8x8 2006 Annual Report Download - page 28

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vendors to comply with the requirements of CALEA. Our failure to achieve compliance with any future CALEA
orders or any enforcement action initiated by the FCC or other agency or task force against us could have a material
adverse effect on our financial position, results of operations or cash flows.
Our success depends on our ability to handle a large number of simultaneous calls, which our network may
not be able to accommodate.
We expect the volume of simultaneous calls to increase significantly as the Packet8 subscriber base grows. Our
network hardware and software may not be able to accommodate this additional volume. If we fail to maintain an
appropriate level of operating performance, or if our service is disrupted, our reputation could be hurt, we could lose
customers and this could have a material adverse effect on our business, financial condition and results of
operations.
We could be liable for breaches of security on our web site, fraudulent activities of our users, or the failure of
third-party vendors to deliver credit card transaction processing services.
A fundamental requirement for operating an internet-based, worldwide voice and video communications service and
electronically billing our Packet8 customers is the secure transmission of confidential information and media over
public networks. Although we have developed systems and processes that are designed to protect consumer
information and prevent fraudulent credit card transactions and other security breaches, failure to mitigate such
fraud or breaches may adversely affect our operating results. The law relating to the liability of providers of online
payment services is currently unsettled. We rely on third party providers to process and guarantee payments made
by Packet8 subscribers up to certain limits, and we may be unable to prevent our customers from fraudulently
receiving goods and services. Our liability risk will increase if a larger fraction of our Packet8 transactions involve
fraudulent or disputed credit card transactions. Any costs we incur as a result of fraudulent or disputed transactions
could harm our business. In addition, the functionality of our current billing system relies on certain third-party
vendors delivering services. If these vendors are unable or unwilling to provide services, we will not be able to
charge for our Packet8 services in a timely or scalable fashion, which could significantly decrease our revenue and
have a material adverse effect on our business, financial condition and operating results.
We have experienced losses due to subscriber fraud and theft of service.
Subscribers have obtained access to the Packet8 service without paying for monthly service and international toll
calls by unlawfully using our authorization codes and submitting fraudulent credit card information. To date, such
losses from unauthorized credit card transactions and theft of service have not been significant. We have
implemented anti-fraud procedures in order to control losses relating to these practices, but these procedures may
not be adequate to effectively limit all of our exposure in the future from fraud. If our procedures are not effective,
consumer fraud and theft of service could significantly decrease our revenue and have a material adverse effect on
our business, financial condition and operating results.
Intellectual property and proprietary rights of others could prevent us from using necessary technology to
provide IP voice and video services.
Certain necessary technologies for us to provide our services may in fact be patented by other parties either now or
in the future. If such technology were held under patent by another person, we would have to negotiate a license for
the use of that certain technology. We may not be able to negotiate such a license at a price that is acceptable. The
existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could
force us to cease using such technology and offering products and services incorporating such technology.
If we discover product defects, we may have product-related liabilities which may cause us to lose revenues or
delay market acceptance of our products.
Products as complex as those we offer frequently contain errors, defects, and functional limitations when first
introduced or as new versions are released. We have in the past experienced such errors, defects or functional
limitations. We sell products into markets that are extremely demanding of robust, reliable, fully functional
products. Therefore, delivery of products with production defects or reliability, quality or compatibility problems
could significantly delay or hinder market acceptance of such products, which could damage our credibility with our
customers and adversely affect our ability to retain our existing customers and to attract new customers. Moreover,
such errors, defects or functional limitations could cause problems, interruptions, delays or a cessation of sales to
our customers. Alleviating such problems may require significant expenditures of capital and resources by us.