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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
	2001                                              
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
	from           to           .                                  

Commission File Number: 000-31121

Avistar Communications Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                                       |  |                                         
|------------------------------------------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                                                               |  | 88-0463156                              
|(State or other jurisdiction of
	incorporation or organization)                                        |  | (I.R.S. Employer
	Identification Number)
|555 Twin Dolphin Drive, Suite 360
	Redwood Shores, California(Address of Principal Executive
	Offices) |  | 94065(Zip Code)                         

Registrants telephone number, including
area code: (650) 610-2900

Securities registered pursuant to
Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|None                |  | None                                     

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.001 par value


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this
Form 10-K.     þ

The aggregate market value of the voting stock
held by non-affiliates of the registrant, based upon the closing
sale price of the Common Stock on February 28, 2002 as
reported on the NASDAQ National Market, was approximately
$14,973,000. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of
the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.

As of December 31, 2001, the registrant had
outstanding 25,196,478 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference into
Part III of this Annual Report on Form 10-K specific
portions of its Proxy Statement for its 2002 Annual Meeting of
Stockholders.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                 |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I                       
|                              | Item 1. Business                                                                             
|                              | Item 2. Properties                                                                           
|                              | Item 3. Legal Proceedings                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                      
|                              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                              | Item 6. Selected Financial Data                                                              
|                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 7a. Quantitative and Qualitative Disclosures About Market Risk                          
|                              | Item 8. Financial Statements and Supplementary Data                                          
|                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                     
|                              | Item 10. Directors and Executive Officers of the Registrant                                  
|                              | Item 11. Executive Compensation                                                              
|                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                      
|                              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                   
|INDEX TO FINANCIAL STATEMENTS
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                              |                                                                                               | NOTES TO FINANCIAL STATEMENTS                  
|INDEX TO EXHIBITS            
|EXHIBIT 21.1                 
|EXHIBIT 23.1                 
|EXHIBIT 99                   



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AVISTAR COMMUNICATIONS CORPORATION

ANNUAL REPORT ON FORM 10-K

Year Ended December 31, 2001


TABLE OF CONTENTS

|                              |  |                                                                                        |     |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                              |  |                                                                                        |     | Page
|                              |  |                                                                                        |     |     
|PART I                       
|Item 1.                       |  | Business                                                                               |     |      | 2  | 
|Item 2.                       |  | Properties                                                                             |     |      | 17 | 
|Item 3.                       |  | Legal Proceedings                                                                      |     |      | 18 | 
|Item 4.                       |  | Submission of Matters to a Vote of Security
	Holders                                   |     |      | 18 | 
|PART II                      
|Item 5.                       |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |     |      | 18 | 
|Item 6.                       |  | Selected Financial Data                                                                |     |      | 19 | 
|Item 7.                       |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |     |      | 20 | 
|Item 7a.                      |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |     |      | 33 | 
|Item 8.                       |  | Financial Statements and Supplementary Data                                            |     |      | 34 | 
|Item 9.                       |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |     |      | 34 | 
|PART III                     
|Item 10.                      |  | Directors and Executive Officers of the Registrant                                     |     |      | 34 | 
|Item 11.                      |  | Executive Compensation                                                                 |     |      | 35 | 
|Item 12.                      |  | Security Ownership of Certain Beneficial Owners
	and Management                        |     |      | 35 | 
|Item 13.                      |  | Certain Relationships and Related Transactions                                         |     |      | 35 | 
|PART IV                      
|Item 14.                      |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |     |      | 35 | 
|Index to Financial Statements |  |                                                                                        | F-1 |     

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PART I




Item 1.     Business

This Annual Report on Form 10-K, the
exhibits hereto and the information incorporated by reference
herein contain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act) and Section 21E of
the Securities Exchange Act of 1934, as amended (the
Exchange Act), and such forward looking statements
involve risks and uncertainties. When used in this Report, the
words expects, anticipates,
believes, plans, intends and
estimates and similar expressions are intended to
identify forward looking statements. Such statements are subject
to risks and uncertainties that could cause actual results to
differ materially from those projected. These risks and
uncertainties include those discussed below and those discussed
in Managements Discussion and Analysis of Financial
Condition and Results of Operations or incorporated by
reference herein. Avistar Communications Corporation (the
Company, we, or us)
undertakes no obligation to publicly release any revisions to
these forward looking statements to reflect events or
circumstances after the date this Report is filed with the
Securities and Exchange Commission or to reflect the occurrence
of unanticipated events.

We were founded as a Nevada limited partnership
in 1993. We filed our articles of incorporation in Nevada in
December 1997 under the name Avistar Systems Corporation. We
reincorporated in Delaware in March 2000 and changed our name to
Avistar Communications Corporation in April 2000. The operating
assets and liabilities of the business were then contributed to
our wholly owned subsidiary, Avistar Systems Corporation, a
Delaware corporation. In July 2001, our Board of Directors and
the board of directors of Avistar Systems approved the merger of
Avistar Systems with and into Avistar Communications. The merger
was completed in July 2001.

Our principal executive offices are located at
555 Twin Dolphin Drive, Suite 360, Redwood
Shores, California, 94065. Our telephone number is
(650) 610-2900.

Overview

We develop, market and support a comprehensive
suite of networked video communication services for the
enterprise. From the desktop, we deliver TV-quality interactive
video calling, content creation and publishing, broadcast
origination and distribution, video-on-demand, and integrated
data sharing. The Avistar video and data collaboration
applications are all managed by the AvistarVOSTM
video operating system. Our customers use our system to improve
productivity and communication within the enterprise and to
enhance relationships with customers, suppliers and partners.
Using AvistarVOSTM software and leveraging video,
telephony and Internet networking standards, Avistar
applications are designed to be scalable, reliable, cost
effective, easy to use and capable of evolving with
communications networks as bandwidth increases and as new
standards and protocols emerge. We sell our system directly to
enterprises in selected strategic vertical markets, and have
focused initially on the financial services and manufacturing
industries. As of December 31, 2001, our customers have
installed Avistar systems at approximately 300 sites
in 118 cities and in 33 countries. Our objective is to
establish our technology as the standard for networked video.

Industry Background

Businesses and other organizations operating in
todays increasingly time, resource and travel constrained
world are searching for new tools that will help them increase
productivity and take advantage of revenue opportunities.
Businesses need these tools to help them address new
opportunities in an environment of rapid change and increased
competition. Enterprises of all sizes have been seeking to
implement new and advanced communication tools that enable their
employees, partners, suppliers and customers to collaborate more
effectively within and across buildings and over disparate
geographies and time zones, recognizing that speed in
decision-making is becoming even more critical in todays
business environment.

For years, enterprises have relied on
communication tools used principally in a point-to-point manner,
such as telephone and fax. More recently, businesses have also
embraced network-based collaboration applications, such as
teleconferencing, voicemail and email. The emergence of the
Internet has accelerated the

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adoption of these network-based collaboration
applications. Businesses are quickly adopting the Internet as
yet another means of improving communication within and amongst
organizations. The increasing availability and affordability of
bandwidth on communication networks is further driving
businesses to utilize new tools of communication to enhance
collaboration among users. For example, a July 2001 study from
International Data Corporation estimates that the number of
worldwide users of enterprise conferencing applications will
increase to over 160 million users in 2005, representing a
64% compound five-year growth rate.


As technology advances and becomes more
affordable, and as modes of communication expand, enterprises
are seeking a widely deployable and cost effective technology to
replicate, at the desktop, the integration of audio and visual
communication and document or project collaboration that occurs
in a face-to-face meeting. Individuals generally prefer
face-to-face encounters to less personal forms of communication
because they can see one another and give non-verbal cues that
speed communication and deepen understanding. This is
particularly true for more complex interactions such as
negotiations, sales, product development and project management.
However, face-to-face interactions often need to be scheduled,
and impromptu meetings can be difficult to arrange because all
the participants need to be in close proximity, which often
requires travel. In addition, everyone needs to be available at
the same time. These time and distance challenges become
increasingly difficult to deal with as the number of potential
participants increases. Beyond traditional teleconferencing and
data sharing communications, attempts to conduct virtual
meetings as an alternative to face-to-face meetings have
generally been limited to conference room-based video
conferencing and specially set-up broadcasts. Most individuals
do not have immediate access to these technologies, and the
reservation and set-up time make them unlikely to be used on a
spontaneous basis.

Limitations of Current Means of
Collaboration

To address the growing need for collaboration
across distance and time, organizations have resorted to using a
patchwork of discrete technologies, including video conferencing
and teleconferencing, fax, email, Internet audio and video
delivery and data sharing applications. Many of these
technologies have been widely adopted, and collectively indicate
the need for collaboration tools including networked video.
However, these discrete technologies are not good substitutes by
themselves for face-to-face meetings and presentations, because
they do not provide an integrated communications solution that
fosters team interaction and delivers critical, time-sensitive
information quickly and reliably. By providing face-to-face
collaboration in an integrated communications solution, video
can speed problem resolution and motivate action, trust and
understanding. Users want to be able to create and publish video
content from their desktops either spontaneously, as with email
or voicemail, or in a more formal manner for broader
distribution through the Internet or corporate data network.

Although limited video technologies are already
in use at many enterprises, businesses and other organizations
require increasingly comprehensive, integrated and scalable
video-enabled communication capabilities. For example, video
conferencing is often limited to point-to-point communication
from designated rooms or through the use of
roll-about products, where call set-up procedures,
lack of networking, bandwidth requirements and room availability
greatly constrain functionality, usability, reliability and
efficiency, as well as access by individuals.

Similarly, broadcasting of stored video or
television programming at a desktop or in a conference room is
of highly varying quality and generally cannot be added on a
real-time basis to a live video conference. Some products are
limited to exclusively using the enterprise data network or the
Internet to carry two-way desktop video conferencing or to
transmit video one-way. As a result, they are unable to deliver
television quality video in normal corporate settings, and are
limited in their ability to create, publish and broadcast these
video conferences. In addition, it is difficult to expand these
existing products within an enterprise, and even more difficult
to do so among enterprises because of bandwidth, functionality
and quality limitations of current enterprise networks.

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Elements of a Complete Collaboration
Solution

To become a mission-critical tool in the
enterprise, a communications solution must provide high quality
at scale, high reliability, and low total cost of ownership.
These communication system essentials should be combined with an
integrated suite of high-value video and data applications
software that enables access to all such applications through
effective utilization of existing and evolving network
infrastructure. We believe a complete collaboration solution
must provide the following:



| |        
| | -------
| | Quality



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approximate the video and audio quality of
	television for natural and easy interaction;                                                                                                        
|
| |  | make interactions as realistic as possible by
	eliminating the delay when transmitting and receiving video
	calls and eliminating latency, jitter, freeze-frame, stutter,
	and small frame size;
|
| |  | seamlessly integrate all forms of audio, video
	and data communication including interactive video calling,
	content creation and publishing, broadcast video and
	video-on-demand retrieval.   



| |            
| | -----------
| | Scalability



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | like the Internet and public telephone networks,
	the communications solution must be designed for size
	independence and should scale cost-effectively to support a very
	large numbers of users as an enterprise-class solution.



| |            
| | -----------
| | Reliability



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | operate dependably and reliably to avoid user
	frustration;                                                                                                                                        
|
| |  | provide to video communications the ease of use,
	speed, quality, functionality, flexibility and global access of
	the telephone while easily supporting more complex applications
	and situations.



| |             
| | ------------
| | Adaptability



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | offer an upgradeable architecture that can evolve
	as bandwidth availability, protocols, standards and compression
	technologies change;  
|
| |  | include powerful software to manage an integrated
	suite of collaborative applications, relying on networked
	infrastructure;             
|
| |  | leverage current and future business investments
	in local and wide area networks, Internet protocol and
	standards-based infrastructures.



| |              
| | -------------
| | Affordability



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | operate and scale cost effectively;                                                            
|
| |  | utilize standard, low cost and widely available
	hardware components;                          
|
| |  | be cost-effective compared to other pervasive
	forms of enterprise communication such as email;
|
| |  | deliver cost savings through innovations in
	support, network and resource management.         

We believe high quality networked video
communication allows businesses to improve collaboration and
thereby offers them the opportunity to increase productivity,
enhance customer service and revenue generation, and facilitate
business-to-business interactions and reduce costs, all on an
accelerated basis. We also believe that, just as every
organization now relies on a telephone network and most
businesses increasingly rely on the Internet, a market is
emerging in which businesses and other organizations will choose
to rely on fully integrated video, audio and data collaboration
networks.

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The Avistar Solution

Avistar delivers a networked video system enabled
by a unique architecture and a powerful software platform: the
AvistarVOSTM video operating system. This software
provides a comprehensive integrated suite of video applications
that include on-demand access to interactive video calling and
conferencing, content creation and publishing, broadcast video,
video-on-demand, as well as data sharing, directory services and
network management. These applications support users within and
amongst enterprises and over telephony networks and the
Internet. Our system architecture is open and flexible in order
to embrace continued technological innovation and
standardization. Our system is designed to use existing and
emerging communication and video standards to deliver the
quality and ease of use of the telephone system. Based on
analysis of over 490,000 calls in 2001, the reliability of video
calls using our system surpassed 90%.

Avistar has built a complete video collaboration
solution, delivering TV-quality video to thousands of desktops
across hundreds of buildings. Our suite of video applications
can be accessed from a users desktop and can be used,
integrated and managed in conjunction with one another. People
often conceive of video in the enterprise only as two-way,
real-time conferencing. Our system allows broadcast video to be
included in a video call and allows the entire session to be
recorded simultaneously, and made available as stored video. Our
system joins users in a high-quality video network to improve
their ability to solve complex problems, connect to co-workers,
customers and suppliers, manage large projects, and quickly act
together on opportunities. Our system does this cost effectively
and reliably, and is designed to be able to serve global
corporations with branch offices and/or distributed operations.

Interactive video calling.Our system allows users to participate
in spontaneous interactive video collaborations from their
desktops. Users can simultaneously see and hear multiple
participants in windows on their workstations. Additionally, our
system provides full duplex audio, which allows multiple users
to speak and hear each other clearly at the same time. The
desktop window can be divided into four quadrants, to permit up
to three other video sources. These sources can include other
participants in real-time, broadcast content, or recorded video.
The participants can include individual users or conference-room
groups located at multiple sites and/or various enterprises, all
without requiring advance reservations or conferencing services.
Each participant has the full ability to utilize all the call
functions of the system, such as adding or removing
participants. The system supports the communications needs of
people by allowing them to add a third or fourth participant
into a call spontaneously for a quick conference, and then
revert back to a two party call. This ability helps speed
decision-making and leverages knowledge experts. As a real
life example, a commercial banks branch loan
officers spread across seven cities use the interactive video
calling application to click and connect real-time to
headquarters personnel in order to expedite lending decisions
and processing.

Video content creation and publishing.With our solution, users can create
and publish video content from their desktops by recording
themselves, recording a multi-point conference, or adding
commentary to a broadcast and recording the entire session.
Users placing video calls can create video-mail for recipients
who were not available at the time of the call. These messages
can include text and video attachments. Content can be published
via email links, posting to web sites or embedded as a streaming
video in an email. For example, an economist at an investment
banking firm regularly records commentary on current events and
market conditions using the Avistar system. This recorded video
is then available internally on the corporate network or through
the Internet to clients.

Broadcast video.Sales meetings, training seminars,
analyst reports, management presentations and live news
broadcasts can be delivered real-time to every users
workstation and streamed to browser-based users. For example, a
customer employed its Avistar video network to maximize the
reach and impact of an educational seminar. The customer
broadcast the seminar to an estimated 300 desktops and meeting
rooms with more than 2,000 employees and clients watching in the
United States and Europe. As another example, one customer has
shifted its international sales meetings to broadcasts and
recorded presentations on its Avistar system, thereby saving
travel time and costs, while expanding the broadcast to a wider
audience.

Video-on-demand.Users anywhere on the Avistar network
can easily retrieve stored videos. For example, a corporation
uses our system to record its sales training seminars.
Salespeople who are unable to attend these face-to-face
presentations are now able to watch the seminars by retrieving
and playing the stored

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videos on their desktops when it is convenient
for them. Another customer uses our system to record and
broadcast their daily morning meetings so colleagues in other
time zones around the world can be updated on the issues of the
day when they report to work.


Integrated data sharing.In addition to viewing the four
quadrants of our video window, multiple users can simultaneously
create and annotate a shared document using text or drawing
tools color-coded specifically for each user. All participants
can access the contents of any shared window and save the marked
changes for later reference. Our system can also be utilized in
conjunction with other application sharing programs that utilize
data networks or the Internet. While participating in an
interactive video call, users can access Microsoft
NetMeetings application sharing capabilities through a
button on our tool bar and revise a document. As an example,
multiple design engineers can share a technical drawing in order
to resolve an issue with a defective part.

Our system has the following key features
necessary to make integrated video collaboration effective:

Easy to use interface.Our applications bring the rich
interaction of a face-to-face meeting and the quality and ease
of use of the telephone to our systems through:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click-to-connect simplicity.To initiate calls or add another user
	to a session already underway, any user simply clicks on either
	a direct connect button, a picture, or a name in the directory.
	Standard telephone-like features such as hold, hang-up, forward,
	leave message or begin another call are all completed with the
	click of a mouse, or keyboard shortcuts. Additionally, anyone on
	an Avistar network can connect to the desktop of colleagues,
	customers, suppliers and others on other Avistar networks. If
	the person being called is logged-in but unavailable, users can
	leave a personalized call back message that allows the person to
	automatically return the video call without having to look up
	the address.                                         
|
| |  | Find Me, Follow Me.Avistar video calling is built on
	directories and presence-based features and is
	referred to as Find Me, Follow Me. Using this
	feature, our system is able to determine the location of any
	user on an Avistar network at any time. To call any user in the
	Avistar network, it is not necessary to know their number or
	current location. As long as the Avistar user is logged into his
	or her Avistar application, the Find Me, Follow Me
	application automatically registers where that user is logged
	in, regardless of site or geography, and routes all calls to the
	users location. Using this Find Me, Follow Me
	technology, Avistars system makes video calling a
	one-click process and enables what we call Video Instant
	Messaging.
|
| |  | Comprehensive directory.The Avistar network directory is a
	comprehensive list of Avistar numbers that can be called with a
	click. All users currently logged into an enterprises
	Avistar network will be shown, providing immediate
	presence information as to availability. The global
	directory can be tailored to include only a business
	community of users. In addition, a private directory feature
	allows users to create their own directory and reach frequently
	called parties with a one click quick connect tool.
	Both global and private directories can also include other sites
	that use standards-based video conferencing systems.                                                                                                                          
|
| |  | Consistency across locations.The Avistar user interface is
	consistent across desktops and conference rooms. Thus, a user
	who is familiar with the functionality at the desktop requires
	no additional training or set up to utilize an Avistar system in
	a conference room, thus allowing conference room systems to be
	self-service.                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Seamless integration of system applications.All of our applications are seamlessly
integrated with one user interface. As a user adds an additional
video source during an ongoing video call  such as an
additional live participant, a one-way broadcast or a stored
video clip  there is virtually no delay to launch
another application or to download data. In addition, each
application is synchronized with the others so that all
participants in a video call see and hear the same content
simultaneously. Thus, recorded or broadcast video can be added
to a live session and shown to all participants. The entire
session can also be recorded. Our system enables common network
and application management, so the same directory can be used
for two-way

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calls, one-way broadcasts and data sharing in the
same session. Usage can be determined with our integrated call
reporting tool that provides summary data for analysis and cost
justification.


Network management.Our network architecture provides
system administrators the ability to flexibly and proactively
manage each of the various components of the network. Within our
system, the most costly and complex equipment and software
applications are shared as networked resources. This arrangement
allows for redundancy and dynamic allocation of these resources
to users who need them, and ensures that users experience the
best video quality possible at the highest reliability and
lowest cost of use. Servers and switches can be maintained,
installed and repaired centrally, and many network support
functions can be performed remotely over the data network,
thereby limiting the disruption of service to an individual
user. Similarly, additional desktops and meeting rooms can be
easily and inexpensively added to the Avistar network, with
those new users concurrently added to the Avistar directory.
Additionally, our software makes call routing decisions to
minimize communications costs.

We believe our solution includes the following
benefits to our customers:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integrated video collaboration solution.We provide a fully integrated Internet
	protocol-based system that seamlessly allows individuals to make
	video calls, view broadcasts and create, store and access video
	content or other forms of data from the desktop.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Increased availability of knowledge within the
	enterprise.At many businesses,
	individuals who possess valuable knowledge often cannot
	effectively distribute their knowledge to the rest of the
	organization. Our system enables these businesses to access
	these individuals and disseminate their knowledge more
	efficiently and effectively by offering them the ability to
	call, broadcast or record from their desktops, and offering
	other users the ability to receive this information real-time,
	or access video recordings at a convenient time and location. In
	addition, our system gives every desktop the ability to create
	and publish valuable visual content that can be distributed
	inside and outside the organization to support employee and
	customer needs worldwide. The ability to spontaneously add
	additional participants to a call encourages personal
	connections and communications between individuals who otherwise
	might not enjoy this access.                                         
|
| |  | Improved productivity and revenue generation.Our system helps companies increase
	the productivity of their employees and speed up time critical
	decision-making. By creating a network of Avistar users, our
	customers can have face-to-face meetings within the enterprise
	and with customers and partners, without the costs and time
	delays of travel. Negotiations, sales, advisory services,
	decision-making and other persuasive communications are more
	effective when done face-to-face. Our solution allows
	interactions to happen in real-time, speeding up the manner in
	which business is done, freeing up time for employees, enhancing
	business-to-business communications, and potentially increasing
	revenue opportunities.                                                                                                                                                                                                                                                                                   
|
| |  | Enhanced customer and partner relationships.Our system allows companies to be more
	responsive to and develop stronger business relationships with
	their customers, partners and suppliers. An Avistar call is
	generally as easy and reliable as a telephone call and much more
	personal. One of our customers is providing Avistar networks to
	their clients and business partners in order to facilitate
	interactions and improve relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Opportunity to leverage existing and future
	communication infrastructures.We
	provide an open architecture that uses existing standards and is
	designed to take advantage of emerging standards. Our system
	integrates into our customers existing network
	communications infrastructure and supports the protocols a
	company may choose to use for video broadcasts, data sharing and
	transport of information, however, video quality varies
	depending on the protocol selected. Our system utilizes the data
	network for transporting stored video, and is designed to
	support real-time digital networking and video transmission. We
	have designed our system to continue to work with Internet
	protocol-based technologies as standards evolve and quality of
	service improves. We expect this flexibility, together with
	simplified software and hardware at the desktop, to allow
	companies to make effective use of their existing local area and
	wide area networks, as well as their next generation networks.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Better communication to face new business
	challenges such as globalization and distributed locations.Within global corporations,
	professionals collaborate daily with customers, partners and
	associates who are often located in different offices and/or
	different time zones. This has increasingly become the case as
	firms, due to economic and security concerns, have restricted
	travel, and have begun distributing their personnel across a
	more distributed set of locations, taking advantage of lower
	costs of real estate. In this context, critical information must
	be delivered on a timely basis and without confusion as smoothly
	as if colleagues were working together in person. By offering a
	combination of conference room and desktop systems,
	Avistars video product suite enables companies that are
	reducing travel and/or distributing their operations to easily
	and quickly connect small, remote offices to the central
	organization, and still benefit from face-to-face interaction.
	Based on our experience in helping existing customers choose
	their optimal configurations, we are able to advise new
	customers on the setups or configurations that will be most
	effective for a large central office, a small branch office or
	other remote locations.

System Architecture and Technology

Our networked video system is based on our fourth
major release of our open architecture, which enables users to
communicate visually using various networking protocols and
transport media, including the Internet. We developed our
architecture to address the necessary elements of a complete
video-enabled collaboration solution.

We believe that the following technical factors
will transform and consolidate the existing video collaboration
applications marketplace, creating a strong need for a software
platform that will support this consolidation and evolution:



| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | improved compression technologies;                                   
|
| |  | widespread proliferation of broadband
	infrastructure;               
|
| |  | developing availability of converged audio, video
	and data networks;
|
| |  | improved computer processing speeds; and                             
|
| |  | adoption of critical digital video standards.                        

Our software platform supports this consolidation
by integrating the audio, video and data transport standards,
including the video standard for television in the United States
and Europe, a standard for compressed digital video storage and
distribution, the video conferencing standard using public
switched networks, an audio and video conferencing standard
using the Internet protocol, and a proprietary video compression
protocol used for Internet protocol streaming video.

We believe our AvistarVOSTM video
operating system positions us to lead the transformation
described above. Further, we provide a suite of collaboration
applications that seamlessly operate with the
AvistarVOSTMsystem allowing users to access this
functionality in an easy and intuitive manner. We expect to make
this platform more accessible to developers and to allow
integration with other applications and network hardware.

Our system uses TCP/ IP, the standard Internet
protocol, for initiating video calls, scheduling and starting
broadcast presentations, and for managing the creation and
access of stored video materials. In addition, we use TCP/ IP
for overall systems and network management throughout our
software platform. This approach provides us with connectivity
throughout the enterprise and allows us to leverage existing
Internet infrastructure. For delivery of live local area network
high-quality video streams with low delays, we use traditional
circuit switched technologies, including our own Avistar network
technology. We use our gateways to translate between the various
network technologies used in our system. These gateways are
managed and controlled by our systems software with TCP/
IP-based protocols.

Each Avistar desktop functions as a node on the
network, like personal computers, printers or file servers on a
local area network. Just as color printers and file servers are
often shared network resources on the local

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area network, the more costly equipment in an
Avistar system, such as servers, switches, and the compression
and decompression equipment component of our gateways, are
centralized and made available to multiple users. Network nodes
and resources, like those of a data network, are managed through
centralized, Internet protocol-based applications and
administration tools, such as Internet-based reports of video
call activity.


Because of the tight integration of various video
network components, namely, the Avistar Switch, Media Server,
Conference Center, Broadcast Podium and gateways, our
architecture has the following key features:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Switched services:Our video network employs a switched
	architecture to ensure that our system can scale to support
	large numbers of users. At the center of the network is an
	Avistar switch, which functions for video networking like the
	local area network switch functions for data networks. With our
	switch, bandwidth for video- enabled communication is available
	on demand so that two or more users participating in a video
	call automatically have the bandwidth required for continuous
	video and audio, with virtually no delay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Network management:The AvistarVOSTM system
	utilizes open protocols for call set-up, call control and
	directory services. It also complies with standards and
	interfaces and connects with video networks through shared
	Avistar gateways, which are further connected via private or
	public telephony or TCP/ IP networks. Servers communicate
	through Avistars signaling system for video protocol, SSV,
	which is based on TCP/ IP, the standard Internet protocol.
	Through this signaling system, servers exchange configuration
	information and allocate call resources during call set-up, and
	exchange network status information. The signaling system
	selects the optimal route for all video calls, minimizing call
	costs and performance demands on wide area network resources.
	Most videoconferencing equipment using industry standard
	compression technologies also can communicate with the Avistar
	network.                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Transport standard independence:Our system automatically selects the
	appropriate transport standards for transmitting information
	over the network, to deliver the highest quality video possible
	and full duplex audio in the most efficient manner. For example,
	AvistarVOSTM software automatically exchanges
	information among servers and switches to determine the best
	network route for video calls, which incorporates all available
	paths using standards-compliant transmission methods. For the
	transport of video over a local area network, our system
	currently uses existing spare Ethernet wires to deliver
	standards-compliant television quality signals. This method of
	transport keeps video signals clear without interfering with
	traffic on the data network, and provides for local area network
	calls with no incremental communications cost. In a wide area
	network, Avistar has only slightly lower than television quality
	for real-time calls and broadcasts, because it uses industry
	video compression standards across the public telephony network
	or a customers private networks. For the transmission of
	recorded content on corporate data networks or via the Internet,
	our system uses standard digital storage formats and transport
	technologies.
|
| |  | Expandable to thousands of users:Because shared resources, such as
	servers, are attached to the Avistar switch and are managed
	through the data network, new users and new capabilities can be
	added without replacing existing infrastructure and simply
	adding video software and hardware at each desktop. Just as
	local area network switches and public telephony networks can be
	linked together without the use of routers, Avistar switches can
	be similarly linked without the use of video network gateways.
	As a result, customers can easily add capacity as their needs
	grow.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Evolves with digital technology:Our AvistarVOSTM software
	is designed to facilitate utilization of all-digital, local area
	networks, including Internet protocol video transmission, when
	sufficient bandwidth and quality of service are available. Our
	system will also maintain compatibility with existing networks.
	To enable the highest quality video possible today given most
	customers infrastructure, we use circuit switching in the
	local area network. Nevertheless, our AvistarVOSTM
	system is designed to enable us to adopt additional Internet
	protocol-based standards, allowing evolution of the transport of
	audio and video on the customers local area data network.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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System Products and Applications

Our system products and applications consist of
shared resources accessible to the entire Avistar network from
desktop and conference room users.

Shared Resources

Like the architecture of data networks, our
system is designed to maximize the use of shared resources on
the network. This configuration results in a thin client, or a
desktop that is not burdened with memory or processor intensive
software and hardware. Each user can access higher quality
software, gateways, multi-point conference centers, media
servers and video broadcasts with lower per user acquisition and
management costs than is possible with non-networked video
solutions. These shared resources consist of the following
products and applications:



| |                                                   
| | --------------------------------------------------
| | Local Area Network and Wide Area Network
	Products



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Avistar Switch.At the center of each local area
	network Avistar system is an Avistar switch that supports up to
	120 Avistar desktop users and/or conference rooms. The switch
	connects video calls placed among Avistar desktop and conference
	room users, and allows those users to access shared resources
	such as Avistar conference centers, media servers and gateways,
	as well as television broadcasts and VCRs. Each Avistar switch
	includes Windows NT-based Avistar server software that provides
	application services and network management. Additional switches
	can be connected together in a building or campus to scale to
	many hundreds or even thousands of users.
|
| |  | The Avistar Gateway.Connectivity to the wide area network
	is provided via the Avistar H.320 and H.323 gateways. The
	gateways support the H.320 and H.323 video compression
	standards, using public telephony or TCP/ IP networks or
	customers private network. With our gateways, users across
	the wide area network can communicate with another Avistar
	network or with other H.320 and H.323 compliant desktop or room
	systems.                                                                                                                                                                                                                                                        



| |                             
| | ----------------------------
| | Server and Software Products



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Avistar Conference Center.Our conference center enables
	multipoint conferences for up to four video sources, with
	continuous presence that allows all participants to see and hear
	one another continuously and simultaneously. Multiple conference
	centers can be installed on each switch to support a
	corresponding number of simultaneous multi-party calls.                                                                                                                                                                        
|
| |  | The Avistar Media Server.Our media server allows users to
	create, publish and view video content from any desktop or
	conference room. Any form of video, including a four-way video
	call, can be saved on the media server in high quality digital
	MPEG format. MPEG is the commonly used Moving Pictures Expert
	Group standard for compressed digital video storage and
	distribution. Any user can retrieve and replay video at any time
	from the media server using the desktop Avistar interface or any
	industry standard MPEG player.
|
| |  | The Avistar Broadcast Podium.Our broadcast podium allows Avistar
	desktop or conference room users to broadcast one-way, real-time
	presentations to an audience of other Avistar users at both
	local and remote sites. The broadcast podium allows an
	individual or a conference call to be broadcast to thousands of
	users, and, via third party products, to be streamed
	simultaneously over the Internet.                                                                                                                                



| |                                      
| | -------------------------------------
| | Internet Protocol-Based
	Applications



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Avistar Directory Software.Our directories allow a user to place
	a video call by simply clicking on a name in the users
	directory of local and remote Avistar users. If the other party
	is logged-on, our system will route the call to the correct
	location over the local area network, or over the public
	telephony lines or the customers private network in the
	wide area. The user can look up addresses in private and global
	address books, utilize browser style type-in boxes, and access
	speed-dial direct

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | connect buttons. This server-based directory
	simplifies administration and allows users to get started
	quickly without having to manually enter many video phone
	numbers into their desktop directory.                                                                                                                                                                                                                                                      
|
| |  | Shareboard®Software. Our Shareboard application allows users to collaborate
	on graphics, data, or text during a video call. By clicking on
	the Share button, users are linked to the Shareboard data
	sharing application. Users can share any application window or
	image with all conference participants, see all users
	color-keyed pointers and text and paintbrush annotations, and
	save or print shared images from any desktop or conference room.
|
| |  | Avistar Call Reporting System.With our Web-based call reporting
	system, our customers can track local and wide area network
	calls logged by each Avistar server. Reports show call details,
	device usage and calls by user, all viewable from any Web
	browser. Reports can be customized and stored for future or
	specialized analysis.                                                                                                                   

Desktop and Conference Room Client
Products

Avistar Conference.We deliver a complete system that
includes all hardware and software components required to
video-enable desktops and conference rooms. The standard Avistar
two-way desktop system consists of the following hardware
components:



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A high resolution camera with built-in
	directional microphone;                                                                                                                                                               
|
| |  | External speakers;                                                                                                                                                                                                            
|
| |  | A video overlay card for a desktop or conference
	room that allows video to be viewed from a computer; and                                                                                                                    
|
| |  | A video network interface unit with ports for
	camera, microphone, speakers, auxiliary video and audio, headset
	and telephone sets, built in echo-cancellation circuitry and
	full duplex audio, without requiring a headset.

Avistar Viewer.Our
viewer is designed for organizations that need to provide users
with view-only access to important video sources. Users can
monitor a selection of real-time, broadcast video sources, such
as training courses or senior management meetings, watch live
broadcasts, such as CNN or CNBC, or select and view stored video
content from their desktops. Customers can deploy Avistar
viewers in networks of only one-way users, or add them to mixed
networks that already include Avistar two-way users. One-way
users can easily be upgraded to two-way.

Avistar Room Systems.We deliver complete video systems for
a wide range of room sizes and layouts. We believe that the key
advantages of our system are that the interface used in a
conference room system is consistent with the interface used on
individual desktops, and that it allows for all forms of
video-enabled communications: interactive video calling, content
creation and publishing, broadcasting and video-on-demand.
Therefore, users are familiar with the controls and do not need
additional training to operate the room system, nor do they need
an additional technician to set-up and connect conference room
calls.

Avistar Digital Viewer.The Digital Viewer allows users to
view streaming presentations from any Avistar presentation,
Avistar broadcast source or other RealNetworks®/
RealVideo®-format video source. Active presentations
can be easily viewed by clicking on a list of available
presentations. Users can also view streaming content available
over the Internet through their Avistar Digital Viewer.

The Avistar Strategy

As a pioneer in networked video, our objective is
to enhance our leadership position in the enterprise video
software industry. To achieve this goal, our strategies are to:

Target, develop and expand vertical markets.We concentrate on selling our systems
into vertical markets, beginning with financial services and
manufacturing. Because communities of users in vertical markets
collaborate on a regular basis and have similar needs, focusing
on individual markets allows us to better understand
collaboration patterns and communication needs of these markets,
and promotes broad-

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based adoption among organizations in these
markets. Achieving a higher penetration rate, and thus
increasing the number of users within a given community,
enhances the network effect and related benefits to
individual users. In the future, we intend to also offer our
applications as hosted services (a Collaboration
Application Service Provider) in order to further drive
penetration, and to provide solutions that address business
problems specific to a vertical market. To do this, we plan to
implement complete video communication networks and charge on a
usage basis.


Expand the number of users and their usage
rapidly, and reduce the total cost of ownership to the
enterprise.We believe that our
existing customers represent a potentially significant source of
revenue as they implement and expand our systems within and
beyond their organizations. As customers use our system, we have
found that they often encourage other affiliated business units,
as well as their clients, suppliers and partners to consider
purchasing an Avistar system. In some cases, customers have gone
a step further and purchased an Avistar system for their clients
in order to improve their relationship with their clients.
Further, to drive daily increases in video usage, we collaborate
with our customers on applications and new features. To increase
user acceptance and network proliferation, we have lowered, and
intend to continue to lower, the total cost of ownership to our
customers, including the initial purchase price, installation,
maintenance and support, and associated communication costs.

Increase our sales force and add appropriate
distribution partners.We plan to
continue to use our direct sales force to increase penetration
in existing vertical markets and to open new vertical markets.
Our sales force has a high degree of industry knowledge and
works closely with our customers to design industry-specific
uses for our system, thus driving early acceptance and
proliferation. As each vertical market matures, we intend to add
indirect distribution channels such as communication service
providers, equipment vendors, systems integrators or value-added
resellers.

Establish Avistar as the Platform
for integrated collaboration.We
believe that our video operating system, or
AvistarVOSTM, is a software platform that allows
several video and data oriented applications, provided by other
companies, to be integrated with Avistars application set
to provide customers with a much fuller and comprehensive set of
collaboration applications. We intend to license the
AvistarVOSTM system and its modules to promote such
integration, as well as develop partnerships to foster mutually
beneficial relationships with a variety of world-class
technology and market players. By integrating our software with
other best-of-breed technologies, and enabling other innovators
to license our intellectual capital, we believe that our
AvistarVOSTM software can become the preferred
platform for video collaboration. For example, in 2001 we
partnered with Syntegra, a consulting and systems integration
business of British Telecommunications Inc., to integrate our
software with Syntegras leading ITS voice trading platform
to achieve the seamless integration of voice and video
communications directly from the traders desktop.

Establish our technology as the standard for
networked video.We believe that our
open, standards-based architecture allows us to embrace new
technology and increases in the availability of bandwidth, while
safeguarding the coherency, serviceability and scalability of
our customers existing Avistar investments. In order to
increase the usage and visibility of our system, we intend to
license our extensive intellectual property portfolio. We
believe this will support our effort to establish the Avistar
architecture as the industry standard for networked video
applications. We also intend to continue our efforts to provide
the highest quality network access and availability, computer
integration and maintainability. We believe our architecture
provides a natural migration path as local data networks evolve
to support high-bandwidth video transmission with an appropriate
quality of service. We will continue to build upon our
software-based business model. We will continue to emphasize the
software components of our revenue and, over time, and as third
party technology becomes more widely available, we intend to
de-emphasize the lower margin hardware components of our
revenue. We have focused on creating a system that can be easily
installed and supported by our customers and partners.
Correspondingly, we will continue to outsource more of the
manufacturing, final assembly, distribution, installation and
support of our system in order to increase the higher margin
software and maintenance components of our revenue. In addition,
we intend to partner with other companies to expand our
application functionality, to utilize our
AvistarVOSTM system to manage video hardware
endpoints from other companies, and separately license our
software technology. For example, in 2001 we introduced the
AC500, a

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fully digital client utilizing a third-party
endpoint managed by our AvistarVOSTM software, which
integrates into existing Avistar networks.


Customers

As of December 31, 2001, we have licensed
and recognized revenue with respect to over 6,000 users of our
customers at approximately 300 sites. These represent 118 cities
in 33 countries. Because many of our customers operate on a
decentralized basis, decisions to purchase our systems are often
made independently by individual business units. As such, a
single company may represent several separate accounts. The
following is a list of some of the customers that, together with
their affiliates, generated the largest portion of our revenue
since our inception:



| |                     
| | --------------------
| | Bank of America     
| | Boeing Corporation  
| | Deutsche Bank AG    
| | Goldman, Sachs & Co.
| | JP Morgan Chase     
| | UBS Warburg LLC     



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Each of Deutsche Bank AG, JP Morgan Chase, UBS
	Warburg LLC and their affiliates, accounted for more than 10% of
	our revenue for 2001. These entities collectively accounted for
	65% of our 2001 revenue.

International revenue, which consists of sales to
customers with operations principally in Western Europe and Asia
comprised 47%, 46% and 19% of total revenue for the years ended
December 31, 2001, 2000 and 1999, respectively. For the
years ended December 31, 2001, 2000 and 1999, respectively,
international revenues to customers in the United Kingdom
accounted for 21%, 28% and 16%, respectively, of total revenues.

Segment Information

We operate through two segments:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Avistar Communications Corporation engages in the
	design, development, manufacturing, sale and marketing of
	networked video communications products.                                      
|
| |  | Collaboration Properties, Inc., our wholly owned
	subsidiary, engages in the development, prosecution,
	maintenance, support and licensing of the intellectual property
	used in our system.

To date, Collaboration Properties, Inc. has not
signed any material license agreements.

Sales and Marketing

Sales.We have a
direct sales force in the United States. Our direct sales force
consists of regional sales managers and client development
managers located in Redwood Shores, California and New York, New
York. Regional sales managers have direct responsibility for
selling and account management, while client development
managers are responsible for system utilization and expansion at
customer sites. Sales efforts are supported by a telesales
program, which generates qualified leads for the regional sales
managers. Our international direct sales force is managed from
our office in London, England, and includes regional sales
managers and client development managers.

Marketing.Our
marketing efforts are directed towards select vertical markets,
with initial emphasis on financial services and manufacturing.
We have identified specific collaboration needs for enterprises
in each of these vertical markets. We then help our customers
understand how our system can satisfy these needs and thereby
increase the number of users. We emphasize initiatives to
develop market awareness of our system and services as well as
increased usage of our installed systems. We also use marketing
programs to build our corporate image.

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Installation, Maintenance, Training and
Support Services

We provide a wide variety of services for
installation and design of Avistar video networks, including
workflow analysis to identify patterns of collaboration between
workgroups to determine the best configuration of networked
resources for the enterprise. We generally install our systems
for customers, although in an increasing number of cases,
follow-on orders are installed by our customers
information technology group or their services partner. In the
future, we expect installation of additional systems will
increasingly be performed by our customers or their services
partners.

Our maintenance services ensure that customers
benefit from the latest networked video technology through
software upgrades and expedited repair and replacement services.
Our customer support center provides voice and video call
assistance to Avistar users and administrators throughout the
world. On-site support is also available from each of our major
regional offices for a separate fee. In addition, training for
users is available onsite or at Avistar and for system
administrators at Avistar on a for-fee basis.

Backlog

The estimated backlog of product orders believed
to be firm was $2.3 million at December 31, 2001 and
$6.9 million at December 31, 2000. The reduction in
backlog reflects, in large part, the increasing tendency of our
customers to self-install their purchases, rather than
scheduling Avistar personnel to perform this task. We expect
most of the orders as of December 31, 2001 will be shipped
within the first two fiscal quarters of 2002. Backlog is not
necessarily indicative of past or future operating results.

Research and Development

We believe that strong system development
capabilities are essential to our strategy. Our research and
development efforts focus on enhancing our core technology,
developing additional applications, addressing emerging
technologies, standards and protocols, and engaging in patent
and licensing activities. Our system development team consists
of engineers and software developers with experience in video
and data networking, voice communications, video and data
compression, email and Internet technologies. We believe that
our diverse technical expertise contributes to the highly
integrated functionality of our system. Research and Development
expenses were $5.3 million in 2001, $4.1 million in 2000
and $2.7 million in 1999. We expect to devote a significant
amount of our resources to research and development in the
foreseeable future.

Manufacturing

We use contract manufacturers to perform
component purchasing and some material assembly. Our operations
staff develops manufacturing strategies and qualifies and audits
manufacturing processes and suppliers. We work with our contract
manufacturers to reduce manufacturing costs and to resolve
quality control issues. We believe our manufacturing strategy
enables us to utilize the manufacturing capabilities of our
contract manufacturers, while allowing us to focus on rapid
system development and deployment, software architecture and
development of video communication applications. We use third
party, commercially available camera components, microphones,
speakers and monitors for desktop and room systems, as well as
third party compression and decompression components for our
gateways.

Intellectual Property and Proprietary
Rights

Our ability to compete, and continue to provide
technological innovation depends substantially upon internally
developed technology. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as
licensing, non-disclosure and other agreements with our
consultants, suppliers, customers and employees, to protect our
technology. We believe that other factors such as the
technological and creative skills of our personnel, new system
developments, frequent system and feature enhancements and
reliable system support and maintenance are also essential to
maintaining our leadership position in technology.

We have pursued registration of our key
trademarks and service marks in the United States, the United
Kingdom and certain other European countries, and intend to
pursue additional registration in additional

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countries where we plan to establish a
significant business presence. We own several United States,
Canadian and United Kingdom registered trademarks, including the
Avistar logo and Shareboard.


Through Collaboration Properties, Inc., our
wholly owned subsidiary, as of December 31, 2001, we held
14 United States patents and 20 non-United States patents and 11
additional United States and non-United States patents had been
allowed. The patents that have been issued expire at varying
dates between 2013 and 2015. In addition, numerous patent
applications are pending in the United States and several other
jurisdictions. Specifically, these patent applications, most of
which relate to and claim priority from an application
originally filed in 1993, currently include both method and
apparatus claims. These patents and pending patent applications
disclose and/or claim aspects of our analog or digital desktop
video conferencing technology, video and multimedia storage
technology for messaging and publishing, directory services, and
public wide area networking access, switching and architecture.
A portion of these technologies is currently utilized in our
system. To date, we have focused on expanding our patent
portfolio and expediting patent issuance. We plan to continue
these efforts and to seek to license our patents to reinforce
the adoption of our technology.

We generally enter into confidentiality, license
and nondisclosure agreements with our employees, consultants,
prospective customers, licensees, and partners that seek to
limit the use and distribution of our proprietary materials, and
prohibit reverse-engineering of our proprietary technologies. In
addition, we control access to and distribution of our software,
documentation, and other proprietary information. Several of our
license agreements with our customers require us to place our
software source code into escrow. In these cases, these
agreements provide that these customers may be entitled to
retain copies of the software and will have a limited
non-exclusive right to use and/or reproduce, maintain, update,
enhance and produce derivative works of the software source code
under the terms of the agreements if we fail to cure a
contractual breach by us on a timely basis, or if we become the
subject of a bankruptcy or similar proceeding.

We maintain a strong working relationship with
vendors whom we identify as key suppliers, and assign preferred
provider status to these vendors under agreements that secure
ordering and extended warranty rights for us. These agreements
also generally include both marketing provisions under which
these vendors promote our system, and development forums under
which we have an opportunity to participate in the vendors
development plans to include features and functions that are
favorable to us.

Competition

The market for video collaboration products and
systems is highly competitive and fragmented. Until recently,
the market has been slow to develop, and primarily consisted of
room-based conferencing systems. As a result of advances in
technology, increases in communications capability, and
reductions in communications costs in the past several years,
the market is now characterized by many competitors, rapidly
changing technology, evolving user needs, developing industry
standards and protocols and the frequent introduction of new
products and services. Within the market for video collaboration
products and systems, we compete primarily with Polycom Inc.,
Tandberg Inc. and VCON Telecommunications Ltd.

We believe that the principal factors affecting
competition in our markets include:



| |   |                                                 
| | - | ------------------------------------------------
| |  | product features, functionality and scalability;
|
| |  | product quality and performance;                
|
| |  | product reliability and ease of installation;   
|
| |  | use of open standards;                          
|
| |  | quality of service and support;                 
|
| |  | company reputation and size; and                
|
| |  | price and overall cost of ownership.            

15



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Currently, our principal competitors are
companies that provide products and services in specific areas
where we offer our integrated system, such as:



| |   |                                                         
| | - | --------------------------------------------------------
| |  | room-based point-to-point video communication
	products;
|
| |  | desktop video communications products;                  
|
| |  | broadcast video products;                               
|
| |  | video retrieval and viewing products; and               
|
| |  | desktop content creation products.                      

While a number of companies have marketed
applications that enable users to use individual features
similar to our system, we do not believe that any single
competitor currently offers a fully integrated system that
competes with all the features of our system. We believe these
companies in many cases can also represent complementary
opportunities to extend the reach of an Avistar system by
potentially expanding the market for video networking.

We expect competition to increase significantly
in the future from existing providers of specialized video
communications products, and from companies that may enter our
existing or future markets, possibly including major telephone
companies or communications equipment providers. These companies
may develop similar or substitute solutions, which may be less
costly or provide better performance or functionality than our
systems. A number of our existing and potential competitors have
longer operating histories, significantly greater financial,
marketing, service, support, technical and other resources,
significantly greater name recognition and a larger installed
base of customers than we do. In addition, many of our current
or potential competitors have well-established relationships
with our current and potential customers, and have extensive
knowledge of our industry. It is possible that new competitors
or alliances among competitors may emerge and rapidly acquire
significant market share. To be successful, we must continue to
respond promptly and effectively to the challenges of developing
customer requirements, technological change and
competitors innovations. Accordingly, we cannot predict
what our relative competitive position will be as the market
evolves for video collaboration products and services.

Employees

As of December 31, 2001, we had 79
employees, including personnel dedicated to research and
development, customer services, including installation and
support services, sales and marketing, and finance and
administration. Our future performance depends in significant
part upon the continued service of our key technical, sales and
marketing, and senior management personnel, none of whom is
obligated to remain with us by an employment agreement. The loss
of the services of one or more of our key employees could harm
our business.

Executive Officers

Our officers and their ages as of
December 31, 2001 are as follows:

|                    |  |     |    |          |  |                                                           
|------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Gerald J. Burnett   |  |     | 59 |          |  | Chairman of the Board and Chief Executive Officer         
|William L. Campbell |  |     | 53 |          |  | Vice Chairman, and Executive Vice President and
	Secretary
|Robert J. Habig     |  |     | 47 |          |  | Chief Financial Officer                                   
|J. Chris Lauwers    |  |     | 41 |          |  | Chief Technology Officer                                  
|James P. Hughes     |  |     | 41 |          |  | President                                                 
|Bruce Gallaher      |  |     | 40 |          |  | Chief Marketing Officer                                   
|Stephen F. Arisco   |  |     | 43 |          |  | Vice President, Operations and Customer Support           

Gerald J. Burnettis
one of our founders and has been Chairman of our Board of
Directors, and our Chief Executive Officer since March 2000. He
has been a director of Collaboration Properties since December
1997.

16



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He served as Chief Executive Officer of Avistar
Systems from December 1998 until March of 2000. From 1993 to
1997, he was a director of Avistar Systems or a principal of its
predecessor limited partnership. He is a member of the
Corporation (Board of Trustees) of the Massachusetts Institute
of Technology. Dr. Burnett holds a B.S. and an M.S. from
the Massachusetts Institute of Technology in electrical
engineering and computer science, and a Ph.D. from Princeton
University in computer science and communications.


William L. Campbellis one of our founders and has been a
member of our Board of Directors and our Executive Vice
President since March 2000. He has been our Corporate Secretary
since June 2001 and served as our Chief Financial Officer from
April 2001 to May 2001. He has been Chairman, President and
Chief Executive Officer of Collaboration Properties since
December 1997. Mr. Campbell holds a B.S. in general
engineering from the U.S. Military Academy and an M.S. in
management from the Sloan School of the Massachusetts Institute
of Technology.

Robert J. Habighas
been our Chief Financial Officer since May 2001. Previously, he
served as Chief Financial Officer at Think3, Inc., a private
computer-aided design software company from March 1999 to
February 2001, as Chief Financial Officer at CrossWorlds
Software, an enterprise software company from July 1998 to June
1999, as Executive Vice President at First Data Corporation, a
financial transactions processing company, from May 1997 to June
1998, as Chief Financial Officer at Allied Signal Corporation,
an automotive, aerospace and chemical manufacturing company from
1994 to 1997, and held various positions with PepsiCo from 1979
to 1994. He holds an M.B.A. from the Simon Graduate School of
Business at the University of Rochester and a B.A. in economics
and business from Lafayette College.

J.Chris Lauwershas
been our Chief Technology Officer since February 2000. He served
as our Vice President of Engineering of Avistar Systems from
1994 to 2000. He previously served as Principal Software
Architect at Vicor Inc., a private e-business product solutions
and engineering consulting company, from 1990 to 1994, and as a
research associate at Olivetti Research Center from 1987 to
1990. He holds a B.S. in electrical engineering from the
Katholieke Universiteit Leuven of Belgium. He also holds an M.S.
and a Ph.D. in electrical engineering and computer science from
Stanford University.

James P. Hugheshas
been our President since July 2001. Previously, he served as
President of Avistar Systems from January 2000 to July 2001, and
Vice President of Sales of Avistar Systems from 1994 to 2000.
From 1991 through 1993, he served as Director of Business
Development at Aurum Software, Inc., a business software and
services company. Mr. Hughes holds a B.S. and an M.B.A. in
Marketing from the University of Santa Clara.

Bruce D. Gallaherhas been our Chief Marketing Officer
since June 2001. Before joining us, he co-founded Greenlight.com
in August 1999 (the company was subsequently acquired by
Carsdirect.com in February 2001). Mr. Gallaher was the
co-founder of Petstore.com from September 1998 to June 1999.
Previously, Mr. Gallaher held management positions at Zip2,
a private media technology company from March 1997 to December
1998, Nissan North America from December 1990 to March 1997, The
Boston Consulting Group from September 1988 to December 1990,
and General Dynamics Space Systems from September 1983 to July
1986. He holds a B.S. in mechanical engineering from the
University of Washington and an M.B.A. from Stanford University.

Stephen F. Ariscohas been our Vice President of
Operations and Customer Service since February 2000. He
previously served as Director of Operations and Customer Service
of Avistar Systems from December 1997 to January 2000. From 1987
through December 1997, he was Director of Customer Service and
Operations at TRW Financial Systems, a systems integration
company. He holds a certificate of study from H.C. Wilcox
Vocational Technical School and an associate degree from Diablo
Valley College.




Item 2.     Properties

Our corporate headquarters are located in Redwood
Shores, California, where we occupy approximately 17,000 square
feet under a lease that expires in September 2003. We believe
that this facility will be sufficient to meet our needs through
the next 12 months. In addition, we lease a total of
approximately 18,000 square feet of office space in Palo Alto,
California; Incline Village, Nevada; New York, New York; Dallas,
Texas; and

17



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London, England. The Palo Alto facility is a
distribution warehouse for inventory, with final assembly and
test capabilities.





Item 3.     Legal
Proceedings

We are not currently involved in any material
litigation.




Item 4.     Submission
of Matters to a Vote of Security Holders

None.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Our common stock has been traded on the NASDAQ
National Market under the symbol AVSR since
August 17, 2000. Prior to such time, there was no public
market for our Common Stock. The following table sets forth for
the period indicated the high and low closing sale prices for
our common stock, as reported by the NASDAQ National Market.

|               |  |              |      |              |  |      |      |     |  |   |       |  |  |   |      | 
|-------------- |  | ------------ | ---- | ------------ |  | ---- | ---- | --- |  | - | ----- |  |  | - | ---- | 
|               |  |              |      |             
|               |  | Year Ended   |      | Year Ended  
|               |  | December 31, |      | December 31,
|               |  | 2001         |      | 2000        
|               |  |              |      |             
|               |  | High         |      | Low          |  | High |      | Low
|               |  |              |      |              |  |      |      |    
|First Quarter  |  | $            | 7.59 |              |  | $    | 1.00 |     |  |   | N/A   |  |  |   | N/A  | 
|Second Quarter |  | $            | 2.99 |              |  | $    | 1.26 |     |  |   | N/A   |  |  |   | N/A  | 
|Third Quarter  |  | $            | 2.80 |              |  | $    | 1.30 |     |  | $ | 12.00 |  |  | $ | 5.88 | 
|Fourth Quarter |  | $            | 2.90 |              |  | $    | 1.95 |     |  | $ | 7.50  |  |  | $ | 3.69 | 

On December 31, 2001, the last reported sale
price of our common stock on the NASDAQ National Market was
$2.00 per share. As of December 31, 2001 there were 78
holders of record of our common stock.

Dividend Policy

We have never paid any cash dividends on our
common stock, and we do not anticipate paying cash dividends in
the foreseeable future.

18



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##### Table of Contents






Item 6.     Selected
Financial Data

The selected combined and consolidated financial
data below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our combined and
consolidated financial statements and notes thereto. The
selected statements of operations data for the years ended
December 31, 2001, 2000 and 1999, and the selected balance
sheet data as of December 31, 2001 and 2000, are derived
from, and are qualified by reference to, the audited financial
statements included elsewhere in this annual report on
Form 10-K. The selected statement of operations data for
the years ended December 31, 1997 and 1998 and the selected
balance sheet data as of December 31, 1997, 1998, and 1999
is derived from our financial statements not included in the
annual report on Form 10-K. Prior to 1998, we did not have
any common stock outstanding because we were organized as
Avistar Systems, Limited Partnership, our predecessor.
Accordingly, no per share data have been presented for the
period prior to 1998. In our opinion, the audited financial
statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
results of operations for these periods. The historical results
presented below are not necessarily indicative of future results.

|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |        |        |  
|------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ------ | -
|                                                        |                                             |                                      
|                                                        |                                             | Year Ended December 31,              
|                                                        |                                             |                                      
|                                                        |                                             | 2001                                  |        | 2000   |        | 1999 |        | 1998   |        | 1997
|                                                        |                                             |                                       |        |        |        |      |        |        |        |     
|                                                        |                                             |                                      
|                                                        |                                             | (In thousands, except per share data)
|Statements of Operations Data                           |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Revenue:                                                |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        | Product                                     |                                       | $      | 11,366 |        |      | $      | 16,925 |        |      | $      | 6,146  |       |   | $      | 3,342  |       |   | $      | 3,196  |       
|                                                        | Services, maintenance and support           |                                       |        | 4,830  |        |      |        | 4,489  |        |      |        | 3,227  |       |   |        | 1,786  |       |   |        | 1,861  |       
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        |                                             | Total revenue                         |        |        | 16,196 |      |        |        | 21,414 |      |        |        | 9,373 |   |        |        | 5,128 |   |        |        | 5,057  |  
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Cost of revenue:                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        | Product                                     |                                       |        | 4,961  |        |      |        | 7,287  |        |      |        | 3,190  |       |   |        | 1,959  |       |   |        | 2,661  |       
|                                                        | Services, maintenance and support           |                                       |        | 2,683  |        |      |        | 2,167  |        |      |        | 1,697  |       |   |        | 1,443  |       |   |        | 2,354  |       
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        |                                             | Total cost of revenue                 |        |        | 7,644  |      |        |        | 9,454  |      |        |        | 4,887 |   |        |        | 3,402 |   |        |        | 5,015  |  
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Gross margin                                            |                                             |                                       | 8,552  |        |        |      | 11,960 |        |        |      | 4,486  |        |       |   | 1,726  |        |       |   | 42     |       
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Operating expenses:                                     |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        | Research and development                    |                                       |        | 5,280  |        |      |        | 4,123  |        |      |        | 2,718  |       |   |        | 3,348  |       |   |        | 3,347  |       
|                                                        | Sales and marketing                         |                                       |        | 6,066  |        |      |        | 5,627  |        |      |        | 3,649  |       |   |        | 3,152  |       |   |        | 2,513  |       
|                                                        | General and administrative                  |                                       |        | 5,002  |        |      |        | 4,283  |        |      |        | 2,872  |       |   |        | 2,289  |       |   |        | 1,182  |       
|                                                        | Amortization of deferred stock compensation |                                       |        | 898    |        |      |        | 2,049  |        |      |        | 618    |       |   |        |       |       |   |        |       |       
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        |                                             | Total operating expenses              |        |        | 17,246 |      |        |        | 16,082 |      |        |        | 9,857 |   |        |        | 8,789 |   |        |        | 7,042  |  
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        | Loss from operations                        |                                       |        | (8,694 | )      |      |        | (4,122 | )      |      |        | (5,371 | )     |   |        | (7,063 | )     |   |        | (7,000 | )     
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Other income (expenses):                                |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        | Interest expense                            |                                       |        | (2     | )      |      |        | (1,184 | )      |      |        | (972   | )     |   |        | (276   | )     |   |        | (2,394 | )     
|                                                        | Interest income                             |                                       |        | 758    |        |      |        | 650    |        |      |        | 54     |       |   |        | 1      |       |   |        | 1      |       
|                                                        | Other, net                                  |                                       |        |       |        |      |        |       |        |      |        | (40    | )     |   |        | (286   | )     |   |        | (288   | )     
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                        |                                             | Total other income (expense)          |        |        | 756    |      |        |        | (534   | )    |        |        | (958  | ) |        |        | (561  | ) |        |        | (2,681 | )
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Loss before provision for (recovery from) income
	taxes |                                             |                                       | (7,938 | )      |        |      | (4,656 | )      |        |      | (6,329 | )      |       |   | (7,624 | )      |       |   | (9,681 | )     
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Provision for (recovery from) income taxes              |                                             |                                       | (19    | )      |        |      | 15     |        |        | $    | 21     |        |       | $ | 17     |        |       | $ | 22     |       
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Net Loss                                                |                                             | $                                     | (7,919 | )      |        | $    | (4,671 | )      |        | $    | (6,350 | )      |       | $ | (7,641 | )      |       | $ | (9,703 | )     
|                                                        |                                             |                                       |        |        |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       

19



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|                                                                                  |                                                               |                                       |        |        |   |      |       |         |   |      |        |        |   |   |        |        |   |  |     |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------- | ------ | ------ | - | ---- | ----- | ------- | - | ---- | ------ | ------ | - | - | ------ | ------ | - |  | --- | ------ | -
|                                                                                  |                                                               |                                      
|                                                                                  |                                                               | Year Ended December 31,              
|                                                                                  |                                                               |                                      
|                                                                                  |                                                               | 2001                                  |        | 2000   |   | 1999 |       | 1998    |   | 1997
|                                                                                  |                                                               |                                       |        |        |   |      |       |         |   |     
|                                                                                  |                                                               |                                      
|                                                                                  |                                                               | (In thousands, except per share data)
|                                                                                  | Beneficial conversion related to convertible
	preferred stock |                                       |        |        |   |      | $     | (37,783 | ) |      |        |        |   |   |        |        |   |  |     |        |  
|                                                                                  |                                                               |                                       |        |        |   |      |       |         |   |      |        |        |   |   |        |        |   |  |     |       
|                                                                                  | Net loss attributable to common stockholders                  |                                       | $      | (7,919 | ) |      | $     | (42,454 | ) |      | $      | (6,350 | ) |   | $      | (7,641 | ) |  | $   | (9,703 | )
|                                                                                  |                                                               |                                       |        |        |   |      |       |         |   |      |        |        |   |   |        |        |   |  |     |       
|Net loss per share  basic and diluted                                            |                                                               | $                                     | (0.31  | )      |   | $    | (4.46 | )       |   | $    | (54.27 | )      |   | $ | (86.83 | )      |   |  | N/A |       
|                                                                                  |                                                               |                                       |        |        |   |      |       |         |   |      |        |        |   |   |        |        |   |  |     |       
|Weighted average shares used in calculating basic
	and diluted net loss per share |                                                               |                                       | 25,168 |        |   |      | 9,510 |         |   |      | 117    |        |   |   | 88     |        |   |  | N/A |       

|                                                           |                    |                         |        |      |  |      |        |      |  |      |        |       |  |   |        |       |  |   |       |     | 
|---------------------------------------------------------- | ------------------ | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ----- |  | - | ------ | ----- |  | - | ----- | --- | 
|                                                           |                    |                        
|                                                           |                    | Year Ended December 31,
|                                                           |                    |                        
|                                                           |                    | 2001                    |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                                           |                    |                         |        |      |  |      |        |      |  |     
|                                                           |                    |                        
|                                                           |                    | (In thousands)         
|Balance Sheet Data                                         |                    |                         |        |      |  |      |        |      |  |      |        |       |  |   |        |       |  |   |       |    
|Cash and cash equivalents                                  |                    | $                       | 7,455  |      |  | $    | 21,660 |      |  | $    | 6,232  |       |  | $ | 139    |       |  | $ | 15    |    
|Short-term investments                                     |                    |                         | 5,831  |      |  |      |       |      |  |      |       |       |  |   |       |       |  |   |      |    
|Working capital (deficit)                                  |                    |                         | 14,039 |      |  |      | 21,423 |      |  |      | 1,656  |       |  |   | (2,881 | )     |  |   | (910  | )  
|Total assets                                               |                    |                         | 19,265 |      |  |      | 28,303 |      |  |      | 10,523 |       |  |   | 2,768  |       |  |   | 4,333 |    
|Notes payable and accrued interest due to related
	parties |                    |                         |        |      |  |      |        |      |  |      |        |       |  |   |        |       |  |   |       |    
|                                                           | Current portion    |                         |        |     |  |      |        |     |  |      |        | 2,533 |  |   |        | 1,300 |  |   |       | 429 | 
|                                                           | Noncurrent portion |                         |        |     |  |      |        |     |  |      |        | 9,190 |  |   |        | 5,152 |  |   |       |    | 
|Preferred stock                                            |                    |                         |       |      |  |      |       |      |  |      | 17     |       |  |   | 16     |       |  |   | 16    |    
|Stockholders equity (deficit)                             |                    |                         | 15,041 |      |  |      | 21,764 |      |  |      | (6,997 | )     |  |   | (7,609 | )     |  |   | 36    |    






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the Consolidated and Combined Financial
Statements and Notes thereto included elsewhere in this report
on Form 10-K. Certain statements in this
Managements Discussion and Analysis of Financial
Condition and Results of Operations are forward looking
statements. These statements relate to future events or our
future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our or our
industrys actual results, levels of activity, performance
or achievements to be materially different from any future
results, levels of activity, performance or achievements
expressed or implied by the forward looking statements. These
risks and other factors include those listed under Factors
Affecting Future Operating Results and elsewhere in this
report on Form 10-K. In some cases, you can identify
forward-looking statements by terminology such as
may, will, should,
expects, plans, anticipates,
believes, estimates,
predicts, potential,
continue or the negative of these terms or other
comparable terminology. These statements are only predictions.
Actual events or results may differ materially.

Although we believe that the expectations
reflected in the forward looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of
these forward-looking statements. We are under no duty to update
any of the forward-looking statements after the date of this
report on Form 10-K to conform our prior statements to
actual results.

Overview

We operate through two segments. Avistar
Communications engages in the design, development,
manufacturing, sale and marketing of networked video
communications products, and associated support services, and
Collaboration Properties, our wholly owned subsidiary, engages
in the development, prosecution, maintenance, support and
licensing of the intellectual property used in our system.

20



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In July 2001, the Board of Directors of Avistar
Communications and the board of directors of Avistar Systems, a
wholly owned subsidiary of Avistar Communications, approved the
merger of Avistar Systems with and into Avistar Communications.
The merger was completed in July 2001.

We operate on a 52-week fiscal year ending
December 31. Our Consolidated and Combined Financial
Statements are prepared in accordance with accounting principles
generally accepted in the United States, which require us to
make estimates and assumptions (see Note 2 to the Consolidated
and Combined Financial Statements).

Revenue

We derive product revenue principally from the
sale and licensing of our video-enabled networked communications
system, consisting of a suite of Avistar-designed software and
hardware products, including third party components. In
addition, we derive revenue from fees for installation,
maintenance, support and training services. As a percentage of
total revenue, product revenue was 70% in 2001 and 79% in 2000.

We recognize revenue from product sales when all
of the following conditions are met: the product has been
shipped, an arrangement exists with the customer at a fixed
price and we have the right to invoice the customer, collection
of the receivable is probable and we have fulfilled all of our
material contractual obligations to the customer. When we
provide installation services, the product and installation
revenues are recognized upon completion of installation, and
when customer acceptance is received, subject to the
satisfaction of the revenue recognition criteria described
above. The price charged for maintenance and/or support services
is stipulated in the customer contract and is based on a
percentage of product revenue. Customers have the option to
renew the maintenance and/or support services in subsequent
periods. Training services are offered independently of the
purchase of product. The value of these training services is
determined based on the price charged when such services are
sold separately, and the related revenue is recognized upon
performance of the service.

To date, a significant portion of our revenue has
resulted from sales to a limited number of customers. For the
year ended December 31, 2001, we recorded revenue of
approximately $10.5 million, or 65% of total revenue, from
our three customers and their affiliates who generated greater
than 10% of our total revenue. For the year ended
December 31, 2000, we recorded revenue of approximately
$17.1 million, or 80% of total revenue, from our four
customers and their affiliates who generated greater than 10% of
our total revenue. We anticipate that our revenue and,
therefore, our operating results for any given period, will
continue to depend to a significant extent on a limited number
of customers. As a result, the loss or a reduction in sales to
any one of these customers would have a significant adverse
impact on our operations and financial performance.

International revenue, which consists of sales to
customers with operations principally in Western Europe and Asia
comprised 47%, 46% and 19% of total revenue for the years ended
December 31, 2001, 2000 and 1999, respectively. For the
years ended December 31, 2001, 2000 and 1999, respectively,
international revenues to customers in the United Kingdom
accounted for 21%, 28% and 16%, respectively, of total revenue.

Cost of Revenue

Our cost of revenue consists primarily of the
cost of software and hardware, including compensation and third
party components, the cost of compensation for installation,
maintenance, support and training personnel, and other costs
related to facilities and office equipment for professional
services, technical support and training personnel. We recognize
product costs as revenue is recorded, and costs of installation,
maintenance, support and training services as we incur those
expenses.

Operating Expenses

We generally recognize our operating expenses as
we incur them in three operational categories: research and
development, sales and marketing, and general and
administrative. Our operating expenses also include amortization
of our deferred stock compensation charges related to stock
options. These charges are amortized over the service period of
the options, generally four years. Our research and development
expenses consist

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primarily of compensation expenses for our
personnel, patent and licensing costs and, to a minor extent,
independent contractors. We expense all patent and licensing
costs as we incur them. Our sales and marketing expenses consist
primarily of compensation, commissions and travel expenses,
along with other internal and outside marketing expenses. Our
general and administrative expenses consist primarily of
compensation for our administrative and financial personnel, and
a number of non-allocable costs, including insurance,
professional fees, legal fees, accounting fees and provision for
doubtful accounts.


We allocate the total cost of overhead and
facilities to each of the functional areas that use overhead and
facilities, based upon the number of employees assigned to each
of these areas. These allocated charges include facilities rent,
utilities and depreciation/amortization expense for property and
equipment.

The non-cash deferred stock compensation charge
relates to stock options issued to employees, and represents the
difference between the exercise price of options granted to
acquire our shares of common stock during the period, and the
deemed fair value for financial reporting purposes of our shares
of common stock on the measurement date, which is the same as
the date of grant of those options. Based on the outstanding
options at December 31, 2001, we anticipate recording
charges of approximately $400,000 in 2002 and $100,000 in 2003
to record the remainder of the costs associated with these
grants. Future compensation expense may be decreased in a period
of forfeiture for any accrued but unvested compensation arising
from the early termination of an optionholders services.

Interest Income and Expenses

We generate interest income by investing our cash
balances. As of December 31, 2001, we had $0.1 million
in bank overdraft, with no other short-term or long-term debt.

Income Taxes

We have made no provision for and have received
no benefit from United States Federal income taxes for any
period due to our operating losses. The provision for (recovery
from) income taxes relates to foreign tax. We provided for
income taxes for our subsidiary in the United Kingdom
(ASUK) of approximately $15,000 and $21,000 in 2000 and
1999, respectively. In 2001, we had a recovery of approximately
$19,000 for taxes previously expensed at ASUK. As of
December 31, 2001, we had $6.7 million and
$0.6 million of net operating loss carry-forwards for
United States Federal and state income tax purposes,
respectively, which expire beginning on various dates through
the year 2020. Our use of these net operating losses may be
limited in future periods. We have recorded no tax benefits
related to possible utilization of these losses in future
periods.

Valuation of Accounts Receivable

Estimates are used in determining our allowance
for doubtful accounts and are based on our historical collection
experience, current trends and a percentage of our accounts
receivable by aging category. In determining these percentages,
we look at historical write-offs of our receivables. We also
look at current trends in the credit quality of our customer
base. If the estimate for bad debts was understated, our
operating income could be significantly reduced. As of
December 31, 2001, approximately 49% of accounts receivable
were concentrated with two customers. As of December 31,
2000, approximately 80% of accounts receivable were concentrated
with four customers.

Valuation of Inventories

We currently record a reserve for obsolete or
excess inventory for models that are no longer manufactured, or
are at risk of being replaced with new versions of our product.
In determining the allowance for obsolete or excess inventory,
we look at our forecasted demand versus quantities on hand and
committed. If the estimate for obsolete or excess inventory was
understated, our operating income could be reduced.

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Results of Operations

The following table sets forth data expressed as
a percentage of total revenue for the periods indicated.

|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |       |       |  
|------------------------------------------------------- | ------------------------------------------- | --------------------------------- | ----- | ---- | ----- | ---- | ------ | ---- | ----- | - | ----- | ----- | ----- | -
|                                                        |                                             |                                  
|                                                        |                                             | Percentage of Total Revenue      
|                                                        |                                             |                                  
|                                                        |                                             |                                  
|                                                        |                                             | Year Ended December 31,          
|                                                        |                                             |                                  
|                                                        |                                             | 2001                              |       | 2000 |       | 1999
|                                                        |                                             |                                   |       |      |       |     
|Revenue:                                                |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        | Product                                     |                                   |       | 70.2 | %     |      |        | 79.0 | %     |   |       | 65.6  | %    
|                                                        | Services, maintenance and support           |                                   |       | 29.8 |       |      |        | 21.0 |       |   |       | 34.4  |      
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        |                                             | Total revenue                     |       |      | 100.0 |      |        |      | 100.0 |   |       |       | 100.0 |  
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Cost of revenue:                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        | Product                                     |                                   |       | 30.6 |       |      |        | 34.0 |       |   |       | 34.0  |      
|                                                        | Services, maintenance and support           |                                   |       | 16.6 |       |      |        | 10.1 |       |   |       | 18.1  |      
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        |                                             | Total cost of revenue             |       |      | 47.2  |      |        |      | 44.1  |   |       |       | 52.1  |  
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Gross margin                                            |                                             |                                   | 52.8  |      |       |      | 55.9   |      |       |   | 47.9  |      
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Operating expenses:                                     |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        | Research and development                    |                                   |       | 32.6 |       |      |        | 19.3 |       |   |       | 29.0  |      
|                                                        | Sales and marketing                         |                                   |       | 37.5 |       |      |        | 26.3 |       |   |       | 38.9  |      
|                                                        | General and administrative                  |                                   |       | 30.9 |       |      |        | 20.0 |       |   |       | 30.7  |      
|                                                        | Amortization of deferred stock compensation |                                   |       | 5.5  |       |      |        | 9.6  |       |   |       | 6.6   |      
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        |                                             | Total operating expenses          |       |      | 106.5 |      |        |      | 75.1  |   |       |       | 105.2 |  
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Loss from operations                                    |                                             |                                   | (53.7 | )    |       |      | (19.2  | )    |       |   | (57.3 | )    
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Other income (expense):                                 |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        | Interest expense                            |                                   |       |     |       |      |        | (5.5 | )     |   |       | (10.4 | )    
|                                                        | Interest income                             |                                   |       | 4.7  |       |      |        | 3.0  |       |   |       | 0.6   |      
|                                                        | Other, net                                  |                                   |       |     |       |      |        |     |       |   |       | (0.4  | )    
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|                                                        |                                             | Total other income (expense), net |       |      | 4.7   |      |        |      | (2.5  | ) |       |       | (10.2 | )
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Loss before provision for (recovery from) income
	taxes |                                             |                                   | (49.0 | )    |       |      | (21.7  | )    |       |   | (67.5 | )    
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Provision for (recovery from) income taxes              |                                             |                                   | (0.1  | )    |       |      | 0.1    |      |       |   | 0.2   |      
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Net loss                                                |                                             |                                   | (48.9 | )%   |       |      | (21.8  | )%   |       |   | (67.7 | )%   
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      
|Net loss attributable to common shareholders            |                                             |                                   | (48.9 | )%   |       |      | (198.3 | )%   |       |   | (67.7 | )%   
|                                                        |                                             |                                   |       |      |       |      |        |      |       |   |       |      



| |                                   
| | ----------------------------------
| | Comparison of 2001, 2000 and
	1999

Revenue

Total revenue decreased by 24% in 2001 from
$21.4 million for 2000 to $16.2 million for 2001. The
decrease in total revenue in 2001 relative to the prior year was
due to lower product sales. Lower product sales in 2001 were due
in large part to the general slowdown experienced in the economy
in 2001, resulting in constrained budgets and delayed
procurement decisions by existing and potential customers. For
2001, three customers accounted for 65% of our total revenue.
For 2000, four customers accounted for 80% of our total revenue.
The level of sales to any customer may vary from quarter to
quarter and year to year. We anticipate that our revenue will
continue to depend on a limited number of major customers for
the foreseeable future, although the companies considered to be
major customers and the percentage of revenue represented by
each major customer may vary from period to period. The loss of
any one of those customers would have a material adverse impact
on our financial condition and operating results.

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Total revenue increased by 128% in 2000 from
$9.4 million for 1999 to $21.4 million for 2000. The
increase in total revenue in 2000 relative to 1999 was due
primarily to increased product and services sales to an
increased customer base.

Cost of Revenue

Cost of revenue declined by 19% in 2001 from
$9.5 million for 2000 to $7.6 million for 2001. Cost
of revenue decreased during 2001 relative to the prior year
primarily due to a reduction in product revenue, offset
partially by increased costs associated with service revenue.

Cost of revenue increased by 93% in 2000 from
$4.9 million for 1999 to $9.5 million for 2000. The
increase in cost of revenue in 2000 relative to 1999 was due to
higher product revenue and the addition of personnel to support
increased service revenue.

Gross Margin

Gross margin as a percentage of revenue decreased
in 2001 from 56% for 2000 to 53% for 2001. This decrease in
gross margin as a percentage of revenue for 2001 relative to the
prior year was due to higher service revenue as a percentage of
total revenue for 2001, which generally carry a lower margin
than product revenue, as well as the lower overall revenue base,
which provided less coverage of the fixed components of the cost
of sales.

Gross margin as a percentage of revenue increased
in 2000 from 48% for 1999 to 56% for 2000. The increase in gross
margin as a percentage of revenue for 2000 relative to 1999 was
primarily due to lower product component costs and the
allocation of certain fixed overhead costs over a larger service
revenue base in 2000 as compared to 1999.

Operating Expenses

Research and development.Research and development expenses
increased by 28% in 2001 from $4.1 million for 2000 to
$5.3 million for 2001. This increase in research and
development expenses in 2001 relative to the prior year was
primarily due to the hiring of research and development
personnel in the first half of 2001, and increases in personnel
related expenses, reflecting increased costs for new product
development and enhancements to existing products. Research and
development expenses increased by 52% in 2000 from
$2.7 million for 1999 to $4.1 million for 2000. The
increase in research and development expenses in 2000 relative
to 1999 was due to significant increases in personnel and
personnel related expenses and increased prototype and
development expenses, reflecting higher costs for new product
development and enhancements to existing products.

Sales and marketing.Sales and marketing expenses increased
by 8% in 2001 from $5.6 million for 2000 to
$6.1 million for 2001. This increase in sales and marketing
expenses in 2001 relative to the prior year was due to increased
personnel and personnel related costs caused by the hiring of
additional sales and marketing staff in the first half of 2001,
and higher marketing program costs and related expenses, offset
by a decrease in commission expenses in 2001. Sales and
marketing expenses increased by 54% in 2000 from
$3.6 million for 1999 to $5.6 million for 2000. The
increase in sales and marketing expenses in 2000 relative to
1999 was due to increased personnel and personnel related costs
resulting from the hiring of additional sales and marketing
personnel, higher sales commission expenses, and higher
marketing program costs.

General and administrative.General and administrative expenses
increased by 17% in 2001 from $4.3 million for 2000 to
$5.0 million for 2001. This increase in general and
administrative expenses in 2001 relative to the prior year was a
result of increased outside professional services expenses and
other expenses required of a public company. General and
administrative expenses increased by 49% from $2.9 million
in 1999 to $4.3 million in 2000. This increase in general
and administrative expenses for 2000 relative to 1999 was a
result of the hiring additional personnel, increased outside
professional services expenses and other expenses required to
support an increased scale of operations.

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Amortization of deferred stock compensation.Amortization of deferred stock
compensation decreased by 56% in 2001 from $2.0 million for
2000 to $0.9 million for 2001. The decrease in amortization
of deferred stock compensation in 2001 relative to 2000 was due
to the achievement of full vesting for a number of option
grants. Amortization of deferred stock compensation increased by
232% in 2000 from $0.6 million for 1999 to
$2.0 million for 2000. The increase in amortization of
deferred stock compensation in 2000 relative to 1999 was due to
the increase in stock options granted at prices below fair
market value during the year ended December 31, 2000.

Other expenses, net.Other expenses, net changed from a net
expense of $0.5 million for 2000 to a net income of
$0.8 million for 2001. The change in other expenses, net in
2001 relative to the prior year was due to lower interest
expenses in 2001 due to the retirement of debt, and higher
interest income in 2001 due to an increased balance of cash and
cash equivalents, and short-term investments. Other expenses,
net decreased from a $1.0 million net expense for 1999 to a
$0.5 million net expense for 2000 due to lower interest
expense due, in turn, to the retirement of debt and higher
interest income resulting from an increased balance of cash and
cash equivalents from our initial public offering in August 2000.

Liquidity and Capital Resources

We had cash and cash equivalents of
$7.5 million as of December 31, 2001 and
$21.7 million as of December 31, 2000. For 2001, we
had an overall net cash outflow of $14.2 million resulting
primarily from net cash used in operations of $8.0 million,
net purchases of short-term investments of $5.8 million,
and purchases of property and equipment of $0.8 million.
The net cash used in operations primarily reflected a net loss
of $7.9 million, a decrease in accounts payable of
$1.4 million and a decrease in deferred revenue and
customer deposits of $0.9 million, but was partially offset
by stock compensation expense of $0.9 million, a decrease
in accounts receivable of $0.9 million, and a decrease in
inventories of $1.1 million. The cash outflows associated
with the net loss, reduced inventories and reduced accounts
receivable reflect the smaller scale of our business in 2001
relative to 2000.

For 2000, we had an overall net cash inflow of
$15.4 million that resulted primarily from net cash
provided by financing activities of $17.7 million,
partially offset by net cash used in operations of
$2.2 million. The net cash provided by financing activities
of $17.7 million included proceeds from our initial public
offering of common stock totaling $31.3 million, net of
fees and expenses, but was offset primarily by payment on our
line of credit of $2.0 million and notes payable to related
parties of $12.6 million. The net cash used in operations
of $2.2 million included primarily a net loss of
$4.7 million, an increase in accounts receivable of
$1.7 million, and an increase in inventories of
$0.6 million, but was partially offset by the amortization
of stock compensation expense of $2.0 million, an increase
in accounts payable of $0.8 million, an increase in
deferred revenue of $0.8 million, and an increase in
accrued liabilities and other of $1.1 million.

For 1999, we had a net cash inflow of
$6.1 million which resulted primarily from net borrowings
from related parties of $5.2 million, proceeds from
issuance of Series B preferred stock of $6.3 million,
and proceeds from borrowings under a line of credit of
$2.0 million, partially offset by a net cash outflow from
operations of $7.3 million. The net cash outflow from
operations of $7.3 million resulted primarily from a net
loss of $6.4 million, an increase in accounts receivable of
$0.7 million and an increase in inventories of
$0.7 million, but was partially offset by amortization of
deferred compensation of $0.6 million.

Under a line of credit we obtained prior to 1999,
we had $2.0 million outstanding at December 31, 1999.
We incurred a total of $82,000 in interest expense on this line
of credit during both 2000 and 1999, at average interest rates
of 15% and 19%, respectively. This line of credit was retired
using a portion of the proceeds from a $4.0 million
one-year line of credit we obtained from another financial
institution in June 2000. This replacement line of credit was
subsequently repaid and retired in December 2000 with a portion
of our proceeds from our initial public offering in August 2000.
No interest expense was incurred during the year ended
December 31, 2001. We had no outstanding borrowings at
December 31, 2001 from our previous lines of credit.

On February 27, 2002, we entered into a Loan
and Security Agreement with a financial institution to borrow up
to $4.5 million as a revolving line of credit and
$0.5 million as an equipment term loan. The first

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$1.0 million of the revolving line is
available on a non-formula basis, and the remainder is limited
to 80% of our eligible accounts receivable. The equipment term
loan is limited to 100% of the purchase price of eligible
equipment. As collateral under this Loan and Security Agreement,
we granted a first priority interest in all our assets,
excluding intellectual property. The revolving line of credit,
which expires on February 26, 2003, and the equipment term
loan, which expires on November 30, 2004, require certain
covenants to be met, including maintenance of a
$3.0 million balance at the financial institution, and
interest on borrowed amounts is payable at prime plus 0.25%. As
of the date we filed this report with the Securities and
Exchange Commission, we did not have any outstanding borrowings
under this line of credit and we were eligible to borrow up to
$1.7 million under the line of credit. Because our accounts
receivable fluctuate from time to time as we invoice customers
and customers pay their invoices, the available borrowings under
this line of credit will fluctuate. We cannot assure you that we
will have sufficient accounts receivable to satisfy our
borrowing needs to any given time.


We currently believe that existing cash and cash
equivalents balances and short-term investments and available
borrowings under the Loan and Security Agreement will provide us
with sufficient funds to finance our operations for the next
12 months. We intend to continue to invest in the
development of new products and enhancements to our existing
products. Our future liquidity and capital requirements will
depend upon numerous factors, including the costs and timing of
our expansion of product development efforts and the success of
these development efforts, the costs and timing of our expansion
of sales and marketing activities, the extent to which our
existing and new products gain market acceptance, competing
technological and market developments, the costs involved in
maintaining and enforcing patent claims and other intellectual
property rights, the level and timing of revenue, and other
factors, all of which impact our ability to achieve and maintain
profitability. If we fail to achieve our plan of generating
positive cash flow from operations over the next 12 months,
we may be required to raise additional funds, and additional
financing may not be available on favorable terms, if at all. If
we cannot raise funds, if needed, on acceptable terms, we may
not be able to develop or enhance our products, take advantage
of future opportunities, or respond to competitive pressures or
unanticipated requirements, which could seriously harm our
business, financial condition, and results of operations. If
additional funds are raised through the issuance of equity
securities, our net tangible book value per share may decrease,
the percentage ownership of then current stockholders may be
diluted, and such equity securities may have rights, preferences
or privileges senior to those of the holders of our common stock.

Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144
(SFAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144
establishes a single accounting model for long-lived assets to
be disposed off and replaces SFAS No. 121 and APB Opinion
No. 30. The provisions of this statement are effective
beginning with fiscal years starting after December 15,
2001. Management believes the adoption of SFAS 144 will not
have a material effect on our financial statements. We adopted
SFAS 144 on January 1, 2002.

Factors Affecting Future Operating
Results

Our market is in the early stages of
development and our system may not be widely
accepted.

Our ability to achieve profitability depends in
large part on the widespread adoption by end users of networked
video communications systems. If the market for our system fails
to grow or grows more slowly than we anticipate, we may not be
able to increase revenue or achieve profitability. The market
for our system is relatively new and rapidly evolving. We will
have to devote substantial resources to educating prospective
customers about the uses and benefits of our system. Our efforts
to educate potential customers may not result in our system
achieving market acceptance. In addition, businesses that have
invested substantial resources in video products may be
reluctant or slow to adopt our system. Similarly, customers
using existing information systems in which they have made
significant investments may refuse to adopt our system if they
perceive that our offerings will not complement their existing
systems. Consequently, the conversion from dependence on
traditional methods of communication to the extensive use of
video networking may not occur as rapidly as we wish.

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| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We have incurred substantial losses in the
	past and may not be profitable in the future.

We incurred a net loss of $7.9 million for
2001, $4.7 million for 2000 and $6.4 million for 1999.
As of December 31, 2001, our accumulated deficit was
$64.6 million. Our revenue may not increase, or even remain
at its current level. In addition, we expect our operating
expenses may increase significantly as we develop and expand our
business in the future. As a result, to become profitable, we
will need to increase our revenue by increasing sales to
existing customers and by attracting additional customers. If
our expenses increase more rapidly than our revenue, we may
never become profitable. Furthermore, we will record additional
amortization of deferred stock compensation in connection with
options that we granted in 1999 and 2000. This amortization,
although declining, will further decrease our ability to become
profitable.

We cannot predict whether or when we will become
profitable. If we do become profitable, we may not be able to
sustain or increase profitability on a quarterly or annual
basis. In addition, if we fail to reach profitability or to
sustain or grow our profits within the time frame expected by
investors, the market price of our common stock may fall.



| |                                                                            
| | ---------------------------------------------------------------------------
| | General economic conditions may reduce our
	revenues and harm our business.

Recently, economic growth in the United States
has slowed to the point where industries are delaying or
reducing technology purchases. This tendency may be further
aggravated by the events of September 11, 2001. If our
customers delay ordering our products, we will fall short of our
revenue expectations for 2002 and beyond. These conditions have
negatively affected our business in 2001 and will in the future
if these conditions persist. For example, we experienced a
decline in product revenue during 2001 relative to 2000. The
outlook for the video communications industry is uncertain and
it is very difficult to predict how long the current slowdown
will last, or whether we will be materially adversely affected
by such continued slowdown. Slower growth among our end-user
customers, tightening of customers operating budgets,
retrenchment in the capital markets and other general economic
factors all could have a material adverse effect on our capital
resources, financial condition and results of operations.



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our lengthy sales cycle to acquire new
	customers or large follow-on orders may cause our quarterly
	operating results to vary significantly and make it more
	difficult to forecast our revenue.

We have generally experienced a product sales
cycle of four to nine months for new customers or large
follow-on orders due to the time needed to educate potential
customers about the uses and benefits of our system, and the
significant investment decisions that our prospective customers
must make when they decide to buy our system. Many of our
prospective customers have neither budgeted expenses for
networked video communications systems nor personnel
specifically dedicated to the procurement, installation or
support of these systems. As a result, our customers spend a
substantial amount of time before purchasing our system,
performing internal reviews and obtaining capital expenditure
approvals. Current economic conditions have contributed to
additional deliberation, and consequent delay in the sales cycle.

Our lengthy sales cycle is one of the factors
that has caused, and may in the future continue to cause, our
operating results to vary significantly from quarter to quarter
and year to year. This makes it difficult for us to forecast
revenue and could cause volatility in the market price of our
common stock. A lost or delayed order could result in lower
revenue than expected in a particular quarter or year.



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since a majority of our revenue has come
	from follow-on orders, our financial performance could be harmed
	if we fail to obtain follow-on orders in the
	future.

Our customers typically place limited initial
orders for our networked video communications system, which
allows them to evaluate its usefulness and value. Our strategy
is to pursue additional and larger follow-on orders after these
initial orders. Revenue generated from follow-on orders
accounted for approximately 91% and 96% of our revenue in the
year ended December 31, 2001 and 2000, respectively.
Current economic conditions have led to decreases in our
clients capital spending, and we have experienced a
decrease in the size of follow-on orders. Our future financial
performance depends on successful initial installations of our

27



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system and successful generation of follow-on
orders. If our system does not meet the needs and expectations
of customers who order our system, we may not be able to
generate follow-on orders.




| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we depend on a few customers for a
	majority of our revenue, the loss of one or more of them could
	cause a significant decrease in our revenue.

We have historically derived the majority of our
revenue from a limited number of customers, particularly
Deutsche Bank, JP Morgan Chase and UBS Warburg LLC and their
affiliates. Collectively, these customers accounted for 65% of
our revenue in the year ended December 31, 2001 and,
together with Goldman, Sachs & Co., 80% of our revenue in
the year ended December 31, 2000. We expect to continue to
depend upon a limited number of customers for a substantial
portion of our revenue. As of December 31, 2001,
approximately 49% of our accounts receivable were concentrated
between two customers who represented greater than 10% of our
total accounts receivable balance. As of December 31, 2000,
approximately 80% of our accounts receivable were concentrated
among four customers who represented greater than 10% of our
total accounts receivable balance.

The loss of a major customer or the reduction,
delay or cancellation of orders from one or more of our
significant customers could cause our revenue and, therefore,
any profits we may make to decline, or our losses to increase.
Because we currently depend on a limited number of customers
with lengthy budgeting cycles and unpredictable buying patterns,
our revenue from quarter to quarter or year to year may be
volatile. Adverse changes in our revenue or operating results as
a result of these budgeting cycles, or any other reduction in
capital expenditures by our large customers, could substantially
reduce the trading price of our common stock.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We may not be able to modify our products
	in a timely and cost effective manner to respond to
	technological change.

Future hardware and software platforms embodying
new technologies and the emergence of new industry standards
could render our system non-competitive or even obsolete. The
market for our system is characterized by:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | rapid technological change;                                                      
|
| |  | significant development costs;                                                   
|
| |  | frequent new stand-alone introductions;                                          
|
| |  | changes in the requirements of our customers and
	their communities of users; and
|
| |  | evolving industry standards.                                                     

Our system is designed to work with a variety of
hardware and software configurations and data networking
infrastructures used by our customers. The majority of these
customer networks rely on Microsoft Windows NT servers. However,
our software may not operate correctly on other hardware and
software platforms or with other programming languages, database
environments and systems that our customers use. Also, we must
constantly modify and improve our system to keep pace with
changes made to our customers platforms, data networking
infrastructures, and their evolving ability to transport video
and other applications. This may result in uncertainty relating
to the timing and nature of our new release announcements,
introductions or modifications, which in turn may cause
confusion in the market, with a potentially harmful effect on
our business. If we fail to promptly modify or improve our
system in response to evolving industry standards or
customers demands, our system could become obsolete, which
would harm our financial condition and reputation.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our networked video communications
	system cannot be deployed effectively on a large scale to many
	users across an enterprise, we may lose orders and suffer
	decreased revenue.

Our strategy requires that our video-enabled
communications network be highly scalable, or able to
accommodate substantial increases in the number of individuals
simultaneously using our system. We are only beginning to deploy
large-scale implementations within organizations, and none of
these installations has yet

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been operating at any customer site for an
extended period of time. If our system does not perform
adequately when deployed on an increasingly larger scale, we may
lose orders and our revenue may decrease.




| |                                                                             
| | ----------------------------------------------------------------------------
| | Difficulties in installing our products
	could harm our revenue and margins.

We recognize revenue upon the installation of our
system in those cases where we are responsible for installation,
which often entails working with sophisticated software and
computing and communications systems. If we experience
difficulties with installation, or do not meet deadlines due to
delays caused by our customers or ourselves, we could be
required to devote more customer support, technical and other
resources to a particular installation. If we have difficulty
installing our products for new or existing customers or such
installation requires significant amounts of our professional
services support, our revenue recognition could be delayed, our
costs could increase, and our margins could suffer.



| |                                                                     
| | --------------------------------------------------------------------
| | Competition could reduce our market share
	and decrease our revenue.

Currently, our competition comes from many other
kinds of companies, including communication equipment providers,
integrated solution providers, broadcast video providers and
stand-alone point solution providers. Within the video-enabled
network communications market, we compete primarily against
Polycom, Inc., Tandberg and VCON. The market in which we operate
is highly competitive and fragmented, and we expect competition
to increase significantly in the future. In addition, because
our industry is new and one which is characterized by rapid
technological change, evolving user needs, developing industry
standards and protocols, and the frequent introduction of new
products and services, it is difficult for us to predict whether
or when new competing technologies or new competitors will enter
our market.

We expect competition to increase in the future
from existing competitors and from new market entrants with
products that may be less expensive than ours or that may
provide better performance or additional features not currently
provided by our products. Many of our current and potential
competitors have substantially greater financial, technical,
manufacturing, marketing, distribution and other resources,
greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than
us. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements.

We may be required to reduce prices or increase
spending in response to competition in order to retain or
attract customers, pursue new market opportunities, or invest in
additional research and development efforts. As a result, our
revenue, margins and market share may be harmed. We cannot
assure you that we will be able to compete successfully against
current and future competitors, or that competitive pressures
faced by us will not harm our business, financial condition and
results of operations.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Infringement of our proprietary rights
	could affect our competitive position, harm our reputation or
	cost us money.

We regard our system as open but proprietary. In
an effort to protect our proprietary rights, we rely primarily
on a combination of patent, copyright, trademark and trade
secret laws, as well as licensing, non-disclosure and other
agreements with our consultants, suppliers, customers and
employees. However, these laws and agreements provide only
limited protection of our proprietary rights. In addition, we
may not have signed agreements in every case, and the
contractual provisions that are in place and the protection they
produce may not provide us with adequate protection in all
circumstances. Although we hold patents and have filed patent
applications covering some of the inventions embodied in our
systems, our means of protecting our proprietary rights may not
be adequate. It may be possible for a third party to copy or
otherwise obtain and use our technology without authorization
and without our detection. A third party may also develop
similar technology independently, without infringing upon our
patents and copyrights. In addition, the laws of some countries
in which we sell our system may not protect our software and
intellectual property rights to the same extent as the laws of
the United States. Unauthorized copying, use or reverse
engineering of our system could harm our business, financial
condition or results of operations.

29



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| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Infringement claims could require us to
	expend significant financial and managerial
	resources.

A third party could claim that our technology
infringes upon its proprietary rights. As the number of software
systems in our target market increases and the functionality of
these systems overlap, we believe that the number of
infringement suits filed by software developers may increase.
Although we have no knowledge that our system infringes the
proprietary rights of any third parties, we could nevertheless
be sued in the future for infringement. Defending against any
infringement claims, even those that are not meritorious could
result in the expenditure of significant financial and
managerial resources. In addition, if we are found liable for
infringement, we may have to pay damages or royalties to a third
party, and may not be able to continue offering that portion of
our system that is found to be infringing. Redesigning our
system components to avoid any alleged or actual infringement
could result in the expenditure of significant financial and
managerial resources and diminish the value of our system, which
could harm our business, financial condition or results of
operations.



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our system could have defects for which we
	could be held liable for, and which could result in lost
	revenue, increased costs, loss of our credibility or delay in
	the further acceptance of our system in the
	market.

Our system may contain errors or defects,
especially when new products are introduced, or when new
versions are released. Despite internal system testing, we have
in the past discovered software errors in some of the versions
of our system after their introduction. Errors in new systems or
versions could be found after commencement of commercial
shipments, and this could result in additional development
costs, diversion of technical and other resources from our other
development efforts, or the loss of credibility with current or
future customers. Any of these events could result in a loss of
revenue or a delay in market acceptance of our system, and could
harm our reputation.

In addition, we have warranted to some of our
customers that our software is free of viruses. If a virus
infects a customers computer software, the customer could
assert claims against us, which, regardless of their merits,
could be costly to defend and could require us to pay damages
and potentially harm our reputation.

Our license agreements with our customers
typically contain provisions designed to limit our exposure to
potential product liability and certain contract claims. Our
license agreements also typically limit a customers entire
remedy to either a refund of the price paid or modification of
our system to satisfy our warranty. However, these provisions
vary as to their terms and may not be effective under the laws
of some jurisdictions. Although we maintain product liability
insurance coverage, we cannot assure you that such coverage will
be adequate. A product liability, warranty or other claim could
harm our business, financial condition and/or results of
operations. Performance interruptions at a customers site
could negatively affect demand for our system, or give rise to
claims against us.

The third party software we license with our
system may also contain errors or defects for which we do not
maintain insurance. Typically, our license agreements transfer
any warranty from the third party to our customers to the extent
permitted. Product liability, warranty or other claims brought
against us with respect to such warranties could, regardless of
their merits, harm our business, financial condition or results
of operations.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of any of our outside contract
	manufacturers or third party equipment suppliers that produce
	key components of our system could significantly disrupt our
	manufacturing process.

We depend on outside contract manufacturers to
produce components of our systems. Most of our compression and
decompression product, or gateway product, is currently supplied
by a single source, Tandberg, Inc. In addition, we depend on
various third party suppliers for the cameras, microphones,
speakers and monitors that we install at desktops and in
conference rooms as a part of each video communications network
system. Two of these contract manufacturers, SAE Materials Inc.
and Pacific Corporation are single

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source suppliers for key components of our
products. Our reliance on these third parties involves a number
of risks, including:




| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the possible unavailability of critical services
	and components on a timely basis, on commercially reasonable
	terms, or at all;                                                                                          
|
| |  | if the components necessary for our system were
	to become unavailable, the need to qualify new or alternative
	components for our use or reconfigure our system and
	manufacturing process could be lengthy and expensive;
|
| |  | the likelihood that, if particular components
	were not available, we would suffer an interruption in the
	manufacture and shipment of our systems until these components
	or alternatives become available;               
|
| |  | reduced control by us over the quality and cost
	of our system and over our ability to respond to unanticipated
	changes and increases in customer orders; and                                                             
|
| |  | the possible unavailability of, or interruption
	in, access to some technologies.                                                                                                                                          

If these manufacturers or suppliers cease to
provide us with the assistance or the components necessary for
the operation of our business, we may not be able to identify
alternate sources in a timely fashion. Any transition to
alternate manufacturers or suppliers would likely result in
operational problems and increased expenses, and could cause
delays in the shipment of, or otherwise limit our ability to
provide our products. In the case of the gateway component, we
believe a delay could be several months or more. We cannot
assure that we would be able to enter into agreements with new
manufacturers or suppliers on commercially reasonable terms or
at all. Any disruption in product flow may limit our revenue,
seriously harm our competitive position, or result in additional
costs, or cancellation of orders by our customers.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not maintain and improve our
	current networked video communications system and develop new
	systems, applications and features, our future business
	prospects may suffer.

We believe that our future business prospects
depend in large part on our ability to maintain and improve our
current system, and to develop new systems, applications and
features on a timely basis. Our system will have to achieve
additional market acceptance, maintain technological
competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in our
system, major new releases, applications and system features
require long development and testing periods. We may not be
successful in developing and marketing, on a timely and cost
effective basis, new releases, applications or features that
respond to technological change, evolving industry standards and
protocols or customer requirements. Significant delays or
problems in the installation or implementation of new releases
of our system could harm our business, financial condition and
results of operations.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | If we are unable to expand our direct sales
	force and distribution channels, our business will
	suffer.

To increase our revenue, we must increase the
size of our direct sales force and add indirect distribution
channels, such as systems integrators or value-added resellers,
or effect sales through our customers. If we are unable to
increase our direct sales force or add indirect distribution
channels, our future revenue growth may be limited and our
future operating results may suffer. There is intense
competition for sales personnel in the communications
marketplace and we cannot assure you that we will be successful
in attracting, integrating, motivating and retaining new sales
personnel. Furthermore, it can take several months before a new
hire becomes a productive member of our sales force. The failure
of new salespeople to develop the necessary skills in a timely
manner could reduce our revenue growth.



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to retain our existing
	key personnel, or hire and retain the additional personnel that
	we need to sustain and grow our business.

We depend on the continued services of our
executive officers and other key personnel. We do not carry any
key man life insurance. The loss of the services of any of our
executive officers or key personnel could harm our business,
financial condition and results of operations.

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As of December 31, 2001, we had
79 employees, down from 93 employees as of
December 31, 2000. We expect to hire a number of new
employees in the future to support our business. If we are
unable to manage our growth effectively, our business, financial
condition and results of operations could be harmed.

We need to attract and retain highly skilled
technical and managerial personnel for whom there is intense
competition. If we are unable to attract and retain qualified
technical and managerial personnel, our results of operations
could suffer and we may never achieve profitability. The failure
of new personnel to develop the necessary skills in a timely
manner could harm our business.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Our plans call for growth in our business,
	and our inability to manage this growth could harm our
	business.

Failure to achieve or manage growth effectively
will harm our business, financial condition and operating
results. Furthermore, in order to remain competitive or to
expand our business, we may find it necessary or desirable to
acquire other businesses, products or technologies. If we
identify an appropriate acquisition candidate, we may not be
able to negotiate the terms of the acquisition successfully, to
finance the acquisition or to integrate the acquired businesses,
products or technologies into our existing business and
operations. In addition, completing a potential acquisition and
integrating an acquired business may strain our resources and
require significant management time.



| |                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our international operations expose us to
	potential tariffs and other trade barriers, unexpected changes
	in foreign regulatory requirements and laws, and economic and
	political instability, as well as other risks that could
	adversely affect our results of operations.

International revenue, which consists of sales to
customers with operations principally in Western Europe and
Asia, comprised 47%, 46% and 19% of total revenue for the years
ended December 31, 2001, 2000 and 1999, respectively. Some
of the risks we may encounter in conducting international
business activities generally could include the following:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | tariffs and other trade barriers;                                                                                                                              
|
| |  | unexpected changes in foreign regulatory
	requirements and laws;                                                                                               
|
| |  | economic and political instability;                                                                                                                            
|
| |  | increased risk of infringement claims;                                                                                                                         
|
| |  | restrictions on the repatriation of funds;                                                                                                                     
|
| |  | potentially adverse tax consequences;                                                                                                                          
|
| |  | timing, cost and potential difficulty of adapting
	our system to the local language standards in those foreign
	countries that do not use the English alphabet;
|
| |  | fluctuations in foreign currencies; and                                                                                                                        
|
| |  | limitations in communications infrastructures in
	some foreign countries.                                                                                      



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | If our customers do not perceive our system
	or services to be effective or of high quality, our brand and
	name recognition would suffer.

We believe that establishing and maintaining
brand and name recognition is critical for attracting and
expanding our targeted customer base. We also believe that the
importance of reputation and name recognition will increase as
competition in our market increases. Promotion and enhancement
of our name will depend on the success of our marketing efforts,
and on our ability to continue to provide high quality systems
and services, neither of which can be assured. If our customers
do not perceive our system or services to be effective or of
high quality, our brand and name recognition will suffer, which
would harm our business.

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| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock has been and will likely continue
	to be subject to substantial price and volume fluctuations due
	to a number of factors, many of which will be beyond our
	control, that may prevent our stockholders from reselling our
	common stock at a profit.

The securities markets have experienced
significant price and volume fluctuations, and the market prices
of the securities of technology companies have been especially
volatile. This market volatility, as well as general economic,
market or political conditions have, and may continue to reduce
the market price of our common stock in spite of our operating
performance. In addition, our operating results could be below
the expectations of public market analysts and investors, and in
response the market price of our common stock could decrease
significantly. The market price of our common stock on the
NASDAQ National Market ranged from a low close value of $1.00 to
a high of $7.59 during the period from January 1, 2001 to
December 31, 2001.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | If our share price is volatile, we may be
	the target of securities litigation, which is costly and
	time-consuming to defend.

In the past, following periods of market
volatility in the price of a companys securities, security
holders have often instituted class action litigation. Many
technology companies have been subject to this type of
litigation. If the market value of our common stock experiences
adverse fluctuations and we become involved in this type of
litigation, regardless of the merits or outcome, we could incur
substantial legal costs and our managements attention
could be diverted, causing our business, financial condition and
operating results to suffer.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of our certificate of
	incorporation, our bylaws and Delaware law may make it difficult
	for a third party to acquire us, despite the possible benefits
	to our stockholders.

Our certificate of incorporation, our bylaws and
Delaware law contain provisions that may inhibit changes in our
control that are not approved by our Board of Directors. For
example, the Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the terms
of this preferred stock, without any further vote or action on
the part of the stockholders.

These provisions may have the effect of delaying,
deferring or preventing a change in our control despite possible
benefits to our stockholders, may discourage bids at a premium
over the market price of our common stock, and may adversely
affect the market price of our common stock and the voting and
other rights of our stockholders.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our principal stockholders can exercise a
	controlling influence over our business affairs and they may
	make business decisions with which you disagree that will affect
	the value of your investment.

Our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially own
approximately 78% of our common stock. If they were to act
together, these stockholders would be able to exercise control
over most matters requiring approval by our stockholders,
including the election of directors and approval of significant
corporate transactions. These actions may be taken even if they
are opposed by other investors. This concentration of ownership
may also have the effect of delaying or preventing a change in
control of our company, which could cause our stock price to
decline.






|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures
	About Market Risk

We are exposed to the impact of interest rate
changes and changes in the market value of our investments. We
do not use derivative financial instruments for speculative or
trading purposes. We do not engage in any foreign currency
hedging transactions and do not believe we are subject to any
significant exchange rate risk.

33



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Cash and Cash Equivalents and Short-Term
Investments

Cash equivalents consist primarily of commercial
paper and money market and municipal bond funds acquired with
original maturity periods of three months or less and are stated
at cost, plus accrued interest that approximates market value.
Short-term investments consist of corporate notes that are
classified as available for sale and are stated at fair value.
We would not expect our operating results or cash flow to be
affected to any significant degree by the effect of a sudden
change in market interest rates on our investment portfolio.

Our investment policy requires excess cash to be
placed in instruments of Investment Grade credit
ratings, or better, where the return is not dependent upon the
appreciation of principal. The policy prohibits any investment
activity that would be considered to be speculative according to
the principles of conservative investment management. All
investments are to be denominated in United States dollars.

Investments in both fixed and floating rate
interest-earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value
adversely impacted due to rising interest rates, while floating
rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes
in interest rates or we may suffer losses in principal if forced
to sell securities that have declined in market value due to
changes in interest rates.

The following table provides information about
the Companys investment portfolio. For investment
securities, the table presents cash and cash equivalents and
short-term investments and related weighted average interest
rates by category.

|                                                       |                                 |                |   |                  |  |  |  |      |  
|------------------------------------------------------ | ------------------------------- | -------------- | - | ---------------- |  |  |  | ---- | -
|                                                       |                                 |                |   | Weighted Average
|Description                                            |                                 | Amounts        |   | Interest Rate   
|                                                       |                                 |                |   |                 
|                                                       |                                 | (In thousands) |   |                 
|Cash and cash equivalents and short-term
	investments: |                                 |                |   |                  |  |  |  |     
|                                                       | Cash                            |                | $ | 94               |  |  |  |      |  
|                                                       | Commercial paper                |                |   | 7,345            |  |  |  | 1.98 | %
|                                                       | Other cash equivalents          |                |   | 16               |  |  |  | 2.11 | %
|                                                       | Short-term investments          |                |   | 5,831            |  |  |  | 4.06 | %
|                                                       |                                 |                |   |                  |  |  |  |     
|                                                       | Fair Value at December 31, 2001 |                | $ | 13,286           |  |  |  |      |  
|                                                       |                                 |                |   |                  |  |  |  |     






|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary
	Data

Our consolidated financial statements and the
independent auditors report appear on pages F-1
through F-23 of this Report.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
	Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
	Registrant

The information required by this item concerning
our directors is incorporated by reference to the sections
captioned Election of Directors and
Section 16(a) Beneficial Ownership Reporting
Compliance contained in the Companys Proxy Statement
related to the 2002 Annual Meeting of Stockholders, to be filed
by the Company with the Securities and Exchange Commission
within 120 days of the end of the year pursuant to General
Instruction G(3) of Form 10-K (the Proxy
Statement). Certain information required by this item
concerning executive officers is set forth in Part I of
this Report in Business  Management and
certain other information required by this item is incorporated
by reference from the section captioned Section 16(a)
Beneficial Ownership Reporting Compliance contained in the
Proxy Statement.

34



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##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference to the section captioned
Executive Compensation and Other Matters contained
in the Proxy Statement.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

The information required by this item is
incorporated by reference to the sections captioned
Principal Stockholders and Record Date and
Principal Share Ownership contained in the Proxy Statement.






|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related
	Transactions

The information required by this item is
incorporated by reference to the sections captioned
Compensation Committee Interlocks and Insider
Participation and Certain Transactions
contained in the Proxy Statement.




PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K

(a)(1) Financial Statements

The following financial statements are
incorporated by reference in Item 8 of this Report:

|                                                                                                                                                                                        |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                                                        |  | Page
|                                                                                                                                                                                        |  |     
|Report of Independent Public Accountants                                                                                                                                                |  |      | F-2 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                                                                                                           |  |      | F-3 | 
|Consolidated Statements of Operations for the
	years ended December 31, 2001 and 2000, and Combined
	Statement of Operations for the year ended December 31, 1999                       |  |      | F-4 | 
|Consolidated Statements of Stockholders
	Equity for the years ended December 31, 2001 and 2000, and
	Combined Statement of Stockholders Deficit for the year
	ended December 31, 1999 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
	years ended December 31, 2001 and 2000, and Combined
	Statement of Cash Flows for the year ended December 31, 1999                       |  |      | F-6 | 
|Notes to the Financial Statements                                                                                                                                                       |  |      | F-7 | 

(a)(2) Financial Statement Schedules

Schedule II  Valuation and
Qualifying Accounts and Reserves (see page S-1)

Schedules not listed above have been omitted
because the information required to be set forth therein is not
applicable or is shown in the financial statements or notes
thereto.

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(a)(3) Exhibits

|          |  |                                                                                                                                                                                                           
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2*      |  | Restated Certificate of Incorporation                                                                                                                                                                     
|3.3*      |  | Bylaws of Avistar Communications Corporation                                                                                                                                                              
|4.1*      |  | Specimen Certificate evidencing shares of Common
	Stock                                                                                                                                                   
|10.1*     |  | Avistar Communications Corporation 1997 Stock
	Option Plan, as amended                                                                                                                                    
|10.1.1*   |  | Avistar Systems Corporation 1997 Stock Option
	Plan Stock Option Agreement                                                                                                                                
|10.2*     |  | Avistar Communications Corporation 2000 Stock
	Option Plan                                                                                                                                                
|10.3*     |  | Avistar Communications Corporation 2000 Director
	Option Plan                                                                                                                                             
|10.4*     |  | Avistar Communications Corporation Director
	Option Agreement                                                                                                                                             
|10.5*     |  | Form of Avistar Communications Corporation
	Indemnification Agreement                                                                                                                                     
|10.6*     |  | Master lease for the premises located at 555 Twin
	Dolphin Drive, Suite 360, Redwood City, California, between
	Spieker Properties, L.P. and Entex Information Services, Inc.,
	dated August 10, 1998     
|10.7*     |  | Sublease by and between Entex Information
	Services, Inc. and Avistar Systems Corporation, dated
	July 23, 1999                                                                                           
|10.8*    |  | Preferred Supplier Agreement dated June 24,
	1997 by and between Avistar and Tandberg, Inc., including
	modifications Nos. 1, 2, 3 and 4                                                                  
|10.8.1*  |  | Modification No. 5 to the Preferred Supplier
	Agreement referenced in Exhibit 10.8, dated June 27,
	2000                                                                                                  
|10.8.2** |  | Modification No. 6 to the Preferred Supplier
	Agreement referenced in Exhibit 10.8, dated
	November 27, 2000                                                                                              
|10.9*     |  | Amended and Restated Secured Nonrecourse
	Revolving Promissory Note in the principal amount of $9,084,074
	by and between Avistar Systems Corporation and Collaborative
	Holdings, dated November 18, 1999
|10.11*    |  | Secured Nonrecourse Revolving Promissory Note of
	Collaboration Properties, Inc. in the principal amount of
	$1,783,989.73 issued in favor of the Burnett Revocable Trust
	dated April 30, 2000           
|10.12*    |  | Secured Nonrecourse Revolving Promissory Note of
	Collaboration Properties, Inc. in the principal amount of
	$716,359.94 issued in favor of the Heinrichs Revocable Trust
	dated April 30, 2000           
|10.13*    |  | Secured Nonrecourse Revolving Promissory Note of
	Collaboration Properties, Inc. in the principal amount of
	$109,915.08 in favor of William L. Campbell dated
	April 30, 2000                            
|10.14*    |  | Collaboration Properties, Inc. Series A
	Preferred Stock Purchase Agreement dated December 9, 1999                                                                                                        
|10.15*    |  | Avistar Systems Corporation Series B
	Preferred Stock Purchase Agreement dated December 9, 1999                                                                                                           
|10.15.1*  |  | Amendment No. 1 to the Series B
	Preferred Stock Purchase Agreement                                                                                                                                       
|10.16*    |  | Avistar Systems Corporation Registration and
	Information Rights Agreement dated December 9, 1999                                                                                                         
|21.1      |  | Subsidiaries of the Company                                                                                                                                                                               
|23.1      |  | Consent of Arthur Andersen LLP                                                                                                                                                                            
|24.1      |  | Power of Attorney (see page 38)                                                                                                                                                                           
|99        |  | Letter to Securities and Exchange Commission                                                                                                                                                              



---



|  |                                                                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of the exhibit have been omitted
	pursuant to a request for confidential treatment and the omitted
	portions have been separately filed with the Commission.



|  |                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Filed as an exhibit to the Companys
	Registration Statement on Form S-1 (File
	No. 333-39008) as declared effective by the Securities and
	Exchange Commission on August 16, 2000.

36



---



##### Table of Contents





|   |                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Filed as an exhibit to the Companys Annual
	Report on Form 10-K for the year ended December 31,
	2000 filed with the Securities & Exchange Commission on
	March 9, 2001.



|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(b) | Reports on
	Form 8-K.The Company did not
	file any reports on Form 8-K during the three months ended
	December 31, 2001.
|   
|(c) | Exhibits.See
	Item 14(a)(3) above.                                                                                      
|   
|(d) | Financial Statement
	Schedules.See Item 14(a)(2)
	above.                                                                

37



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| |                                   
| | ----------------------------------
| | AVISTAR COMMUNICATIONS CORPORATION



| |     |                      
| | --- | ---------------------
| | By: | /s/ GERALD J. BURNETT

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Gerald J. Burnett                               
| | President, Chief Executive Officer and
	Chairman

Date: March 20, 2002

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Gerald J. Burnett and William L. Campbell, his true
and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:

|                                             |  |                                                                                 |  |               
|-------------------------------------------- |  | ------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Title                                                                           |  | Date          
|                                             |  |                                                                                 |  |               
|/s/ GERALD J. BURNETTGerald J. Burnett       |  | President, Chief Executive Officer
	and Chairman
	(Principal Executive Officer) |  | March 20, 2002
|                                            
|/s/ ROBERT J. HABIGRobert J. Habig           |  | Chief Financial Officer
	(Principal Financial and
	Accounting Officer)          |  | March 20, 2002
|                                            
|/s/ WILLIAM L. CAMPBELLWilliam L. Campbell   |  | Executive Vice President and Director                                           |  | March 20, 2002
|                                            
|/s/ R. STEPHEN HEINRICHSR. Stephen Heinrichs |  | Director                                                                        |  | March 20, 2002
|                                            
|/s/ WILLIAM R. BRODYWilliam R. Brody         |  | Director                                                                        |  | March 20, 2002

38



---



##### Table of Contents



|                                         |  |          |  |               
|---------------------------------------- |  | -------- |  | --------------
|Signature                                |  | Title    |  | Date          
|                                         |  |          |  |               
|/s/ ROBERT P. LATTARobert P. Latta       |  | Director |  | March 20, 2002
|                                        
|/s/ ROBERT M. METCALFERobert M. Metcalfe |  | Director |  | March 20, 2002
|                                        
|/s/ DAVID M. SOLODavid M. Solo           |  | Director |  | March 20, 2002

39



---



##### Table of Contents






INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                                                                        |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                                                        |  | Page
|                                                                                                                                                                                        |  |     
|Report of Independent Public Accountants                                                                                                                                                |  |      | F-2 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                                                                                                           |  |      | F-3 | 
|Consolidated Statements of Operations for the
	years ended December 31, 2001 and 2000, and Combined
	Statement of Operations for the year ended December 31, 1999                       |  |      | F-4 | 
|Consolidated Statements of Stockholders
	Equity for the years ended December 31, 2001 and 2000, and
	Combined Statement of Stockholders Deficit for the year
	ended December 31, 1999 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
	years ended December 31, 2001 and 2000, and Combined
	Statement of Cash Flows for the year ended December 31, 1999                       |  |      | F-6 | 
|Notes to the Financial Statements                                                                                                                                                       |  |      | F-7 | 

F-1



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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To Avistar Communications Corporation:

We have audited the accompanying balance sheets
of Avistar Communications Corporation (a Delaware corporation)
and subsidiaries identified in Note 1 as of December 31,
2001 and 2000, and the accompanying statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. These
financial statements and schedule referred to below are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule, based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Avistar Communications Corporation and subsidiaries
as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of
America.

Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole.
The schedule listed under Item 14(a) is presented for the
purposes of complying with the Securities and Exchange
Commissions rules and is not a part of the basic financial
statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



| |                         
| | ------------------------
| | /s/  ARTHUR ANDERSEN LLP

San Jose, California

January 23, 2002


(except with respect to the matter discussed in
Note 13,


as to which the date is February 27, 2002)


F-2



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


As of December 31, 2001 and
2000


|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |         |        | 
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------ |  | - | ------- | ------ | 
|                                      |                                                                                                                                                                                          |                                           
|                                      |                                                                                                                                                                                          | December 31,                              
|                                      |                                                                                                                                                                                          |                                           
|                                      |                                                                                                                                                                                          | 2001                                       |   | 2000   
|                                      |                                                                                                                                                                                          |                                            |   |        
|                                      |                                                                                                                                                                                          |                                           
|                                      |                                                                                                                                                                                          | (In thousands,                            
|                                      |                                                                                                                                                                                          | except share data)                        
|ASSETS                               
|Current assets:                       |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      | Cash and cash equivalents                                                                                                                                                                |                                            | $ | 7,455   |        |  | $ | 21,660  |       
|                                      | Short-term investments                                                                                                                                                                   |                                            |   | 5,831   |        |  |   |        |       
|                                      | Accounts receivable, net of allowance for
	doubtful accounts of $232 and $312, respectively                                                                                              |                                            |   | 2,760   |        |  |   | 3,712   |       
|                                      | Inventories, including inventory shipped to
	customers sites, not yet installed of $262 and $854, respectively                                                                           |                                            |   | 1,096   |        |  |   | 2,156   |       
|                                      | Prepaid expenses and other current assets                                                                                                                                                |                                            |   | 1,121   |        |  |   | 434     |       
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      |                                                                                                                                                                                          | Total current assets                       |   |         | 18,263 |  |   |         | 27,962 | 
|                                      | Property and equipment, net                                                                                                                                                              |                                            |   | 599     |        |  |   | 83      |       
|                                      | Other assets                                                                                                                                                                             |                                            |   | 403     |        |  |   | 258     |       
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      |                                                                                                                                                                                          | Total assets                               |   | $       | 19,265 |  |   | $       | 28,303 | 
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY
|Current liabilities:                  |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      | Bank overdraft                                                                                                                                                                           |                                            | $ | 149     |        |  | $ |        |       
|                                      | Accounts payable                                                                                                                                                                         |                                            |   | 633     |        |  |   | 2,006   |       
|                                      | Deferred revenue and customer deposits                                                                                                                                                   |                                            |   | 1,205   |        |  |   | 2,126   |       
|                                      | Accrued liabilities and other                                                                                                                                                            |                                            |   | 2,237   |        |  |   | 2,407   |       
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      |                                                                                                                                                                                          | Total current liabilities                  |   |         | 4,224  |  |   |         | 6,539  | 
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|Stockholders equity:                 |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      | Convertible preferred stock, $0.001 per share par
	value; 10,000,000 shares authorized at December 31, 2001
	and 2000; no shares outstanding at December 31, 2001 and
	2000              |                                            |   |        |        |  |   |        |       
|                                      | Common stock, $0.001 par value; 250,000,000
	shares authorized at December 31, 2001 and 2000; 26,362,603
	and 26,266,990 shares outstanding at December 31, 2001 and
	2000, respectively |                                            |   | 26      |        |  |   | 26      |       
|                                      | Treasury common stock, 1,166,125 and 1,143,625
	shares outstanding at December 31, 2001 and
	December 31, 2000 respectively                                                              |                                            |   | (1      | )      |  |   | (1      | )     
|                                      | Additional paid-in-capital                                                                                                                                                               |                                            |   | 80,000  |        |  |   | 80,145  |       
|                                      | Deferred stock compensation                                                                                                                                                              |                                            |   | (493    | )      |  |   | (1,755  | )     
|                                      | Other comprehensive income                                                                                                                                                               |                                            |   | 79      |        |  |   |        |       
|                                      | Accumulated deficit                                                                                                                                                                      |                                            |   | (64,570 | )      |  |   | (56,651 | )     
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      |                                                                                                                                                                                          | Total stockholders equity                 |   |         | 15,041 |  |   |         | 21,764 | 
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        
|                                      |                                                                                                                                                                                          | Total liabilities and stockholders equity |   | $       | 19,265 |  |   | $       | 28,303 | 
|                                      |                                                                                                                                                                                          |                                            |   |         |        |  |   |        

The accompanying notes are an integral part of
these financial statements.

F-3



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF
OPERATIONS


For the Years Ended December 31, 2001 and
2000, and Combined Statement of


Operations for the Year Ended
December 31, 1999


|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |       |     |        |  
|------------------------------------------------------------------------------------ | -------------------------------------------- | ------------------------------------- | --------------------------------- | ------ | --- | ------ | ------- | ------ | ----- | ------ | ------ | ----- | --- | ------ | -
|                                                                                     |                                              |                                      
|                                                                                     |                                              | Year Ended December 31,              
|                                                                                     |                                              |                                      
|                                                                                     |                                              | 2001                                  |                                   | 2000   |     | 1999  
|                                                                                     |                                              |                                       |                                   |        |     |       
|                                                                                     |                                              |                                      
|                                                                                     |                                              | (In thousands, except per share data)
|Revenue:                                                                             |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     | Product                                      |                                       | $                                 | 11,366 |     |        | $       | 16,925 |       |        | $      | 6,146 |    
|                                                                                     | Services, maintenance and support            |                                       |                                   | 4,830  |     |        |         | 4,489  |       |        |        | 3,227 |    
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              |                                       | Total revenue                     |        |     | 16,196 |         |        |       | 21,414 |        |       |     | 9,373  |  
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Cost of revenue:                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     | Product                                      |                                       |                                   | 4,961  |     |        |         | 7,287  |       |        |        | 3,190 |    
|                                                                                     | Services, maintenance and support            |                                       |                                   | 2,683  |     |        |         | 2,167  |       |        |        | 1,697 |    
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              |                                       | Total cost of revenue             |        |     | 7,644  |         |        |       | 9,454  |        |       |     | 4,887  |  
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              |                                       | Gross margin                      |        |     | 8,552  |         |        |       | 11,960 |        |       |     | 4,486  |  
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Operating Expenses:                                                                  |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     | Research and development                     |                                       |                                   | 5,280  |     |        |         | 4,123  |       |        |        | 2,718 |    
|                                                                                     | Sales and marketing                          |                                       |                                   | 6,066  |     |        |         | 5,627  |       |        |        | 3,649 |    
|                                                                                     | General and administrative                   |                                       |                                   | 5,002  |     |        |         | 4,283  |       |        |        | 2,872 |    
|                                                                                     | Amortization of deferred stock compensation* |                                       |                                   | 898    |     |        |         | 2,049  |       |        |        | 618   |    
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              |                                       | Total operating expenses          |        |     | 17,246 |         |        |       | 16,082 |        |       |     | 9,857  |  
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              |                                       | Loss from operations              |        |     | (8,694 | )       |        |       | (4,122 | )      |       |     | (5,371 | )
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Other income (expense)                                                               |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     | Interest expense                             |                                       |                                   | (2     | )   |        |         | (1,184 | )     |        |        | (972  | )  
|                                                                                     | Interest income                              |                                       |                                   | 758    |     |        |         | 650    |       |        |        | 54    |    
|                                                                                     | Other, net                                   |                                       |                                   |       |     |        |         |       |       |        |        | (40   | )  
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              |                                       | Total other income (expense), net |        |     | 756    |         |        |       | (534   | )      |       |     | (958   | )
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Loss before provision for (recovery from) income
	taxes                              |                                              |                                       | (7,938                            | )      |     |        | (4,656  | )      |       |        | (6,329 | )    
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Provision for (recovery from) income taxes                                           |                                              |                                       | (19                               | )      |     |        | 15      |        |       |        | 21     |      
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Net loss                                                                             |                                              |                                       | (7,919                            | )      |     |        | (4,671  | )      |       |        | (6,350 | )    
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Beneficial conversion related to convertible
	preferred stock                        |                                              | $                                     |                                  |        |     | $      | (37,783 | )      |       | $      |       |      
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Net loss attributable to common stockholders                                         |                                              | $                                     | (7,919                            | )      |     | $      | (42,454 | )      |       | $      | (6,350 | )    
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Net loss per share  basic and diluted                                               |                                              | $                                     | (0.31                             | )      |     | $      | (4.46   | )      |       | $      | (54.27 | )    
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|Weighted average shares used in calculating basic
	and diluted net loss per share    |                                              |                                       | 25,168                            |        |     |        | 9,510   |        |       |        | 117    |      
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|* Amortization of deferred stock compensation
	excluded from the following expenses: |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              | Cost of revenue                       |                                   | $      | 120 |        |         | $      | 263   |        |        | $     | 146 |       
|                                                                                     |                                              | Research and development              |                                   |        | 101 |        |         |        | 223   |        |        |       | 143 |       
|                                                                                     |                                              | Sales and marketing                   |                                   |        | 657 |        |         |        | 1,516 |        |        |       | 303 |       
|                                                                                     |                                              | General and administrative            |                                   |        | 20  |        |         |        | 47    |        |        |       | 26  |       
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      
|                                                                                     |                                              | $                                     | 898                               |        |     | $      | 2,049   |        |       | $      | 618    |      
|                                                                                     |                                              |                                       |                                   |        |     |        |         |        |       |        |        |      

The accompanying notes are an integral part of
these financial statements.

F-4



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


For the Years Ended December 31, 2001 and
2000, and Combined Statement


of Stockholders Deficit for the Year
Ended December 31, 1999


|                                                                                              |  |                                      |             |              |  |                |     |            |  |          |            |               |  |             |    |               |  |        |           |         |  |                  |    |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----------- | ------------ |  | -------------- | --- | ---------- |  | -------- | ---------- | ------------- |  | ----------- | -- | ------------- |  | ------ | --------- | ------- |  | ---------------- | -- | - |  | - | ------ | - |  | - | ------ | - |  | - | -- |  |  | - | ------- | - |  | - | ------ | -
|                                                                                              |  |                                      |             |              |  |                |     |            |  |          |            |               |  |             |    |               |  |        |           |        
|                                                                                              |  | Convertible                          |             |              |  |                |     |            |  |          |            |               |  |             |    |              
|                                                                                              |  | Preferred Stock                      |             | Common Stock |  | Treasury Stock |     | Additional |  | Deferred |            | Other         |  |             |    | Total        
|                                                                                              |  |                                      |             |              |  |                |     | Paid-In    |  | Stock    |            | Comprehensive |  | Accumulated |    | Stockholders
|                                                                                              |  | Shares                               |             | Amount       |  | Shares         |     | Amount     |  | Shares   |            | Amount        |  | Capital     |    | Compensation  |  | Income |           | Deficit |  | Equity (Deficit)
|                                                                                              |  |                                      |             |              |  |                |     |            |  |          |            |               |  |             |    |               |  |        |           |         |  |                 
|                                                                                              |  |                                     
|                                                                                              |  | (In thousands, except share amounts)
|Balance at December 31, 1998                                                                  |  |                                      | 16,000,000  |              |  | $              | 16  |            |  |          | 2,802,200  |               |  | $           | 3  |               |  |        | 985,250   |         |  | $                | (1 | ) |  | $ | 220    |   |  | $ |       |   |  | $ |   |  |  | $ | (7,847  | ) |  | $ | (7,609 | )
|Issuance of Series B Convertible Preferred
	stock for cash                                    |  |                                      | 1,067,369   |              |  |                | 1   |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 6,380  |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   | 6,381  |  
|Costs associated with issuance of Series B
	Convertible Preferred Stock                       |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | (41    | ) |  |   |       |   |  |   |   |  |  |   |        |   |  |   | (41    | )
|Issuance of common stock pursuant to exercise of
	stock options                               |  |                                      |            |              |  |                |    |            |  |          | 16,750     |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 5      |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   | 5      |  
|Repurchase of common stock upon employee
	terminations                                        |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        | 50,000    |         |  |                  |   |   |  |   |       |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   |       |  
|Deferred stock compensation                                                                   |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 2,702  |   |  |   | (2,702 | ) |  |   |   |  |  |   |        |   |  |   |       |  
|Amortization of deferred stock compensation                                                   |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   |       |   |  |   | 618    |   |  |   |   |  |  |   |        |   |  |   | 618    |  
|Repurchase of common stock from Avistar Systems,
	Limited Partnership                         |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        | 104,375   |         |  |                  |   |   |  |   | (1     | ) |  |   |       |   |  |   |   |  |  |   |        |   |  |   | (1     | )
|Net loss                                                                                      |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   |       |   |  |   |       |   |  |   |   |  |  |   | (6,350  | ) |  |   | (6,350 | )
|                                                                                              |  |                                      |             |              |  |                |     |            |  |          |            |               |  |             |    |               |  |        |           |         |  |                  |    |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |         |   |  |   |        |  
|Balance at December 31, 1999                                                                  |  |                                      | 17,067,369  |              |  |                | 17  |            |  |          | 2,818,950  |               |  |             | 3  |               |  |        | 1,139,625 |         |  |                  | (1 | ) |  |   | 9,265  |   |  |   | (2,084 | ) |  |   |   |  |  |   | (14,197 | ) |  |   | (6,997 | )
|Issuance of common stock pursuant to initial
	public offering (net of related offering costs) |  |                                      |            |              |  |                |    |            |  |          | 3,000,000  |               |  |             | 3  |               |  |        |          |         |  |                  |   |   |  |   | 31,296 |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   | 31,299 |  
|Issuance of common stock pursuant to exercise of
	options                                     |  |                                      |            |              |  |                |    |            |  |          | 232,093    |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 84     |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   | 84     |  
|Conversion of preferred stock to common stock                                                 |  |                                      | (17,067,369 | )            |  |                | (17 | )          |  |          | 17,067,369 |               |  |             | 17 |               |  |        |          |         |  |                  |   |   |  |   |       |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   |       |  
|Beneficial conversion related to convertible
	preferred stock                                 |  |                                      |            |              |  |                |    |            |  |          | 3,148,578  |               |  |             | 3  |               |  |        |          |         |  |                  |   |   |  |   | 37,780 |   |  |   |       |   |  |   |   |  |  |   | (37,783 | ) |  |   |       |  
|Repurchase of common stock upon employee
	terminations                                        |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        | 4,000     |         |  |                  |   |   |  |   |       |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   |       |  
|Deferred stock compensation                                                                   |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 1,720  |   |  |   | (1,720 | ) |  |   |   |  |  |   |        |   |  |   |       |  
|Amortization of deferred stock compensation                                                   |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   |       |   |  |   | 2,049  |   |  |   |   |  |  |   |        |   |  |   | 2,049  |  
|Net loss                                                                                      |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   |       |   |  |   |       |   |  |   |   |  |  |   | (4,671  | ) |  |   | (4,671 | )
|                                                                                              |  |                                      |             |              |  |                |     |            |  |          |            |               |  |             |    |               |  |        |           |         |  |                  |    |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |         |   |  |   |        |  
|Balance at December 31, 2000                                                                  |  |                                      |            |              |  |                |    |            |  |          | 26,266,990 |               |  |             | 26 |               |  |        | 1,143,625 |         |  |                  | (1 | ) |  |   | 80,145 |   |  |   | (1,755 | ) |  |   |   |  |  |   | (56,651 | ) |  |   | 21,764 |  
|Repurchase of common stock pursuant to stock buy
	back program                                |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        | 22,500    |         |  |                  |   |   |  |   | (34    | ) |  |   |       |   |  |   |   |  |  |   |        |   |  |   | (34    | )
|Issuance of common stock pursuant to employee
	stock purchase plan                            |  |                                      |            |              |  |                |    |            |  |          | 63,776     |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 201    |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   | 201    |  
|Issuance of common stock pursuant to exercise of
	options                                     |  |                                      |            |              |  |                |    |            |  |          | 31,837     |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 21     |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   | 21     |  
|Amortization of deferred stock compensation, net
	of forfeitures                              |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | (364   | ) |  |   | 1,262  |   |  |   |   |  |  |   |        |   |  |   | 898    |  
|Compensation on options issued to consultants                                                 |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   | 31     |   |  |   |       |   |  |   |   |  |  |   |        |   |  |   | 31     |  
|Unrealized gain on short-term investments                                                     |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   |       |   |  |   |       |   |  |   | 79 |  |  |   |        |   |  |   | 79     |  
|Net loss                                                                                      |  |                                      |            |              |  |                |    |            |  |          |           |               |  |             |   |               |  |        |          |         |  |                  |   |   |  |   |       |   |  |   |       |   |  |   |   |  |  |   | (7,919  | ) |  |   | (7,919 | )
|                                                                                              |  |                                      |             |              |  |                |     |            |  |          |            |               |  |             |    |               |  |        |           |         |  |                  |    |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |         |   |  |   |        |  
|Balance at December 31, 2001                                                                  |  |                                      |            |              |  | $              |    |            |  |          | 26,362,603 |               |  | $           | 26 |               |  |        | 1,166,125 |         |  | $                | (1 | ) |  | $ | 80,000 |   |  | $ | (493   | ) |  | $ | 79 |  |  | $ | (64,570 | ) |  | $ | 15,041 |  
|                                                                                              |  |                                      |             |              |  |                |     |            |  |          |            |               |  |             |    |               |  |        |           |         |  |                  |    |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |         |   |  |   |        |  

The accompanying notes are an integral part of
these financial statements.

F-5



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


For the Years Ended December 31, 2001 and
2000, and Combined Statement of


Cash Flows for the Year Ended
December 31, 1999


|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |        |        |      |  
|------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ---- | -
|                                      |                                                                              |                                              
|                                      |                                                                              | Year Ended December 31,                      
|                                      |                                                                              |                                              
|                                      |                                                                              | 2001                                          |                                           | 2000    |        | 1999  
|                                      |                                                                              |                                               |                                           |         |        |       
|                                      |                                                                              |                                              
|                                      |                                                                              | (In thousands)                               
|Cash Flows from Operating Activities: |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Net loss                                                                     |                                               | $                                         | (7,919  | )      |        | $ | (4,671  | )      |        | $ | (6,350 | )     
|                                      | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                               |                                           |         |        |        |   |         |        |        |   |        |       
|                                      |                                                                              | Depreciation                                  |                                           |         | 300    |        |   |         | 136    |        |   |        | 248    |     
|                                      |                                                                              | Loss on disposal of fixed assets              |                                           |         |       |        |   |         |       |        |   |        | 24     |     
|                                      |                                                                              | Stock compensation expense, net               |                                           |         | 898    |        |   |         | 2,049  |        |   |        | 618    |     
|                                      |                                                                              | Compensation on options issued to consultants |                                           |         | 31     |        |   |         |       |        |   |        |       |     
|                                      |                                                                              | Provision for doubtful accounts               |                                           |         | 52     |        |   |         | 72     |        |   |        | (32    | )   
|                                      |                                                                              | Changes in current assets and liabilities:    |                                           |         |        |        |   |         |        |        |   |        |        |     
|                                      |                                                                              |                                               | Accounts receivable                       |         |        | 900    |   |         |        | (1,743 | ) |        |        | (718 | )
|                                      |                                                                              |                                               | Inventories                               |         |        | 1,060  |   |         |        | (567   | ) |        |        | (693 | )
|                                      |                                                                              |                                               | Prepaid expenses and other current assets |         |        | (687   | ) |         |        | (310   | ) |        |        | (106 | )
|                                      |                                                                              |                                               | Other assets                              |         |        | (145   | ) |         |        | 60     |   |        |        | (279 | )
|                                      |                                                                              |                                               | Accounts payable                          |         |        | (1,373 | ) |         |        | 849    |   |        |        | 127  |  
|                                      |                                                                              |                                               | Deferred revenue and customer deposits    |         |        | (921   | ) |         |        | 813    |   |        |        | (197 | )
|                                      |                                                                              |                                               | Accrued liabilities and other             |         |        | (170   | ) |         |        | 1,078  |   |        |        | 49   |  
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      |                                                                              | Net cash used in operating activities         |                                           |         | (7,974 | )      |   |         | (2,234 | )      |   |        | (7,309 | )   
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|Cash Flows from Investing Activities: |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Purchase of short-term investments                                           |                                               |                                           | (5,852  | )      |        |   |        |        |        |   |       |       
|                                      | Sale of short-term investments                                               |                                               |                                           | 100     |        |        |   |        |        |        |   |       |       
|                                      | Purchase of property and equipment                                           |                                               |                                           | (816    | )      |        |   |        |        |        |   | (106   | )     
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Net cash used in investing activities                                        |                                               |                                           | (6,568  | )      |        |   |        |        |        |   | (106   | )     
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|Cash Flows from Financing Activities: |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Net borrowings (payments) under line of
	credit                              |                                               |                                           |        |        |        |   | (1,998  | )      |        |   | 1,998  |       
|                                      | Increase in bank overdraft                                                   |                                               |                                           | 149     |        |        |   |        |        |        |   |       |       
|                                      | Payments on notes payable to related parties                                 |                                               |                                           |        |        |        |   | (12,623 | )      |        |   | (269   | )     
|                                      | Borrowings from related parties                                              |                                               |                                           |        |        |        |   | 900     |        |        |   | 5,435  |       
|                                      | Proceeds from issuance of common stock (net of
	offering costs)              |                                               |                                           | 222     |        |        |   | 31,383  |        |        |   | 5      |       
|                                      | Proceeds from issuance of Series B preferred
	stock (net of offering costs)  |                                               |                                           |        |        |        |   |        |        |        |   | 6,340  |       
|                                      | Repurchases of common stock                                                  |                                               |                                           | (34     | )      |        |   |        |        |        |   | (1     | )     
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Net cash provided by financing activities                                    |                                               |                                           | 337     |        |        |   | 17,662  |        |        |   | 13,508 |       
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Net increase (decrease) in cash and cash
	equivalents                        |                                               |                                           | (14,205 | )      |        |   | 15,428  |        |        |   | 6,093  |       
|                                      | Cash and cash equivalents, beginning of period                               |                                               |                                           | 21,660  |        |        |   | 6,232   |        |        |   | 139    |       
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Cash and cash equivalents, end of period                                     |                                               | $                                         | 7,455   |        |        | $ | 21,660  |        |        | $ | 6,232  |       
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|Supplemental Cash Flow Information:   |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Cash paid for income taxes                                                   |                                               | $                                         |        |        |        | $ | 5       |        |        | $ | 21     |       
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Cash paid for interest                                                       |                                               | $                                         |        |        |        | $ | 1,530   |        |        | $ | 84     |       
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       
|                                      | Beneficial conversion related to convertible
	preferred stock                |                                               | $                                         |        |        |        | $ | 37,783  |        |        | $ |       |       
|                                      |                                                                              |                                               |                                           |         |        |        |   |         |        |        |   |       

The accompanying notes are an integral part of
these financial statements.

F-6



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES




NOTES TO FINANCIAL STATEMENTS



|   |                                                                                                                      
|-- | ---------------------------------------------------------------------------------------------------------------------
|1. | Business, Organization, Reorganization,
	Initial Public Offering, Basis of Presentation, and Risks and
	Uncertainties



| |         
| | --------
| | Business

Avistar Communications Corporation
(Avistar or the Company) develops,
markets and supports a comprehensive suite of networked video
communication services for the enterprise. Avistars
products include applications for interactive video calling,
content creation and publishing, broadcast origination and
distribution, video and video-on-demand as well as integrated
data sharing and directory services. Avistar designs, markets,
sells, manufactures or assembles and installs and supports its
products. Avistars real-time and non-real-time products
are based upon its architecture, which facilitates distribution
over local and wide area networks using telephony or Internet
services as appropriate. Avistars services include
consulting, implementation, training, maintenance and support.



| |             
| | ------------
| | Organization

The business was founded in 1993 as a Nevada
limited partnership, Avistar Systems, Limited Partnership
(ASLP). In December 1997, ASLP entered into an
acquisition agreement with a newly formed corporation, Avistar
Systems Corporation (ASC), to convey all of
ASLPs assets, and transfer all of ASLPs liabilities,
in exchange for 16,000,000 shares of ASCs Series A
convertible preferred stock (see Note 7) and 2,171,400
shares of common stock. Effective December 31, 1997, all
operations previously conducted by ASLP were thereafter
undertaken by ASC.

Collaboration Properties, Inc. (CPI)
and VCT, Inc. (VCT) were founded in 1997 and 1998,
respectively, to hold certain intellectual property, including
patents, which underlie certain technology used by ASLP and
subsequently by ASC. Three of the stockholders of CPI and VCT
owned approximately 95% of CPI and 100% of VCT and were also the
partners of Collaborative Holdings L.P. (CHLP),
which owned a controlling interest in ASLP. The remaining 5%
ownership of CPI was held by UBS (USA), Inc. (UBS)
which also held a 5% ownership interest in ASC (see Note 6
and Note 7). Accordingly, the accounts of CPI and VCT have
been combined at historical cost with those of ASC for all
periods presented since their inception.



| |               
| | --------------
| | Reorganization

Effective March 31, 2000, ASC merged with
and into a newly formed Delaware corporation, Avistar
Communications Corporation. The operating assets and liabilities
of the business were then contributed to a wholly owned
subsidiary, Avistar Systems Corporation (Avistar
Systems), a Delaware corporation. At the same time, the
owners of CPI and VCT transferred all of their stock in those
entities to Avistar as a capital contribution. As a result, CPI
and VCT are recorded at their historical cost basis and became
wholly owned subsidiaries of Avistar as of March 31, 2000.
In April 2000, the operations of VCT were merged with and into
CPI.

In June 2000, all of the Series A preferred
stock held by ASLP was distributed to the Companys three
founders and several other individuals based on their respective
ownership interests in ASLP. In addition, all of the shares of
Avistars common stock, held by ASLP were distributed to
the Companys employees, former advisors and officers.
These common shares represent an amount equal to those shares of
Class B units in ASLP that were owned by the respective
individuals before the acquisition.

In July 2001, the Board of Directors of Avistar
Communications and the board of directors of Avistar Systems
approved the merger of Avistar Systems, the wholly owned
subsidiary of Avistar Communications, with and into Avistar
Communications. The merger was completed in July 2001. The
assets and liabilities of Avistar Systems were transferred to
the Company at historical cost on the date of the merger.

F-7



---



##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                        
| | -----------------------
| | Initial Public Offering

In August 2000, the Company completed its initial
public offering, selling three million shares of common stock at
$12 per share. The initial public offering resulted in net
proceeds to the Company of approximately $31.3 million
after the payment of the underwriters commission and
deduction of offering expenses.

In August 2000, the Company used a portion of the
net proceeds from the initial public offering to repay the
outstanding balances of notes payable and accrued interest due
related parties of approximately $12.6 million. The
remainder of the proceeds has been used to fund our working
capital requirements and invested in securities with varying
maturities and is included in cash and cash equivalents, and
short-term investments.



| |                      
| | ---------------------
| | Basis of Presentation

The reorganization in March 2000 of these
affiliated entities described above was treated as a combination
of entities under common control for financial reporting
purposes. Accordingly, the accompanying financial statements for
1999 has been presented on a combined basis to reflect the
operations of ASC (or ASLP for 1997) and its wholly-owned
consolidated subsidiary, Avistar Systems (UK) Limited
(ASUK), together with the results of CPI and VCT,
after elimination of all accounts and transactions between the
affiliated entities.

The accompanying financial statements as of
December 31, 2001 and 2000 present the consolidated
financial position of Avistar and its two wholly owned
subsidiaries, ASUK and CPI, after elimination of all
intercompany accounts and transactions. The combined and
consolidated results are referred to, collectively, as those of
Avistar or the Company in these footnotes.

The functional currency of ASUK is the United
States dollar. Accordingly, all gains and losses resulting from
those transactions denominated in currencies other than the
United States dollar are included in the statements of
operations.



| |                        
| | -----------------------
| | Risks and Uncertainties

The markets for the Companys products and
services have only recently begun to develop. Some of the
Companys products utilize changing and emerging
technologies. As is typical in industries of this nature, demand
and market acceptance are subject to a high level of
uncertainty. Acceptance of the Companys products, over
time, is critical to the Companys success. The
Companys prospects must be evaluated in light of
difficulties encountered by it and its competitors in further
developing the evolving marketplace. The Company has generated
losses since inception and had an accumulated deficit of
approximately $65 million as of December 31, 2001. The
Companys operating results may fluctuate significantly in
the future as a result of a variety of factors, including, but
not limited to, the use of differing distribution channels, the
timing of the new product announcements by the Company or its
competitors, and general economic conditions.

We intend to continue to invest in the
development of new products and enhancements to our existing
products. Our future liquidity and capital requirements will
depend upon numerous factors, including the costs and timing of
our expansion of product development efforts and the success of
these development efforts, the costs and timing of our expansion
of sales and marketing activities, the extent to which our
existing and new products gain market acceptance, competing
technological and market developments, the costs involved in
maintaining and enforcing patent claims and other intellectual
property rights, the level and timing of revenue, and other
factors. We may need to raise additional funds, and additional
financing may not be available on favorable terms, if at all. If
we cannot raise funds, if needed, on acceptable terms, we may
not be able to develop or enhance our products, take advantage
of future opportunities, or respond to competitive

F-8



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AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

pressures or unanticipated requirements, which
could seriously harm our business, financial condition, and
results of operations.

2.     Summary of
Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from
those estimates.



| |                                                      
| | -----------------------------------------------------
| | Cash and Cash Equivalents and Short-term
	Investments

The Company considers all investment instruments
purchased with an original maturity of three months or less to
be cash equivalents. The Companys cash equivalents at
December 31, 2001 and 2000 consist of money market funds,
and short-term securities. The Company classifies its short-term
investments as available for sale with unrealized gains or
losses reported as a separate component of stockholders
equity. The fair value of the Companys investments was
based on quoted market prices at the reporting date for those
instruments. Short-term investments as of December 31, 2001
consist of the following:

|            |                          |                |       |              |       |  |       |       |       | 
|----------- | ------------------------ | -------------- | ----- | ------------ | ----- |  | ----- | ----- | ----- | 
|            |                          | Cost           |       | Market Value
|            |                          |                |       |             
|            |                          |               
|            |                          | (In thousands)
|Investments |                          |                |       |              |       |  |       |      
|            | Government obligations   |                | $     | 637          |       |  | $     | 638   |      
|            | Corporate obligations    |                |       | 3,815        |       |  |       | 3,893 |      
|            | Other                    |                |       | 1,300        |       |  |       | 1,300 |      
|            |                          |                |       |              |       |  |       |      
|            |                          |                | 5,752 |              |       |  | 5,831 |      
|            | Unrealized holding gains |                |       | 79           |       |  |       |      |      
|            |                          |                |       |              |       |  |       |      
|            |                          | Total          |       | $            | 5,831 |  |       | $     | 5,831 | 
|            |                          |                |       |              |       |  |       |      

At December 31, 2001, investments with
scheduled maturities within one year were $3.8 million and
from one to two years were $2.0 million. As of
December 31, 2000, there were no short-term investment
balances. The Company has classified all investments as short
term since it has the intent and ability to redeem them within
one year.



| |                           
| | --------------------------
| | Significant Concentrations

A relatively small number of customers have
accounted for a significant percentage of the Companys net
sales. Sales to major customers as a percentage of sales are as
follows for the years ended December 31, 2001, 2000 and
1999:

|           |  |      |    |      |  |      |    |   |  |  |    |  
|---------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  | 2001 |    | 2000 |  | 1999
|           |  |      |    |      |  |     
|Customer A |  |      | 33 | %    |  |      | 33 | % |  |  | *  |  
|Customer B |  |      | 22 | %    |  |      | 23 | % |  |  | 23 | %
|Customer C |  |      | 10 | %    |  |      | 13 | % |  |  | 43 | %
|Customer D |  |      | *  |      |  |      | 11 | % |  |  | *  |  
|Customer E |  |      | *  |      |  |      | *  |   |  |  | 11 | %



---



|  |              
|- | -------------
|* | Less than 10%

F-9



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AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Any change in the relationship with these
customers could have a potentially adverse effect on the
Companys financial position. Management currently
anticipates no such change.

Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of temporary cash investments and trade receivables. The Company
has cash and investment policies that limit the amount of credit
exposure to any one financial institution and restrict placement
of these investments to financial institutions evaluated as
highly credit worthy. Concentration of credit risk with respect
to trade receivables relate to those trade receivables from both
United States and foreign entities. As of December 31,
2001, approximately 49% of accounts receivable were concentrated
with two customers who represented greater than 10% of the
Companys total accounts receivable balance. As of
December 31, 2000, approximately 80% of accounts receivable
were concentrated with four customers who represented greater
than 10% of our total accounts receivable balance.



| |                                     
| | ------------------------------------
| | Fair Value of Financial
	Instruments

The carrying amounts of the Companys
financial assets and liabilities, including cash and cash
equivalents, short-term investments, accounts receivable,
accounts payable, short-term borrowings and notes payable at
December 31, 2001 and 2000, approximate fair value because
of the short maturity of these instruments.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost
(first-in, first-out method) or market. When required,
provisions are made to reduce excess and obsolete inventories to
their estimated net realizable value. Inventories consist of the
following (in thousands):

|                                                        |  |              |       |      |  |   |       |  
|------------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | -
|                                                        |  |             
|                                                        |  | December 31,
|                                                        |  |             
|                                                        |  | 2001         |       | 2000
|                                                        |  |              |       |     
|Raw materials and subassemblies                         |  | $            | 169   |      |  | $ | 93    |  
|Finished goods                                          |  |              | 1,018 |      |  |   | 1,513 |  
|Inventory shipped to customer sites, not yet
	installed |  |              | 262   |      |  |   | 854   |  
|Less: Allowance for obsolescence                        |  |              | (353  | )    |  |   | (304  | )
|                                                        |  |              |       |      |  |   |       |  
|                                                        |  | $            | 1,096 |      |  | $ | 2,156 |  
|                                                        |  |              |       |      |  |   |       |  

Inventory shipped to customer sites, not yet
installed represents product shipped to customer sites pending
completion of the installation process by the Company. As of
December 31, 2001 and 2000, the Company had billed
approximately $0.6 million and $2.4 million,
respectively, to customers related to these shipments, but did
not record the receivable or the revenue, as the installations
had not been completed. Although customers are billed in
accordance with customer agreements, these amounts are netted
against accounts receivable.

F-10



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost and are
depreciated using the double declining balance method over the
estimated useful lives (three to five years) of the assets.
Repairs and maintenance are expensed as incurred. Property and
equipment consists of the following (in thousands):

|                                  |  |              |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2001         |        | 2000
|                                  |  |              |        |     
|Computer equipment                |  | $            | 1,906  |      |  | $ | 1,345  |  
|Computer software                 |  |              | 308    |      |  |   | 106    |  
|Furniture, fixtures and equipment |  |              | 348    |      |  |   | 295    |  
|                                  |  |              |        |      |  |   |        |  
|                                  |  |              | 2,562  |      |  |   | 1,746  |  
|Less: Accumulated depreciation    |  |              | (1,963 | )    |  |   | (1,663 | )
|                                  |  |              |        |      |  |   |        |  
|                                  |  | $            | 599    |      |  | $ | 83     |  
|                                  |  |              |        |      |  |   |        |  



| |                         
| | ------------------------
| | Research and Development

The Statement of Financial Accounting Standards
(SFAS) No. 86 (SFAS 86),
Accounting for Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, requires the capitalization
of certain software development costs subsequent to the
establishment of technological feasibility. Based on the
Companys product development process, technological
feasibility is established upon completion of a working model.
Software development costs incurred prior to the establishment
of technological feasibility are included in research and
development and are expensed as incurred. After technological
feasibility is established, material software development costs
are capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues,
whichever is greater.



| |                              
| | -----------------------------
| | Accrued Liabilities and Other

Accrued liabilities and other consist of the
following (in thousands):

|                                         |  |              |       |      |  |   |       | 
|---------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                         |  |             
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2001         |       | 2000
|                                         |  |              |       |     
|Accrued payroll and related benefits     |  | $            | 583   |      |  | $ | 809   | 
|Accrued commissions and bonuses          |  |              | 314   |      |  |   | 464   | 
|Accrued inventory purchases              |  |              | 264   |      |  |   | 43    | 
|Accrued consulting and professional fees |  |              | 497   |      |  |   | 674   | 
|Other                                    |  |              | 579   |      |  |   | 417   | 
|                                         |  |              |       |      |  |   |       | 
|                                         |  | $            | 2,237 |      |  | $ | 2,407 | 
|                                         |  |              |       |      |  |   |       | 



| |             
| | ------------
| | Patent Costs

Due to uncertainties about the estimated future
economic benefits and lives of the Companys patents and
patent applications, all related outside patent costs have been
expensed as incurred and the Company plans to continue with this
policy in the future. Outside patent costs were approximately
$0.5 million, $0.4 million and $0.3 million for
2001, 2000 and 1999, respectively, and are reflected in general
and administrative expenses in the accompanying statements of
operations.

F-11



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                                          
| | -----------------------------------------
| | Revenue Recognition and Deferred
	Revenue

The Companys revenue recognition policy is
in compliance with Statement of Position (SOP) 97-2,
Software Revenue Recognition (SOP 97-2), and
SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions.
The Company recognizes revenues from product sales when all of
the following conditions are met: the product has been shipped,
an arrangement exists with the customer at a fixed price and the
Company has the right to invoice the customer, collection of the
receivable is probable and the Company has fulfilled all of its
material contractual obligations to the customer.

The price charged for maintenance and/or support
is stipulated in the contract and is based on a percentage of
product revenue. Customers have the option to renew the
maintenance and/or support in subsequent periods. Training
services are offered independent of the purchase of product. The
value of these training courses is determined based on the price
charged when such services are sold separately, and the related
revenue is recognized upon performance of the service.

When the Company provides installation services,
the product and installation revenues are recognized upon
completion of installation and customer acceptance is received,
subject to the satisfaction of the revenue recognition criteria
described above. When the customer or a third party provides
installation services, the product revenue is recognized upon
shipment, subject to satisfaction of the revenue recognition
criteria described above. Payment for product is due upon
shipment based on specific payment terms. Installation and
training services are due upon providing the services. If
payments for systems are made in advance of the completion of
installation, such amounts are deferred and recorded as deferred
revenue in the accompanying balance sheets until installation
has occurred and the customer has accepted the product. Revenue
from the provision of services, including training, is
recognized as the work is performed. Revenue from maintenance
and support services is based on a percentage of product sales
as stipulated in the customer agreement and is recognized
pro-rata over the maintenance and/or support term, which is
typically one year in length. Payments for services made in
advance of the provision of services are recorded as deferred
revenue.



| |         
| | --------
| | Warranty

The Company accrues the estimated costs of
fulfilling the warranty provisions of its contracts over the
warranty period, which is typically 90 days. The warranty
accrual was approximately $0.1 million as of
December 31, 2001 and 2000, and is included in accrued
liabilities in the accompanying balance sheets.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company has adopted SFAS No. 123
(SFAS 123), Accounting for Stock-Based
Compensation. As permitted under this standard, the
Company applies Accounting Principles Board Opinion No. 25,
Accounting For Stock Issued to Employees and related
interpretations in accounting for its stock options (see
Note 8).



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In August 2001, the FASB issued SFAS No. 144
(SFAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144
establishes a single accounting model for long-lived assets to
be disposed off and replaces SFAS No. 121 and APB Opinion
No. 30. The provisions of this statement are effective
beginning with fiscal years starting after December 15,
2001. Management believes the adoption of SFAS 144 will not
have a material effect on the Companys financial
statements.



| |                           
| | --------------------------
| | Other Comprehensive Income

The FASB issued SFAS No. 130
(SFAS 130), Reporting Comprehensive
Income establishes standards for reporting and display of
comprehensive income (loss) and its components. SFAS 130 was

F-12



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

adopted by the Company beginning on
January 1, 1998. This standard defines comprehensive income
as the changes in equity of an enterprise, except those
resulting from stockholder transactions. Accordingly,
comprehensive income includes certain changes in equity that are
excluded from the net income or loss.

The comprehensive loss for 2001 was
$7.8 million. For the years ended December 31, 2000
and 1999, the comprehensive loss presented equaled the net loss.


3.     Line of
Credit

The Company had a Loan and Security Agreement
(the Agreement) with a financial institution to
borrow up to the lesser of $2.0 million or 80% of the
Companys eligible accounts receivable. As of
December 31, 1999, the Company had $2.0 million
outstanding and no available borrowings. Interest on the loan
was at prime plus 2% (8.5% at December 31, 1999). In May
2000, Avistar Systems entered into a one year line of credit
agreement with a financial institution providing for borrowings
up to $4.0 million, based on 80% of eligible accounts
receivable, to be used for working capital purposes. This line
required certain financial covenants and interest was at prime
plus 1.25%. The Line of Credit was repaid in December 2000 with
proceeds from the Companys initial public offering and was
terminated.

4.     Notes Payable
and Line of Credit From Related Parties

The Company had a line of credit agreement (the
Credit Agreement) from CHLP. On November 18,
1999, the Company amended the Credit Agreement to increase the
principal amount to $9.1 million. Borrowings under the
Credit Agreement accrued interest at 10% per annum. As of
December 31, 1999, the outstanding principal under the
Credit Agreement was $9.1 million. The line of credit was
repaid in full with proceeds from the Companys initial
public offering and was terminated.

5.     Commitments
and Contingencies

The Company leases its facilities under operating
leases that expire through April 2011. As of December 31,
2001, the future minimum lease commitments under all leases were
as follows (in thousands):

|                             |  |        |       | 
|---------------------------- |  | ------ | ----- | 
|Year Ending December 31,     |  | Amount
|                             |  |       
|2002                         |  | $      | 1,118 | 
|2003                         |  |        | 799   | 
|2004                         |  |        | 206   | 
|2005                         |  |        | 213   | 
|2006                         |  |        | 213   | 
|Thereafter                   |  |        | 921   | 
|                             |  |        |       | 
|Total minimum lease payments |  | $      | 3,470 | 
|                             |  |        |       | 

Rent expense under all operating leases for each
of 2001, 2000 and 1999 was approximately $1.4 million,
$1.2 million and $0.9 million, respectively.

6.     Related Party
Transactions

Certain directors with controlling interests in
the Company are also the majority owners of two entities that
conducted business with the Company, Vicor Inc.
(Vicor) and Western Data Systems of Nevada, Inc.
(WDS). In addition to the transactions described
with these entities elsewhere herein, descriptions of certain
transactions between the Company and these and other related
entities follow.

F-13



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |              
| | -------------
| | Rent Sublease

The Company sub-leased certain office space, at
cost, to Vicor, an affiliated entity, through common ownership.
Beginning in September 1999, the Company began subleasing office
space to Vicor. The Company received approximately $34,000,
$136,000 and $45,000 for the years ended December 31, 2001,
2000 and 1999, respectively, from Vicor under this sublease
agreement. The sublease was terminated in July 2001. There were
no outstanding receivables from Vicor as of December 31,
2001.



| |                 
| | ----------------
| | Support Services

The Company maintains a seven-day a week,
24 hour a day support center to receive first level support
calls. The support center handled support calls for WDS in
addition to those for the Company. Pursuant to an agreement
between the Company and WDS, the Company charged WDS for its
share of support center costs. For 2000 and 1999, the Company
charged WDS $0.5 million and $0.6 million,
respectively, under the agreement. Such reimbursement from WDS
was recorded as a reduction in the costs incurred for the
support center. The agreement was terminated in December 2000.
There were no outstanding receivables from WDS as of
December 31, 2001 and 2000.



| |                             
| | ----------------------------
| | Revenue from a Related Party

UBS Warburg LLC, which is an affiliate of UBS
A.G., an approximate 5% stockholder of the Company during 2000
and 1999, is also a customer of the Company. As of
December 31, 2001 and 2000, UBS Warburg held less than 5%
of the Companys stock. Revenue from UBS Warburg LLC and
its affiliates represented approximately 22%, 23% and 23% of
total revenue for the years ended December 31, 2001, 2000
and 1999, respectively. Management believes the transactions
with UBS Warburg LLC and its affiliates are at terms comparable
to those provided to unrelated third parties. As of
December 31, 2001 and 2000 the Company had accounts
receivable outstanding from UBS Warburg LLC and its affiliates
of approximately $0.4 million and $3.1 million,
respectively.



| |                        
| | -----------------------
| | Fees to Related Parties

On February 6, 2001, Robert P. Latta,
partner at the law firm Wilson Sonsini Goodrich &
Rosati (WSGR), was appointed to the Companys
Board of Directors. Mr. Latta and WSGR have represented the
Company and its predecessors as its corporate counsel since
1997. During 2001, payments of approximately $0.3 million
were made to WSGR for legal services provided to the Company by
WSGR.

During 2001, payments of approximately
$0.1 million in consulting fees were made to a former
officer of the Company who is also a member of the Board of
Directors.

7.     Stockholders
Equity



| |            
| | -----------
| | Stock Spilt

In July 2000, the Company effected a one-for-five
reverse stock split. All share and per share amounts in these
financial statements have been adjusted to give effect to the
reverse stock split.



| |                      
| | ---------------------
| | Stock Repurchase Plan

On March 22, 2001, the Company announced
that its Board authorized the repurchase of up to
$2.0 million of its common stock in the open market. During
2001, the Company repurchased 22,500 shares at an aggregate cost
of approximately $34,000.

F-14



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                
| | ---------------
| | Preferred Stock

In June 2000, the Companys Board of
Directors (the Board) authorized the filing of a
registration statement with the SEC to register shares of its
common stock in connection with its initial public offering.
As a result of the initial public offering all 16,000,000
of the outstanding shares of Series A convertible preferred
stock were converted into 19,148,578 shares of common stock,
which represents the sum of (1) 16,000,000 shares of
common stock plus (2) an additional 3,148,578 shares of
common stock representing a beneficial conversion feature equal
to the quotient of (A) the conversion amount, which was
$37.8 million at August 16, 2000, and which includes
an amount equal to $0.2167 per share per annum, pro rated based
on the number of days elapsed in the year, divided by
(B) the initial offering price of $12.00 per share. The
shares of Series A preferred stock had the same voting
rights as the shares of common stock into which they were
converted. The Series A preferred stock had a liquidation
preference of $2.009 per share plus all declared and unpaid
dividends on each share of Series A preferred stock. As of
December 31, 1999, the liquidation preference per share was
$2.2255.

In December 1999, ASC and CPI raised a combined
$6.4 million from UBS in an offering of 932,196 shares
of ASCs Series B-1 convertible preferred stock and
135,173 shares of ASCs Series B-2 convertible
preferred stock (collectively with the Series B-1
convertible preferred stock, the Series B preferred
stock), and 526,316 shares of CPIs Series A
preferred stock. As a result, UBS owned approximately 5% of ASC
and CPI, respectively. The shares of Series A preferred
stock in CPI were subsequently conveyed to the Company for a
nominal value and cancelled as part of the year 2000
reorganization. After the reorganization, UBS held an
approximate 5% ownership interest in the Company.

Simultaneous with the closing of the initial
public offering, all 1,067,369 outstanding shares of
Series B preferred stock were converted into 1,067,369
shares of common stock determined by dividing the original
Series B issue price ($1.00) by the Series B
conversion price then in effect ($1.00). Holders of the
Series B-1 convertible preferred stock had the same voting
rights equal to the number of shares of common stock into which
their shares of Series B-1 preferred stock are convertible.
Holders of the Series B-2 preferred stock had no voting
rights.



| |                            
| | ---------------------------
| | Deferred Stock Compensation

In connection with the grant of stock options to
purchase shares of common stock to employees during 1999, the
Company recorded deferred compensation of approximately
$2.7 million, representing the difference between the
estimated fair value of the common stock and the aggregate
option exercise price of such options at the date of grant. The
Company recorded an additional $1.7 million of deferred
stock compensation net of forfeitures for stock options granted
during year ended December 31, 2000. This amount is
presented as a reduction of stockholders equity and is
being amortized ratably over the service period of the
applicable options (generally four years). Amortization expense,
net of forfeitures related to deferred stock compensation was
approximately $0.9 million, $2.0 million and
$0.6 million in 2001, 2000, and 1999, respectively.
Compensation expense is decreased in the period of forfeiture
for any accrued but unvested compensation arising from the early
termination of an option holders services.



| |                                 
| | --------------------------------
| | Repurchase of Partnership
	Units

If an employee of the Company was terminated and
the employee had Class B units in ASLP (the
Class B units), ASLP had a repurchase right
related to those Class B units. When ASLP exercised its
right to buy back the Class B units held by the terminated
employee, the Company had the right to repurchase an equal
number of shares common stock in the Company held by ASLP.
During fiscal 1999, the Company repurchased 104,375 shares of
its common stock from ASLP.

F-15



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

8.     Stock Option
Plans



| |                       
| | ----------------------
| | 1997 Stock Option Plan

In December 1997, the Board established the 1997
Stock Option Plan (the 1997 Plan) and authorized the
issuance of 1,828,602 shares of common stock thereunder. In
December 1999 and May 2000, respectively, the Board authorized
an additional 1,065,625 shares and 100,000 shares to be issued
under the Plan. In connection with the initial public offering,
the Board terminated the 1997 Plan as to future grants effective
August 17, 2000. Under the Plan, incentive stock options to
purchase shares of common stock were granted only to employees
at not less than 100% of the fair market value at the grant date
as determined by the Board. Additionally, nonqualified stock
options to purchase shares of common stock were granted to
employees and consultants at not less than 85% of the fair
market value at the grant date. Options granted generally had a
life of ten years.

On December 31, 1997, the Company issued
options to purchase 1,091,800 shares of common stock, including
631,800 that were fully vested at the grant date. All other
options vested over a four-year period, with 25% vesting after
one year and the remaining vesting 6.25% per quarter. Under this
plan, the Company granted options to purchase approximately
1.2 million common shares in 2000. In 2001, the Company had
no grants under this plan. At December 31, 2001 options to
purchase a total of 1,658,757 were outstanding under the 1997
Plan.



| |                       
| | ----------------------
| | 2000 Stock Option Plan

In April 2000, the Board established the 2000
Stock Option Plan (the 2000 Plan). As of
December 31, 2001, the Company has authorized 5,400,000
shares through its registration statement in August 2000.
Initially, a total of 3,000,000 shares of common stock was
approved by the Board for issuance under the 2000 Plan, together
with annual increases in the number of shares of common stock
reserved under the plan beginning on the first day of the
Companys fiscal year, commencing January 1, 2001, as
defined. In January 2001, the Board approved the annual increase
of 1,004,936 shares. As of December 31, 2001, a total of
4,004,936 shares have been approved. The term of the options
granted under this plan may not exceed 10 years and in the
case of the grantees who own more than 10% of the Companys
outstanding stock at the time of grant, the term of the option
may not exceed 5 years. Options granted under the 2000 plan
vest and become exercisable as set forth in each option
agreement. In the event of a merger or sale of substantially all
assets, these options must be assumed by the successor and if
not assumed, will fully vest. The 2000 plan will terminate in
2010. As a result of the increases, a maximum of 15,000,000
shares of common stock could be issued. The Company granted
options to purchase approximately 1.2 million common shares
in 2000 under this plan. In 2001, the Company granted options to
purchase approximately 2.3 million common shares under this
plan. At December 31, 2001 options to purchase a total of
2,962,950 were outstanding under the 2000 Plan.



| |                          
| | -------------------------
| | 2000 Director Option Plan

In April 2000, the Company adopted the 2000
Director Option Plan (the Director Plan). Initially,
a total of 90,000 shares of common stock were approved by the
Board, for issuance under the plan, together with an annual
increase in the number of shares of common stock reserved
thereunder as provided in the plan beginning on the first day of
the Companys fiscal year, commencing January 1, 2001.
In January 2001, the Board approved the annual increase of
12,000 shares. In May 2001, the Board registered and approved an
additional 198,000 shares under this plan. As of
December 31, 2001, the Company has authorized a total of
300,000 shares for issuance under this plan. As a result of the
annual increases, a maximum of 408,000 shares of common stock
could be issued over the 10-year life of the plan. Options to
purchase 12,000 shares were granted in 2000. In 2001, the
Company granted options to purchase 270,000 shares under this
plan. At December 31, 2001 options to purchase a total of
282,000 were outstanding under the Director Plan.

F-16



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

A summary of the 1997 Plan, the 2000 Plan, and
the Director Plan activity and related information for the years
ended December 31, 1999, 2000, and 2001 follows:

|                           |                      |           |           |                     |   |                |           |           |   |   |      |       | 
|-------------------------- | -------------------- | --------- | --------- | ------------------- | - | -------------- | --------- | --------- | - | - | ---- | ----- | 
|                           |                      |           |           |                    
|                           |                      |           |           | Options Outstanding
|                           |                      |           |           |                    
|                           |                      |           |           |                     |   | Weighted      
|                           |                      | Options   |           |                     |   | Average       
|                           |                      | Available |           | Shares              |   | Exercise Price
|                           |                      |           |           |                     |   |               
|Balance, December 31, 1998 |                      |           | 676,500   |                     |   |                | 546,100   |           |   |   | 0.27 |      
|                           | Authorized           |           |           | 1,065,625           |   |                |           |          |   |   |      |      | 
|                           | Granted              |           |           | (734,242            | ) |                |           | 734,242   |   |   |      | 1.45  | 
|                           | Exercised            |           |           |                    |   |                |           | (16,750   | ) |   |      | 0.31  | 
|                           | Canceled/repurchased |           |           | 137,450             |   |                |           | (87,450   | ) |   |      | 0.445 | 
|                           |                      |           |           |                     |   |                |           |           |   |   |      |      
|Balance, December 31, 1999 |                      |           | 1,145,333 |                     |   |                | 1,176,142 |           |   |   | 1.00 |      
|                           | Authorized           |           |           | 5,614,000           |   |                |           |          |   |   |      |      | 
|                           | Granted              |           |           | (2,420,608          | ) |                |           | 2,420,608 |   |   |      | 10.92 | 
|                           | Exercised            |           |           |                    |   |                |           | (232,093  | ) |   |      | 0.39  | 
|                           | Canceled/repurchased |           |           | 87,300              |   |                |           | (87,300   | ) |   |      | 7.17  | 
|                           |                      |           |           |                     |   |                |           |           |   |   |      |      
|Balance, December 31, 2000 |                      |           | 4,426,025 |                     |   |                | 3,277,357 |           |   | $ | 8.20 |      
|                           | Authorized           |           |           | 198,000             |   |                |           |          |   |   |      |      | 
|                           | Granted              |           |           | (2,528,200          | ) |                |           | 2,528,200 |   |   |      | 2.00  | 
|                           | Exercised            |           |           |                    |   |                |           | (31,837   | ) |   |      | 0.63  | 
|                           | Canceled/repurchased |           |           | 870,013             |   |                |           | (870,013  | ) |   |      | 8.18  | 
|                           |                      |           |           |                     |   |                |           |           |   |   |      |      
|Balance, December 31, 2001 |                      |           | 2,965,838 |                     |   |                | 4,903,707 |           |   | $ | 5.05 |      
|                           |                      |           |           |                     |   |                |           |           |   |   |      |      

|                    |                |                |  |                     |           |                |  |                |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|------------------- | -------------- | -------------- |  | ------------------- | --------- | -------------- |  | -------------- | ---- | -------------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                    |                |                |  |                    
|Options Outstanding |                |                |  | Options Exercisable
|                    |                |                |  |                    
|                    |                | Number         |  |                     |           |                |  | Number         |      |               
|                    |                | Outstanding at |  | Weighted-           |           | Weighted-      |  | Exercisable at |      | Weighted-     
|Range of            |                | December 31,   |  | Average             |           | Average        |  | December 31,   |      | Average       
|Exercise Prices     |                | 2001           |  | Remaining Life      |           | Exercise Price |  | 2001           |      | Exercise Price
|                    |                |                |  |                     |           |                |  |                |      |               
|                    | $0.25          |                |  |                     | 205,000   |                |  |                | 6.00 |                |  | $ | 0.25  |  |  |  | 205,000   |  |  | $ | 0.25  | 
|                    | $0.40 - 0.45   |                |  |                     | 2,582     |                |  |                | 6.64 |                |  |   | 0.42  |  |  |  | 2,000     |  |  |   | 0.42  | 
|                    | $0.95 - 1.27   |                |  |                     | 495,825   |                |  |                | 7.75 |                |  |   | 1.00  |  |  |  | 261,062   |  |  |   | 0.95  | 
|                    | $1.47 - 2.21   |                |  |                     | 2,003,300 |                |  |                | 9.00 |                |  |   | 1.75  |  |  |  | 27,244    |  |  |   | 1.56  | 
|                    | $2.45 - 3.45   |                |  |                     | 162,142   |                |  |                | 8.45 |                |  |   | 3.24  |  |  |  | 60,070    |  |  |   | 3.44  | 
|                    | $3.95 - 5.75   |                |  |                     | 578,408   |                |  |                | 8.51 |                |  |   | 4.27  |  |  |  | 178,382   |  |  |   | 4.16  | 
|                    | $8.50 - 9.35   |                |  |                     | 853,700   |                |  |                | 7.85 |                |  |   | 8.65  |  |  |  | 266,763   |  |  |   | 8.65  | 
|                    | $14.00 - 17.25 |                |  |                     | 602,750   |                |  |                | 8.25 |                |  |   | 17.23 |  |  |  | 260,707   |  |  |   | 17.23 | 
|                    |                |                |  |                     |           |                |  |                |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|                    |                |                |  |                     | 4,903,707 |                |  |                | 8.38 |                |  | $ | 5.05  |  |  |  | 1,261,228 |  |  | $ | 6.41  | 
|                    |                |                |  |                     |           |                |  |                |      |                |  |   |       |  |  |  |           |  |  |   |       | 

The Company had 372,346 and 224,657 options
outstanding that were exercisable at a weighted average exercise
price of $0.87 per share and $0.25 per share as of
December 31, 2000 and 1999 respectively.

The Company has adopted SFAS 123 for disclosure
purposes. The weighted average fair value of options granted
during 2001, 2000 and 1999, estimated on the date of grant using
the Black-Scholes option pricing model was $1.73, $4.14 and
$0.30, respectively. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options
that have vesting restrictions and are fully transferable. In
addition, option-pricing models require the input of highly
subjective assumptions, including the expected

F-17



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

stock price volatility. Because the
Companys employee stock options have characteristics
significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the Companys
options. The fair value of 2001, 2000 and 1999 options granted
is estimated on the date of grant using the following
assumptions: risk-free interest rate range of 3.35 to 6.66%,
depending on the grant date, volatility up to 185%, expected
term of 4 years, and no expected dividends.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized over the
options vesting period. The Companys pro forma
expense was $2,815,000, $497,000 and $63,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. The
Companys pro forma information for the years ended
December 31, 2001, 2000 and 1999 is as follows:

|                                                             |             |      |   |         |   |      |   |         |   |  |   |        |  
|------------------------------------------------------------ | ----------- | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------ | -
|                                                             |             | 2001 |   | 2000    |   | 1999
|                                                             |             |      |   |         |   |     
|Net loss attributable to common stockholders (in
	thousands) |             |      |   |         |   |      |   |         |   |  |   |       
|                                                             | As reported |      | $ | (7,919  | ) |      | $ | (42,454 | ) |  | $ | (6,350 | )
|                                                             | Pro forma   |      | $ | (10,734 | ) |      | $ | (42,951 | ) |  | $ | (6,413 | )
|Basic and diluted loss per share                             |             |      |   |         |   |      |   |         |   |  |   |       
|                                                             | As reported |      | $ | (0.31   | ) |      | $ | (4.46   | ) |  | $ | (54.27 | )
|                                                             | Pro forma   |      | $ | (0.43   | ) |      | $ | (4.52   | ) |  | $ | (54.81 | )



| |                                   
| | ----------------------------------
| | 2000 Employee Stock Purchase
	Plan

In April 2000, the Company adopted the 2000
Employee Stock Purchase Plan (Employee Stock Purchase
Plan). As of December 31, 2001 the Company has
registered 3,300,000 shares through its registration statement
in August 2000. Initially, a total of 1,500,000 shares of common
stock were approved by the Board, for issuance under the plan,
together with an annual increase in the number of shares of
common stock reserved thereunder as provided in the plan
beginning on the first day of the Companys fiscal year,
commencing January 1, 2001. In January 2001, the Board
approved the annual increase of 753,701 shares. As of
December 31, 2001, the Company has authorized a total of
2,253,702 shares for issuance under this plan. As a result of
these annual increases, a maximum of 10,500,000 shares could be
sold over the 10-year life of the plan. The Employee Stock
Purchase Plan permits employees to purchase common stock through
payroll deductions, which may not exceed 15% of an
employees compensation, at 85% of the lower of the fair
market value of the Companys common stock on the first or
the last day of each offering period. A total of 63,776 shares
were sold under this plan in 2001.



| |                                           
| | ------------------------------------------
| | Common Stock Reserved for Future
	Issuance

As of December 31, 2001, the Company had
reserved the following shares of common stock for issuance in
connection with:

|                                       |       |  |           |            | 
|-------------------------------------- | ----- |  | --------- | ---------- | 
|Stock options under stock option plans |       |  | 7,869,545 |           
|Employee stock purchase plan           |       |  | 2,189,925 |           
|                                       |       |  |           |           
|                                       | Total |  |           | 10,059,470 | 
|                                       |       |  |           |           

9.     Income
Taxes

The Company accounts for income taxes in
accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS 109). SFAS 109
provides for an asset and liability approach to account for
income taxes under which deferred tax assets and liabilities are
recognized for the future tax consequences attributable to

F-18



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

differences between the financial statement
carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some or all of the
deferred tax assets will not be recognized. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period of enactment.

No provision for federal or state income taxes is
reflected in the accompanying statements of operations for CPI
and VCT (both S corporations prior to January 1, 2000)
as such taxes were levied on the individual partners and
shareholders of ASLP and of CPI and VCT. The tax returns, the
qualifications of ASLP as such for tax purposes, and the amount
of distributable income or loss are subject to examination by
federal and state taxing authorities.

The provision for (recovery from) income taxes
relates to foreign tax. We provided for income taxes for our
subsidiary in the United Kingdom (ASUK) of approximately
$15,000 and $21,000 in 2000 and 1999, respectively. In 2001, we
had a recovery of approximately $19,000 for taxes previously
expensed at ASUK.

The provision for (recovery from) taxes of
Avistar only consists of the following (in thousands):

|                    |         |                         |        |        |   |      |        |      |   |   |        |        |  
|------------------- | ------- | ----------------------- | ------ | ------ | - | ---- | ------ | ---- | - | - | ------ | ------ | -
|                    |         |                        
|                    |         | Year Ended December 31,
|                    |         |                        
|                    |         | 2001                    |        | 2000   |   | 1999
|                    |         |                         |        |        |   |     
|Current:            |         |                         |        |        |   |      |        |      |   |   |        |       
|                    | Federal |                         | $      |       |   |      | $      |     |   |   | $      |       |  
|                    | State   |                         |        |       |   |      |        |     |   |   |        | 2      |  
|                    | Foreign |                         |        | (19    | ) |      |        | 15   |   |   |        | 19     |  
|                    |         |                         |        |        |   |      |        |      |   |   |        |       
|                    |         |                         | (19    | )      |   |      | 15     |      |   |   | 21     |       
|Deferred benefits:  |         |                         |        |        |   |      |        |      |   |   |        |       
|                    | Federal |                         |        | (6,729 | ) |      |        | (985 | ) |   |        | (1,791 | )
|                    | State   |                         |        | (574   | ) |      |        | (141 | ) |   |        | (284   | )
|                    |         |                         |        |        |   |      |        |      |   |   |        |       
|                    |         |                         | (7,303 | )      |   |      | (1,126 | )    |   |   | (2,075 | )     
|Valuation allowance |         |                         | 7,303  |        |   |      | 1,126  |      |   |   | 2,075  |       
|                    |         |                         |        |        |   |      |        |      |   |   |        |       
|                    |         | $                       | (19    | )      |   | $    | 15     |      |   | $ | 21     |       
|                    |         |                         |        |        |   |      |        |      |   |   |        |       

Avistars effective income tax provision
differs from the federal statutory rate of 35% due to the
following (in thousands):

|                                               |  |                         |        |      |  |      |        |   |  |   |        |  
|---------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                               |  |                        
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2001                    |        | 2000 |  | 1999
|                                               |  |                         |        |      |  |     
|Expected tax benefit at federal statutory rate |  | $                       | (2,792 | )    |  | $    | (1,630 | ) |  | $ | (1,741 | )
|State taxes, net                               |  |                         | (458   | )    |  |      | (268   | ) |  |   | (284   | )
|Permanent non-deductible                       |  |                         |       |      |  |      | 732    |   |  |   |       |  
|Change in valuation allowance                  |  |                         | 3,289  |      |  |      | 1,126  |   |  |   | 2,075  |  
|Research credits not used                      |  |                         |       |      |  |      |       |   |  |   |       |  
|Other                                          |  |                         | (58    | )    |  |      | 55     |   |  |   | (29    | )
|                                               |  |                         |        |      |  |      |        |   |  |   |        |  
|Provision for (recovery from) income taxes     |  | $                       | (19    | )    |  | $    | 15     |   |  | $ | 21     |  
|                                               |  |                         |        |      |  |      |        |   |  |   |        |  

Permanent and non-deductible is primarily
composed of the non-deductible portion of the deferred stock
compensation expense.

F-19



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The net deferred income tax asset related to
Avistar consists of the following as of December 31, 2001
and 2000 (in thousands):

|                              |                                          |      |       |        |   |   |       |        |  
|----------------------------- | ---------------------------------------- | ---- | ----- | ------ | - | - | ----- | ------ | -
|                              |                                          | 2001 |       | 2000  
|                              |                                          |      |       |       
|Deferred income tax assets:   |                                          |      |       |        |   |   |       |       
|                              | Federal net operating loss carryforwards |      | $     | 6,729  |   |   | $     | 3,882  |  
|                              | State net operating loss carryforwards   |      |       | 574    |   |   |       | 325    |  
|                              | Tax credit carry forward                 |      |       | 1,306  |   |   |       | 733    |  
|                              | Reserves                                 |      |       | 407    |   |   |       | 787    |  
|                              |                                          |      |       |        |   |   |       |       
|                              |                                          |      | 9,016 |        |   |   | 5,727 |       
|                              | Valuation allowance                      |      |       | (9,016 | ) |   |       | (5,727 | )
|                              |                                          |      |       |        |   |   |       |       
|Net deferred income tax asset |                                          | $    |      |        |   | $ |      |       
|                              |                                          |      |       |        |   |   |       |       

Net operating loss carryforwards at
December 31, 2001 were approximately $6.7 million and
$0.6 million, for Federal and state income tax purposes,
respectively. The net operating loss carryforwards expire on
various dates through the year 2020. The Internal Revenue Code
of 1986, as amended, contains provisions that may limit the net
operating loss carryforwards to be used in any given year upon
the occurrence of certain events, including a significant change
in ownership interest. The Company believes sufficient
uncertainty exists regarding the realizability of the net
operating loss carryforwards and other timing differences.
Accordingly, a valuation allowance has been provided for the
entire net deferred tax asset.

10.     Net Loss Per
Share

Basic and diluted net loss per share of common
stock is presented in conformity with SFAS No. 128
(SFAS 128), Earnings Per Share, for
all periods presented. Pursuant to SEC Staff Accounting Bulletin
No. 98, common stock and convertible preferred stock issued
or granted for nominal consideration prior to an initial public
offering must be included in the calculation of basic and
diluted net loss per share as if such stock had been outstanding
during 1999. To date, the Company has had no issuances or grants
for nominal consideration.

In accordance with SFAS 128, basic net loss per
share has been computed using the weighted average number of
shares of common stock outstanding during the period, less
shares subject to repurchase. Diluted net loss per share is
computed on the basis of the weighted average number of shares
and common equivalent shares outstanding during the period.
Common equivalent shares result from the assumed exercise of
outstanding stock options that have a dilutive effect when
applying the treasury stock method. The Company has excluded all
convertible preferred stock, outstanding stock options and
shares subject to repurchase from the calculation of diluted net
loss per share for 2001, 2000 and 1999, because all such
securities are antidilutive. Accordingly, diluted net loss per
share approximates basic net loss per share for all years
presented.

The total number of shares excluded from the
calculations of diluted net loss per share was 2,346,597,
916,933 and 18,333,729 for 2001, 2000 and 1999, respectively.
Basic and diluted pro forma net loss per share have been
computed as described above and also give effect, under SEC
guidance, to the conversion of the convertible preferred stock
(using the if-converted method) from the original date of
issuance and the effect of the beneficial conversion related to
the Series A convertible preferred stock.

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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following table presents the calculation of
basic and diluted and pro forma basic and diluted net loss per
share (in thousands, except per share data):

|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                                                                                                                              |  |                        
|                                                                                                                                                                                              |  | Year Ended December 31,
|                                                                                                                                                                                              |  |                        
|                                                                                                                                                                                              |  | 2001                    |        | 2000 |  | 1999
|                                                                                                                                                                                              |  |                         |        |      |  |     
|Net Loss                                                                                                                                                                                      |  | $                       | (7,919 | )    |  | $    | (4,671  | ) |  | $ | (6,350 | )
|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  
|Beneficial Conversion Related To Convertible
	Preferred Stock                                                                                                                                 |  |                         |       |      |  | $    | (37,783 | ) |  |   |       |  
|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  
|Net Loss Attributable To Common Stockholders                                                                                                                                                  |  | $                       | (7,919 | )    |  | $    | (42,454 | ) |  | $ | (6,350 | )
|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  
|Weighted Average Shares Of Common Stock Used In
	Computing Net Loss Per Share                                                                                                                 |  |                         | 25,168 |      |  |      | 9,510   |   |  |   | 117    |  
|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  
|Net Loss Per Share Basic and Diluted                                                                                                                                                          |  | $                       | (0.31  | )    |  | $    | (4.46   | ) |  | $ | (54.27 | )
|Pro Forma:                                                                                                                                                                                    |  |                         |        |      |  |      |         |   |  |   |        |  
|Weighted Average Shares Of Common Stock Used In
	Computing Basic And Diluted Net Loss Per Share                                                                                               |  |                         | N/A    |      |  |      | 9,510   |   |  |   | N/A    |  
|Pro Forma Adjustment To Reflect Weighted Average
	Effect Of Assumed Conversion Of Convertible Preferred Stock And
	Beneficial Conversion Related To The Series A Convertible
	Preferred Stock |  |                         | N/A    |      |  |      | 15,525  |   |  |   | N/A    |  
|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  
|Weighted Average Shares Of Common Stock Used In
	Computing Pro Forma Basic And Diluted Net Loss Per Share                                                                                     |  |                         | N/A    |      |  |      | 25,035  |   |  |   | N/A    |  
|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  
|Pro forma basic and diluted net loss per share                                                                                                                                                |  |                         | N/A    |      |  | $    | (1.70   | ) |  |   | N/A    |  
|                                                                                                                                                                                              |  |                         |        |      |  |      |         |   |  |   |        |  

11.     Segment
Reporting

SFAS No. 131 (SFAS 131),
Disclosures About Segments of an Enterprise and Related
Information, establishes standards for disclosures about
operating segments, products and services, geographic areas and
major customers. The Company is organized and operates as two
operating segments: (1) the design, development,
manufacturing, sale and marketing of networked video
communications products (ACC in 2001, ACC and ASC in 2000 and
1999) and (2) the development, prosecution, maintenance and
support of the intellectual property used in the Companys
products (CPI). Service revenue relates mainly to the
maintenance, support, training and installation of products and
is included in ACC for purposes of reporting

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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

and decision-making. The Companys chief
decision maker monitors the Companys operations based upon
the information reflected in the following table:

|                             |                          |                |   |         |   |     |   |        |   |  |   |         |   |  |   |         |  
|---------------------------- | ------------------------ | -------------- | - | ------- | - | --- | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                             |                          | ASC            |   | CPI     |   | ACC |   | Total 
|                             |                          |                |   |         |   |     |   |       
|                             |                          |               
|                             |                          | (In thousands)
|Year Ended December 31, 2001 |                          |                |   |         |   |     |   |        |   |  |   |         |   |  |   |        
|                             | Revenue                  |                | $ |        |   |     | $ |       |   |  | $ | 16,196  |   |  | $ | 16,196  |  
|                             | Gross margin             |                |   |        |   |     |   |       |   |  |   | 8,552   |   |  |   | 8,552   |  
|                             | Depreciation expense     |                |   |        |   |     |   | (13    | ) |  |   | (287    | ) |  |   | (300    | )
|                             | Total operating expenses |                |   |        |   |     |   | (1,076 | ) |  |   | (16,170 | ) |  |   | (17,246 | )
|                             | Interest income          |                |   |        |   |     |   |       |   |  |   | 758     |   |  |   | 758     |  
|                             | Interest expense         |                |   |        |   |     |   |       |   |  |   | (2      | ) |  |   | (2      | )
|                             | Net loss                 |                |   |        |   |     |   | (1,179 | ) |  |   | (6,740  | ) |  |   | (7,919  | )
|                             | Assets                   |                |   |        |   |     |   | 78     |   |  |   | 19,187  |   |  |   | 19,265  |  
|                            
|Year Ended December 31, 2000 |                          |                |   |         |   |     |   |        |   |  |   |         |   |  |   |        
|                             | Revenue                  |                | $ | 21,414  |   |     | $ |       |   |  | $ |        |   |  | $ | 21,414  |  
|                             | Gross margin             |                |   | 11,960  |   |     |   |       |   |  |   |        |   |  |   | 11,960  |  
|                             | Depreciation expense     |                |   | (121    | ) |     |   | (15    | ) |  |   |        |   |  |   | (136    | )
|                             | Total operating expenses |                |   | (11,797 | ) |     |   | (1,204 | ) |  |   | (3,081  | ) |  |   | (16,082 | )
|                             | Interest income          |                |   | 179     |   |     |   | 42     |   |  |   | 429     |   |  |   | 650     |  
|                             | Interest expense         |                |   | (674    | ) |     |   | (167   | ) |  |   | (343    | ) |  |   | (1,184  | )
|                             | Net loss                 |                |   | (847    | ) |     |   | (830   | ) |  |   | (2,994  | ) |  |   | (4,671  | )
|                             | Assets                   |                |   | 7,569   |   |     |   | 155    |   |  |   | 20,579  |   |  |   | 28,303  |  
|                            
|Year Ended December 31, 1999 |                          |                |   |         |   |     |   |        |   |  |   |         |   |  |   |        
|                             | Revenue                  |                | $ | 9,373   |   |     | $ |       |   |  | $ |        |   |  | $ | 9,373   |  
|                             | Gross margin             |                |   | 4,486   |   |     |   |       |   |  |   |        |   |  |   | 4,486   |  
|                             | Depreciation expense     |                |   | (229    | ) |     |   | (19    | ) |  |   |        |   |  |   | (248    | )
|                             | Total operating expenses |                |   | (7,956  | ) |     |   | (1,901 | ) |  |   |        |   |  |   | (9,857  | )
|                             | Interest income          |                |   | 14      |   |     |   | 40     |   |  |   |        |   |  |   | 54      |  
|                             | Interest expense         |                |   | (789    | ) |     |   | (183   | ) |  |   |        |   |  |   | (972    | )
|                             | Net loss                 |                |   | (4,280  | ) |     |   | (2,070 | ) |  |   |        |   |  |   | (6,350  | )
|                             | Assets                   |                |   | 9,366   |   |     |   | 1,157  |   |  |   |        |   |  |   | 10,523  |  

International revenue, which consists of domestic
sales to customers with operations principally in Western Europe
and Asia comprised 47%, 46% and 19% of total revenue for the
years ended December 31, 2001, 2000 and 1999, respectively.
For the years ended December 31, 2001, 2000 and 1999,
respectively, international revenues to customers in the United
Kingdom accounted for 21%, 28% and 16%, respectively, of total
revenue. The Company had no significant long-lived assets in any
country other than in the United States for any period presented.

12.     Selected
Quarterly Results of Operations

The following tables set forth, for the periods
indicated, our unaudited financial information for the last
eight quarters. The Company believes that the financial
statements used to prepare this information include all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this

F-22



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

information when read in conjunction with our
financial statements and notes to financial statements. The
operating results for any quarter do not necessarily indicate
the results expected for any future period.

|                                             |  |                                      |        |          |  |               |        |              |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | ------------------------------------ | ------ | -------- |  | ------------- | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|                                             |  |                                     
|                                             |  | Quarter Ended                       
|                                             |  |                                     
|                                             |  | March 31,                            |        | June 30, |  | September 30, |        | December 31,
|                                             |  | 2001                                 |        | 2001     |  | 2001          |        | 2001        
|                                             |  |                                      |        |          |  |               |        |             
|                                             |  |                                     
|                                             |  | (In thousands except per share data)
|Total revenue                                |  | $                                    | 6,082  |          |  | $             | 3,543  |              |  | $ | 3,029  |   |  | $ | 3,542  |  
|Gross margin                                 |  |                                      | 3,448  |          |  |               | 1,754  |              |  |   | 1,594  |   |  |   | 1,756  |  
|Total operating expenses                     |  |                                      | 5,159  |          |  |               | 4,796  |              |  |   | 3,684  |   |  |   | 3,607  |  
|Net loss attributable to common shareholders |  | $                                    | (1,405 | )        |  | $             | (2,836 | )            |  | $ | (1,937 | ) |  | $ | (1,741 | )
|Net loss per share  Basic/ Diluted          |  | $                                    | (0.06  | )        |  | $             | (0.11  | )            |  | $ | (0.08  | ) |  | $ | (0.07  | )
|Weighted average shares                      |  |                                      | 25,150 |          |  |               | 25,145 |              |  |   | 25,181 |   |  |   | 25,196 |  

|                                             |  |                                      |        |          |  |               |        |              |  |   |         |   |  |   |        |  
|-------------------------------------------- |  | ------------------------------------ | ------ | -------- |  | ------------- | ------ | ------------ |  | - | ------- | - |  | - | ------ | -
|                                             |  |                                     
|                                             |  | Quarter Ended                       
|                                             |  |                                     
|                                             |  | March 31,                            |        | June 30, |  | September 30, |        | December 31,
|                                             |  | 2000                                 |        | 2000     |  | 2000(1)       |        | 2000        
|                                             |  |                                      |        |          |  |               |        |             
|                                             |  |                                     
|                                             |  | (In thousands except per share data)
|Total revenue                                |  | $                                    | 4,326  |          |  | $             | 4,925  |              |  | $ | 5,532   |   |  | $ | 6,631  |  
|Gross margin                                 |  |                                      | 2,207  |          |  |               | 2,718  |              |  |   | 3,250   |   |  |   | 3,785  |  
|Total operating expenses                     |  |                                      | 3,321  |          |  |               | 3,766  |              |  |   | 4,390   |   |  |   | 4,605  |  
|Net loss attributable to common shareholders |  | $                                    | (1,379 | )        |  | $             | (1,399 | )            |  | $ | (38,983 | ) |  | $ | (693   | )
|Net loss per share  Basic/ Diluted          |  | $                                    | (9.32  | )        |  | $             | (4.63  | )            |  | $ | (3.21   | ) |  | $ | (0.03  | )
|Weighted average shares                      |  |                                      | 148    |          |  |               | 302    |              |  |   | 12,136  |   |  |   | 25,107 |  



---



|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Per share amounts include the $37.8 million
	beneficial conversion related to convertible preferred stock.

13.     Subsequent
Event

On February 27, 2002, the Company entered
into a Loan and Security Agreement with a financial institution
to borrow up to $4.5 million as a revolving line of credit
and $0.5 million as an equipment term loan. The first
$1.0 million of the revolving line is available on a
non-formula basis, and the remainder is limited to 80% of the
Companys eligible accounts receivable. The equipment term
loan is limited to 100% of the purchase price of eligible
equipment. As collateral under this Loan and Security Agreement,
the Company granted a first priority interest in all its assets,
excluding intellectual property. The revolving line of credit,
which expires on February 26, 2003, and the equipment term
loan, which expires on November 30, 2004, require certain
covenants to be met, including maintenance of a
$3.0 million balance at the financial institution, and
interest on borrowed amounts is payable at prime plus 0.25%.

F-23



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##### Table of Contents



Item 14(a)

AVISTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

|                                |                   |                |   |            |  |            |   |            |  |  |   |      |   |  |   |     | 
|------------------------------- | ----------------- | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ---- | - |  | - | --- | 
|                                |                   | Balance at     |   | Additions  |  |            |   | Balance at
|                                |                   | Beginning of   |   | Charged to |  |            |   | End of    
|                                |                   | Period         |   | Operations |  | Write-Offs |   | Period    
|                                |                   |                |   |            |  |            |   |           
|                                |                   |               
|                                |                   | (In thousands)
|Allowance for Doubtful Accounts |                   |                |   |            |  |            |   |            |  |  |   |      |   |  |   |    
|Period Ended:                   |                   |                |   |            |  |            |   |            |  |  |   |      |   |  |   |    
|                                | December 31, 2001 |                | $ | 312        |  |            | $ | 52         |  |  | $ | (132 | ) |  | $ | 232 | 
|                                | December 31, 2000 |                | $ | 240        |  |            | $ | 117        |  |  | $ | (45  | ) |  | $ | 312 | 
|                                | December 31, 1999 |                | $ | 272        |  |            | $ |           |  |  | $ | (32  | ) |  | $ | 240 | 

S-1



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##### Table of Contents






INDEX TO EXHIBITS

|          |  |                                                                                                                                                                                                           
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits  |  |                                                                                                                                                                                                           
|          |  |                                                                                                                                                                                                           
|3.2*      |  | Restated Certificate of Incorporation                                                                                                                                                                     
|3.3*      |  | Bylaws of Avistar Communications Corporation                                                                                                                                                              
|4.1*      |  | Specimen Certificate evidencing shares of Common
	Stock                                                                                                                                                   
|10.1*     |  | Avistar Communications Corporation 1997 Stock
	Option Plan, as amended                                                                                                                                    
|10.1.1*   |  | Avistar Systems Corporation 1997 Stock Option
	Plan Stock Option Agreement                                                                                                                                
|10.2*     |  | Avistar Communications Corporation 2000 Stock
	Option Plan                                                                                                                                                
|10.3*     |  | Avistar Communications Corporation 2000 Director
	Option Plan                                                                                                                                             
|10.4*     |  | Avistar Communications Corporation Director
	Option Agreement                                                                                                                                             
|10.5*     |  | Form of Avistar Communications Corporation
	Indemnification Agreement                                                                                                                                     
|10.6*     |  | Master lease for the premises located at 555 Twin
	Dolphin Drive, Suite 360, Redwood City, California, between
	Spieker Properties, L.P. and Entex Information Services, Inc.,
	dated August 10, 1998     
|10.7*     |  | Sublease by and between Entex Information
	Services, Inc. and Avistar Systems Corporation, dated
	July 23, 1999                                                                                           
|10.8*    |  | Preferred Supplier Agreement dated June 24,
	1997 by and between Avistar and Tandberg, Inc., including
	modifications Nos. 1, 2, 3 and 4                                                                  
|10.8.1*  |  | Modification No. 5 to the Preferred Supplier
	Agreement referenced in Exhibit 10.8, dated June 27,
	2000                                                                                                  
|10.8.2** |  | Modification No. 6 to the Preferred Supplier
	Agreement referenced in Exhibit 10.8, dated
	November 27, 2000                                                                                              
|10.9*     |  | Amended and Restated Secured Nonrecourse
	Revolving Promissory Note in the principal amount of $9,084,074
	by and between Avistar Systems Corporation and Collaborative
	Holdings, dated November 18, 1999
|10.11*    |  | Secured Nonrecourse Revolving Promissory Note of
	Collaboration Properties, Inc. in the principal amount of
	$1,783,989.73 issued in favor of the Burnett Revocable Trust
	dated April 30, 2000           
|10.12*    |  | Secured Nonrecourse Revolving Promissory Note of
	Collaboration Properties, Inc. in the principal amount of
	$716,359.94 issued in favor of the Heinrichs Revocable Trust
	dated April 30, 2000           
|10.13*    |  | Secured Nonrecourse Revolving Promissory Note of
	Collaboration Properties, Inc. in the principal amount of
	$109,915.08 in favor of William L. Campbell dated April 30,
	2000                            
|10.14*    |  | Collaboration Properties, Inc. Series A
	Preferred Stock Purchase Agreement dated December 9, 1999                                                                                                        
|10.15*    |  | Avistar Systems Corporation Series B
	Preferred Stock Purchase Agreement dated December 9, 1999                                                                                                           
|10.15.1*  |  | Amendment No. 1 to the Series B
	Preferred Stock Purchase Agreement                                                                                                                                       
|10.16*    |  | Avistar Systems Corporation Registration and
	Information Rights Agreement dated December 9, 1999                                                                                                         
|21.1      |  | Subsidiaries of the Company                                                                                                                                                                               
|23.1      |  | Consent of Arthur Andersen LLP                                                                                                                                                                            
|24.1      |  | Power of Attorney (see page 38)                                                                                                                                                                           
|99        |  | Letter to Securities and Exchange Commission                                                                                                                                                              



---



|  |                                                                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of the exhibit have been omitted
	pursuant to a request for confidential treatment and the omitted
	portions have been separately filed with the Commission.



|  |                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Filed as an exhibit to the Companys
	Registration Statement on Form S-1 (File
	No. 333-39008) as declared effective by the Securities and
	Exchange Commission on August 16, 2000.



|   |                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Filed as an exhibit to the Companys Annual
	Report on Form 10-K for the year ended December 31,
	2000 filed with the Securities & Exchange Commission on
	March 9, 2001.