we have an investor relations web page located on our website, which

includes additional information including webcasts of earnings announcements, stock information, press releases and other information of interest to current and prospective investors. Information on our website is not part of this report.

Item 1A.      Risk Factors

The following risk factors and other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.

The revenue uncertainty associated with one of our two primary pricing models, usage-based pricing, makes our quarterly results variable and difficult to predict, which could cause unpredictable fluctuations in our stock price.

We use two primary pricing models to price our services: a committed-subscription pricing model and a usage-based pricing model. Although our subscription model is dominant, each pricing model is responsible for a significant percentage of our total revenue. Because the usage-based portion of our revenue varies depending on customer usage, it is more difficult to predict than our subscription-based pricing and therefore our revenue may fluctuate unpredictably from publicly-announced targets, which in turn could cause our stock price to fluctuate unpredictably.

Our dominant pricing model has been a committed-subscription pricing model. We offer several forms of committed-subscription pricing:

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“Flat rate” pricing, in which the customer selects a specific number of pre-identified hosts—called “named hosts”—authorized to start a meeting, and based upon the number of named hosts selected the customer pays a set price per month regardless of usage. A majority of our committed-subscription customers purchase our services in this manner;   –  

“Concurrent-user” or “per port” pricing, which enables a customer to have a set number of users connected to WebEx meetings at any one time; and   –  

“Minimum minutes” pricing, in which the customer commits to pay for a certain number of “people minutes” of usage during a specified time period. We calculate people minutes by multiplying the number of meeting participants by the number of minutes transpired in the meeting. We refer to the revenue associated with our various committed-subscription arrangements as committed revenue.

Currently, our most popular flat-rate offering is the named host offering, in which a certain named individual may host meetings at which up to a certain number of attendees may participate. The named host service differs from the concurrent-user port offering in several respects: (i) with the concurrent user offering, any employee of the customer may host a meeting, whereas with the named host service only employees who are designated as named hosts may host a meeting, (ii) the price charged for a named host subscription is appreciably lower than the price charged for a concurrent user subscription, in part because the named host model is less flexible with respect to who can host a meeting, and (iii) unlike the concurrent user offering, with the named host offering there are effectively no overage fees. We also offer a full-deployment offering in which all employees within a company can utilize WebEx meeting services for a flat monthly rate. We offer two flat-rate offerings targeted at individuals and ses. The first offering, available for purchase online and called MeetMeNow, is a simple web conferencing service offered on a monthly basis. The second flat-rate offering is our WebEx WebOffice line of collaboration services, which we offer for purchase through a variety of monthly subscription plans.

In addition to our committed subscription offerings, there are several situations in which customers are charged based on volume of use, or what we call usage-based or uncommitted pricing. These include certain reseller arrangements, customer overage fees for usage above the subscribed-to amount of ports or minutes, many types of telephony charges, individual pay-per-use services purchased directly from our website, and a limited number of customers who do not have a minimum commitment obligation of any kind. A majority of revenue received from our telecommunications partner arrangements is usage based. In addition, we sometimes obtain usage-based fees from subscription customers in the form of overage fees. Overage fees are charged when a customer subscribing to a set number of ports uses more than the subscribed number of ports, or when a customer on a minutes pricing model uses more than its commitment. We get per-minute telephony revenue when we provide the audio conferencing component of a web collaboration session. Finally, we have per-minute web collaboration services available through our website and payable by credit card. The revenue derived from this usage-based pricing model, measured as of the end of any month, is what we refer to as uncommitted revenue.

For the quarter ended December 31, 2006, usage-based and other non-subscription revenue was approximately 26% of our total revenue. We include in our usage-based revenue category, in addition to the various types of per-minute revenue identified in the preceding paragraph, certain non-recurring revenue items. Examples of such non-recurring revenue items are the fees we charge our customers for consulting or other forms of professional services (PSO) work, an example of which is the fee we charge to help a customer produce an online event. Our various usage-based revenue sources are more variable and difficult to predict than our committed subscription revenue sources, given that customer demand may vary from month to month depending on a number of factors, such as number of business days in a month or vacation patterns. Accordingly, to the extent the revenue derived from our various usage-based sources—or uncommitted revenue—grows faster than the combined revenue from ports, minimum minutes and flat-rate offerings—together called committed revenue—our overall revenue becomes more difficult to predict.

There are factors other than usage-based pricing—some within and some not within our control—that make our quarterly results variable and difficult to predict, which could cause unpredictable fluctuations in our stock price.

For several additional reasons, some inside and some outside of our control, our quarterly revenue and operating results may fluctuate from quarter to quarter and may vary from publicly-announced quarterly or annual financial guidance. These additional factors include the emerging nature of the market for web collaboration services, fluctuations in sales and customer retention and the uncertain impact of competition, which are listed below along with several other factors which could cause our quarterly results to fluctuate unpredictably:

Factors outside our control include:

  –  

the emerging nature of the market for, and the growth rate of, the market for web collaboration software and services generally and particularly for on-demand web collaboration services;   –  

market acceptance of our services;   –  

our resellers’ degree of success in distributing our services to end-users;   –  

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

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

a trend toward lower average per-minute prices in the telecommunications sector generally. Factors within our control include:

  –  

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

the mix of web collaboration services we offer, and our introduction of asynchronous web collaboration services;   –  

our ability to attract and retain customers;   –  

as to our new WebEx Connect offering, the ability to attract and contract with third-party on-demand software providers;   –  

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

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

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

We expect to continue to spend substantial financial and other resources on developing and introducing new services, on expanding our sales and marketing organization, on enhancing our network infrastructure and on upgrading leased facilities in the U.S. and in China, India and Europe. An example of a substantial financial commitment we have made is our ten-year lease for space in a Santa Clara, California building which became our corporate headquarters in January 2005. We base our expansion plans and expense levels in part on our expectations of future revenue levels. If our revenue for a particular quarter is lower than we expect, we may be unable to reduce, proportionately, our operating expenses for that quarter, in which case our operating results for that quarter would suffer. And because our fixed expenses have increased appreciably due to our expectations relating to future revenue levels, if our revenue is sufficiently below expectation in one or more quarters, we may be unable to effect proportionate reductions in our operating expenses in a timely manner and, therefore, our operating results could suffer.

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

Most of our customer contracts have initial terms of three to twelve months. These contracts are typically automatically renewed except where a customer takes action to cancel a contract prior to the end of an initial or renewal term. In a few customer situations, including contracts with the federal government, the contract can be terminated by the customer at any time during the term of the agreement. Our monthly average lost subscription MRR, an internal measurement tool we use to evaluate subscription-based revenues that we have lost was 1.6% for the quarter ended December 31, 2006. In addition to cancellation, a customer may stop buying our services directly from us and, instead, start purchasing our services from one of our resellers. A customer may also change types of services that the customer purchases directly from us such that the overall subscription revenue to us is lower. The reasons why customers have canceled use of our services have included the following: the pricing of our service offerings, the failure of a customer’s employees to learn about and use our services, the failure of the services to meet a customer’s expectations or requirements, financial difficulties experienced by a customer, and a customer’s decision to use services or products offered by a competitor. As a result of customer cancellations or reductions in purchases of our services, we may need to invest additional amounts in sales and marketing in order to compensate for increases in net customer losses, or we may need to invest in the development or acquisition of new offerings in an attempt to increase customer retention. We may not obtain a sufficient amount of new or incremental business to compensate for any customers that we may lose. The loss of existing customers or our failure to obtain additional customers, and the additional expense associated with acquiring new customers or developing or acquiring new products, could harm our business and operating results.

Our business and operating results may suffer if we fail to establish reseller relationships, if our resellers experience financial hardships, do not successfully market and sell our services, or devote greater efforts to the products and services of competitors, or if we fail to maintain significant participation in the telecommunications provider distribution channel.

As of December 31, 2006, we had distribution agreements in place with telecommunications partners, software vendors, web services providers and miscellaneous other resellers that during the fourth quarter of 2006 accounted for 16% of our revenue. Our revenue generally consists of initial set-up fees, commitment payments, and service fees. The majority of the payments received from these resellers are per minute or usage-based payments. We must continue to establish and extend these distribution relationships. Establishing these distribution relationships can take as long as several months or more. Our resellers are not prohibited from offering and reselling the products and services of our competitors, and a significant majority of our resellers currently do so. Such resellers (i) may devote greater resources to marketing and supporting the products and services of our competitors including specific efforts to persuade the reseller’s customers to switch from our services to those of our competitors, or (ii) may be persuaded by a competitor of ours to sever the reseller’s distribution arrangement with us and possibly also become the exclusive reseller of that competitor. Our resellers could also devote greater resources to the development and deployment of their own web collaboration service offerings, which may be or become competitive with ours.

An example of a reseller which may devote greater resources to marketing and supporting the products and services of our competitors is our distributor Intercall, whose corporate parent West Corporation in April 2006 acquired our competitor Raindance and who therefore may increase its support of the Raindance offering, or cease offering some or all of our offerings, to our detriment. With regard to the telecommunications-provider distribution channel for web collaboration services which may prove economically significant in the future, our web collaboration services competitors may be more successful in partnering with telecommunications providers, or telecommunications providers may independently enter the web collaboration services business, either alone or with web conferencing vendors that do not include us. If we fail to establish new distribution relationships in a timely manner, if our resellers do not successfully distribute our services, if we lose existing resellers for whatever reason or if we fail to maintain significant participation in the telecommunications-provider distribution channel, our ability to maintain current levels of market acceptance of our web collaboration services will suffer and our business and operating results will be harmed.

A small number of reseller accounts was responsible for most of the 16% of our total revenue during the fourth quarter of 2006 that was attributable to resellers, and if any of these resellers were to discontinue or significantly curtail a reseller arrangement with us, our operating results would be negatively affected.

Of the 16% of our total fourth quarter revenue that was attributable to resellers, a large majority came from five resellers. Each of these five resellers operates in the telecommunications-provider reseller channel. If one or more of these resellers were to significantly reduce the scope of or discontinue a reseller arrangement with us, our business and operating results would suffer.

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

We sell our services directly to customers and also indirectly through our resellers which buy and resell our services. We enter into distribution relationships so that we can obtain additional customers through third parties that we could not obtain through our direct sales efforts. Under our agreements with our resellers, we sell our services on a discounted basis to the reseller, which in turn marks up the price and sells the services to the end-user. In such cases, we contract directly with the reseller, and revenue is recognized on amounts charged to the reseller. We also have another type of distribution arrangement—known as a referral arrangement—in which a third party refers a potential customer to our direct sales force, which in turn seeks to enter into a contract directly with the potential customer. When a sale is made from us to a customer through a lead provided by a referral agent, the referral agent receives from us a percentage of the proceeds from the sale of WebEx services to

the customer, we include the revenue received by us within the broad category of revenue received from services sold directly to customers, and we record the amount paid to the referral agent as sales and marketing expense. In either the reseller or referral agent case, the profit per sale received by us when a sale is generated by a third party is not as great as it would have been had the sale been made by us directly, for the same volume of WebEx services. To the extent that sales of our services generated by our resellers or referral agents are sales that, absent the existence of the distribution arrangement, would be made by our direct sales force, our profit per sale may decrease. Additionally, to the extent our existing customers discontinue direct agreements with us in order to purchase our services from our resellers or through our referral agents, our profit per sale may decrease.

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

Our standalone WebEx Meeting Center service, our first on-demand web collaboration service offering launched several years ago accounted for approximately 30% of our revenue for the quarter ended December 31, 2006. We have developed and are selling other services, such as (i) our Enterprise Edition service consisting of a composite of our Meeting Center, Event Center, Training Center, Sales Center and Support Center services, each of which services may also be purchased separately, (ii) our audio conferencing service called WebEx Audio; (iii) our asynchronous offering called WebOffice, (iv) our MeetMeNow service, and (v) our PCNow service. Although the number of web collaboration services we offer other than our standalone Meeting Center offering continues to increase, we still depend on Meeting Center for a large percentage of our revenue. Our operating results will suffer if sales of our standalone Meeting Center service decline or do not increase.

We have modified our business strategy from a focus on web meetings to a more diverse product line of web collaboration services, and if our investments in these new markets are not well targeted or well executed, if overall market growth in these new segments is less than anticipated or if we are unable to compete successfully in these new market segments, our operating results could suffer.

Our business strategy has expanded from a focus on real-time web meetings and closely-related applications to an emphasis on a more diverse product line of web collaboration services, including the asynchronous collaborative service offerings we now offer as a result of our acquisition of Intranets. We are also expanding service offerings such as remote access, instant messaging and audio conferencing. In addition, we are developing a new platform, called WebEx Connect, which is designed to provide customers with (i) access to an online marketplace offering a variety of third party on-demand software applications, (ii) software called middleware, which enables interoperability among on-demand and on-premise applications, and (iii) a portal called Connect Workspace through which a customer may access WebEx Connect applications.

This product diversification strategy includes a greater emphasis on selling services provided by, or obtained through acquisition of, third parties rather than our historical practice of selling services developed solely by us. Because the markets for certain of these web collaboration services, such as the asynchronous web collaboration services market and the market for interoperable on-demand applications to be addressed by our WebEx Connect offering, are just emerging, it is uncertain how successful WebEx will be in these markets. We are also uncertain how much investment in sales, marketing, product development and infrastructure will be necessary to compete successfully in these markets, since we are a relatively new participant in these markets. If our investments in these new markets do not produce or exceed our expected return, our financial results will suffer. Also, to the extent we expand our service offerings to include those offerings, such as audio conferencing, which currently or may in the future have lower profit margins than our traditional web collaboration service offerings, our operating and profit margins may decline.

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

We believe that continued marketing and brand recognition efforts will be critical to achieve widespread acceptance of our web collaboration services. Nevertheless, our marketing and advertising campaigns or branding efforts may not be successful. For example, certain sales promotion initiatives, such as free introductory

or free trial use, may dampen short-term sales even as such initiatives attempt to cultivate participants’ desire to purchase and use our services, in that a customer who might have otherwise purchased our services will instead receive free use of our services for the trial period of time. In addition, failure to adequately generate and develop sales leads could negatively impact our revenue and therefore our financial results. More specifically, our inability to generate and cultivate sales leads into large organizations, where there is the potential for significant use of our services and where any future marketplace standardization of our service might emerge, could harm our business. If our marketing, branding or lead-generation efforts are not successful, our business and operating results will be harmed.

If our services fail to function, whether because of the large number of participants or because of separate quality-related issues relating to our network infrastructure, we may lose customers and our business and reputation may be harmed.

Our business strategy requires that our services be able to accommodate large numbers of sessions and users at any one time. Our data network monitoring system measures the capacity of our data network by bandwidth use. The goal of our data network capacity planning is to have our average daily peak usage be less than 50% of our data network capacity. We use this capacity planning standard as it is our best effort to simultaneously balance two important business objectives: (i) having enough excess capacity to avoid service interruptions or other service quality problems on our service delivery network on days when network usage is unusually heavy, and (ii) not wasting resources on unnecessary excess network capacity.

From time to time daily peak usage has exceeded 50% of our data network capacity. However, by monitoring and managing our data network resources we have been able to meet our internal goal of maintaining average daily peak usage at less than 50% of our data network capacity. Whenever average daily peak usage increases to a point approaching or exceeding 50% of our data network capacity, we add capacity so that we continue to meet our internal target of having average daily peak usage be less than 50% of our data network capacity. During the quarter ended December 31, 2006, the average of our daily peak usages, as a percentage of our data network capacity, was less than 50% of our total capacity.

In addition to our data network, we also maintain an integrated telephony network for which capacity planning and service-level monitoring is necessary. During the quarter ended December 31, 2006, the average of our daily peak usages, as a percentage of our telephony network capacity, was less than 50% of total capacity. From time to time, as with our data network, daily peak usage has exceeded 50% of our telephony network capacity.

Meeting our goal of having average daily peak usage be less than 50% of capacity depends on our continuing ability to add both data network and telephony network capacity whenever we so desire. Securing such additional network capacity has not been a problem for us to date, due to the abundance of supply available for purchase. However, there can be no assurance that such supply of data network and telephony network capacity will always be available or available at reasonable prices.

The trend in recent quarters has been that customer usage levels on our network have been growing at a rate faster than revenue growth. These increases in network usage require us to more actively and accurately monitor not only our capacity but also the operational health of the basic computer-related hardware such as servers, personal computers and data storage equipment upon which the continuous functioning of our network depends. Our network monitoring systems are capable of detecting equipment failure within the network, and we have redundant—sometimes also called fail-over—infrastructure in place to keep our network functioning in the event a hardware failure occurs within the network. Despite these safeguards, it is possible that we could suffer a temporary network service outage due to the quantity or critical nature of the particular disabled items of infrastructure, or due to human operator error in dealing with a particular hardware failure or even a hardware maintenance activity. From time to time, as with capacity usage on our data and telephony networks, network device usage as a percentage of capacity has exceeded 50%.

If we fail to invest adequately, or act quickly enough, to increase the capacity and quality of our data and telephony networks consistent with the growth in usage of each, if there are supply constraints with respect to the acquisition of additional data network or telephony capacity, or if we improperly monitor or mishandle the hardware equipment components of our networks, the performance of these networks could be adversely impacted. In addition, we may encounter performance or other service-quality problems when making upgrades and modifications to either or both of these networks, including upgrades to our network hardware. If our services do not perform adequately because of capacity-related or other quality-related problems with either or both of our data and telephony networks or with certain hardware components of our networks, we may lose customers and be unable to attract new customers and our operating results would be harmed.

We operate subsidiaries in China and India, which exposes us to economic and political risks specific to conducting offshore operations in those countries.

We continue to rely on our Asian subsidiaries, WebEx China and WebEx India, for the performance of a variety of activities that are important to our business, including research and development, sales-support and customer-support activities. In the case of WebEx China, such activities include quality assurance testing and software development and provisioning of customer websites. We are now selling our services to the mainland China market. In the case of WebEx India, the activities include online demonstrations of our services to potential customers, other sales support activities such as customer prospect, or lead, development, and certain information technology (IT) support activities.

In each country, we face foreign exchange risk in that we have significant payment obligations that must be made in local currencies including employee salaries and lease payments, which currently and for the foreseeable future are currently not offset by sufficient revenue in such currencies, particularly in China. If the local currency in either country appreciates relative to the U.S. dollar, the cost of such country’s operations, as reflected in our financial statements, would increase. Also, political and economic tensions between the United States and either country could harm our ability to conduct operations in such country, which could increase our operating costs and harm our business and operations.

Our reliance on WebEx China exposes us to a variety of economic and political risks including, but not limited to, technology-development restrictions, potentially costly and pro-employee labor laws and regulations governing our employees in China, travel restrictions and difficulties enforcing our intellectual property rights in China. In addition, we face risks related to possible Chinese government requirements or activities affecting customers of WebEx located in China. The Chinese government may require, as a condition of doing business in China, that WebEx provide information related to users of our services located in China or may otherwise seek to obtain information related to users of our services in China. Although we are not currently aware of any such activity or requirement, if such activities or requirements were to occur, this could harm our reputation, cause us to lose customers in China and could deter potential future customers in China from signing up for our services which would damage our operating results.

Finally, we could be harmed by any disruption in the intercontinental Internet infrastructure, such as damage to undersea cables under the Pacific Ocean as recently occurred. In such a circumstance, not only would customer use of our web collaboration services possibly be disrupted, the various IT, research and development, sales and customer support activities conducted online by our WebEx China and WebEx India employees and contractors possibly would be disrupted as well.

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

A small part of our sales and support activities, and a significant portion of our customer provisioning and research and development activities, are conducted outside of the United States. Customer payments to us, and payments by us to both our foreign-based vendors and to our foreign-based employees, are generally made in the

local currency. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. We do not currently engage in hedging activities or other actions to decrease fluctuations in operating results due to changes in foreign currency exchange rates, although we may do so when the amount of revenue obtained from sources outside the United States becomes significant. We conduct sales, marketing, network and customer support operations in countries outside of the United States, and we currently have subsidiaries in several non-U.S. countries. Our future results could be materially adversely affected by a variety of challenges generally associated with managing a global business including, among others, the following:

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

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

properly designing, testing and maintaining internal controls over financial reporting in our non-U.S. subsidiaries, as required under the Sarbanes-Oxley Act of 2002 and related laws and regulations;   –  

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

addressing political, economic or social instabilities that may arise from time to time in a specific non-U.S. country or region. The cost of meeting these and other challenges, or our failure to address adequately one or more of such challenges, could have a material adverse impact on our costs, expenses, and financial condition.

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

Many of the business interactions supported by our services are critical to our customers’ businesses. Although it is not standard practice for us to do so, in some situations we do make warranties in our customer agreements as to service uptime, or the percentage of time that our network will be operational and available for customer use. Accordingly, any failure by us to fulfill such warranty obligation, or more generally any failure in a customer’s business interaction or other communications activity that is caused or allegedly caused by our services, could result in a claim for damages against us, regardless of our responsibility for the failure, and cause us to incur unexpected costs which could unfavorably impact our revenue. The risk of service-related failures and claims may increase as we launch additional new services, including services developed by third parties. Moreover, as certain of our recent and planned service offerings, such as our WebOffice service and our planned network-based-recording (NBR) offering, include storage of potentially sensitive customer content on our network as part of the service offering, this may increase the potential for claims and liability associated with that stored content.

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

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

  –  

damage to our reputation;   –  

damage to our efforts to build brand awareness;   –  

loss of customers, or loss of or delay in revenue;   –  

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

unexpected expenses and diversion of resources to remedy errors. If our services do not work with the many hardware and software platforms used by our customers and end-users, or if we do not successfully adapt our MediaTone on-demand delivery platform to the increasing numbers of customers and varieties of web collaboration services we are offering including third-party web application services to be provided by our new WebEx Connect offering, our business may be harmed.

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

Our success also depends on our ability to modify our services and underlying technology as new versions of on-demand applications are introduced, and to manage our MediaTone platform such that it is able to handle the increasing scale and diversity of on-demand collaboration services furnished to customers. In particular, our MediaTone Network must successfully accommodate our new WebEx Connect platform and its various customer-facing features including a user interface, tools the customer can use to build software application interoperability and a marketplace where customers can obtain third-party applications. We could suffer damage to our reputation if third-party web applications purchased by customers from our WebEx Connect on-demand software marketplace suffer from bugs or other service interruptions, regardless of whether such third-party applications are hosted either by WebEx as part of WebEx’s MediaTone Network or at a third party’s facility. If we fail to maintain the capacity and quality of our MediaTone Network across a wide variety of user computer platforms, or fail in our efforts to utilize the MediaTone Network to support new web collaboration services including those to be provided through our new WebEx Connect platform, our business will suffer.

We rely on third parties for technologies we use in conducting our business, and in certain cases we rely on third parties to provide us with products we include in our set of commercial offerings. If we cannot continue to license these third-party technologies or products in a timely manner and on commercially reasonable terms, our business could suffer.

We intend to continue to license technologies from third parties, which are integrated into our services and which constitute new web collaboration services. For example, we license database, operating system, server and enterprise marketing automation software, application server, monitoring and management software, billing software, font-rendering technology, voice-over-Internet protocol (VOIP) technology, and credit card payment processing services. We also license proprietary software tools, within a category of software called middleware, that will be a component of our new WebEx Connect platform. As our sales volume, together with the scale and variety of our collaborative service offerings, grows larger, managing these third-party relationships and integrating the licensed technologies into our services, into our service delivery infrastructure and into our sales and marketing operations has become more important to the health of our business. If we are unable to meet the challenges associated with these more numerous and complex relationships with third-party providers, our business could suffer. Also, we are now relying on third parties to supply us with certain of our web collaboration services themselves, such as the System Management service that is one of the offerings within the Support Center family of services. These product-related third-party technologies, and any that we may utilize in the future, may not continue to be available to us on commercially reasonable terms. In addition, we may fail to successfully integrate any licensed technology or licensed product into our MediaTone service delivery platform. This in turn could increase our costs and harm our business and operating results.

If we fail to adequately manage the infrastructure and operational requirements of our business as it grows, both within the U.S. and internationally, our business could suffer.

Our business continues to grow. We continue to increase our total number of employees, and we continue to increase our usage of facilities and infrastructure. We expect that this growth will continue to place a significant

strain on our resources and cause us, from time to time, to face risks associated with upgrading, moving or otherwise changing our facilities and infrastructure.

We expect to continue to increase our personnel during 2007. Our expansion in personnel, facilities and infrastructure has presented, and will continue to present, management and operational resource challenges. In addition to completing the physical transfer of one of our primary network operations centers from our former San Jose headquarters to a facility in Mountain View, California, we are exploring the option of transitioning another of our network operations centers from a Denver, Colorado facility to an alternative facility, although we have not yet identified the location of such alternative facility.

Separately, we are continuing periodically to update our information technology infrastructure to meet increased requirements for capacity, flexibility and efficiency resulting from the growth of our business. In the event these recently re-deployed or recently-updated systems or technologies do not meet our requirements or are not deployed in a successful or timely manner, our business may suffer.

Breaches of our physical or technical security systems, or the security systems of our vendors who partner with us in the delivery of services to customers, may result in violations of our confidentiality and security obligations to our customers, may result in damage to our systems and our reputation, may endanger the safety of our employees and may harm our financial performance.

Our customers and end-users may use our services to share confidential and sensitive information, the security of which is critical to their business. Third parties may attempt to breach our security or the security of our vendors or customers. For example, although we are not aware of any breaches to the security of our primary service delivery infrastructure or our primary web collaboration service offerings, we have faced from time to time multiple ancillary security-related issues such as credit card payment verification problems, abuse of free trial offerings made available on our public website, and theft of audio-conferencing services by non-contracted parties.

We may be liable to our customers for any breach in security, and any breach could harm our reputation and cause us to lose customers or incur additional expenses, or both. For example, in connection with customer purchases of our services and with the help of an outside vendor, we process tens of thousands of credit card transactions per month, and any failure in either our or the vendor’s security system to safeguard customer information could result in violations of law or industry standards by us, damage to our customers or damage to our financial performance or reputation.

In addition, computers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. A breach of the physical security of our facilities may endanger the safety of our employees. We may be required to expend significant capital and other resources to further protect against security breaches or to resolve problems caused by any breach, including litigation-related expenses if we are sued.

Changes in our executive management team may be disruptive to our business.

From time to time there are changes in our executive management team, including the hiring and departure of executives, and the reorganization of responsibilities and personnel. For example, during the first quarter of 2006 we had a reorganization affecting the leadership of our sales and customer care organization, our product and engineering organization and our marketing organization, which are important areas of our business. In addition, our president and chief operating officer left the Company in the second quarter of 2006. Such changes may be disruptive to our business, because the executives and employees reporting to them require time to become fully productive in their new roles and new organizations. Changes in the Company’s organization or management may not achieve the expected benefits. In addition, the departure of executives may create temporary voids in leadership in critical areas of the Company. In particular, we are highly dependent on the

executive and leadership skills of our chief executive officer and co-founder Subrah Iyar, and his departure for any reason would likely be disruptive to our business. Because of these risks, organizational and management changes may have an adverse impact on our financial performance. We do not have long-term employment agreements or life insurance policies on any of our senior executives.

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

Our future success will depend on our ability to attract, train, retain and motivate highly skilled engineering, technical, managerial, sales and marketing and customer support personnel. We expect to continue to increase our personnel during 2007. Demand for skilled engineering and other technical personnel continues to be high among companies in the technology sector of the U.S. economy and particularly in the Silicon Valley, and because of this we could encounter increasing difficulty hiring and retaining qualified personnel. We could encounter the same difficulty in other countries and regions where we operate and where the demand for skilled technology workers is growing quite rapidly, such as in China and India where we have experienced a significant degree of salary pressure and turnover in our workforce. In addition, our current financial plans depend upon substantially increasing our sales force in the coming year. If we encounter difficulty hiring, integrating and retaining a sufficient number of qualified personnel in the future, the quality of our web collaboration services and our ability to develop new services, obtain new customers, achieve revenue growth goals and provide a high level of customer service could all suffer, and consequently the health of our overall business could suffer. If in our hiring we hire employees from our competitors, we face a risk that a competitor may claim that we have engaged in unfair hiring practices, which could cause us to incur costs in defending ourselves against such claims, regardless of their merits. Also, our competitors appear to value certain specialized skills possessed by certain of our technical and sales employees, having hired or attempted to hire such individuals in recent quarters. If the rate at which such employees are hired away increases appreciably, our business and operations could be harmed.

Interruption or malfunction of our internal business processing systems, including our comprehensive database system, or problems relating to our use of a third party service to assist us with certain billing tasks, could result in customer invoicing delays and other disruptions to our revenue-related financial accounting processes.

Our business, which includes thousands of subscription customers and a large number of daily transactions, is substantially dependent on the continuous and error-free functioning of our automated business processing systems covering such areas as order-entry, billing, contract management and collection activities. We currently are utilizing an internally-developed, in part, proprietary business processing system to capture and record customer usage of our various services. Because we have to rely on our own know-how and experience, rather than that of an outside vendor, to identify, diagnose and repair any bugs, start-up problems or other malfunctions relating to the system, any such malfunction could cause delays or errors in transaction processing, which could negatively affect customer relationships and could harm our business. Actual malfunction-related costs that could have negative effects on our business include (i) delays in generating, or inability to generate, customer invoices, (ii) difficulty, or inability, to track the customer usage data needed to generate invoices, (iii) our having to deploy additional resources internally to troubleshoot these invoice and data collection problems and to complete the processing of sales transactions, and (iv) our having to issue credits to customers due to discrepancies or disagreements with particular invoices.

During the first quarter of 2006 we completed the installation of a key upgrade to the application we use for financial reporting, human resource management and other enterprise resource planning functions. During the remainder of 2006 we installed, and in 2007 we plan to continue to install, upgrades to other portions of the application. In addition, we are utilizing a third party billing service to assist us in the preparation and transmission of invoices to customers. Also, in connection with our WebEx Connect offering of on-demand applications developed by third parties, we intend to provide the billing services, which will introduce a greater load on and increased complexity to our billing systems. Any material interruption or malfunction associated

with the installation of these upgrades, the functioning of our third party billing service arrangement, or the addition of the WebEx Connect offering to our billing process could result in billing, collection, credit-issuance and other revenue-related financial accounting problems. Such interruptions or malfunctions, were they to become persistent or large-scale, could harm our customer relationships. In addition, such interruptions or malfunctions could interfere with the accuracy of our financial reporting and could disrupt related internal control compliance activities, which could result in our violating legal requirements applicable to public companies. Any such result could harm our business and stock price.

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

The success of our on-demand web collaboration services depends on the efficient and uninterrupted operation of our internal and outsourced computer and communications hardware, software and services. Any system failure that causes an interruption in our web collaboration services, or a decrease in their performance, could harm our relationships with our customers and resellers. In addition, some of our communications hardware and software are hosted at third-party co-location facilities, and we rely as well on the functional operation of connectivity infrastructure such as fiber provided by third-party service providers. These systems and operations, including those of our third-party service providers as well as those within our service delivery network, are vulnerable to damage or interruption from human error, telecommunications failures, physical or remote break-ins, physical damage to fiber lines or other third-party service provider infrastructure, sabotage, computer viruses and intentional acts of vandalism. In addition, third-party co-location facilities may discontinue their operations due to poor business performance. Because a substantial part of our central computer and communications hardware and network operations are located in the San Francisco Bay Area, an earthquake or other natural disaster, or a loss of electrical power to our Bay Area computer and communications hardware and network operations for a sustained period of time, could impair the performance of our entire network. In the event of damage to or interruption of our internal or outsourced systems, if we are unable to implement our disaster recovery plans or our efforts to restore our services to normal levels in a timely manner are not successful, our business would be harmed. In addition, business interruption insurance may not adequately compensate us for losses that may occur, which would harm our business.

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

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

We rely on patents to protect our software and technology, and such patents, when and if obtained, may be insufficient to protect such intellectual property assets.

We strive to protect our underlying software and our proprietary technology through patents. We regard the effective protection of patentable inventions as important to our future opportunities. We currently have 29 issued patents. Our patents are in several areas including peer-to-peer connections to facilitate conferencing, document annotation, optimizing data transfer, graphical user interface for extracting video presentations, and remote collaboration systems involving multiple computers. We currently have over 75 patent applications pending in the United States Patent Office. We may seek additional patents in the future. Our current patent applications cover different aspects of the technology used to deliver our services and are important to our ability to compete. However, it is possible that:

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

any issued patent could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents and subjecting us to claims for seeking to enforce such patents;   –  

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

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

effective patent protection, including effective legal-enforcement mechanisms against those who violate our patent-related assets, may not be available in every country in which we do business. We also rely upon trademarks, copyrights and trade secrets to protect our technology, which may not be sufficient to protect our intellectual property.

We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions such as confidentiality agreements and licenses, to establish and protect our technology. Also, our software is automatically protected by copyright law. These forms of intellectual property protection are critically important to our ability to establish and maintain our competitive position. However,

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third parties may infringe or misappropriate our trademarks and may also infringe our copyrights and similar proprietary rights;   –  

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

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

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

policing unauthorized use of our services and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business.

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

We may be subject to legal proceedings and claims, including claims of alleged infringement of the copyrights, trademarks and patents of third parties. Our services may infringe issued patents. The holders of such patents could initiate infringement claims against us. Also, in response to an infringement action brought by us, the defendant in such action could file counterclaims against us in the same proceeding or file a separate action against us in a different court. For example, in January 2007 lawsuits were filed in U.S. federal district court by Accolade Systems LLC against a number of companies, including us, alleging that the defendants’ services infringe one of plaintiff’s patents. Future intellectual property dispute proceedings such as the Accolade Systems action can be expensive, time-consuming and may divert management attention and engineering resources from their other responsibilities.

In addition, we may be unaware of filed patent applications which have not yet been made public and which relate to our services. From time to time, we have received notices alleging that we infringe intellectual property rights of third parties. In such cases, we investigate the relevant facts, respond to the allegations and, where the

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

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

We may acquire or invest in complementary businesses, technologies or services. For example, in September 2005 we acquired Intranets, a company which provides web-based collaborative application services primarily to ses. We have changed the name of this subsidiary to WebExOne, Inc., and the various collaboration services are now marketed and sold under the brand name WebEx WebOffice. Operating and integrating newly-acquired businesses, employees, technologies or services may be expensive and time-consuming. We may be unable to operate any acquired businesses profitably, successfully integrate the employees, technology, products or services of any acquired businesses into our existing business, or achieve post-integration financial targets established for specific acquisitions. To illustrate, we could fail to successfully manage the newly-acquired WebExOne portion of our business, including such key areas as WebExOne sales activity, WebExOne employee motivation and retention including key WebExOne executives, and the WebExOne service delivery infrastructure. Also, we face possible future integration-related risks such as those associated with transferring the WebExOne billing and service delivery infrastructure from its current platform to our proprietary MediaTone platform. Expenses associated with, and diverted WebEx employee time and energy required in connection with, the integration of a newly-acquired business such as WebExOne could further harm our operating results. More generally, if we are unable to operate and integrate any newly-acquired entities or technologies effectively, including those related to our acquisition of the former Intranets entity now renamed WebExOne, our operating results could suffer. Future acquisitions by us, or deterioration of the businesses we have acquired, could also result in large and immediate write-downs, any of which would harm our financial performance.

We must compete successfully in the web collaboration services market.

The market for collaboration software and services is intensely competitive, subject to rapid change and is significantly affected by new product and service introductions and other market activities of industry participants. Although we do not currently compete against any one entity with respect to all aspects of our services, we do compete with various companies in regards to specific elements of our on-demand web collaboration services. For example, we compete with providers of traditional communications technologies such as teleconferencing and videoconferencing, application software and tools companies including online application services providers, and web conferencing products and services from vendors such as Adobe Systems, Cisco Systems, Citrix Systems, Genesys S.A., IBM, Microsoft, Netviewer, NTR Global, Oracle, and Saba.

In addition to the above competitors, certain of our resellers offer competitive web conferencing, web application and other web collaboration services. One of our key resellers, Intercall, is a subsidiary of West Corporation which in April 2006 acquired our competitor Raindance. As a result of its acquisition of Raindance, Intercall could choose to increase its emphasis on offerings competitive with ours, or cease to offer some or all of our offerings, or both.

Other companies could choose to extend their products and services to include competitive interactive communication offerings in the future. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and other resources and greater name recognition than we do.

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

Competition from Microsoft in the collaboration software and services markets, from other vendors specifically targeted at the low-end market, or customers offering customer-premises products may adversely affect our operating results.

Competition from Microsoft in the collaboration software and services markets may adversely affect us. Microsoft has a product offering which is competitive with ours and which is called Microsoft Office Live Meeting. Microsoft also has an offering called Office Live, which consists of a set of Internet-based software services. In January 2007, Microsoft began selling its new Windows Vista operating system, which includes a real-time web meeting feature, for up to ten persons, and related collaboration functionalities such as document sharing. Microsoft has also announced plans to offer web collaboration functionality in its Office Communications Server product scheduled for release later in 2007. Microsoft’s investment of development and marketing resources in products or services that compete directly with us and Microsoft’s integration of competitive technologies from other companies may have an adverse impact on our business. More generally, Microsoft may attempt to leverage its dominant market position in the operating system, productivity application or browser markets, through technical integration or bundled offerings, to expand further its presence in these web collaboration markets. This expanded Microsoft presence in web collaboration markets could make it difficult for other vendors of web collaboration products and services, such as WebEx, to compete.

In addition, some competitors offer web collaboration products and services targeted at customers who are more price-conscious and are less concerned about functionality, scalability, integration and security features. Such offerings may make it more difficult for us to compete in that segment of the market and may cause some of our existing customers to switch to these competitors. In 2005, we introduced new services with lower entry prices that enable us to compete more effectively with such offerings. If our industry were to experience a general decline in prices and there were not a sufficient increase in volume to compensate for the price reductions, we might be forced to change the extent and type of resources we deploy in the selling of our services in an effort to maintain operating margins. Such forced price reductions, as well as costs or lost sales associated with a transitioning to different sales practices, could have a negative effect on our operating results.

Finally, some of our competitors such as IBM and Cisco Systems offer software products or products that are a combination of software and hardware that include web collaborations functionality. This type of web collaboration offering, sometimes called a customer premise or on-premise solution, allows customers to purchase such products, install them at their own facilities, and manage the products by themselves. If significant numbers of existing or potential customers determine that they would prefer to have their basic web conferencing or more advanced web collaboration needs met with these types of products, demand for WebEx services may decrease.

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

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

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willingness of businesses and end-users to use web collaboration services;   –  

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

the willingness of our resellers to integrate web collaboration services in their service offerings; and   –  

the ongoing level of security and reliability for conducting business over the Web. We face risks associated with government regulation of the Internet, and related legal uncertainties.

Currently, a relatively small number of existing laws or regulations specifically apply to the Internet, other than laws generally applicable to businesses. Many Internet-related laws and regulations, however, are pending and may be adopted in the United States, in individual states, in local jurisdictions, and in other countries. These laws may relate to many areas that impact our business, including encryption, network and information security, the convergence of traditional communication services, such as telephone services, with Internet communications, taxes and wireless networks. For example, media reports have surfaced from time to time concerning possible future regulation, and perhaps also taxation, of VOIP products and services similar to the manner in which current telephony services are currently regulated and taxed. These types of regulations could differ between countries and other political and geographic divisions both inside and outside the United States. Non-U.S. countries and political organizations may impose, or favor, more and different regulation than that which has been proposed in the United States, thus furthering the complexity of regulation. In addition, state and local governments within the United States may impose regulations in addition to, inconsistent with, or stricter than federal regulations. The adoption of such laws or regulations, and uncertainties associated with their validity, interpretation, applicability and enforcement, may affect the available distribution channels for, and the costs associated with, our products and services. The adoption of such laws and regulations may harm our business.

In addition to the effect of such potential future laws and regulations, existing laws and regulations in both domestic and non-U.S. jurisdictions could be interpreted to apply to our web collaboration business, in which case our regulatory compliance obligations and associated financial burdens could increase. An example of a non-U.S. law or regulation that we are expending resources, both infrastructure-related and legal-related, to comply with are the various privacy statutes enacted by the European Union. Examples of U.S. laws and regulations that we may have to expend greater resources to comply with are various U.S. state sales tax laws and regulations that may be held by the applicable authorities to apply to the sale of our web collaboration services.

We have not generally collected sales tax from customers in the United States, and we believe that the services we provide are generally exempt from sales tax. From time to time, states have initiated, and may initiate in the future, audits or inquiries with respect to sales, use or income taxes. For example, during the third quarter of 2006, we reached resolution of sales tax audits with two states, one verbal and one written, in which the states concluded that our services are exempt from sales tax. Despite the results of these particular audits, federal or state tax authorities could still assert that we are obligated to collect such taxes from our customers and remit those taxes to those authorities. The collection and remittance of such taxes could increase the cost of our services and harm our operating results. In addition, such authorities may seek to collect sales taxes for sales of services by us that occurred in the past. If such a claim were to be asserted against us and if we were unable to collect such taxes from our customers, we may be required to pay such back taxes and any associated interest and penalties, which would increase our costs and harm our operating results.

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

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

We face risks associated with potential future zoning activity relating to our Mountain View network operations center property.

We own real property in Mountain View, California on which resides a building that serves as one of our primary network operations center facilities. The Mountain View City Council is currently considering a proposal to rezone the area surrounding our facility from industrial to residential use. If such rezoning, and the accompanying expansion of neighboring residential development, takes place, operations in our building could be impeded, interrupted or otherwise negatively affected by construction activities, the new residents, or city ordinances relating to noise or other byproducts of our building’s operations. Because of such negative circumstances, we might be forced to re-locate to a less suitable and perhaps more expensive site for our network operations facility, which would negatively affect our business. Having to invest additional resources and management time in the locating and fitting of the alternative network operations site would further hurt our business.

New Financial Accounting Standards Board (FASB) rules relating to equity-compensation programs, changes we are making in our equity compensation programs in response to the new rules, will significantly affect our results of operations.

The Financial Accounting Standards Board (FASB) has adopted final rules which change the way companies account for equity compensation in their financial statements. This accounting rule change requires companies to report as a compensation expense equity compensation provided to employees, including stock options, purchases of stock at a discount pursuant to an employee stock purchase plan, and other forms of equity compensation. The adoption of SFAS 123R has had, and could continue to have, a negative effect on our reported net income, due to our use of stock options and our current practice of awarding other forms of equity compensation, such as restricted stock units and employee stock purchase plan awards. The adoption of SFAS 123R also has negatively affected our reported amounts for pre-tax expense, tax rate, cash flow from operations and diluted shares outstanding.

The new FASB rule has added, and we believe will continue to add, complexity and uncertainty to our management of employee compensation practices, and for the foreseeable future will continue to demand a significant amount of management attention. O