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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

        [X]     Annual report pursuant to Section 13 or 15(d) of the Securities
                Exchange Act of 1934 for the fiscal year ended December 31, 2000
                or


        [ ]     Transition report pursuant to Section 13 of 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                    (I.R.S. Employer
    of incorporation or organization)              Identification Number)

    555 TWIN DOLPHIN DRIVE, SUITE 360                       94065
       REDWOOD SHORES, CALIFORNIA                        (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
                  None                               on which registered
                                                            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 [X] No [ ]

        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.  [X]

        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, 2001 as reported on the Nasdaq National Market, was approximately
$30,774,000. 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, 2000, the registrant had outstanding 25,123,365
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 portions of its Proxy Statement for its 2001 Annual
Meeting of Stockholders.



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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,"
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. 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 video-enabled networked communications
system, with products that provide businesses and other organizations with an
integrated suite of video and data collaboration applications. Our system gives
users on-demand access to interactive video calling, content creation and
publishing, broadcast video and video-on-demand as well as integrated data
sharing, directory services and network management. Our customers use our system
to improve productivity and communication with the enterprise and to enhance
relationships with customers, suppliers and partners. Our system's open
architecture works with the standards and protocols of enterprise data networks,
the Internet and public communications networks. It is designed to evolve with
these networks as bandwidth increases and as new standards and protocols emerge.
Our system is able to expand with the needs of our customers. 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, 2000, our customers have installed Avistar systems at over 200 sites in 111
cities in 32 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 and resource 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.


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        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 adoption of these network-based collaboration
applications. Businesses are quickly adopting the Internet as yet another means
of improving communication within and among organizations. International Data
Corporation, a market research firm, estimates that the number of worldwide
Internet users in commercial businesses will increase to 244 million by 2003.
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, International Data Corporation
estimates that the number of worldwide users of network/web-integrated
collaborative applications will increase to 256 million users in 2002. Even
though this figure is not a direct indicator of the market for video-enabled
collaboration that we serve, we believe it indicates the significant growth
potential in the use of network-based collaboration tools.

        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 constraints 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 an impromptu 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 potential for a new
market for integrated video networking and collaboration. However, these
discrete technologies are not good substitutes by themselves for face-to-face
meetings and presentations because they do not give an enterprise an integrated,
video-enabled communications solution. They are unable to facilitate spontaneous
real-time or recorded video collaboration throughout the enterprise and do not
maximize efficient information exchange, effective decision making and team
interaction. The ability to add video content to a message or conference call
can speed problem resolution and motivate action, trust and understanding. Users
want to be able to create and publish this 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


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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.

ELEMENTS OF A COMPLETE COLLABORATION SOLUTION

        Complete video, audio and data collaboration networks that solve
business problems of time and distance should:

        -       approximate the video and audio quality of television;

        -       make interactions as realistic as possible by eliminating the
                delay when transmitting and receiving two-way video calls;

        -       seamlessly integrate all forms of audio, video and data
                communication: interactive video calling, content creation and
                publishing, broadcast video and video-on-demand retrieval;

        -       operate and scale cost effectively;

        -       provide to video communications the ease of use, speed, quality,
                functionality, flexibility and global access of the telephone
                while easily and reliably supporting more complex applications
                and situations;

        -       offer an upgradeable architecture that can evolve as bandwidth
                availability, protocols, standards and compression technologies
                change;

        -       leverage current and future business investments in local and
                wide area networks, Internet protocol and standards-based
                infrastructures; and

        -       enable the creation, publishing and broadcasting of video
                content from the networked desktop.

        We believe high quality video-enabled 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. 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.

THE AVISTAR SOLUTION

        We develop, market and support a comprehensive, video-enabled
communications system and product suite. Our system provides a seamless,
integrated suite of collaboration applications that include on demand access to
interactive video calling, content creation and publishing, broadcast video,
video-on-demand, as well as data sharing, directory services and network
management. These applications support


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users within and among 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.

        Our video applications can be used for high quality video calling as
well as for creating, publishing, broadcasting, retrieving and viewing video
content. Each of these 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. In fact, 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 both small and large enterprises.

        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 a window on their
workstations, without needing a headset. 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 or broadcast 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. For example, a
commercial bank's branch loan officers in 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 videomail for
recipients who were not available at the time of the call, without overburdening
the data network. These messages can include text and video attachments as well
as audio messages and diagrams or other data. 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. For example, a customer used its Avistar video network
to maximize the reach and impact of an education 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.

        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 videos on their desktops when it is convenient for them.

        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 share 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


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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. For 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". To call any user in the Avistar network,
                it is not necessary to know their number or current location. As
                long as an Avistar user is logged into his or her Avistar
                network, 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.

        -       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, also, to reach frequently called
                parties with a one click "quick connect". Both global and
                private directories can also include other 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.

        Seamless integration of system applications. All of our applications are
seamlessly integrated in 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 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 all users who need them


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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 only minimally disrupting
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:

        -       An integrated collaboration solution. We believe that we
                currently provide the only fully integrated Internet
                protocol-based system that allows individuals to make video
                calls, view broadcasts and create, store and access video
                content or other forms of data from the desktop. Other discrete
                technologies exist but we believe none of these integrate all of
                these capabilities.

        -       Increased availability of knowledge. Within many businesses, a
                limited number of 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 easily
                distributed inside and outside the organization to support
                employee and customer needs worldwide.

        -       Improved productivity and revenue generation. Our system enables
                companies to increase the productivity of their employees and
                speeds 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 these interactions to happen in real-time,
                speeding up the manner in which business is done, freeing up
                time for employees and 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. A number of our customers are
                providing Avistar networks to their clients and business
                partners in order to facilitate interactions, improve the
                relationship and gain an advantage over the competition.

        -       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 seamlessly 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, the video quality
                varies depending on the protocol selected. Our system utilizes
                the data network for transporting selected 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


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                effective use of their existing local area and wide area
                networks, as well as their next generation networks.

THE AVISTAR STRATEGY

        Our goal is to become the leading provider of integrated video-enabled
collaboration networks within and among enterprises. We believe that to
establish networked video as a new communications methodology for doing
business, users must be able to make video calls, and view, broadcast, create
and publish high quality video content from their desktop with the quality and
ease of use of the telephone. 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 how our system addresses the needs of these markets and
promotes broad-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," or benefit to individual users. In the
future, we intend to 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 for applications used and call duration.

        Expand our customers' usage and number of users rapidly and reduce the
total cost of ownership to the enterprise. We believe that our existing
customers will be a significant source of revenue as they implement 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 the relationship with their clients. We
aggressively pursue follow-on orders as customers realize the value of the
collaboration network our system creates. 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 VOS(TM), 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 sets of collaboration applications. We
intend to license the VOS(TM) system and its modules to promote such
integration.

        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


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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, 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 will partner
with other companies to expand our application functionality, to utilize our
VOS(TM) system to manage video hardware endpoints from other companies, and
separately license our software technology.

SYSTEM ARCHITECTURE AND TECHNOLOGY

        Our networked video system is based on the sixth generation
implementation of our open architecture that 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;

        -       the widespread proliferation of broadband infrastructure;

        -       the developing availability of converged audio, video and data
                networks;

        -       improved computer processing speeds; and

        -       the adoption of critical digital video standards.

        Our software platform supports this consolidation by integrating the
audio, video and data transport standards, or more specifically, 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.

        Since our inception we have invested in creating our VOS(TM) video
operating system that we believe positions us to lead this transformation.
Further, we provide a suite of collaboration applications that seamlessly
operate with the VOS(TM) system allowing users to access this functionality in
an easy and intuitive manner. We expect to make this platform increasingly
usable by developers to allow integration with other applications and network
hardware.

        Our system uses TCP/IP, the standard Internet protocol, for initiating
video calls, for 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


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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 H.320 and 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 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 many 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 H.320 Gateway, 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 VOS 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 that are further
                connected via private or public telephony networks. Servers
                communicate through Avistar's unique 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 wide area network
                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 all interactions, the data network is used to
                transport information that can be easily and reliably sent in
                that fashion, such as call set-up information from a user seat
                to the Avistar switch or directory dialing information. 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.


                                      -10-
<PAGE>   11

        -       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 or adding costly
                software or 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 VOS 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 VOS system is designed to enable us
                to adopt additional Internet protocol-based standards allowing
                evolution on the transport of audio and video on the customer's
                local area data network.

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 and conference room users. 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 of users.

        -       The Avistar H.320 Gateway. Connectivity to the wide area network
                is provided via the Avistar H.320 gateway. The gateway supports
                the H.320 video compression standard, using the public telephony
                network or a customer's private network. With our gateway, users
                across the wide area network can communicate with another
                Avistar network or with other H.320 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


                                      -11-
<PAGE>   12

                another continuously and simultaneously. Multiple conference
                centers can be installed on each switch to support several
                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 picture or name in
                the user's directory of local and remote Avistar users on the
                same Avistar network. 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 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(R) 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 and are 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;


                                      -12-
<PAGE>   13

        -       A video network interface unit with ports for camera,
                microphone, speakers, auxiliary video and audio, headset and
                telephone sets; and

        -       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.

CUSTOMERS

        As of December 31, 2000, we have licensed and recognized revenue with
respect to over 4,300 users of our customers at over 200 sites. These represent
111 cities in 32 countries. Because many of our customers operate on a
decentralized basis, decisions to purchase our systems are often made
independently by individual business units, so that in many cases a single
company represents 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
                                    Silicon Valley Bank
                                    UBS Warburg LLC

        Each of Deutsche Bank AG, Goldman, Sachs & Co., JP Morgan Chase, UBS
Warburg LLC and their affiliates, accounted for more than 10% of our revenue for
2000. These entities collectively accounted for 80% of our 2000 revenue.

        Case Studies. The following are examples of how customers use our system
to solve their collaboration needs:

        -       After significant investigation of the market for video-enabled
                communications systems, a major international investment bank
                made an initial order in 1998. The order was for a limited
                deployment to understand actual user acceptance and productivity
                impact. The bank


                                      -13-
<PAGE>   14

                wanted to improve day-to-day communication across its global
                organization while reducing the significant travel demands of
                its managers and analysts. The system is now utilized globally
                by traders, analysts, business managers, credit and legal
                departments and external customers to establish a more effective
                communication method. The success of the system within the
                investment banking division has led the European-based parent
                bank to install the system in the offices of its key managers
                globally, as well as in its various management board rooms. As
                of December 31, 2000, the bank and its affiliates had purchased
                over 19 times the amount included in the initial order.

        -       A manufacturer has deployed Avistar to seven sites in just over
                a year. First deployed in January 1999 as a means to improve
                communications internally among three main locations, our video
                network has expanded internally and has been extended to a key
                supplier. Our system is utilized to establish a virtual supply
                chain management solution. By video enabling both the key
                internal and external suppliers, our system allows the
                manufacturer to manage the nuances associated with complex
                design, development and fulfillment, particularly when it is
                designing products in one geographic location but building and
                outsourcing assembly in another. Throughout the supply chain,
                team members can collaborate on revisions, engineering, changes
                in orders, quality issues, manufacturing challenges and
                component delivery requirements. Our network has improved
                communication, fostered collaboration and compressed the time
                required to resolve manufacturing issues, as well as saved time
                and travel costs.

        -       Another financial services customer has demonstrated how
                enterprise video can directly impact revenue. Using an Avistar
                network, this institution was able to complete a complex trade
                involving multiple equities. Due to the complexities associated
                with this trade, the process to develop and approve this type of
                transaction would normally take approximately two weeks, as it
                requires the involvement and approval of many different legal,
                tax and other experts. Since several institutions compete
                simultaneously for this business, time is of the essence. By
                using our system, our customer was able to bring together all of
                the necessary parties to share appropriate data. They structured
                the trade and won the business in 48 hours. This real-time
                collaboration resulted in a completed client transaction well
                before competition could respond.

SEGMENT INFORMATION

        We operate through two segments:

        -       Avistar Systems Corporation, our wholly owned subsidiary,
                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 engaged in any
                material licensing activities.

SALES AND MARKETING

        Sales. We have a direct sales force in the United States. As of December
31, 2000, our direct sales force consisted of five regional sales managers and
six account development managers in Redwood Shores, California and New York, New
York. Regional sales managers have direct responsibility for


                                      -14-
<PAGE>   15

selling and account management, while account development managers are
responsible for system utilization and expansion at customer sites. Our
international direct sales force is managed from our office in London, England,
and included one regional sales manager and two account development managers as
of December 31, 2000.

        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 and increase
usage of our installed systems. We also use marketing programs to build our
corporate image.

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 some 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, extended warranty care and
expedited repair and replacement services. Our customer support center provides
voice and video call assistance to Avistar users and administrators throughout
the world, 24 hours per day, seven days per week. 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 $4.9
million at December 31, 1999 and $6.9 million at December 31, 2000. We expect
most of these orders to be shipped within the next two fiscal quarters. 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, e-mail and Internet technologies. We believe that
our diverse technical expertise contributes to the highly integrated
functionality of our system. Research and Development expenses were $3.3 million
in 1998, $2.7 million in 1999 and $4.1 million in 2000. As of December 31, 2000,
22 of our employees were engaged in research and development activities. 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


                                      -15-
<PAGE>   16

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 countries where we plan
to establish a significant business presence. We own several U.S., Canadian and
United Kingdom registered trademarks, including Avistar Systems, Avistar logos
and Shareboard.

        Through Collaboration Properties, Inc., our wholly owned subsidiary, as
of December 31, 2000, we held 12 U.S. patents and 13 non-U.S. patents and 10
additional U.S. and non-U.S. 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 U.S. 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. Two of our license agreements with our
customers require us to place our software source code into escrow. In these two
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 timely cure
a breach by us 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


                                      -16-
<PAGE>   17

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.

        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.

        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 individual applications that
enable users to use individual features of our system, we do not believe that
any single competitor currently offers a fully integrated system that competes
with the features of our system. Although we compete with companies to satisfy a
given application at a potential customer, 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 that may be less costly or provide
better performance or functionality than our systems. Many of our existing and
potential competitors have longer operating histories, significantly greater
financial, marketing, service, support, technical and other


                                      -17-
<PAGE>   18

resources, significantly greater name recognition and a larger installed base of
customers than we do. In addition, many of our 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 changing customer requirements, technological change and
competitors' innovations. Accordingly, we cannot predict what our relative
competition position will be as the market evolves for video collaboration
products and services.

EMPLOYEES

        As of December 31, 2000, we had 93 employees, including 22 employees in
research and development, 30 employees in customer services, including
installation and support services, 19 employees in sales and marketing and 22
employees in finance, administration and contract 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
bound by an employment agreement. The loss of the services of one or more of our
key employees could harm our business.




                                      -18-
<PAGE>   19

EXECUTIVE OFFICERS

        Our officers and their ages as of December 31, 2000 are as follows:

<TABLE>
<CAPTION>
NAME                             AGE   POSITION
----                             ---   --------
<S>                              <C>   <C>
Gerald J. Burnett............     58   Chief Executive Officer, President and Chairman of the
                                       Board
R. Stephen Heinrichs.........     53   Vice Chairman of the Board, Chief Financial Officer and
                                       Secretary
William L. Campbell..........     52   Executive Vice President and Director
Craig F. Heimark.............     46   Vice President of Strategic Markets
James P. Hughes..............     40   President of Avistar Systems Corporation
R. Jan Afridi................     41   Vice President of Financial Industry Sales of Avistar
                                       Systems Corporation
Stephen F. Arisco............     42   Vice President of Operations and Customer Support of
                                       Avistar Systems Corporation
Michael G. Barsotti(1).......     51   Vice President of Finance; Chief Financial Officer of
                                       Avistar Systems Corporation
Lauren F. Calaby(2)..........     39   Vice President of Product Marketing and Business
                                       Development of Avistar Systems Corporation
J. Chris Lauwers.............     40   Vice President of Engineering of Avistar Systems
                                       Corporation
Lester F. Ludwig.............     44   Vice President of Collaboration Properties, Inc.
</TABLE>

    (1) Resigned in January 2001

    (2) Resigned in February 2001

        Gerald J. Burnett is one of our founders and has been Chairman,
President and Chief Executive Officer since March 2000. He has been Chief
Executive Officer of Avistar Systems Corporation and a director of Collaboration
Properties, Inc. since 1998. From 1993 to 1997, he was a director of Avistar
Systems Corporation or a principal of its predecessor limited partnership. Dr.
Burnett has been a director of Vicor, Inc. since its inception in 1989. Since
1990, he has been a director of Western Data Systems of Nevada, Inc., a supplier
of software to the aerospace and defense industries. 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.

        R. Stephen Heinrichs is one of our founders and has been Vice Chairman,
Chief Financial Officer and Secretary since March 2000. He has been Chairman of
Avistar Systems Corporation since 1993 and served as Chief Executive Officer
from 1993 to 1997 and Chief Financial Officer from 1993 to the present. Mr.
Heinrichs has been a director of Collaboration Properties, Inc., a wholly owned
subsidiary of the Company, since its inception. From 1976 through 1989 he was
Chief Financial Officer of Teknekron and Chairman and Chief Executive Officer of
several Teknekron companies. He is also one of the founders and has been a
director of Vicor, Inc. since its inception in 1989. He has been Chairman of
Western Data Systems of Nevada, Inc. since 1990. Mr. Heinrichs holds a B.S. from
California State University in Fresno in Accounting. He is a certified public
accountant.

        William L. Campbell is one of our founders and has been a director and
Executive Vice President since March 2000. He has been Chairman, President and
Chief Executive Officer of Collaboration Properties, Inc. since 1998. He has
been Chairman of Vicor, Inc., since 1994 and a director since 1989. 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.


                                      -19-
<PAGE>   20

        Craig F. Heimark has been Vice President of Strategic Markets since
March 2000. From 997 to 2000, he was Managing Partner of the Hawthorne Group, a
strategic advisory firm specializing in consulting to high growth information
technology companies. Prior to founding the Hawthorne Group, he served in
various roles at SBC Warburg, including Member of the Executive Board, Head of
Strategic Planning and Chief Information Officer from 1990 to 1997. He holds a
B.A. in Economics and B.S. in Biology from Brown University.

        James P. Hughes has been President of Avistar Systems Corporation since
January 2000. Previously, he had been Vice President of Sales of Avistar Systems
Corporation since 1994. From 1991 through 1993, he was Director of Business
Development at Aurum Software, Inc. Mr. Hughes holds a B.S. and an M.B.A. in
Marketing from the University of Santa Clara.

        R. Jan Afridi has been Vice President of Financial Industry Sales of
Avistar Systems Corporation since April 2000. Previously, he served as Director
of Domestic Financial Services Sales from 1998 to March 2000 of Avistar Systems
Corporation and as Director of Support Services from 1997 to 1998 of Avistar
Systems Corporation. Prior to joining Avistar he was Director of Sales at
Cornerstone, a document imaging company, from 1994 to 1997. Mr. Afridi holds a
B.S. in engineering from U.S. Military Academy University and an M.B.A. from
Golden Gate University.

        Stephen F. Arisco has been Vice President of Operations and Customer
Service of Avistar Systems Corporation since February 2000. He previously served
as Director of Operations and Customer Service from December 1997 to January
2000 of Avistar Systems Corporation. From 1987 through 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.

        J. Chris Lauwers has been Vice President of Engineering of Avistar
Systems Corporation since 1994. He was Principal Software Architect at Vicor,
Inc. from 1990 through 1993. From 1987 to 1990 he was a Research Associate at
Olivetti Research Center. Dr. Lauwers 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.

        Lester F. Ludwig has been Vice President of Collaboration Properties,
Inc. since 1998. Previously, he had been Principal Scientist at Vicor, Inc.
since 1990. He was Director of Technology of Avistar Systems Corporation from
1995 to 1998. From 1986 to 1990 Dr. Ludwig conducted foundational multimedia
communications research at Bellcore. Dr. Ludwig holds a B.S. and an M.S. in
electrical engineering from Cornell University and a Ph.D. in electrical
engineering and computer science from the University of California at Berkeley.

ITEM 2. PROPERTIES

        Our corporate headquarters are located in Redwood Shores, California,
where we lease approximately 17,000 square feet under a lease that expires
September 2003. We believe that this facility together with additional space we
intend to acquire for use in 2001 will be sufficient to meet our needs through
the next 12 months. In addition, we lease a total of approximately 12,400 square
feet of office space in Palo Alto, California; Incline Village, Nevada; New
York, New York; Dallas, Texas; and London, England. The Palo Alto facility is a
distribution warehouse for inventory, with final assembly and test capabilities.



                                      -20-
<PAGE>   21

ITEM 3. LEGAL PROCEEDINGS

        We are not currently involved in any material litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        On January 2, 2001, our majority stockholders, Gerald J. Burnett, R.
Stephen Heinrichs, and William L. Campbell voted 17,278,452 shares of our common
stock (69% of outstanding shares as of December 29, 2000) by an action by
written consent to:

    1.  Approve the amendment of our bylaws to increase the range of authorized
        directors from four to six to five to nine; and

    2.  Approve the appointment of Robert P. Latta to our board of directors.

        These stockholders actions by written consent became effective on
February 5, 2001.





                                      -21-
<PAGE>   22

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

INITIAL PUBLIC OFFERING

        In August 2000, we completed an initial public offering of the Company,
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, we 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 invested in securities with maturities of three months or
less and is included in cash and cash equivalents.

PRICE RANGE OF AVISTAR COMMON STOCK

        Our common stock has been traded on the Nasdaq National Market under the
symbol "AVSR" since August 17, 2000. The following table sets forth for the
period indicated the high and low sale prices for our common stock, as reported
by the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                        HIGH         LOW
                                                        ----         ---
<S>                                                   <C>          <C>
       YEAR ENDED DECEMBER 31, 2000
           Third Quarter.........................     $ 14.00      $5.6875

          Fourth Quarter.........................     $8.0625      $  3.25
</TABLE>

        On December 29, 2000, the last reported sale price of our common stock
on the Nasdaq National Market was $4.50 per share. As of December 31, 2000 there
were approximately 63 holders of record of our common stock.


SALES OF UNREGISTERED SECURITIES

        None.

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.




                                      -22-
<PAGE>   23

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, 1998 through December 31, 2000, and the selected
balance sheet data as of December 31, 1999 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 statements of operations data
for the years ended December 31, 1996 and 1997 and the selected balance sheet
data as of December 31, 1996, 1997, and 1998 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 periods 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.




                                      -23-
<PAGE>   24


                                STATEMENTS OF OPERATIONS DATA


<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                           -----------------------------------------------------------------
                                                             1996          1997          1998          1999           2000
                                                           --------       -------       -------       -------       --------
                                                             PREDECESSOR ENTITY
                                                           ----------------------
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                        <C>            <C>           <C>           <C>           <C>
Revenue:
   Product ..........................................      $  2,253       $ 3,196       $ 3,342       $ 6,146       $ 16,925
   Services, maintenance and support ................           540         1,861         1,786         3,227          4,489
                                                           --------       -------       -------       -------       --------
      Total revenue .................................         2,793         5,057         5,128         9,373         21,414
Cost of revenue:
   Product ..........................................         2,474         2,661         1,959         3,190          7,287
   Services, maintenance and support ................         1,660         2,354         1,443         1,697          2,167
                                                           --------       -------       -------       -------       --------
      Total cost of revenue .........................         4,134         5,015         3,402         4,887          9,454
                                                           --------       -------       -------       -------       --------
Gross margin ........................................        (1,341)           42         1,726         4,486         11,960
                                                           --------       -------       -------       -------       --------
Operating expenses:
   Research and development .........................         2,591         3,347         3,348         2,718          4,123
   Sales and marketing ..............................         2,288         2,513         3,152         3,649          5,627
   General and administrative .......................           862         1,182         2,289         2,872          4,283
   Amortization of deferred stock compensation ......            --            --            --           618          2,049
                                                           --------       -------       -------       -------       --------
      Total operating expenses ......................         5,741         7,042         8,789         9,857         16,082
                                                           --------       -------       -------       -------       --------
   Loss from operations .............................        (7,082)       (7,000)       (7,063)       (5,371)        (4,122)
                                                           --------       -------       -------       -------       --------
Other (expense) income:
   Interest expense .................................        (1,501)       (2,394)         (276)         (972)        (1,184)
   Interest income ..................................             1             1             1            54            650
   Other ............................................             4          (310)         (303)          (61)           (15)
                                                           --------       -------       -------       -------       --------
         Total other expense ........................        (1,496)       (2,703)         (578)         (979)          (549)
                                                           --------       -------       -------       -------       --------
Net loss ............................................      $ (8,578)      $(9,703)      $(7,641)      $(6,350)      $ (4,671)
                                                           ========       =======       =======       =======       ========
   Beneficial conversion related to
      convertible preferred stock ...................                                                               $(37,783)
   Net loss attributable to common stockholders .....      $ (8,578)      $(9,703)      $(7,641)      $(6,350)      $(42,454)
                                                           ========       =======       =======       =======       ========
Net loss per share -- basic and diluted .............                                   $(86.83)      $(54.27)      $  (4.46)
                                                                                        =======       =======       ========
Weighted average shares used in calculating
   basic and diluted net loss per share .............                                        88           117          9,510
</TABLE>


                                      -24-
<PAGE>   25

                  COMBINED AND CONSOLIDATED BALANCE SHEET DATA


<TABLE>
<CAPTION>
                                              -----------------------------------------------------------------
                                                                   YEAR ENDED DECEMBER 31,
                                              -----------------------------------------------------------------
                                                1996           1997         1998           1999           2000
                                              --------       -------       -------       --------       -------
                                               PREDECESSOR ENTITY
                                              ----------------------
                                                                       (IN THOUSANDS)
<S>                                           <C>            <C>           <C>           <C>            <C>
Cash and cash equivalents ..............      $     32       $    15       $   139       $  6,232       $21,660
Working capital (deficit) ..............       (20,351)         (910)       (2,881)         1,656        21,423
Total assets ...........................         2,919         4,333         2,768         10,523        28,303
Notes payable and accrued interest
  due to related parties
    Current portion ....................        19,648           429         1,300          2,533            --
    Noncurrent portion .................            --            --         5,152          9,190            --
Preferred stock ........................            --            16            16             17            --
Stockholders' equity (deficit) .........       (19,137)           36        (7,609)        (6,997)       21,764
</TABLE>


                                      -25-
<PAGE>   26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        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
"Risk Factors" and elsewhere in this annual 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. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors". These factors may cause our actual results to differ materially from
any forward looking statement.

        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 annual report on Form 10-K to conform our
prior statements to actual results.

OVERVIEW

        We operate through two segments:

        - Avistar Systems Corporation, our wholly owned subsidiary, engages in
          the design, development, manufacturing, sale and marketing of
          networked video communications products; and

        - Collaboration Properties, Inc., our wholly owned subsidiary, engages
          in the development, prosecution, maintenance, support and licensing of
          the intellectual property used in our system.

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 66% and 79% in 1999 and 2000, respectively. We expect the
hardware component of product revenue as a percentage of total product revenue
to decline over time as technology evolves and we are no longer required to
provide as many hardware products or their component parts.

        Revenue from customers outside the United States accounted for 19% of
our revenue in 1999 and 46% of our revenue in 2000. To date, a significant
portion of our revenue has resulted from sales to a limited number of customers.
In 1999, we recorded revenue of approximately $7.2 million from our three
largest customers and their affiliates, which represented 77% of total revenue.
In 2000, we recorded revenue of approximately $17.1 million from our four
largest customers and their affiliates, which represented 80% of total revenue.
We anticipate that our revenue and, therefore, our operating results for


                                      -26-
<PAGE>   27

any given period will continue to depend to a significant extent on a limited
number of customers. As a result, loss of any one of these customers would have
a significant adverse impact on our operation.

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
and costs of installation, maintenance, support, and training services as
revenue is recorded. The gross margins on service revenue have been comparable
to our product revenue margins. This is due in part to the fact that a
significant percentage of service revenue is derived from our higher margin
maintenance business. Maintenance has higher margins than other service revenue
due to the recurring nature of maintenance business.

Operating Expenses

        We generally recognize our operating expenses as we incur them in three
general 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 vesting period of the options, generally four
years. Our research and development expenses consist 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. Our sales
and marketing expenses consist primarily of compensation, commission and travel
expenses along with other marketing expenses. Our general and administrative
expenses consist primarily of compensation for our administrative, financial,
and contractual personnel and a number of non-allocable costs, including
professional fees, legal fees, accounting fees and provisions for allowance 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 and utilities and depreciation expense for property and
equipment.

        The non-cash deferred stock compensation charge related to stock options
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, 2000, we anticipate recording charges
of $1.1 million in 2001, $0.6 million in 2002 and $0.1 million in 2003, to
record the remainder of the costs associated with these grants.

Interest income and expenses

        We generate interest income by investing the cash we raised in December
1999 and August 2000 equity financings. Interest expense consists primarily of
amounts we owed under our line of credit, short-term debt and long-term debt. At
December 31, 2000, we had no short-term or long-term debt and had paid off our
line of credit and terminated the line.

Income taxes

        We have made no provision for and have received no benefit from U.S.
Federal income taxes for any period due to our operating losses. As of December
31, 2000, we had $3.9 million of net operating loss carry-forwards for federal
income tax purposes, which expire beginning on various dates through the


                                      -27-
<PAGE>   28

year 2020. Our use of these net operating losses may be limited in future
periods. We have recorded no tax benefits for these losses.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                          PERCENTAGE OF TOTAL REVENUE
                                                        -------------------------------
                                                                   YEAR ENDED
                                                                  DECEMBER 31,
                                                        -------------------------------
                                                         1998         1999         2000
                                                        -----        -----        -----
<S>                                                     <C>          <C>          <C>
Revenue:
   Product .......................................       65.2%        65.6%        79.0%
   Services, maintenance and support .............       34.8         34.4         21.0
                                                        -----        -----        -----
     Total revenue ...............................      100.0        100.0        100.0
                                                        -----        -----        -----
Cost of revenue:
   Product .......................................       38.2         34.0         34.0
   Services, maintenance and support .............       28.1         18.1         10.1
                                                        -----        -----        -----
     Total cost of revenue .......................       66.3         52.1         44.1
                                                        -----        -----        -----
Gross margin .....................................       33.7         47.9         55.9
Operating expenses:
Research and development .........................       65.3         29.0         19.3
Sales and marketing ..............................       61.5         38.9         26.3
General and administrative .......................       44.6         30.7         20.0
Amortization of deferred stock compensation ......         --          6.6          9.6
                                                        -----        -----        -----
     Total operating expenses ....................      171.4        105.2         75.1
                                                        -----        -----        -----
Loss from operations .............................      (137.7)      (57.3)       (19.2)
                                                        -----        -----        -----
Other (expense) income:
   Interest expense ..............................       (5.4)       (10.4)        (5.5)
   Interest income ...............................         --          0.6          3.0
   Other .........................................       (5.9)        (0.6)        (0.1)
                                                        -----        -----        -----
     Total other expense .........................      (11.3)       (10.4)        (2.6)
                                                        -----        -----        -----
Net loss .........................................      (149.0)%     (67.7)%      (21.8) %
                                                        =====        =====        =====
Net loss attributable to common shareholders .....      (149.0)%     (67.7)%      (198.3)%
                                                        =====        =====        =====
</TABLE>

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000

Revenue

        Total revenue increased by 83% from $5.1 million in 1998 to $9.4 million
in 1999, and increased 128% to $21.4 million in 2000. The increases were due
primarily to increased product and services sales to an increased customer base.
For 2000, revenue from four customers accounted for 80% of total revenues. The
level of sales to any customer may vary from quarter to quarter. We expect that
there will continue to be significant customer concentration in future quarters.
The loss of any one of those customers could have a material adverse impact on
our financial condition or operating results.

Cost of Revenue

        The cost of revenue increased by 44% from $3.4 million in 1998 to $4.9
million in 1999, and increased 93% to $9.5 million for 2000. Cost of revenues
increased due to higher product revenue and the addition of personnel to support
increased service revenue.


                                      -28-
<PAGE>   29

Gross Margin

        The gross margin as a percentage of revenues increased from 34% in 1998
to 48% in 1999, and increased to 56% in 2000. These increases were primarily due
to lower product component costs and the allocation of certain fixed overhead
costs over a larger service revenue base.

Operating expenses

        Research and development. Research and development expenses decreased by
19% from $3.3 million in 1998 to $2.7 million in 1999, and increased 52% to $4.1
million in 2000. The increase was due to increased costs due to significant
increases in personnel and personnel related expenses and increased prototype
and development expenses, reflecting increased costs for new product development
and enhancements to existing products. The 1998 amounts included significant
hardware redesign and associated consultant and prototype expenses. These costs
were not incurred in 1999 leading to the decrease of approximately $0.6 million.

        Sales and marketing. Sales and marketing expenses increased by 16% from
$3.2 million in 1998 to $3.6 million in 1999, and increased 54% to $5.6 million
in 2000. These increases were due to increased personnel and personnel related
costs due to 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 25% from $2.3 million in 1998 to $2.9 million in 1999, and
increased 49% to $4.3 million in 2000. These increases were a result of hiring
additional personnel, increased outside professional services expenses and other
expenses required to support an increased scale of operations and the costs of
being a public company.

        Amortization of deferred stock compensation. Amortization of deferred
stock compensation increased by 232% from $.6 million in 1999 to $2.0 million in
2000. The increase was due to stock options granted during the year ended
December 31, 2000, at prices below fair market value.

        All operating expenses, except for amortization deferred stock
compensation for the year ended December 31, 2000, decreased as a percentage of
revenues for all periods due primarily to significant increases in revenue.

Other expenses, net

        Other expenses, net increased by 69% from $(.6) million in 1998 to
$(1.0) million in 1999 due to higher interest expenses due to the establishment
of a $2.0 million line of credit with a financial institution in June 1999 and
the increase in the balance on the notes payable to related parties. Other
expenses, net decreased by 44% to ($0.5) million in 2000 due to lower interest
expenses due to the retirement of debt and higher interest income due to an
increased balance of cash, cash equivalents, and short term investments
resulting from our initial public offering in August 2000.

Net loss

        The net loss of $7.6 million in 1998 decreased by 17% to a net loss of
$6.4 million in 1999 and the net loss decreased by 26% to $4.7 million in 2000.
These decreases were due to significantly increased revenues, partially offset
by increased cost of revenue and operating expenses.


                                      -29-
<PAGE>   30

Net loss attributable to common shareholders

        The 2000 results include a $37.8 million non-cash amount relating to the
beneficial conversion related to the conversion of our convertible preferred
stock at the time of the initial public offering.

LIQUIDITY AND CAPITAL RESOURCES

        We had cash and cash equivalents of $6.2 million as of December 31, 1999
and $21.7 million as of December 31, 2000. Our operating activities resulted in
net cash outflows of $5.7 million, $7.3 million, and $2.2 million for 1998,
1999, and 2000 respectively. For 2000, the net cash flow of $15.4 million
resulted 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 an
initial public offering of common stock totaling $31.3 million, net of fees and
expenses, a decrease in net borrowings under our line of credit of $2.0 million,
offset by payment on notes payable to related parties of $12.6 million. The net
cash used in operations of $2.2 million included a net loss of $4.7 million, an
increase in accounts receivable of $1.7 million, an increase in inventories of
$.6 million, an increase in prepaid expenses and other current assets of $.3
million, partially offset by the amortization of stock compensation expense of
$2.0 million, an increase in accounts payable of $.8 million, an increase in
deferred revenue of $.8 million and an increase in accrued liabilities of $1.1
million.

        For 1999, the net cash outflow from operating activities of $7.3 million
resulted from a net loss of $6.4 million, an increase in accounts receivable of
$.7 million, an increase in inventories of $.7 million, partially offset by
amortization of deferred compensation of $.6 million. Cash flows provided from
financing activities of $13.5 million resulting primarily from $6.3 million of
proceeds from our private placement of our series B preferred stock completed in
December 1999, $5.2 million of net borrowings from related parties and $2.0
million of borrowings under our line of credit.

        The net cash outflow from operating activities of $5.7 million in 1998
was due to a net loss of $7.6 million, offset by a decrease in accounts
receivable of $.7 million, a decrease in inventories of $.4 million and an
increase in deferred revenue of $.3 million. Cash flows provided from financing
activities of $6.0 million were primarily from net borrowings from related
parties.

        We had no expenditures for property and equipment which were capitalized
for 2000. At December 31, 2000, we did not have any material commitments for
future capital expenditures.

        Under our previous line of credit, we had $2.0 million outstanding at
December 31, 1999. We incurred $82,000 of interest expense on this line of
credit for 1999 and $82,000 for 2000, at an average interest rate of 19% and
15%, respectively. This line of credit was retired using the proceeds from a
portion of a $4.0 million one-year line of credit with another financial
institution in June 2000. The second line of credit was repaid in December 2000,
and the line was terminated.

        We used approximately $12.6 million of the net proceeds from our initial
public offering to repay our related party indebtedness.

        We believe that existing cash and cash equivalents will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next twelve months. If our cash and cash equivalents are not sufficient to meet
our working capital and capital expenditure requirements for the next twelve
months, then we may be forced to engage in equity financing that could dilute
the per share value of our common stock; or debt financing on terms that could
restrict our ability to make capital expenditures or incur additional
indebtedness, which could impede our ability to achieve our business plan.


                                      -30-
<PAGE>   31

        Additionally, we may need to raise additional funds to fund more rapid
expansion, including significant increases in personnel and office facilities,
to develop new systems, to enhance our existing system or to respond to
competitive pressures. We cannot assure you that alternative or additional
financing will be available to us on favorable terms or at all or that any such
financing will not dilute your ownership interest in our company.

RECENT ACCOUNTING PRONOUNCEMENTS

        The Financial Accounting Standards Board has issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which requires
companies to record derivative financial instruments on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. We were
required to adopt SFAS 133 effective January 1, 2001, in accordance with SFAS
137. To date, we have not entered into any derivative financial instrument
contracts. Thus, the adoption of this statement did not have a material impact
on our financial condition or results of operations.

        The SEC has issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
We have historically recognized and currently recognize revenue under the
guidelines as currently provided by SAB 101.

        The FASB has issued Financial Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation -- an
interpretation of APB Opinion 25. Interpretation No. 44 is effective July 1,
2000. Interpretation No. 44 clarifies the application of APB Opinion 25 for
various matters, specifically:

        - the definition of an employee for purposes of applying APB Opinion 25;

        - the criteria for determining whether a plan qualifies as a
          noncompensatory plan;

        - the accounting consequence of various modifications to the terms of a
          previously fixed stock option or award; and

        - the accounting for an exchange of stock compensation awards in a
          business combination.

        The adoption of Interpretation No. 44 did not have a material impact on
our financial position or results of operations.

FACTORS AFFECTING FUTURE OPERATING RESULTS

YOU MAY HAVE DIFFICULTY EVALUATING OUR BUSINESS AND OPERATING RESULTS BECAUSE WE
ARE STILL IN THE EARLY STAGES OF DEVELOPMENT.

        Although we commenced operations in November 1993, the first two and a
half years of our operations were primarily dedicated to research and
development. We did not begin delivering our initial two-way video calling and
data sharing applications until mid-1996, and we did not release our full
product suite, including video-publishing, one-way broadcast viewing and
video-on-demand, until the


                                      -31-
<PAGE>   32

third quarter of 1998. Because we have only recently begun to offer our full
system and services, it may be difficult for you to evaluate our historical
performance and project our future operating results.

        In addition, as an early stage company in an industry with rapidly
changing technology, we face numerous risks and uncertainties associated with
our need to grow and develop as discussed in more detail below. If we are
unsuccessful in addressing these risks, sales of our system and services, as
well as our ability to maintain or increase our customer base, will be
substantially diminished.

WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND MAY NOT BE PROFITABLE IN THE
FUTURE.

        We incurred a net loss of $4.7 million for 2000 and a net loss of $6.4
million in 1999. Our accumulated deficit through December 31, 2000 was $56.7
million. Our revenue may not continue to increase or even remain at its current
level, in addition, we expect our operating expenses to increase significantly
as we develop and expand our business. 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 recognize
significant additional charges relating to non-cash compensation in connection
with options that we granted in 1999 and 2000. These additional charges 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.

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.

        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. 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.

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 future financial performance will depend on our ability to secure
follow-on orders from existing customers. Our strategy is to pursue additional
and larger follow-on orders after these initial orders. Revenue generated from
follow-on orders accounted for approximately 76% and 96% of our revenue in 1999
and 2000, respectively. Our future financial performance depends on successful
initial installations of our system that in turn lead to follow-


                                      -32-
<PAGE>   33

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, Goldman, Sachs & Co., JP Morgan
Chase and UBS Warburg LLC and their affiliates. These customers collectively
accounted for 80% of our revenue in 2000. We expect to continue to depend upon a
limited number of customers for a substantial portion of our revenue.

        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 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 OR TO SHIFTS AWAY FROM THE MICROSOFT
OPERATING SYSTEM.

        Future hardware and software platforms embodying new technologies and
the emergence of new industry standards could render our system obsolete or
noncompetitive. 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,
including primarily Microsoft Windows NT servers. However, our software may not
operate correctly on other hardware and software platforms and 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 may cause confusion in the market and
thereby barm our business. If we fail to promptly modify or improve our system
in response to evolving industry standards or customers' demands, our system
could rapidly become obsolete, which would harm our financial condition and
reputation.


                                      -33-
<PAGE>   34

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 scaleable, or able to accommodate substantial increases in the number of
individuals simultaneously using our system. We are only just beginning to
deploy large-scale implementations within organizations and none of these
installations has 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, computing and communications systems. If we experience
difficulties with installation or do not meet deadlines in a timely manner, 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 new or existing customers have difficulty installing our
products or require significant amounts of our professional services support,
our revenue recognition could be delayed and our costs could increase, causing
increased variability in our operating results, and our margins may 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. 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 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 markets.

        We may be required to reduce prices or increase spending in response to
competition in order to retain or attract customers, to pursue new market
opportunities or to 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 provide 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 our


                                      -34-
<PAGE>   35

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.

INFRINGEMENT CLAIMS COULD REQUIRE US TO EXPEND SIGNIFICANT FINANCIAL AND
MANAGERIAL RESOURCES.

        A third party could claim that our technology infringes 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 will 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. Claims of
infringement against us, if successful, could harm us. 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 AND THAT COULD
RESULT IN LOST REVENUE, INCREASED COSTS, LOSS OF OUR CREDIBILITY OR DELAY IN
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 harm our
reputation.

        Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability and some 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 and a product liability, warranty or other claim may be brought against
us that could harm our business, financial condition and 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 operation.


                                      -35-
<PAGE>   36

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES

        California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below one and
one-half percent, the State of California has on some occasions implemented, and
may in the future continue to implement, rolling blackouts throughout the state.
We currently do not have backup generators or alternate sources of power in the
event of a blackout, and our current insurance does not provide coverage for any
damages we or our customers may suffer as a result of any interruption in our
power supply. If blackouts interrupt our ability to continue operations at our
facilities, then our reputation could be damaged, our ability to retain existing
customers could be harmed and we could fail to obtain new customers. These
interruptions could also result in lost revenue, any of which could
substantially harm our business and results of operations.

        Furthermore, the deregulation of the energy industry instituted in 1996
by the California state government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale prices continue to increase, our operating expenses will
likely increase, as our primary North American facilities are located in
California. Some of our component suppliers are also located in California.
While our orders from our suppliers have not been affected by power failure to
date, the continuance of blackouts may affect our suppliers' ability to
manufacture our products and meet scheduled delivery needs.

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, 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. 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, each of which could
          be lengthy and expensive;

        - the likelihood that, if particular components are 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.


                                      -36-
<PAGE>   37

Any transition to alternate manufacturers or suppliers would be likely to result
in operational problems and increased expenses and could cause delays in the
shipment of, or limit our ability to provide our products. In the case of the
gateway component, we believe the delay could be several months or more. We
cannot assure you that we would be able to enter into agreements with new
manufacturers or suppliers on commercially reasonable terms or at all. Any
disruptions in product flow may limit our revenue, seriously harm our
competitive position and result in additional costs or cancellation of orders by
our customers.

OUR MARKET IS IN AN EARLY STAGE OF DEVELOPMENT, AND OUR SYSTEM MAY NOT BE
ADOPTED.

        Our ability to attain 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 attain 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, which might replace their existing equipment. 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 expect it will.

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. Our inability to
increase our direct sales force and to add indirect distribution channels may
limit our future revenue growth and harm our future operating results. As of
December 31, 2000, our sales force consisted of 14 professionals. We expect to
substantially increase the size of our sales force over the next twelve months.
However, 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.


                                      -37-
<PAGE>   38

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.

        As of December 31, 2000, we had 93 employees, up from 64 employees as of
December 31, 1999. We expect to hire a significant 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.

        In addition, we need to attract and retain highly skilled technical and
managerial personnel for whom there is intense competition. We have had some
difficulty hiring highly skilled technical people due to the high market demand
for their services. 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.

OUR PLANS CALL FOR US TO GROW RAPIDLY, AND OUR INABILITY TO MANAGE THIS GROWTH
COULD HARM OUR BUSINESS.

        We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and is expected to continue to place,
a significant strain on our managerial, operational and financial resources and
information systems. Failure to manage our 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.

        We intend to expand our international business in Western Europe and
enter additional international markets. Expansion will require significant
management attention and financial resources as we establish additional foreign
operations, hire additional personnel and establish indirect distribution
channels. Revenue from this international expansion may be inadequate to cover
the related expenses.

        Other 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;


                                      -38-
<PAGE>   39

        - 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.

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 recently 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, could 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 ranged from a low of $3.25
to a high of $14.00 during the period from August 17, 2000 to December 31, 2000.
Investors may be unable to resell their shares of our common stock for a profit.
In the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.

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 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


                                      -39-
<PAGE>   40

directors has the authority to issue up to 10,000,000 shares of preferred stock
and to determine the terms of 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to market risk related to changes in interest rates. We
do not use derivative financial instruments for speculative or trading purposes.
We do not engage in any foreign currency hedging transactions and therefore, do
not believe we are subject to any significant exchange rate risk.

CASH EQUIVALENTS AND INVESTMENTS

        Cash equivalents consist primarily of commercial paper and money market
and municipal bond funds acquired with remaining maturity periods of 90 days or
less and are stated at cost plus accrued interest that approximates market
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.

        The following table provides information about the company's investment
portfolio. For investment securities, the table presents cash and cash
equivalents and related weighted average interest rates by category.


<TABLE>
<CAPTION>
                                                           Weighted Average
           Description                       Amounts        Interest Rate
                                         --------------    ----------------
                                         (in thousands)
<S>                                      <C>               <C>
Cash and Equivalents:
  Cash ...............................       $ 1,869
  Commercial paper ...................        17,750             6.62%
  Other cash equivalents .............         2,041             6.38%
                                             -------
  Fair Value at December 31,2000 .....       $21,660
                                             -------
</TABLE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Our financial statements and the independent auditors' report appear on
pages F-1 through F-21 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.


                                      -40-
<PAGE>   41

                                    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 2001 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.

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 "Security Ownership of Certain Beneficial Owners and
Management" and "Record Date; Outstanding Shares" 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:

<TABLE>
<CAPTION>
                                                                                            PAGE
                                                                                            ----
<S>                                                                                         <C>
Report of Independent Public Accountants........................................            F-2

Combined Balance Sheet as of December 31, 1999, and Consolidated Balance Sheet
  as of December 31, 2000.......................................................            F-3

Combined Statements of Operations for each of the two years in the period ended
  December 31, 1999, and the Consolidated Statement of Operations for the year
  ended December 31, 2000.......................................................            F-4

Combined Statements of Stockholders' Equity (deficit) for each of the two years
  in the period ended December 31, 1999, and the Consolidated Statement of
  Stockholders' Equity (deficit) for the year ended December 31, 2000...........            F-5

Combined Statements of Cash Flows for each of the two years in the period ended
  December 31,
</TABLE>


                                      -41-
<PAGE>   42

<TABLE>
<S>                                                                                         <C>
1999, and the Consolidated Statement of Cash Flows for the year ended December
  31, 2000......................................................................             F-6

Notes to the Financial Statements...............................................             F-7
</TABLE>

        (a)(2) Financial Statement Schedules

                Report of Independent Accountants on Schedule (see page F20)

                Schedule II--Valuation and Qualifying Accounts and Reserves (see
                page F21)



        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.

        (a)(3) Exhibits

<TABLE>
<S>                      <C>
          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

          10.10*         Accounts Receivable Financing Agreement between Silicon
                         Valley Bank and Avistar Systems Corporation dated May
                         26, 2000

          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
</TABLE>


                                      -42-
<PAGE>   43

<TABLE>
<S>                      <C>
          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 44)
</TABLE>

        --------------
        +  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.

        (b) Reports on Form 8-K. The Company did not file any reports on Form
            8-K during the three months ended December 31, 2000.

        (c) Exhibits. See Item 14(a)(3) above.

        (d) Financial Statement Schedules. See Item 14(a)(2) above.


                                      -43-
<PAGE>   44

                                   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 9, 2001


                                POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gerald J. Burnett and R. Stephen
Heinrichs, 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:

<TABLE>
<CAPTION>
             Signature                                     Title                             Date
             --------                                      -----                             ----
<S>                                       <C>                                           <C>
                                          President, Chief Executive Officer and        March 9, 2001
/s/ Gerald J. Burnett                     Chairman (Principal Executive Officer)
------------------------------------
         Gerald J. Burnett

                                          Vice Chairman, Chief Financial Officer and    March 9, 2001
/s/ R. Stephen Heinrichs                  Secretary (Principal Accounting Officer)
------------------------------------
       R. Stephen Heinrichs

/s/ William L. Campbell                   Executive Vice President and Director         March 9, 2001
------------------------------------
        William L. Campbell

/s/ William R. Brody                      Director                                      March 9, 2001
------------------------------------
         William R. Brody

/s/ Robert P. Latta                       Director                                      March 9, 2001
------------------------------------
          Robert P. Latta

/s/ Robert M. Metcalfe                    Director                                      March 9, 2001
------------------------------------
        Robert M. Metcalfe

/s/ David M. Solo                         Director                                      March 9, 2001
------------------------------------
           David M. Solo
</TABLE>


                                      -44-
<PAGE>   45


                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                    PAGE
                                                                                    ----
<S>                                                                                 <C>
Report of Independent Public Accountants........................................     F-2

Combined Balance Sheet as of December 31, 1999, and Consolidated Balance Sheet
  as of December 31, 2000.......................................................     F-3

Combined Statements of Operations for each of the two years in the period ended
  December 31, 1999, and the Consolidated Statement of Operations for the year
  ended December 31, 2000.......................................................     F-4

Combined Statements of Stockholders' Equity (deficit) for each of the two years
  in the period ended December 31, 1999, and the Consolidated Statement of
  Stockholders' Equity (deficit) for the year ended December 31, 2000 ..........     F-5

Combined Statements of Cash Flows for each of the two years in the period ended
  December 31, 1999, and the Consolidated Statement of Cash Flows for the year
  ended December 31, 2000.......................................................     F-6

Notes to the Financial Statements...............................................     F-7
</TABLE>


                                       F1
<PAGE>   46

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avistar Communications Corporation and affiliates:

        We have audited the accompanying balance sheets of Avistar
Communications Corporation (a Delaware corporation, formerly known as Avistar
Systems Corporation) and affiliates identified in Note 1 as of December 31, 1999
and 2000, and the accompanying statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 affiliates as of December 31, 1999 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ending December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

                                            /s/ ARTHUR ANDERSEN LLP

San Jose, California
January 30, 2001


                                       F2
<PAGE>   47

               AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                             COMBINED BALANCE SHEET
 AS OF DECEMBER 31, 1999 AND CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                                DECEMBER 31,
                                                                                                          -----------------------
                                                                                                            1999           2000
                                                                                                          --------       --------
<S>                                                                                                       <C>            <C>
ASSETS:
  Current assets
    Cash and cash equivalents ......................................................................      $  6,232       $ 21,660
    Accounts receivable, net of allowance for doubtful
      accounts of $240 and $312, respectively ......................................................         2,041          3,712
    Inventories, including inventory shipped to customer sites, not
      yet installed of $818 and $854, respectively .................................................         1,589          2,156
    Prepaid expenses and other current assets ......................................................           124            434
                                                                                                          --------       --------
         Total current assets ......................................................................         9,986         27,962
  Property and equipment, net ......................................................................           219             83
  Other assets .....................................................................................           318            258
                                                                                                          --------       --------
         Total assets ..............................................................................      $ 10,523       $ 28,303
                                                                                                          ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
  Current liabilities
    Line of credit .................................................................................      $  1,998       $     --
    Notes payable and accrued interest due to related parties ......................................         2,533             --
    Accounts payable ...............................................................................         1,157          2,006
    Deferred revenue ...............................................................................         1,313          2,126
    Accrued liabilities and other ..................................................................         1,329          2,407
                                                                                                          --------       --------
         Total current liabilities .................................................................         8,330          6,539
  Notes payable and accrued interest due to related parties, net ...................................         9,190             --
                                                                                                          --------       --------
         Total liabilities .........................................................................        17,520          6,539
                                                                                                          --------       --------
  Stockholders' equity (deficit):
    Convertible preferred stock, $0.001 per share par value; .......................................
      86,000,000 and 10,000,000 shares authorized at December 31, 1999 and 2000 respectively.
      Issued and outstanding -- 17,067,369 shares, and no shares at December 31, 1999 and 2000,
      respectively .................................................................................            17             --
    Common stock, $0.001 par value; 25,000,000 and 250,000,000 shares authorized at December 31,
       1999, and 2000, respectively, 2,818,950, and 26,266,990 shares issued at December 31, 1999
       and 2000, respectively ......................................................................             3             26
    Treasury common stock, 1,139,625 and 1,143,625 shares, at cost, at December 31, 1999, and 2000,
       respectively ................................................................................            (1)            (1)
    Additional paid-in-capital .....................................................................         9,265         80,145
    Deferred stock compensation ....................................................................        (2,084)        (1,755)
    Accumulated deficit ............................................................................       (14,197)       (56,651)
                                                                                                          --------       --------
         Total stockholders' equity (deficit) ......................................................        (6,997)        21,764
                                                                                                          --------       --------
         Total liabilities and stockholders' equity (deficit) ......................................      $ 10,523       $ 28,303
                                                                                                          ========       ========
</TABLE>


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


                                       F3
<PAGE>   48

               AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                        COMBINED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND THE CONSOLIDATED STATEMENT OF
                OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                       -------------------------------------
                                                                         1998          1999           2000
                                                                       --------       -------       --------
<S>                                                                    <C>            <C>           <C>
Revenue:
  Products ......................................................      $  3,342       $ 6,146       $ 16,925
  Services, maintenance and support .............................         1,786         3,227          4,489
                                                                       --------       -------       --------
          Total revenue .........................................         5,128         9,373         21,414
                                                                       --------       -------       --------
Cost of revenue:
  Products ......................................................         1,959         3,190          7,287
  Services, maintenance and support .............................         1,443         1,697          2,167
                                                                       --------       -------       --------
          Total cost of revenue .................................         3,402         4,887          9,454
                                                                       --------       -------       --------
          Gross margin ..........................................         1,726         4,486         11,960
                                                                       --------       -------       --------
Operating expenses:
  Research and development ......................................         3,348         2,718          4,123
  Sales and marketing ...........................................         3,152         3,649          5,627
  General and administrative ....................................         2,289         2,872          4,283
  Amortization of deferred stock compensation* ..................            --           618          2,049
                                                                       --------       -------       --------
          Total operating expenses ..............................         8,789         9,857         16,082
                                                                       --------       -------       --------
          Loss from operations ..................................        (7,063)       (5,371)        (4,122)
                                                                       --------       -------       --------
Other income (expenses)
  Interest expense ..............................................          (276)         (972)        (1,184)
  Interest income ...............................................             1            54            650
  Other, net ....................................................          (286)          (40)            --
                                                                       --------       -------       --------
          Total other expense, net ..............................          (561)         (958)          (534)
                                                                       --------       -------       --------
          Loss before provision for income tax ..................        (7,624)       (6,329)        (4,656)
Provision for income taxes ......................................            17            21             15
                                                                       --------       -------       --------
          Net loss ..............................................      $ (7,641)      $(6,350)      $ (4,671)
                                                                       ========       =======       ========
  Beneficial conversion related to convertible preferred
  stock .........................................................                                   $(37,783)
                                                                                                    --------
Net loss attributable to common stockholders ....................      $ (7,641)      $(6,350)      $(42,454)
                                                                       ========       =======       ========
Net loss per share -- basic and diluted .........................      $ (86.83)      $(54.27)      $  (4.46)
                                                                       ========       =======       ========
Weighted Average shares used in calculating basic and diluted
net loss per share ..............................................            88           117          9,510

*Amortization of deferred stock compensation excluded
  from the following expenses:
  Cost of revenue ...............................................                     $   146       $    263
  Research and development ......................................                         143            223
  Sales and marketing ...........................................                         303          1,516
  General and administrative ....................................                          26             47
</TABLE>

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


                                       F4
<PAGE>   49

               AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND THE CONSOLIDATED STATEMENT OF
      STOCKHOLDER'S EQUITY (DEFICIT) FOR THE YEAR ENDED DECEMBER 31, 2000
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                     CONVERTIBLE
                                                                   PREFERRED STOCK         COMMON STOCK         TREASURY STOCK
                                                              ---------------------   ---------------------  ---------------------
                                                                 SHARES     AMOUNT      SHARES      AMOUNT    SHARES       AMOUNT
                                                              -----------  --------   ----------   --------  ----------   --------
<S>                                                           <C>          <C>        <C>          <C>       <C>          <C>
Balance, December 31, 1997 ................................    16,000,000  $     16    2,171,400   $      2          --   $     --
  Issuance of common stock pursuant to exercise
    of stock options ......................................            --        --      630,800          1          --         --
  Repurchase of common stock upon employee
    terminations ..........................................            --        --           --         --      24,000         --
  Repurchase of common stock from Avistar
    Systems, Limited Partnership ..........................            --        --           --         --     961,250         (1)
  Net loss ................................................            --        --           --         --          --         --
                                                              -----------  --------   ----------   --------  ----------   --------
Balance, December 31, 1998 ................................    16,000,000        16    2,802,200          3     985,250         (1)
  Issuance of Series B Convertible Preferred
    Stock for cash ........................................     1,067,369         1           --         --          --         --
  Costs associated with issuance of Series B
    Convertible Preferred Stock ...........................            --        --           --         --          --         --
  Issuance of common stock pursuant to exercise
    of stock options ......................................            --        --       16,750         --          --         --
  Repurchase of common stock upon employee
    terminations ..........................................            --        --           --         --      50,000         --
  Deferred stock compensation .............................            --        --           --         --          --         --
  Amortization of deferred stock compensation .............            --        --           --         --          --         --
  Repurchase of common stock from Avistar
    Systems, Limited Partnership ..........................            --        --           --         --     104,375         --
  Net loss ................................................            --        --           --         --          --         --
                                                              -----------  --------   ----------   --------  ----------   --------
Balance, December 31, 1999 ................................    17,067,369        17    2,818,950          3   1,139,625         (1)
  Issuance of common stock pursuant to initial public
   offering  (net of related offering costs) ..............            --        --    3,000,000          3          --         --
  Issuance of common stock pursuant to exercise of
    options ...............................................            --        --      232,093         --          --         --
  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          --         --
  Repurchase of common stock upon employee termination ....            --        --           --         --       4,000         --
  Deferred Stock Compensation .............................            --        --           --         --          --         --
  Amortization of Deferred Stock Compensation .............            --        --           --         --          --         --
  Net loss ................................................            --        --           --         --          --         --
                                                              -----------  --------   ----------   --------  ----------   --------
Balance, December 31, 2000 ................................            --  $     --   26,266,990   $     26   1,143,625   $     (1)
                                                              -----------  ========   ==========   ========  ==========   ========
</TABLE>


<TABLE>
<CAPTION>
                                                                ADDITIONAL    DEFERRED                        TOTAL
                                                                 PAID-IN        STOCK       ACCUMULATED    STOCKHOLDERS'
                                                                 CAPITAL     COMPENSATION     DEFICIT         EQUITY
                                                                ----------   ------------   -----------    -------------
<S>                                                             <C>          <C>            <C>            <C>
Balance, December 31, 1997 ................................      $    223       $    --       $   (206)      $     35
  Issuance of common stock pursuant to exercise
    of stock options ......................................             1            --             --              2
  Repurchase of common stock upon employee
    terminations ..........................................            --            --             --             --
  Repurchase of common stock from Avistar
    Systems, Limited Partnership ..........................            (4)           --             --             (5)
  Net loss ................................................            --            --         (7,641)        (7,641)
                                                                 --------       -------       --------       --------
Balance, December 31, 1998 ................................           220            --         (7,847)        (7,609)
  Issuance of Series B Convertible Preferred
    Stock for cash ........................................         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 ......................................             5            --             --              5
  Repurchase of common stock upon employee
    terminations ..........................................            --            --             --             --
  Deferred stock compensation .............................         2,702        (2,702)            --             --
  Amortization of deferred stock compensation .............            --           618             --            618
  Repurchase of common stock from Avistar
    Systems, Limited Partnership ..........................            (1)           --             --             (1)
  Net loss ................................................            --            --         (6,350)        (6,350)
                                                                 --------       -------       --------       --------
Balance, December 31, 1999 ................................         9,265        (2,084)       (14,197)        (6,997)
  Issuance of common stock pursuant to initial public
   offering  (net of related offering costs) ..............        31,296            --             --         31,299
  Issuance of common stock pursuant to exercise of
    options ...............................................            84            --             --             84
  Conversion of Preferred Stock to Common Stock ...........            --            --             --             --
  Beneficial Conversion related to convertible
     preferred stock ......................................        37,780            --        (37,783)            --
  Repurchase of common stock upon employee termination ....            --            --             --             --
  Deferred Stock Compensation .............................         1,720        (1,720)            --             --
  Amortization of Deferred Stock Compensation .............            --         2,049             --          2,049
  Net loss ................................................            --            --         (4,671)        (4,671)
                                                                 --------       -------       --------       --------
Balance, December 31, 2000 ................................      $ 80,145       $(1,755)      $(56,651)      $ 21,764
                                                                 ========       =======       ========       ========
</TABLE>


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


                                       F5
<PAGE>   50

               AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                        COMBINED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND THE CONSOLIDATED STATEMENT OF
                CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                     -------------------------------------
                                                                      1998           1999           2000
                                                                     -------       --------       --------
<S>                                                                  <C>           <C>            <C>
Cash Flows from Operating Activities:
  Net loss ....................................................      $(7,641)      $ (6,350)      $ (4,671)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation ..............................................          425            248            136
    Loss on disposal of fixed assets ..........................           --             24             --
    Amortization of goodwill ..................................          261             --             --
    Amortization of stock compensation expense ................           --            618          2,049
    Allowance for doubtful accounts ...........................           25            (32)            72
    Changes in current assets and liabilities:
       Accounts receivable ....................................          695           (718)        (1,743)
       Inventories ............................................          436           (693)          (567)
       Prepaid expenses and other current assets ..............           12           (106)          (310)
       Other assets ...........................................           12           (279)            60
       Accounts payable .......................................         (124)           127            849
       Deferred revenue .......................................          303           (197)           813
       Accrued liabilities and other ..........................          (85)            49          1,078
                                                                     -------       --------       --------
  Net cash used in operating activities .......................       (5,681)        (7,309)        (2,234)
                                                                     -------       --------       --------
Cash Flows from Investing Activities:
  Purchase of property and equipment ..........................         (175)          (106)            --
                                                                     -------       --------       --------
Cash Flows from Financing Activities:
  Net borrowings (payments) under line of credit ..............           --          1,998         (1,998)
  Payments on notes payable to related parties ................         (200)          (269)       (12,623)
  Borrowings from related parties .............................        6,183          5,435            900
  Proceeds from issuance of common stock (net) ................            2              5         31,383
  Proceeds from issuance of Series B preferred stock (net) ....           --          6,340             --
  Repurchase of common stock from employees and the
      Partnership .............................................           (5)            (1)            --
                                                                     -------       --------       --------
  Net cash provided by financing activities ...................        5,980         13,508         17,662
                                                                     -------       --------       --------
  Net increase in cash and cash equivalents ...................          124          6,093         15,428
  Cash and cash equivalents, beginning of period ..............           15            139          6,232
                                                                     -------       --------       --------
  Cash and cash equivalents, end of period ....................      $   139       $  6,232       $ 21,660
                                                                     =======       ========       ========
Supplemental Cash Flow Information:
  Cash paid for income taxes ..................................      $    17       $     21       $      5
                                                                     =======       ========       ========
  Cash paid for interest ......................................      $    --       $     84       $  1,530
                                                                     =======       ========       ========
  Beneficial conversion related to convertible
   preferred stock ............................................      $    --       $     --       $ 37,783
                                                                     =======       ========       ========
</TABLE>


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


                                       F6
<PAGE>   51

               AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


1. BUSINESS, ORGANIZATION, BASIS OF PRESENTATION AND RISKS AND UNCERTAINTIES

BUSINESS

        Avistar Communications Corporation ("Avistar" or the "Company") provides
networked video communications software and hardware products and services.
Avistar's products include applications for interactive video calling, content
creation and publishing, broadcast video and video-on-demand as well as data
sharing, directory services and network management. 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 ("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.

INITIAL PUBLIC OFFERING

        In August 2000, we completed an initial public offering of the company,
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, we 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 invested in securities with maturities of three months or
less and is included in cash and cash equivalents.


                                       F7
<PAGE>   52

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
as of December 31, 1998, and 1999, and for the two years in the period ended
December 31, 1999 have 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 balance sheet as of December 31, 2000 presents the
consolidated financial position of Avistar and its two wholly-owned
subsidiaries, Avistar Systems and CPI. 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 U.S. dollar. Accordingly, all
gains and losses resulting from those transactions denominated in currencies
other than the U.S. 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 $57
million as of December 31, 2000. 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.

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

        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, 1999 and December 31, 2000 consist of money
market funds, and short-term securities.

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, 1998, 1999, and 2000:


<TABLE>
<CAPTION>
                                        1998       1999        2000
                                       -------    ------      -------
<S>                                    <C>        <C>         <C>
               Customer A.........       12%         *           *
               Customer B.........       11%        43%         13%
               Customer C.........       14%         *           *
               Customer D.........       12%        23%         23%
               Customer E.........        *          *          33%
               Customer F.........        *          *          11%
               Customer G.........        *         11%          *
</TABLE>

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


                                       F8
<PAGE>   53

        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 trade receivables from U.S.
and foreign entities. As of December 31, 1999, approximately 80 percent of
accounts receivable was concentrated with three customers. As of December 31,
2000, approximately 80 percent of accounts receivable was concentrated with four
customers.

FAIR VALUE OF FINANCIAL INSTRUMENTS

        The carrying amounts of the Company's financial assets and liabilities,
including cash and cash equivalents, accounts receivable, accounts payable,
short-term borrowings and notes payable at December 31, 1999 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 and comprise the following (in thousands):

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                 ------------------
                                                                  1999        2000
                                                                 ------      ------
<S>                                                              <C>         <C>
Raw materials .............................................      $  302      $  216
Work-in-progress ..........................................         382          88
Finished goods ............................................          87         998
Inventory shipped to customer sites, not yet installed ....         818         854
                                                                 ------      ------
                                                                 $1,589      $2,156
</TABLE>

        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, 1999 and 2000, the Company has billed
approximately $1.5 million and $2.4 million to their customers related to these
shipments, but has not recorded the receivable or the revenue, as the
installations have not been completed.

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. Property and equipment consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                    ---------------------
                                                     1999          2000
                                                    -------       -------
<S>                                                 <C>           <C>
        Computer equipment ...................      $ 1,345       $ 1,345
        Computer software ....................          106           106
        Furniture, fixtures and equipment ....          295           295
                                                    -------       -------
                                                      1,746         1,746
        Less: Accumulated depreciation .......       (1,527)       (1,663)
                                                    -------       -------
                                                    $   219       $    83
                                                    =======       =======
</TABLE>

RESEARCH AND DEVELOPMENT

        Research and development expenditures are charged to operations as
incurred. 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. Costs incurred by the Company between
completion of a working model and the point at which the product is ready for
general release have been insignificant. Through December 31, 2000, all research
and development costs have been expensed.

PATENT COSTS


                                       F9
<PAGE>   54

        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 $0.3
million, $0.3 million, and $0.4 million for the years ended December 31, 1998,
1999, and 2000, respectively, and are reflected in general and administrative
expenses in the accompanying statements of operations.

REVENUE RECOGNITION AND DEFERRED REVENUE

        The Company's revenue recognition policy is in compliance with Statement
of Position ("SOP") 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" (SOP 98-9). 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 is stipulated in the contract and is
based on a percentage of product revenue. Customers have the option to renew the
maintenance in subsequent periods at the rate established in the original
agreement. Training services can be 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.

        When the Company provides installation services, the product and
installation revenues are recognized upon completion of installation and
customer acceptance is received. When the customer or a third party provides
installation services, the product revenue is recognized upon shipment. 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 is offered based on a percentage of
product sales as stipulated in the agreement and is recognized pro-rata over the
maintenance term, which is typically one year in length. Payments for services
and maintenance made in advance of the provision of services and maintenance are
recorded as deferred revenue.

WARRANTY RESERVE

        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 reserve was approximately $0.1 million and $0.1 million as of
December 31, 1999 and 2000, respectively, 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

        The Financial Accounting Standards Board ("FASB") issued SFAS No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" which
requires companies to record derivative financial instruments on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The Company was required to adopt SFAS 133 effective
January 1, 2001 in accordance with SFAS 137. To date, the Company has not
entered into any derivative financial instrument contracts. Thus, the adoption
of this Statement did not have a material impact on the financial condition or
results of operations of the Company.

        The Securities and Exchange Commission ("SEC") has issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for


                                      F10
<PAGE>   55

disclosures related to revenue recognition policies. The Company has
historically recognized and currently recognizes revenue under the guidelines as
currently provided by SAB 101.

        The FASB has issued Financial Accounting Standards Board Interpretation
No. 44 ("Interpretation No. 44"), "Accounting for Certain Transactions involving
Stock Compensation -- an interpretation of APB Opinion 25". Interpretation No.
44 was effective July 1, 2000. Interpretation No. 44 clarifies the application
of APB Opinion 25 for certain matters, specifically (a) the definition of an
employee for purposes of applying APB Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. Adoption of Interpretation No. 44
did not have a material impact on the financial position or results of
operations of the Company.

COMPREHENSIVE NET LOSS

        The FASB issued SFAS No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 was 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
loss includes certain changes in equity that are excluded from the net loss. The
comprehensive loss for each of the periods presented equaled the net loss.

3. LINE OF CREDIT

        The Company entered into a Loan and Security Agreement (the "Agreement")
with a financial institution to borrow up to the lesser of $2 million or 80
percent of the Company's eligible accounts receivable. As of December 31, 1999,
the Company had $2 million outstanding and no available borrowings. Interest on
the loan was at prime plus two percent (8.5 percent at December 31, 1999). In
May 2000, Avistar Systems Corporation entered into a one year line of credit
agreement with a financial institution providing for borrowings up to $4.0
million, based on 80 percent 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 percent. The line was repaid in December 2000
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
accrue interest at ten percent per annum. As of December 31, 1999, the
outstanding principal under the Credit Agreement was $9.1 million. The line was
paid off in August 2000.

5. COMMITMENTS AND CONTINGENCIES

        The Company leases its facilities under operating leases that expire
through April 2004. As of December 31, 2000, the future minimum lease
commitments under all leases were as follows (in thousands):


<TABLE>
<CAPTION>
                YEAR ENDING
                DECEMBER 31,                            AMOUNT
                ------------                           -------
<S>                                                    <C>
                2001................................   $   857
                2002................................       803
                2003................................       558
                2004................................        33
                                                       -------
                Total minimum lease payments........   $ 2,251
                                                       =======
</TABLE>

        Rent expense under operating leases for each of the years ended December
31, 1998, 1999, and 2000 was approximately $0.8 million, $0.9 million, and $1.2
million respectively.

        The Company sub-leased certain office space, at cost, from an affiliated
entity through common ownership. For the years ended December 31, 1998 and 1999,
rental expense includes $0.5 million and $0.5 million respectively, relating to
this lease. This lease expired in August 1999 when the Company moved to its new
facilities. Beginning in September 1999, the Company began subleasing office
space to Vicor, Inc. ("Vicor"). The Company received approximately $45,000
during the year ended December 31, 1999 and $136,000 for the year ended December
31, 2000, from Vicor related to this sublease agreement.


                                      F11
<PAGE>   56

6. OTHER 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
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 entities follow.

SUPPORT SERVICES

        The Company maintained 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 the years ended December 31, 1998, 1999, and 2000, the Company
charged WDS $0.6 million, $0.6 million and $0.5 million, respectively, under the
agreement. There were no outstanding receivables related to WDS as of December
31, 1999 and 2000. Such reimbursement from WDS was recorded as a reduction in
the costs incurred for the support center. The agreement was terminated in
December 2000.

ACQUISITION OF PRODUCT LINE FROM AFFILIATE

        Effective December 31, 1996, ASLP acquired the assets relating to a
product line from Vicor. The product line consists of Internet-based e-mail and
fax messaging products. The purchase price of $0.6 million, including costs
associated with the transaction, was settled by the issuance of a note bearing
interest at ten percent per annum. The purchase price reflected Vicor's carrying
value of the product line assets at the acquisition date, including a goodwill
amount of $0.5 million. The Company made principal payments of $0.2 million
during 1998, and in February 1999, the Company repaid all principal and accrued
interest outstanding on the note. The goodwill is fully amortized.

REVENUE FROM A RELATED PARTY

        UBS Warburg LLC, which is an affiliate of UBS (an approximate 5 percent
stockholder during 1999 and 2000) is also a customer of the Company. Revenue
from UBS Warburg LLC and its affiliates represented approximately 12 percent, 23
percent and 23 percent of total revenue for the years ended December 31, 1998,
1999 and 2000, 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, 1999 and 2000, the Company had
accounts receivable outstanding from UBS Warburg LLC and its affiliates of
approximately $1.1 million and $3.1 million, respectively. As of December 31,
2000, USB Warburg held less than 5% of company stock.

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.

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 was 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


                                      F12
<PAGE>   57

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
percent 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 Reorganization. After the reorganization, UBS held an approximate
5 percent ownership interest in Avistar.

        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. In addition, 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 vesting period of the applicable options (generally four years).
Amortization expense related to deferred stock compensation was approximately
$0.6 million in 1999 and $2.0 million in 2000. 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
1998 and 1999, respectively, the Company repurchased 961,250 and 104,375 shares
of its common stock from ASLP.

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 percent 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
percent 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. The common stock issued under these fully vested options was subject to a
repurchase right of the Company upon the occurrence of certain events, including
the termination of an employee. This repurchase right was an option of the
Company that expires 60 days from the triggering event or upon the occurrence of
certain specific transactions, including the initial public offering. If the
Company exercises its repurchase right, the purchase price was the net book
value of the stock as of the end of the calendar quarter immediately preceding
the triggering event, as determined by management. All other options vested over
a four year period, with 25 percent vesting after one year and the remaining
vesting 6.25 percent per quarter. The Company granted options to purchase
approximately 1.2 million common shares in 2000 under this plan.

2000 STOCK OPTION PLAN

        In April 2000, the Board established the 2000 Stock Option Plan (the
"2000 Plan"). A total of 3,000,000 shares of common stock have been 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.
As of December 31, 2000, the Company has authorized 5,400,000 shares through its
registration statement in August 2000. 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


                                      F13
<PAGE>   58

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.

2000 DIRECTOR OPTION PLAN

        In April 2000, the Company adopted the 2000 Director Option Plan. A
total of 90,000 shares of common stock have been 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. As of
December 31, 2000, the Company has authorized 114,000 shares through its
registration statement in August 2000. As a result of these increases, a maximum
of 210,000 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.


        A summary of the 1997 Plan, the 2000 Plan, and the 2000 Directors Option
Plan activity and related information for the years ended December 31, 1998,
1999, and 2000 follows:

<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING
                                                       ---------------------------
                                                                       WEIGHTED
                                       OPTIONS                         AVERAGE
                                      AVAILABLE        SHARES       EXERCISE PRICE
                                     ----------       ----------    --------------
<S>                                  <C>              <C>           <C>
Balance, December 31, 1997 .....        736,800        1,091,800       $  0.105
  Authorized ...................             --               --             --
  Granted ......................        (86,100)          86,100           0.39
  Exercised ....................             --         (630,800)        0.0005
  Canceled/repurchased .........         25,800           (1,000)        0.0005
                                     ----------       ----------       --------
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
                                     ==========       ==========       ========
</TABLE>


                                      F14
<PAGE>   59

<TABLE>
<CAPTION>
             OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
------------------------------------------------------  --------------------------
                    NUMBER       WEIGHTED-   WEIGHTED-     NUMBER        WEIGHTED-
   RANGE OF      OUTSTANDING AT   AVERAGE     AVERAGE   EXERCISABLE AT    AVERAGE
   EXERCISE      DECEMBER 31,    REMAINING   EXERCISE    DECEMBER 31,    EXERCISE
    PRICES           2000          LIFE        PRICE         2000          PRICE
-------------    -----------    ----------  ----------  --------------  ----------
<S>              <C>            <C>         <C>         <C>             <C>
$   0.25            239,750        7.00        $0.25        151,000         $0.25
$0.40 - 0.45         12,582        7.85         0.44          5,925          0.45
$   0.95            514,975        8.47         0.95        180,537          0.95
$1.95 - 2.45         16,200        8.67         1.99          4,999          1.98
$2.95 - 3.45        119,542        8.97         3.45         29,885          3.45
$3.95 - 4.94        428,258        9.26         4.13             --            --
$5.75 - 8.50        937,700        9.73         8.47             --            --
$9.34 - 14.0        157,000        4.94         9.56             --            --
$   17.25           851,350        9.25        17.25             --            --
                  ---------        ----        -----        -------         -----
                  3,277,357        8.87        $8.20        372,346         $0.87
                  =========        ====        =====        =======         =====
</TABLE>

        The Company had 115,000 and 224,657 options outstanding that were
exercisable at a weighted average exercise price of $0.25 per share and $0.25
per share as of December 31, 1998 and 1999 respectively.

        The Company has adopted SFAS 123 for disclosure purposes. The weighted
average fair value of options granted during 1998, 1999, and 2000, estimated on
the date of grant using the Black-Scholes option pricing model was $0.05, $0.30
and $4.14 respectively. The fair value of 1998, 1999, and 2000, options granted
is estimated on the date of grant using the following assumptions: risk-free
interest rate range of 4.24 to 6.67 percent, depending on the grant date,
volatility up to 80 percent, 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 $8,000, $63,000, and $497,000 for the years ended December 31, 1998,
1999, and 2000 respectively. The Company's pro forma information for the years
ended December 31, 1998, 1999, and 2000 is as follows:

<TABLE>
<CAPTION>
                                                                    1998        1999          2000
                                                                  --------    --------      ---------
<S>                                                               <C>         <C>           <C>
Net loss attributable to common stockholders (in thousands)
  As reported.................................................    $(7,641)    $(6,350)      $(42,454)
  Pro forma...................................................     (7,649)     (6,413)       (42,951)
Basic and diluted earnings per share
  As reported.................................................    $(86.83)    $(54.27)      $  (4.46)
  Pro forma...................................................     (86.92)     (54.81)         (4.52)
</TABLE>

2000 EMPLOYEE STOCK PURCHASE PLAN

        In April 2000, the Company adopted the 2000 Employee Stock Purchase
Plan. A total of 1,500,000 shares of common stock have been 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. As of December 31, 2000 the Company has authorized 3,300,000 shares
through its registration statement in August 2000. 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. No shares were sold under this plan in 2000.

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

        As of December 31, 2000, the Company had reserved the following shares
of common stock for issuance in connection with:

<TABLE>
<S>                                                           <C>
            Stock options under stock option plans.........    7,703,382
            Employee stock purchase plan...................    3,300,000
                                                              ----------
            Total..........................................   11,003,382
                                                              ==========
</TABLE>

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
differences between the financial statement carrying amounts of existing


                                      F15
<PAGE>   60

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 taxes of Avistar only consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                           YEAR ENDED
                                          DECEMBER 31,
                             -----------------------------------
                               1998          1999         2000
                             -------       -------       -------
<S>                          <C>           <C>           <C>
Current:
  Federal ...............    $    --       $    --       $    --
  State .................          2             2            --
  Foreign ...............         15            19            15
                             -------       -------       -------
                                  17            21            15
Deferred benefits:
  Federal ...............     (2,622)       (1,791)         (985)
  State .................       (388)         (284)         (141)
                             -------       -------       -------
                              (3,010)       (2,075)       (1,126)
Valuation allowance .....      3,010         2,075         1,126
                             -------       -------       -------
                             $    17       $    21       $    15
                             =======       =======       =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                                      DECEMBER 31,
                                          -----------------------------------
                                            1998         1999          2000
                                          -------       -------       -------
<S>                                       <C>           <C>           <C>
Expected tax benefit at federal
statutory rate ......................     $(2,249)      $(1,741)      $(1,630)
State taxes, net ....................        (469)         (284)         (268)
Permanent non-deductible ............          --            --           732
Change in valuation allowance .......       3,010         2,075         1,126
Research credits not used ...........        (255)           --            --
Other ...............................         (20)          (29)           55
                                          -------       -------       -------
Provision for income taxes ..........     $    17       $    21       $    15
                                          =======       =======       =======
</TABLE>

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

        The net deferred income tax asset related to Avistar consists of the
following as of December 31, 1999 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                       1999           2000
                                                      -------       -------
<S>                                                   <C>           <C>
Deferred income tax assets:
  Federal net operating loss carryforwards .....      $ 3,692       $ 3,882
  State net operating loss carryforwards .......          596           325
  Tax credit carry forward .....................          255           733
  Reserves .....................................          542           787
                                                      -------       -------
                                                        5,085         5,727
  Valuation allowance ..........................       (5,085)       (5,727)
                                                      -------       -------
Net deferred income tax asset ..................      $    --       $    --
                                                      =======       =======
</TABLE>

Net operating loss carryforwards at December 31, 1999 and 2000 were
approximately $4.3 million and $4.2 million, for federal and state income tax
purposes, respectively. The net operating loss carryforwards expire on various
dates through the year 2020. The


                                      F16
<PAGE>   61

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 the years ended
December 1998 and 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 the years
ended December 31, 1998, 1999, and 2000, 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 were 18,154,364 and 18,333,729 and 916,933 for the years ended
December 31, 1998, 1999, and 2000 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.

        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):

<TABLE>
<CAPTION>
                                                                    YEAR ENDED
                                                                   DECEMBER 31,
                                                      -------------------------------------
                                                        1998          1999           2000
                                                      --------       -------       --------
<S>                                                   <C>            <C>           <C>
Net Loss .......................................      $ (7,641)      $(6,350)      $ (4,671)
                                                      ========       =======       ========
Beneficial Conversion Related To Convertible
  Preferred Stock ..............................            --            --       $(37,783)
                                                      --------       -------       --------
Net Loss Attributable To Common
  Stockholders .................................      $ (7,641)      $(6,350)      $(42,454)
                                                      ========       =======       ========
Weighted Average Shares Of Common Stock Used In
  Computing Net Loss Per Share .................            88           117          9,510
                                                      --------       -------       --------
Net Loss Per Share Basic and Diluted ...........      $ (86.83)      $(54.27)      $  (4.46)
Pro Forma:
Weighted Average Shares Of Common Stock Used In
  Computing Basic And Diluted Net Loss Per
  Share ........................................                                      9,510
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 ........................................                                     15,525
                                                                                   --------
Weighted Average Shares Of Common Stock Used In
  Computing Pro Forma Basic And Diluted Net Loss
  Per Share ....................................                                     25,035
Pro forma basic and diluted net loss per share .                                   $  (1.70)
</TABLE>


                                      F17
<PAGE>   62

11. SEGMENT REPORTING

In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." SFAS 131 was adopted by the
Company beginning on January 1998. SFAS 131 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 (ASC) and (2) the development,
prosecution, maintenance and support of the intellectual property used in the
Company's products (CPI). The parent company (ACC) engages in the corporate
oversight function and provides financing and management services to the
subsidiaries. Service revenue relates mainly to the maintenance, training and
installation of products and is included in ASC for purposes of reporting and
decision making. The Company's chief decision maker monitors the Company's
operations based upon the information reflected in the following table:

<TABLE>
<CAPTION>
                                           ASC          CPI            ACC            TOTAL
                                        --------       -----         ------         --------
                                                           (IN THOUSANDS)
<S>                                     <C>            <C>           <C>            <C>
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
YEAR ENDED DECEMBER 31, 1998
  Revenue ........................      $  5,128       $    --       $     --       $  5,128
  Gross margin ...................         1,726            --             --          1,726
  Depreciation expense ...........          (423)           (2)            --           (425)
  Total operating expenses .......        (7,332)       (1,457)            --         (8,789)
  Interest income ................             1            --             --              1
  Interest expense ...............          (259)          (17)            --           (276)
  Net loss .......................        (6,167)       (1,474)            --         (7,641)
  Assets .........................         2,642           126             --          2,768
</TABLE>


        International revenue, which consists of domestic sales to customers
with operations principally in Western Europe, comprised 14.1%, 18.6%, and 46%
of total revenue for the years ended December 31, 1998, 1999, and 2000,
respectively. No single foreign country represented greater than 10% of total
revenues for the year ended December 31, 1998. For the years ended December 31,
1999 and 2000, respectively, international revenues to customers in the United
Kingdom accounted for 15.6%, and 28.3% of total revenues. The Company had no
significant long-lived assets in any country other than in the United States for
any period presented.


                                      F18
<PAGE>   63

12. SELECTED QUARTERLY RESULTS OF OPERATIONS

        The following tables set forth, for the periods indicated, our unaudited
financial information for the last eight quarters. We believe 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
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.


<TABLE>
<CAPTION>
                                                                       QUARTER ENDED
                                                 -------------------------------------------------------------
                                                 MARCH 31,         JUNE 30,      SEPTEMBER 30,    DECEMBER 31,
                                                   1999             1999              1999            1999
                                                 ---------         --------      -------------    ------------
                                                             (in thousands except per share data)
<S>                                              <C>               <C>           <C>              <C>
Total revenue ...........................         $ 2,295          $ 1,848          $ 2,624          $ 2,606
Gross margin ............................             834              825            1,318            1,509
Total operating expenses ................           2,314            1,982            2,673            2,888
Net loss attributable to common
  shareholder ...........................         $(1,563)         $(1,404)         $(1,669)         $(1,714)
Net loss per share -- Basic/Diluted .....         $(14.21)         $(11.90)         $(14.14)         $(13.71)
Weighted average shares .................             110              118              118              125
</TABLE>


<TABLE>
<CAPTION>
                                                                         QUARTER ENDED
                                                  ------------------------------------------------------------
                                                 MARCH 31,         JUNE 30,      SEPTEMBER 30,      DECEMBER 31,
                                                   2000              2000           2000 (1)            2000
                                                  -------          -------          --------          --------
                                                             (in thousands except per share data)
<S>                                               <C>              <C>              <C>               <C>
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
  shareholder ...........................         $(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
</TABLE>




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


                                      F19
<PAGE>   64

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE


        To Avistar Communications Corporation and affiliates:

        We have audited, in accordance with auditing standards generally
accepted in the United States, the financial statements of Avistar
Communications Corporation and affiliates as of December 31, 1999 and 2000 and
for each of the three years then ended included in this annual report thereon
dated January 30, 2001. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth herein in relation to the basic financial statements
taken as a whole.





                                            /s/ ARTHUR ANDERSEN LLP



San Jose, California
January 30, 2001


                                      F20
<PAGE>   65

              AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                  BALANCE AT    ADDITIONS                   BALANCE AT
                                 BEGINNING OF   CHARGED TO                    END OF
                                    PERIOD      OPERATIONS    WRITE - OFFS    PERIOD
                                 ------------   ----------    ------------  ----------
                                                     (in thousands)
<S>                              <C>            <C>           <C>           <C>
Allowance for Doubtful
  Accounts Period Ended:
  December 31, 1998 .........        $247          $ 25          $ --           $272
                                     ====                                       ====
  December 31, 1999 .........        $272          $ --          $(32)          $240
                                     ====                                       ====
  December 31, 2000 .........        $240          $117          $(45)          $312
                                     ====                                       ====
</TABLE>


                                      F21
<PAGE>   66


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
       Exhibits
       --------
<S>                 <C>
          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

         10.10*     Accounts Receivable Financing Agreement between Silicon
                    Valley Bank and Avistar Systems Corporation dated May 26,
                    2000

         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
</TABLE>


<PAGE>   67


<TABLE>
<CAPTION>
        Exhibits
        --------
<S>                 <C>
         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
</TABLE>

----------------
+ 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.