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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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FORM 10-K

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|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2002

OR

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

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

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

|                         |  |                                               
|------------------------ |  | ----------------------------------------------
|Title of each class
None |  | Name of each exchange 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]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

Aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
June 28, 2002 was $4,492,971. 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, 2002, the registrant had outstanding 25,285,433 shares
of Common Stock.

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DOCUMENTS INCORPORATED BY
REFERENCE
The Registrant has incorporated by reference into Part III of this Annual Report on Form 10-K specific portions of its Proxy Statement
for its 2003 Annual Meeting of Stockholders.

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|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                       
|                              | Item 1. Business                                                                             
|                              | Item 2. Properties                                                                           
|                              | Item 3. Legal Proceedings                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                      
|                              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                              | Item 6. Selected Financial Data                                                              
|                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 7a. Quantitative and Qualitative Disclosures About Market Risk                          
|                              | Item 8. Financial Statements and Supplementary Data                                          
|                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                     
|                              | Item 10. Directors and Executive Officers of the Registrant                                  
|                              | Item 11. Executive Compensation                                                              
|                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                              | Item 13. Certain Relationships and Related Transactions                                      
|                              | Item 14. Controls and Procedures                                                             
|PART IV                      
|                              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                   
|INDEX TO FINANCIAL STATEMENTS
|INDEX TO EXHIBITS            
|EXHIBIT 10.11                
|EXHIBIT 10.11.1              
|EXHIBIT 10.11.2              
|EXHIBIT 10.11.3              
|EXHIBIT 10.11.4              
|EXHIBIT 10.11.5              
|EXHIBIT 21.1                 
|EXHIBIT 23.1                 
|EXHIBIT 99.1                 



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AVISTAR COMMUNICATIONS CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|                                                                                              |  |     
|PART I                                                                                        |  |     
|Item 1. Business                                                                              |  | 4   
|Item 2. Properties                                                                            |  | 18  
|Item 3. Legal Proceedings                                                                     |  | 18  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 18  
|PART II                                                                                       |  |     
|Item 5. Market for Registrants Common Equity and Related Stockholder Matters                 |  | 19  
|Item 6. Selected Financial Data                                                               |  | 20  
|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21  
|Item 7a. Quantitative and Qualitative Disclosures About Market Risk                           |  | 38  
|Item 8. Financial Statement and Supplementary Data                                            |  | 38  
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 38  
|PART III                                                                                      |  |     
|Item 10. Directors and Executive Officers of the Registrant                                   |  | 39  
|Item 11. Executive Compensation                                                               |  | 39  
|Item 12. Security Ownership of Certain Beneficial Owners and Management                       |  | 39  
|Item 13. Certain Relationship and Related Transactions                                        |  | 39  
|Item 14. Disclosure Controls and Procedures                                                   |  | 39  
|PART IV                                                                                       |  |     
|Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  | 39  
|Index to Financial Statements                                                                 |  | F-1 

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Forward Looking Statements

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




PART I




Item 1.Business

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

Our principal executive offices are located at 555 Twin Dolphin Drive,
Suite 360, Redwood Shores, California, 94065. Our telephone number is (650)
610-2900. Our trademarks include Avistar and the Avistar logo, AvistarVOS,
Shareboard and The Enterprise Video Company. This Annual Report on Form 10-K
also includes our and other organizations product names, trade names and
trademarks. Our website is www.Avistar.com and we post a link to our reports
filed with the Securities and Exchange Commission on our website.

Overview

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

We operate in two segments. Avistar Communications Corporation engages in
the design, development, manufacture, sale and marketing of networked video
communications products and associated support services, and Collaboration
Properties, Inc., or CPI, our wholly owned subsidiary, engages in the
prosecution, maintenance, support and licensing of the intellectual property
that we have developed, some of which is used in our products. As of December
31, 2002, CPI had not entered into any third party licensing agreements.

Industry Background

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

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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.
The increasing availability and affordability of bandwidth on communication
networks is further driving businesses to utilize new tools of communication,
such as web conferencing, to enhance collaboration among users. For example, a
September 2002 study from Raymond James & Associates, Inc. forecasts a 41%
compound five-year growth rate for the electronic conferencing market.

As technology advances and becomes more affordable and modes of
communication expand, enterprises are seeking 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
benefit from the non-verbal cues that speed communication and deepen
understanding. This is particularly true for more complex interactions such as
negotiations, sales, product development, project management and decision
making across geography/functions. However, face-to-face interactions often
need to be scheduled, and impromptu meetings can be difficult to arrange
because all the participants need to be in close proximity, which often
requires travel. In addition, everyone needs to be available at the same time.
These time and distance challenges become increasingly difficult to deal with
as the number of potential participants increases. Beyond traditional
teleconferencing and data sharing communications, attempts to conduct virtual
meetings as an alternative to face-to-face meetings have generally been limited
to conference room-based video conferencing and specially set-up broadcasts.
Most individuals do not have immediate access to these technologies, and the
reservation and set-up time make them unlikely to be used on a spontaneous
basis.

Limitations of Current Means of Collaboration

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

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

Similarly, broadcasting of stored video or television programming at a
desktop or in a conference room is of highly varying quality and generally
cannot be added on a real-time basis to a live videoconference. 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 videoconferences. 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, security, functionality and quality
limitations of current enterprise networks.

Elements of a Complete Collaboration Solution

To become a critical tool in the enterprise, a communications solution
must first and foremost provide application functionality that boosts worker
productivity. It also has to provide high quality at scale, high reliability,
low total cost of ownership and be available to people where and when they do
most of their work, which typically means at their desks. And it must
effectively utilize existing and evolving network infrastructure. We believe a
complete collaboration solution must provide the following:

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Applications and functionality



| |  |  | support the applications people use, in the way they use them to
deliver real-time and non real-time personal collaboration and data
communication
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | provide ease of use                                                                                                                               

Quality



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

Scalability



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

Reliability



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

Adaptability



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

Affordability



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

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

The Avistar Solution

Avistar delivers a networked video system enabled by a unique architecture
and a powerful software platform: the AvistarVOS video operating system. This
software provides a comprehensive, integrated suite of video applications that
include on-demand access to interactive video calling and conferencing, content
creation and publishing, broadcast video, and video-on-demand, as well as data
sharing, directory services and network management. These applications support
users within and amongst enterprises and over data networks, 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 such as
standard Internet protocol, or SIP, to deliver the quality and ease of use of
the telephone system. Based on our analysis of over 1,100,000 calls in 2002,
the reliability of video calls using our system in terms of first-time
connection and call continuity surpassed 95%.

Avistar has built a complete video collaboration solution that today is
delivering TV-quality video to thousands of desktops across hundreds of
buildings. Each of our applications can be used, integrated and managed in
conjunction with one another. People often

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conceive of video in the enterprise only as two-way, real-time
conferencing. Our system allows broadcast video to be included in a video call
and allows the entire session to be recorded simultaneously, and made available
as stored video. Our system joins users in a high-quality video network to
improve their ability to solve complex problems, connect to co-workers,
customers and suppliers, manage large projects and quickly act together on
opportunities. Our system does this cost effectively and reliably and is
designed to be able to serve global corporations with branch offices and/or
distributed operations.

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

Video content creation and publishing.With our solution, users can
create and publish video content from their desktops by recording themselves,
recording a multi-point conference or adding commentary to a broadcast and
recording the entire session. Recorded content can be played back on demand
and can be published in various forms to others inside and outside the
enterprise. Content can be published via email links, posting to web sites or
embedded as a streaming video in an email. For example, an economist at an
investment-banking firm regularly records commentary on current events and
market conditions using the Avistar system. This recorded video is then
available internally on the corporate network or through the Internet to
clients.

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

Video-on-demand.Users anywhere on the Avistar network can easily
retrieve stored videos. For example, a corporation uses our system to record
its sales training seminars. Salespeople who are unable to attend these
face-to-face presentations are now able to watch the seminars by retrieving and
playing the stored videos on their desktops when it is convenient for them.
Another customer uses our system to record and broadcast their daily morning
meetings so colleagues in other time zones around the world can be updated on
the issues of the day when they report to work.

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

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

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



| |  |  | Click-to-connect simplicity.To initiate calls or add another user
to a session already underway, a 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
initiate a video call 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Find Me, Follow Me.Avistar video calling is built on directories
and presence-based features referred to as Find Me, Follow Me. Using
this feature, our system is able to determine the presence and location
of any user on an Avistar network at any time. To call any user in the
Avistar network, it is not necessary to know their number or current
location. As long as the Avistar user is logged into his or her Avistar
application, the Find Me, Follow Me application automatically registers
where that user is logged in, regardless of site or geography, and
routes all calls to the users location. Using this Find Me, Follow Me
technology, Avistars system makes video calling a one-click process and
enables what we call Video Instant Messaging.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Comprehensive directory.The Avistar network directory is a
comprehensive list of Avistar numbers that can be called with a click.
All users currently logged into an enterprises Avistar network will be
shown, providing immediate presence information as to availability.
The global directory can be tailored to include only a business
community of users. In addition, a private directory feature allows
users to create their own directory and reach frequently called parties
with a one-click direct connect tool. Both global and private
directories can also include other non-Avistar sites that use
standards-based video conferencing systems.                                                                                                          
|
| |  |  | Consistency across locations.The Avistar user interface is
consistent across desktops and conference rooms. Thus, a user who is
familiar with the functionality at the desktop requires no additional
training or set up to utilize an Avistar system in a conference room
setting. This allows conference room systems to be self-service,
thereby avoiding the support logistics and expense of traditional room
based systems.                                                                                                                                                                                                                                                                                                                                             

Seamless integration of system applications.All of our applications are
seamlessly integrated with one user interface. As a user adds an additional
video source during an ongoing video call  such as an additional live
participant, a one-way broadcast or a stored video clip  there is virtually no
delay in launching 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 with the ability to flexibly and proactively manage each of the
various components of the network. Within our system, the most costly and
complex equipment and software applications are shared as networked resources.
This arrangement allows for redundancy and dynamic allocation of these
resources to users who need them, and ensures that users experience the best
video quality possible at the highest reliability and lowest cost of use.
Servers and switches can be maintained, installed and repaired centrally, and
many network support functions can be performed remotely over the data network,
thereby limiting the disruption of service to an individual user. Similarly,
additional desktops and meeting rooms can be easily and inexpensively added to
the Avistar network, with those new users concurrently added to the Avistar
directory. Additionally, our software makes call routing decisions to minimize
communications costs.

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



| |  |  | Integrated video collaboration solution.We provide a fully
integrated Internet protocol-based system that seamlessly allows
individuals to make video calls, view broadcasts and create, store and
access video content or other forms of data from the desktop. This can
speed business processes by enhancing collaboration and communication.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Increased availability of knowledge within the enterprise.At many
businesses, individuals who possess valuable knowledge often cannot
effectively distribute their knowledge to the rest of the organization.
Our system enables these businesses to access these individuals and
disseminate their knowledge more efficiently and effectively by offering
them the ability to call, broadcast or record from their desktops, and
offering other users the ability to receive this information real-time,
or access video recordings at a convenient time and location. In
addition, our system gives every desktop the ability to create and
publish valuable visual content, which can be distributed inside and
outside the organization to support employee and customer needs
worldwide. The ability to spontaneously add additional participants to
a call encourages personal communications between individuals who
otherwise might not enjoy this access.

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| |  |  | Improved productivity and revenue generation.Our system helps
companies increase the productivity of their employees and speed up time
critical decision-making. By creating a network of Avistar users, our
customers can have face-to-face meetings within the enterprise and with
customers and partners, without the costs and time delays of travel.
Negotiations, sales, advisory services, decision-making and other
persuasive communications are more effective when done face-to-face.
Our solution allows interactions to happen in real-time, speeding up the
manner in which business is done, freeing up time for employees,
enhancing business-to-business communications, and potentially
increasing revenue generation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Enhanced customer and partner relationships.Our system helps
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, while being
more personal. One of our customers provides Avistar networks to their
clients and business partners in order to facilitate interactions and
improve relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Opportunity to leverage existing and future communication
infrastructures.We provide an open architecture that uses existing
standards and is designed to take advantage of emerging standards. Our
system integrates into our customers existing network communications
infrastructure, and supports the protocols a company may choose to use
for video broadcasts, data sharing and transport of information.
However, video quality varies depending on the protocol selected. Our
system utilizes existing data networks for transporting stored video,
and is designed to support real-time digital networking and video
transmission. We have designed our system to continue to work with
Internet protocol-based technologies as standards evolve and quality of
service improves. We expect this flexibility, together with simplified
software and hardware at the desktop, to allow companies to make
effective use of their existing local area and wide area networks, as
well as their next generation networks.                                                                                                                                                                                                                                                                
|
| |  |  | Better communication to face new business challenges such as
globalization and distributed locations.Within global corporations,
professionals collaborate daily with customers, partners and associates
who are often located in different offices and/or different time zones.
This has increasingly become the case as firms, due to economic and
security concerns, have restricted travel and have begun decentralizing
their personnel across a more distributed set of locations, taking
advantage of lower costs of real estate. In this context, critical
information must be delivered on a timely basis and without confusion as
smoothly as if colleagues were working together in person. By offering
a combination of conference room and desktop systems, Avistars video
product suite enables companies that are reducing travel and/or
distributing their operations to easily and quickly connect small,
remote offices to the central organization, and still benefit from
face-to-face interaction. Based on our experience in helping existing
customers choose their optimal configurations, we are able to advise new
customers on the setups or configurations that will be most effective
for a large central office, a small branch office or other remote
locations.

System Architecture and Technology

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

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



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

Our software platform supports this consolidation and evolution by
integrating industry standards for audio, video and data transport, but
separating them from application functionality and system management. This
allows the video operating system to manage the interoperation and transcoding
of various standards to seamlessly integrate video, audio and data into complex

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applications, and not be limited by the functionality built into one
particular, application-specific standard. It also allows the system to
accommodate new and evolving standards with minimal disruption. Current
industry and widely accepted proprietary standards supported include H.320,
H.323, NTSC, PAL, MPEG, Microsoft Windows Media Video and Real Networks
RealMedia.

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

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

Each Avistar desktop functions as a node on the network, like personal
computers, printers or file servers on a local area network. Just as color
printers and file servers are often shared network resources on the local area
network, the more costly equipment in an Avistar system, such as servers,
switches, and the compression and decompression equipment components of our
gateways, are centralized and made available to multiple users. Network nodes
and resources, like those of a data network, are managed through centralized,
Internet protocol-based applications and administration tools, such as
Internet-based reports of video call activity.

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



| |  |  | Switched services:Our video network employs a switched architecture
to ensure that our system can scale to support large numbers of users.
At the center of the network is an Avistar switch, which functions for
video networking like the local area network switch functions for data
networks. With our switch, bandwidth for video-enabled communication is
available on demand so that two or more users participating in a video
call automatically have the bandwidth required for continuous video and
audio, with virtually no delay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Network management:The AvistarVOS system utilizes open protocols for
call set-up, call control and directory services. It also complies with
standards and interfaces and connects with video networks through shared
Avistar gateways, which are further connected via private or public
telephony or TCP/IP networks. Servers communicate through our signaling
system for video protocol, SSV, which is based on TCP/IP, the standard
Internet protocol. Through this signaling system, servers exchange
configuration information and allocate call resources during call
set-up, and exchange network status information. The signaling system
selects the optimal route for all video calls, helping to minimize call
costs and performance demands on wide area network resources. Most
videoconferencing equipment using industry standard compression
technologies also can communicate with an Avistar network.                                                                                                                                                                                                                                                                                  
|
| |  |  | Transport standard independence:Our system automatically selects the
appropriate transport standards for transmitting information over the
network, to help deliver the highest quality video possible and full
duplex audio in the most efficient manner. For example, the AvistarVOS
software automatically exchanges information among servers and switches
to determine the best network route for video calls. 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, we deliver only slightly lower-than-television quality for
real-time calls and broadcasts, because we use industry video
compression standards across the public telephony network or a
customers private networks. For the transmission of recorded content
on corporate data networks or via the Internet, our system uses standard
digital storage formats and transport technologies.
|
| |  |  | Expandable to thousands of users:Because shared resources, such as
servers, are attached to the Avistar switch and are managed through the
data network, new users and new capabilities can be added without
replacing existing infrastructure, but rather, by simply adding video
software and hardware at each desktop. Just as local area network
switches and public                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |   |  | 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 AvistarVOS software is designed
to facilitate utilization of all-digital, local area networks, including
Internet protocol video transmission, when sufficient bandwidth, quality
of service and digital endpoints are available. We expect that our
system will also maintain compatibility with existing networks. Our
AvistarVOS system is designed to enable us to adopt additional Internet
protocol-based standards, allowing evolution of the transport of audio
and video on the customers local area data network.

System Products and Applications

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

Shared Resources

Like the architecture of most 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



| |  |  | Avistar Switch.At the center of each of our local area network
systems is an Avistar switch that supports up to 120 desktop users
and/or conference rooms. The switch connects video calls placed among
Avistar desktop and conference room users, and allows those users to
access shared resources such as Avistar conference centers, media
servers and gateways, as well as television broadcasts and VCRs. Each
Avistar switch includes server software that provides application
services and network management. Additional switches can be connected
together in a building or campus to scale to many hundreds or even
thousands of users.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Avistar Gateways.Connectivity to the wide area network is provided
via our gateways. The gateways support various protocol standards,
using public telephony, TCP/IP networks or customers private networks.
With our gateways, users across the wide area network can communicate
with another Avistar network or with third-party desktop or room systems
that are H.320 and H.323 compliant. Our new, multi-channel IP gateway,
introduced in February 2003, significantly reduces the cost of wide area
connectivity as compared to previous generations of our gateway
products.                                                             

Server and Software Products



| |  |  | Avistar Conference Center.Our conference center enables multi-point
conferences for up to four video sources, with continuous presence that
allows all participants to see and hear one another continuously and
simultaneously. Multiple conference centers can be installed on each
switch to support a corresponding number of simultaneous multi-party
calls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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. 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 Media Server also has a publishing capability allowing Avistar
users to publish video content on intranets, extranets or the Internet,
including web servers, video servers or content distribution networks.
Publishing to vBrief video email messages is one example. The Media
Server software manages format plug-ins to simplify transcoding to other
video standards and formats, such as Real Networks and Microsoft Windows
Media Video.
|
| |  |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

11



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| |  |  | individual or a conference call to be broadcast to thousands of users,
and, via third party products, to be streamed simultaneously over the
Internet.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

Internet Protocol-Based Applications



| |  |  | Avistar Directory Software.Our directories allow a user to place a
video call by simply clicking on a name in the users directory of local
and remote Avistar users. If the other party is logged-on, our system
will route the call to the correct location over the local area network,
or the wide area as appropriate. 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Avistar Community Exchange and AvistarVOS Proxy. These products,
introduced in February 2003, provide secure, cross-enterprise
communications between independent Avistar systems. This provides
directory and presence information and system resource reservation for
easy and fast connections between firms. These products will facilitate
the building of communities of video-enabled users.                                                                                                                                                                                                                                                                     
|
| |  |  | Shareboard® Software.Our Shareboard application allows users to
collaborate on graphics, data or text during a video call. By clicking
on the share button, users are linked to the Shareboard data sharing
application. Users can share any application window or image with all
conference participants, see all users color-keyed pointers and text
and paintbrush annotations, and save or print shared images from any
desktop or conference room.                                                                                                                                                                                                              
|
| |  |  | Avistar Call Reporting System.With our web-based call reporting
system, our customers can track local and wide area network calls logged
by each of our servers. Reports show call details, device usage and
calls by user, all viewable from any Web browser. Reports can be
customized and stored for future or specialized analysis.                                                                                                                                                                                                                                                                                                                                 

Desktop and Conference Room Client Products

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



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

Avistar Viewer.Our viewer is designed for organizations that need to
provide users with view-only access to important video sources. Users can
monitor a selection of real-time, broadcast video sources, such as training
courses or senior management meetings, watch live television broadcasts, or
select and view stored video content from their desktops. Customers can deploy
our viewers in networks of one-way users, or add them to mixed networks that
already include our 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, allowing for all forms of video-enabled
communications: interactive video calling, content creation and publishing,
broadcasting and video-on-demand. Therefore, desktop users are familiar with
the controls used in Avistar room systems 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 (as is common with traditional room systems).

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.

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Customers

As of December 31, 2002, we have licensed and recognized revenue with
respect to over 8,500 end-users at approximately 325 customer sites in 124
cities and 36 countries. Because many of our customers operate on a
decentralized basis, decisions to purchase our systems are often made
independently by individual business units. As such, a single company may
represent several separate accounts. The following is a list of some of the
customers that, together with their affiliates, have generated the largest
portion of our revenue since our inception:



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

Deutsche Bank AG and JP Morgan Chase and their affiliates, each accounted
for more than 10% of our revenue for 2002. These entities collectively
accounted for 66% of our 2002 revenue.

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia comprised 49%, 47% and 46% of
total revenue for 2002, 2001 and 2000, respectively. For 2002, 2001 and 2000
revenues to customers in the United Kingdom accounted for 26%, 21% and 28%,
respectively, of total revenues.

Segment Information

We operate through two segments:



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

Financial information regarding these segments is provided in Note 11 to
our consolidated financial statements included in this Annual Report on Form
10-K. To date, CPI has not signed any material licensing agreements.

Sales and Marketing

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

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

Installation, Maintenance, Training and Support Services

We provide a wide variety of services for installation and design of our
video communications products, 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
new customers. In an increasing number of cases, our customers information
technology group or services partner installs follow-on orders. In the future,
we expect our customers or their services partners will increasingly perform
installation of additional systems.

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

Backlog

The estimated backlog of product orders believed to be firm was $700,000
at December 31, 2002 and $2.3 million at December 31, 2001. We expect most of
the orders as of December 31, 2002 will be shipped in the first two quarters of
2003. Backlog is not necessarily indicative of past or future operating
results.

Research and Development

We believe that strong system development capabilities are essential to
our strategy. Our research and development efforts focus on enhancing our core
technology, developing additional applications, addressing emerging
technologies, standards and protocols, and engaging in patent and licensing
activities. Our system development team consists of engineers and software
developers with experience in video and data networking, voice communications,
video and data compression, email and Internet technologies. We believe that
our diverse technical expertise contributes to the highly integrated
functionality of our system. Research and development expenses were $3.7
million in 2002, $5.3 million in 2001 and $4.1 million in 2000. We expect to
devote a significant amount of our resources to research and development in the
foreseeable future.

Manufacturing

We use contract manufacturers to produce components and perform component
purchasing and some material assembly. Our operations staff develops
manufacturing strategies and qualifies and audits manufacturing processes and
suppliers. We work with our contract manufacturers to reduce manufacturing
costs and to resolve quality control issues, as well as performing final
assembly and testing of our standard products. 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 United States,
Canadian and United Kingdom registered trademarks, including Avistar and the
Avistar logo, AvistarVOS, Shareboard and The Enterprise Video Company.

Through Collaboration Properties, Inc., our wholly owned subsidiary, as of
December 31, 2002, we held 18 United States patents and 33 non-United States
patents and 7 additional United States and non-United States patents had been
allowed. The patents that have been issued expire at varying dates between
2013 and 2015. In addition, numerous patent applications are pending in the
United States and several other jurisdictions. Specifically, these patent
applications, most of which relate to and claim priority from an application
originally filed in 1993, 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.

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

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

Competition

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

We believe we may face increasing competition in the future from
alternative video communications solutions that employ new technologies or new
combinations of technologies from companies such as Cisco Systems, Inc.,
Hewlett-Packard Company, Microsoft Corporation, RealNetworks, Inc. and WebEx
Communications, Inc., that enable web-based or network-based video
communications with low-cost digital camera systems.

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;                             
|
| |  |  | price and overall cost of ownership; and                 
|
| |  |  | document sharing, including internet-based collaboration.

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



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

While a number of companies have marketed applications that enable users
to use individual features similar to our system, we do not believe that any
single competitor currently offers a fully integrated system that offers all
the features of our system. We believe these companies in many cases can also
represent complementary opportunities to extend the reach of our 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 companies
that may enter our existing or future markets, possibly including major
telephone companies or

15



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

Employees

As of December 31, 2002, we had 71 employees, including personnel
dedicated to research and development, customer services, including
installation and support services, sales and marketing and finance and
administration. Our future performance depends in significant part upon the
continued service of our key technical, sales and marketing, and senior
management personnel, none of whom is obligated to remain with us by an
employment agreement. The loss of the services of one or more of our key
employees could harm our business.

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Executive Officers

Our officers and their ages as of December 31, 2002 were as follows:

|                    |  |     |    |          |  |                                                          
|------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Gerald J. Burnett   |  |     | 60 |          |  | Chairman of the Board and Chief Executive Officer        
|William L. Campbell |  |     | 54 |          |  | Vice Chairman, and Executive Vice President and Secretary
|Robert J. Habig     |  |     | 48 |          |  | Chief Financial Officer                                  
|J. Chris Lauwers    |  |     | 42 |          |  | Chief Technology Officer                                 
|Robin Gilthorpe     |  |     | 35 |          |  | Vice-President of Sales, Financial Industry              
|Stephen F. Arisco   |  |     | 44 |          |  | Vice President, Operations and Customer Support          



---

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

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

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

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

Robin Gilthorpehas been our Vice President of Global Sales, Financial
Services since April 2002. Previously, he served as Managing Director of Slam
Dunk Networks, a managed network service company from October 2000 to April
2002, as Senior Vice President at New Era of Networks, Inc., an enterprise
application integration company from July 1997 to October 2000. Mr. Gilthorpe
held various positions at TIBCO Software, Inc. from April 1993 to July 1997,
Hitachi, Ltd. from October 1991 to April 1993 and Banca Commerciale Italiana
from July 1990 to October 1991. Mr. Gilthorpe holds a B.A. in economics and
Italian studies from University of Lancaster, England.

Stephen F. Ariscohas been our Vice President of Operations and Customer
Service since February 2000. He previously served as Director of Operations
and Customer Service of Avistar Systems from December 1997 to January 2000.
From 1987 through December 1997, he was Director of Customer Service and
Operations at TRW Financial Systems, a systems integration company. Mr. Arisco
holds a B.S. in Business from the University of Phoenix.

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Item 2.Properties

Our corporate headquarters are located in Redwood Shores, California,
where we occupy approximately 17,000 square feet under a lease that expires in
September 2003. We believe that our current leased facilities, together with
facilities that are available to us or are being negotiated, will be sufficient
to meet our needs for the next twelve months. In addition, we lease a combined
total of approximately 18,000 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.




Item 3.Legal Proceedings

On September 23, 2002, CPI, our wholly-owned subsidiary, commenced a
patent infringement lawsuit against Polycom, Inc. alleging that several Polycom
videoconferencing products infringe four patents held by CPI. The suit was
filed in the United States District Court for the Northern District of
California. The four patents involved are U.S. Patent Nos. 5,867,654,
5,896,500, 6,212,547 and 6,343,314. These patents cover technologies relating
to video and data conferencing over unshielded twisted pair (UTP) networks,
distributed call-state management, separate monitors for simultaneous
computer-based data sharing and videoconferencing and remote participant hold
and disconnect functions in multi-party conferencing. These technologies are
core components of our AvistarVOS video operating system. In this action, CPI
has requested injunctive relief, damages to compensate for past and present
infringement, treble damages, costs associated with the litigation and such
further relief as the Court deems just and proper. Polycom responded to CPIs
claims on November 14, 2002, at which time it both answered the complaint and
asserted counterclaims against CPI for non-infringement, invalidity and
unenforceability. On January 31, 2003 Polycom filed a motion with the court
requesting permission to amend its counterclaims to incorporate claims of
alleged infringements by Avistar Communications of four PictureTel patents that
Polycom has told us it has had assigned to it. A hearing was held on March 7,
2003, at which time the judge granted Polycoms motion to amend its
counterclaims. A trial date for CPIs claims against Polycom and Polycoms
proposed counterclaims has not yet been set.

The prosecution of this lawsuit and the defense of the proposed Polycom
counterclaim may require us to expend significant financial and managerial
resources and therefore may have a material negative impact on our business.
The duration and ultimate outcome of this litigation are uncertain. In
addition, an adverse judgment, if entered against CPI or Avistar, could require
CPI or Avistar to pay substantial compensation and/or damages to Polycom, which
could harm our business, financial position and results of operations and cause
our stock price to decline substantially. It should be noted that Avistars
agreement with a third-party supplier (whose products are implicated by
Polycoms claims of alleged patent infringement), provides for indemnification
to Avistar by that third party. Nevertheless, litigation such as this suit can
take years to resolve and can be expensive to prosecute. Regardless of the
outcome, the prosecution of our claims in this lawsuit may require us to obtain
additional financing.




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

None.

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PART II




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

Our common stock traded on the NASDAQ National Market from August 17, 2000
to October 29, 2002 and has traded on the NASDAQ SmallCap Market since October
30, 2002 under the symbol AVSR. Prior to August 17, 2000, there was no
public market for our Common Stock. The following table sets forth for the
period indicated the high and low closing sale prices for our common stock, as
reported by the NASDAQ National Market.

|               |  |                   |      |                   |  |      |      |     |  |   |      |  |  |   |      | 
|-------------- |  | ----------------- | ---- | ----------------- |  | ---- | ---- | --- |  | - | ---- |  |  | - | ---- | 
|               |  | Year Ended        |      | Year Ended       
|               |  |                   |      |                  
|               |  | December 31, 2002 |      | December 31, 2001
|               |  |                   |      |                  
|               |  | High              |      | Low               |  | High |      | Low
|               |  |                   |      |                   |  |      |      |    
|First Quarter  |  | $                 | 2.32 |                   |  | $    | 1.45 |     |  | $ | 7.59 |  |  | $ | 1.00 | 
|Second Quarter |  | $                 | 1.63 |                   |  | $    | 0.68 |     |  | $ | 2.99 |  |  | $ | 1.26 | 
|Third Quarter  |  | $                 | 1.15 |                   |  | $    | 0.40 |     |  | $ | 2.80 |  |  | $ | 1.30 | 
|Fourth Quarter |  | $                 | 0.80 |                   |  | $    | 0.23 |     |  | $ | 2.90 |  |  | $ | 1.95 | 

On December 31, 2002, the last reported sale price of our common stock on
the NASDAQ SmallCap Market was $0.23 per share. As of December 31, 2002 there
were 75 holders of record of our common stock.

On October 8, 2002, due to non-compliance with the NASDAQ national market
listing requirements, we applied for trading of our common stock on The NASDAQ
SmallCap Market. NASDAQ approved this application and our common stock was
transferred to The NASDAQ SmallCap Market as of the commencement of trading on
October 30, 2002 despite the fact that the closing bid price of our common
stock was below the minimum closing bid price requirement of The NASDAQ
SmallCap Market on that date. NASDAQ allows companies that meet the listing
requirements of the NASDAQ SmallCap Market (other than the minimum closing bid
price) an initial grace period of 180 days to regain compliance by posting a
minimum closing bid price of $1.00 for at least ten consecutive trading days.
With the acceptance of our application to switch to The NASDAQ SmallCap Market,
our 90-day grace period to achieve the minimum bid requirements, which
commenced July 24, 2002, was extended to 180 days, or through January 21, 2003.
On January 21, 2003 we were notified by NASDAQ that we had been granted an
additional 180-day grace period to meet the $1.00 minimum closing bid price
requirement, or until July 19, 2003. The minimum closing bid price of our
common stock exceeded $1.00 per share for ten consecutive trading days in
February 2003 and we have been advised by NASDAQ that we are now in compliance
with the listing requirements of The NASDAQ SmallCap Market.

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.

19



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##### Table of Contents






Item 6. Selected Financial Data

The selected consolidated financial data below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and our consolidated financial statements and notes
thereto. The selected statements of operations data for the years ended
December 31, 2002, 2001 and 2000 and the selected balance sheet data as of
December 31, 2002 and 2001 are derived from, and are qualified by reference to,
the audited financial statements included elsewhere in this Annual Report on
Form 10-K. The selected statement of operations data for the year ended
December 31, 1999 and 1998 and the selected balance sheet data as of December
31, 2000, 1999 and 1998 is derived from our financial statements not included
in the Annual Report on Form 10-K. The historical results presented below are
not necessarily indicative of future results.

|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |       |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------- | ------ | ----------------------- | ------ | ---- | ------ | ------------------------------------- | ------ | ---- | ------ | ------- | ------ | - | ------ | ------ | ----- | - | ------ | ------ | ----- | -
|                                                                                 |                                                              |                              |        | Year Ended December 31,
|                                                                                 |                                                              |                              |        |                        
|                                                                                 |                                                              |                              |        | 2002                    |        | 2001 |        | 2000                                  |        | 1999 |        | 1998   
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |        
|                                                                                 |                                                              |                              |        |                         |        |      |        | (In thousands, except per share data) |        |      |        |        
|Statements of Operations Data                                                    |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |       
|Revenue:                                                                         |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |       
|                                                                                 | Product                                                      |                              | $      | 4,430                   |        |      | $      | 11,366                                |        |      | $      | 16,925  |        |   | $      | 6,146  |       |   | $      | 3,342  |      
|                                                                                 | Services, maintenance and support                            |                              |        | 4,369                   |        |      |        | 4,830                                 |        |      |        | 4,489   |        |   |        | 3,227  |       |   |        | 1,786  |      
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|                                                                                 |                                                              | Total revenue                |        |                         | 8,799  |      |        |                                       | 16,196 |      |        |         | 21,414 |   |        |        | 9,373 |   |        |        | 5,128 |  
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Cost of revenue:                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |       
|                                                                                 | Product                                                      |                              |        | 2,129                   |        |      |        | 4,961                                 |        |      |        | 7,287   |        |   |        | 3,190  |       |   |        | 1,959  |      
|                                                                                 | Services, maintenance and support                            |                              |        | 2,348                   |        |      |        | 2,683                                 |        |      |        | 2,167   |        |   |        | 1,697  |       |   |        | 1,443  |      
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|                                                                                 |                                                              | Total cost of revenue        |        |                         | 4,477  |      |        |                                       | 7,644  |      |        |         | 9,454  |   |        |        | 4,887 |   |        |        | 3,402 |  
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Gross margin                                                                     |                                                              |                              | 4,322  |                         |        |      | 8,552  |                                       |        |      | 11,960 |         |        |   | 4,486  |        |       |   | 1,726  |       
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Operating expenses:                                                              |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |       
|                                                                                 | Research and development                                     |                              |        | 3,699                   |        |      |        | 5,280                                 |        |      |        | 4,123   |        |   |        | 2,718  |       |   |        | 3,348  |      
|                                                                                 | Sales and marketing                                          |                              |        | 3,728                   |        |      |        | 6,066                                 |        |      |        | 5,627   |        |   |        | 3,649  |       |   |        | 3,152  |      
|                                                                                 | General and administrative                                   |                              |        | 4,593                   |        |      |        | 5,002                                 |        |      |        | 4,283   |        |   |        | 2,872  |       |   |        | 2,289  |      
|                                                                                 | Amortization of deferred stock compensation                  |                              |        | 358                     |        |      |        | 898                                   |        |      |        | 2,049   |        |   |        | 618    |       |   |        |       |      
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|                                                                                 |                                                              | Total operating expenses     |        |                         | 12,378 |      |        |                                       | 17,246 |      |        |         | 16,082 |   |        |        | 9,857 |   |        |        | 8,789 |  
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|                                                                                 | Loss from operations                                         |                              |        | (8,056                  | )      |      |        | (8,694                                | )      |      |        | (4,122  | )      |   |        | (5,371 | )     |   |        | (7,063 | )    
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Other income (expenses):                                                         |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |       
|                                                                                 | Interest expense                                             |                              |        |                        |        |      |        | (2                                    | )      |      |        | (1,184  | )      |   |        | (972   | )     |   |        | (276   | )    
|                                                                                 | Interest income                                              |                              |        | 269                     |        |      |        | 758                                   |        |      |        | 650     |        |   |        | 54     |       |   |        | 1      |      
|                                                                                 | Other, net                                                   |                              |        | 227                     |        |      |        |                                      |        |      |        |        |        |   |        | (40    | )     |   |        | (286   | )    
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|                                                                                 |                                                              | Total other income (expense) |        |                         | 496    |      |        |                                       | 756    |      |        |         | (534   | ) |        |        | (958  | ) |        |        | (561  | )
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Loss before provision for (recovery from) income taxes                           |                                                              |                              | (7,560 | )                       |        |      | (7,938 | )                                     |        |      | (4,656 | )       |        |   | (6,329 | )      |       |   | (7,624 | )     
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Provision for (recovery from) income taxes                                       |                                                              |                              | 18     |                         |        |      | (19    | )                                     |        |      | 15     |         |        | $ | 21     |        |       | $ | 17     |       
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Net Loss                                                                         |                                                              | $                            | (7,578 | )                       |        | $    | (7,919 | )                                     |        | $    | (4,671 | )       |        | $ | (6,350 | )      |       | $ | (7,641 | )     
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|                                                                                 | Beneficial conversion related to convertible preferred stock |                              |        |                         |        |      |        |                                       |        |      | $      | (37,783 | )      |   |        |        |       |   |       
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|                                                                                 | Net loss attributable to common stockholders                 |                              | $      | (7,578                  | )      |      | $      | (7,919                                | )      |      | $      | (42,454 | )      |   | $      | (6,350 | )     |   | $      | (7,641 | )    
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Net loss per share  basic and diluted                                           |                                                              | $                            | (0.30  | )                       |        | $    | (0.31  | )                                     |        | $    | (4.46  | )       |        | $ | (54.27 | )      |       | $ | (86.83 | )     
|                                                                                 |                                                              |                              |        |                         |        |      |        |                                       |        |      |        |         |        |   |        |        |       |   |        |        |      
|Weighted average shares used in calculating basic and diluted
net loss per share |                                                              |                              | 25,260 |                         |        |      | 25,168 |                                       |        |      | 9,510  |         |        |   | 117    |        |       |   | 88     |       

|                                                          |                    |   |                    |   |      |   |                |   |      |   |        |   |  |   |        |       |  |   |        |       | 
|--------------------------------------------------------- | ------------------ | - | ------------------ | - | ---- | - | -------------- | - | ---- | - | ------ | - |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                          |                    |   | As of December 31,
|                                                          |                    |   |                   
|                                                          |                    |   | 2002               |   | 2001 |   | 2000           |   | 1999 |   | 1998  
|                                                          |                    |   |                    |   |      |   |                |   |      |   |       
|                                                          |                    |   |                    |   |      |   | (In thousands) |   |      |   |        |   |  |   |       
|Balance Sheet Data                                        |                    |   |                    |   |      |   |                |   |      |   |        |   |  |   |        |       |  |   |        |      
|Cash and cash equivalents                                 |                    | $ | 4,783              |   |      | $ | 7,455          |   |      | $ | 21,660 |   |  | $ | 6,232  |       |  | $ | 139    |      
|Short-term investments                                    |                    |   | 2,402              |   |      |   | 5,831          |   |      |   |       |   |  |   |       |       |  |   |       |      
|Working capital (deficit)                                 |                    |   | 7,250              |   |      |   | 14,039         |   |      |   | 21,423 |   |  |   | 1,656  |       |  |   | (2,881 | )    
|Total assets                                              |                    |   | 10,400             |   |      |   | 19,265         |   |      |   | 28,303 |   |  |   | 10,523 |       |  |   | 2,768  |      
|Notes payable and accrued interest due to related parties
|                                                          | Current portion    |   |                    |  |      |   |                |  |      |   |        |  |  |   |        | 2,533 |  |   |        | 1,300 | 
|                                                          | Noncurrent portion |   |                    |  |      |   |                |  |      |   |        |  |  |   |        | 9,190 |  |   |        | 5,152 | 
|Preferred stock                                           |                    |   |                   |   |      |   |               |   |      |   |       |   |  |   | 17     |       |  |   | 16     |      
|Stockholders equity (deficit)                            |                    |   | 7,948              |   |      |   | 15,041         |   |      |   | 21,764 |   |  |   | (6,997 | )     |  |   | (7,609 | )    

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

The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Annual Report on Form 10-K. Certain statements in this Managements
Discussion and Analysis of Financial Condition and Results of Operations are
forward looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industrys actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by the forward looking statements. These risks and other factors
include those listed under Factors Affecting Future Operating Results
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, intends, 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
Factors Affecting Future Operating Results. 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 develop, market and support an integrated suite of video-enabled
vBusiness applications, all powered by our AvistarVOS software. From the
desktop, we deliver TV-quality interactive video calling, content creation and
publishing, broadcast origination and distribution, video-on-demand and
integrated data sharing. Our video and data collaboration applications are all
managed by the AvistarVOS video operating system. Our customers use our system
to improve productivity and communication within their enterprise and between
enterprises to enhance relationships with customers, suppliers and partners.
Using AvistarVOS software and leveraging video, telephony and Internet
networking standards, our applications are designed to be scalable, reliable,
cost effective, easy to use and capable of evolving with communications
networks as bandwidth increases and as new standards and protocols emerge. We
sell our system directly to enterprises in selected strategic vertical markets
and have focused initially on the financial services and manufacturing
industries. Our objective is to establish our technology as the standard for
networked video.

We operate in two segments. We engage in the design, development,
manufacturing, sale and marketing of networked video communications products,
and associated support services and CPI, our wholly-owned subsidiary, engages
in the prosecution, maintenance, support and licensing of the intellectual
property that we have developed, some of which is used in our products. As of
December 31, 2002, CPI had not entered into any such third party licensing
agreements.

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

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

Critical Accounting Policies

The preparation of our Consolidated Financial Statements in accordance
with accounting principles generally accepted in the United States requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.

We believe the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our Consolidated Financial Statements:

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| |  |  | Revenue recognition;                 
| | - |  | -------------------------------------
|
| |  |  | Valuation of accounts receivable; and
|
| |  |  | Valuation of inventories.            

These critical accounting policies are discussed below.

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, training services and software development. Product
revenue as a percentage of total revenue was 50% for 2002 and 70% for 2001.

We recognize revenue from product sales when all of the following
conditions are met: the product has been shipped, an arrangement exists with
the customer at a fixed price and we have the right to invoice the customer,
collection of the receivable is probable, and we have fulfilled all of our
material contractual obligations to the customer. When we provide installation
services, the product and installation revenue is recognized upon completion of
installation and receipt of customer confirmation, subject to the satisfaction
of the revenue recognition criteria described above. The price charged for
maintenance and/or support services is stipulated in the customer contract and
is based on a percentage of product revenue. Customers have the option to renew
the maintenance and/or support services in subsequent periods at the same rate
as paid in the initial year. Revenue from maintenance and support is recognized
pro-rata over the maintenance and/or support term, which is typically one year
in length. Training services are offered independently of the purchase of
product. The value of these training services is determined based on the price
charged when such services are sold separately and training revenue is
recognized upon performance of the service. We recognize service revenue from
software development contracts using the percentage of completion method, when
all of the following conditions are met: a contract exists with the customer at
a fixed price, we have fulfilled all of our material contractual obligations to
the customer for a deliverable of the contract, verification of completion of
the deliverable has been received, and collection of the receivable is
probable. Reimbursements received for out-of-pocket expenses incurred during
installation and support services, which have not been significant to date, are
recognized as revenue in accordance with Emerging Issues Task Force (EITF)
Issue No. 01-14 (EITF 01-14), Income Statement Characterization of
Reimbursements Received for Out of Pocket Expenses Incurred.

To date, a significant portion of our revenue has resulted from sales to a
limited number of customers, particularly Deutsche Bank AG and JP Morgan Chase
& Company and their affiliates. For 2002, we recorded revenue of approximately
$5.8 million, or 66% of total revenue, from these customers, each of whom
generated more than 10% of our total revenue. For 2001, we recorded revenue of
approximately $10.5 million, or 65% of total revenue, from Deutsche Bank, JP
Morgan Chase and UBS Warburg LLC and their affiliates, each of whom generated
more than 10% of our total revenue. We anticipate that our revenue, and
therefore, our operating results for any given period, will continue to depend
to a significant extent on a limited number of customers. As a result, the
loss of or a reduction in sales to any one of these customers would have a
significant adverse impact on our operations and financial performance.

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 49% of total
revenue for 2002, 47% for 2001 and 46% for 2000.

Cost of Revenue

Our cost of revenue consists of the cost of product, services, maintenance
and support, and includes compensation for distribution personnel and the cost
of third party components, the cost of compensation for installation,
maintenance, support, training and engineering personnel and other costs
related to facilities and office equipment for professional services, technical
support and training personnel. We recognize product costs when the revenue
from the sale of such products is recorded, and we recognize costs of
installation, maintenance, software development, support and training services
as we incur those expenses.

Operating Expenses

We generally recognize our operating expenses as we incur them in three
operational categories: research and development, sales and marketing and
general and administrative. Our operating expenses also include amortization
of our deferred stock compensation charges related to stock options granted
prior to our initial public offering. These charges are amortized on a
straight-line basis over the vesting period of the options, generally four
years. Our research and development expenses consist primarily of compensation

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expenses for our personnel, patent and licensing costs. Due to
uncertainties about the estimated future economic benefits and lives of our
patents and patent applications, all related patent costs are expensed as
incurred. Our sales and marketing expenses consist primarily of compensation,
commissions, travel expenses and other internal and outside marketing expenses.
Our general and administrative expenses consist primarily of compensation for
our administrative and financial personnel and a number of non-allocable costs,
including insurance, professional fees, legal fees, accounting fees and
provision for doubtful accounts receivable balances.

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

Amortization of deferred stock compensation relates to stock options
issued to employees and represents the difference between the exercise price of
options granted to employees and the grant-date fair value of our common stock.
Based on the outstanding options at December 31, 2002, we anticipate recording
charges of approximately $135,000 in 2003 to record the remainder of the costs
associated with these grants. Future compensation expense may be decreased in
a period of forfeiture for any accrued but unvested compensation arising from
the termination of an option holders services. In addition, we have granted
options to acquire shares of common stock to non-employees who have provided
consulting services. For 2002, we recognized an expense of approximately
$102,000 related to these non-employee options. For 2001, we recognized an
expense of approximately $31,000 related to these non-employee options.
Pursuant to the provisions of SFAS 123, the fair value of non-employee options
issued was determined based on the fair value of the consideration received,
where such amount was reliably measurable, or the fair value of the equity
instruments issued, in which case, the fair value was estimated as services
were provided using the Black-Scholes option pricing model.

Valuation of Accounts Receivable

Estimates are used in determining our allowance for doubtful accounts and
are based on our historical collection experience, historical write-offs,
current trends and the credit quality of our customer base and the
characteristics of our accounts receivable by aging category. If the allowance
for doubtful accounts was understated, our operating income could be
significantly reduced. The impact of any such change or deviation may be
increased by our reliance on a relatively small number of customers for a large
portion of our total revenue. As of December 31, 2002, approximately 65% of our
accounts receivable balance was concentrated with one customer. As of December
31, 2001, approximately 49% of our accounts receivable were concentrated with
two customers, each of whom represented more than 10% of our total accounts
receivable.

Valuation of Inventories

We record a provision for obsolete or excess inventory for models that are
no longer manufactured or are at risk of being replaced with new versions of
our product. In determining the allowance for obsolete or excess inventory, we
look at our forecasted demand versus quantities on hand and commitments. Any
significant unanticipated changes in demand or technological developments could
have a significant impact on the value of our inventory and commitments and our
reported results. If actual market conditions are less favorable than those
projected, additional inventory write-downs, provision for purchase commitments
and charges against earnings may be required, which would negatively effect our
operating income for such period.

Results of Operations

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

|                 |                                   |                       |  |                             |       |      |  |      |       |  |  |      |       | 
|---------------- | --------------------------------- | --------------------- |  | --------------------------- | ----- | ---- |  | ---- | ----- |  |  | ---- | ----- | 
|                 |                                   |                       |  | Percentage of Total Revenue
|                 |                                   |                       |  |                            
|                 |                                   |                       |  | Year Ended December 31,    
|                 |                                   |                       |  |                            
|                 |                                   |                       |  | 2002                        |       | 2001 |  | 2000
|                 |                                   |                       |  |                             |       |      |  |     
|Revenue:         |                                   |                       |  |                             |       |      |  |      |       |  |  |     
|                 | Product                           |                       |  | 50.3                        | %     |      |  | 70.2 | %     |  |  | 79.0 | %    
|                 | Services, maintenance and support |                       |  | 49.7                        |       |      |  | 29.8 |       |  |  | 21.0 |      
|                 |                                   |                       |  |                             |       |      |  |      |       |  |  |     
|                 |                                   | Total revenue         |  |                             | 100.0 |      |  |      | 100.0 |  |  |      | 100.0 | 
|                 |                                   |                       |  |                             |       |      |  |      |       |  |  |     
|Cost of revenue: |                                   |                       |  |                             |       |      |  |      |       |  |  |     
|                 | Product                           |                       |  | 24.2                        |       |      |  | 30.6 |       |  |  | 34.0 |      
|                 | Services, maintenance and support |                       |  | 26.7                        |       |      |  | 16.6 |       |  |  | 10.1 |      
|                 |                                   |                       |  |                             |       |      |  |      |       |  |  |     
|                 |                                   | Total cost of revenue |  |                             | 50.9  |      |  |      | 47.2  |  |  |      | 44.1  | 
|                 |                                   |                       |  |                             |       |      |  |      |       |  |  |     

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|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |      |      |  
|------------------------------------------------------ | ------------------------------------------- | --------------------------------- | ----- | --------------------------- | ----- | ---- | ----- | ---- | ----- |  | ------ | ---- | ---- | -
|                                                       |                                             |                                   |       | Percentage of Total Revenue
|                                                       |                                             |                                   |       |                            
|                                                       |                                             |                                   |       | Year Ended December 31,    
|                                                       |                                             |                                   |       |                            
|                                                       |                                             |                                   |       | 2002                        |       | 2001 |       | 2000
|                                                       |                                             |                                   |       |                             |       |      |       |     
|Gross margin                                           |                                             |                                   | 49.1  |                             |       |      | 52.8  |      |       |  | 55.9   |     
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|Operating expenses:                                    |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|                                                       | Research and development                    |                                   |       | 42.0                        |       |      |       | 32.6 |       |  |        | 19.3 |     
|                                                       | Sales and marketing                         |                                   |       | 42.4                        |       |      |       | 37.5 |       |  |        | 26.3 |     
|                                                       | General and administrative                  |                                   |       | 52.2                        |       |      |       | 30.9 |       |  |        | 20.0 |     
|                                                       | Amortization of deferred stock compensation |                                   |       | 4.1                         |       |      |       | 5.5  |       |  |        | 9.6  |     
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|                                                       |                                             | Total operating expenses          |       |                             | 140.7 |      |       |      | 106.5 |  |        |      | 75.1 |  
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|Loss from operations                                   |                                             |                                   | (91.6 | )                           |       |      | (53.7 | )    |       |  | (19.2  | )   
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|Other income (expense):                                |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|                                                       | Interest expense                            |                                   |       |                            |       |      |       |     |       |  |        | (5.5 | )   
|                                                       | Interest income                             |                                   |       | 3.1                         |       |      |       | 4.7  |       |  |        | 3.0  |     
|                                                       | Other, net                                  |                                   |       | 2.6                         |       |      |       |     |       |  |        |     |     
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|                                                       |                                             | Total other income (expense), net |       |                             | 5.6   |      |       |      | 4.7   |  |        |      | (2.5 | )
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|Loss before provision for (recovery from) income taxes |                                             |                                   | (85.9 | )                           |       |      | (49.0 | )    |       |  | (21.7  | )   
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|Provision for (recovery from) income taxes             |                                             |                                   | 0.2   |                             |       |      | (0.1  | )    |       |  | 0.1    |     
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|Net loss                                               |                                             |                                   | (86.1 | )%                          |       |      | (48.9 | )%   |       |  | (21.8  | )%  
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     
|Net loss attributable to common shareholders           |                                             |                                   | (86.1 | )%                          |       |      | (48.9 | )%   |       |  | (198.3 | )%  
|                                                       |                                             |                                   |       |                             |       |      |       |      |       |  |        |     

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COMPARISON OF 2002, 2001 AND 2000

Revenue

Total revenue decreased by 46% in 2002 to $8.8 million from $16.2 million
for 2001. The decrease in total revenue in 2002 relative to 2001 was due to
lower product sales. Lower product sales in 2002 were due in large part to the
continued slowdown experienced in the economy and in the financial services
industry in particular, resulting in constrained budgets and delayed
procurement decisions by existing and potential customers. For 2002, two
customers accounted for 66% of our total revenue. For 2001, three customers
accounted for 65% of our total revenue. The level of sales to any customer may
vary from quarter to quarter and year to year. We anticipate that our revenue
will continue to depend on a limited number of major customers for the
foreseeable future, although the companies considered to be major customers and
the percentage of revenue represented by each major customer may vary from
period to period. The loss of any one of those customers would have a material
adverse impact on our financial condition and operating results.

Total revenue decreased by 24% in 2001 to $16.2 million from $21.4 million
for 2000. The decrease in total revenue in 2001 relative to 2000 was due
primarily to lower product sales and the general slowdown experienced in the
economy.

Cost of Revenue

Cost of revenue declined by 41% in 2002 to $4.5 million from $7.6 million
for 2001. The decrease in cost of revenue in 2002 relative to 2001 was
primarily due to the reduction in direct product costs caused by the reduction
in product volume.

Cost of revenue declined by 19% in 2001 to $7.6 million from $9.5 million
for 2000. The decrease in cost of revenue in 2001 relative to 2000 was
primarily due to a reduction in product revenue, partially offset by increased
costs associated with service revenue.

Gross Margin

Gross margin as a percentage of revenue decreased in 2002 to 49% from 53%
for 2001. The decrease in gross margin as a percentage of revenue for 2002
relative to 2001 was due in large part to the reduced product revenue, which
resulted in less coverage of the fixed component of the cost of product sales.

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

Operating Expenses

Research and development.Research and development expenses decreased by
30% in 2002 to $3.7 million from $5.3 million for 2001. The decrease in
research and development expenses in 2002 relative to 2001 was primarily due to
the reduction in personnel and personnel related expense as a result of a 10%
reduction in staffing and a reduction in outside service costs. Research and
development expenses increased by 28% in 2001 to $5.3 million from $4.1 million
for 2000. The increase in research and development expenses in 2001 relative
to 2000 was primarily due to the hiring of research and development personnel
in the first half of 2001 and increases in personnel related expenses,
reflecting increased costs for new product development and enhancements to
existing products.

Sales and marketing.Sales and marketing expenses decreased by 39% in
2002 to $3.7 million from $6.1 million for 2001. The decrease in sales and
marketing expenses in 2002 relative to 2001 was due to decreased personnel and
personnel related costs as a result of a 10% reduction in staffing levels,
decreased commission expense due to lower product sales, reductions in
marketing program expenditures and
reductions in outside service costs. Sales and marketing expenses
increased by 8% in 2001 to $6.1 million from $5.6 million for 2000. The
increase in sales and marketing expenses in 2001 relative to 2000 was due to
increased personnel and personnel related costs caused by the hiring of
additional sales and marketing staff in the first half of 2001 and higher
marketing program costs and related expenses, offset by a decrease in
commission expenses in 2001.

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General and administrative.General and administrative expenses decreased
by 8% in 2002 to $4.6 million from $5.0 million for 2001. The decrease in
general and administrative expenses in 2002 relative to 2001 was a result of
decreased personnel and external labor costs, offset by increased outside
professional services expenses. General and administrative expenses increased
by 17% in 2001 to $5.0 million from $4.3 million for 2000. The increase in
general and administrative expenses in 2001 relative to 2000 was a result of
increased outside professional services expenses and other expenses required of
a public company.

Amortization of deferred stock compensation.Amortization of deferred
stock compensation decreased by 60% in 2002 to $0.4 million from $0.9 million
for 2001. The decrease in amortization of deferred stock compensation in 2002
relative to 2001 was due to the cumulative effect of the completion of option
amortization, as well as forfeitures of stock options by employees no longer
with our company. Amortization of deferred stock compensation decreased by 56%
in 2001 to $0.9 million from $2.0 million for 2000. The decrease in
amortization of deferred stock compensation in 2001 relative to 2000 was due to
the achievement of full vesting for a number of option grants.

Other income (expense), net.Other income, net decreased by 34% in 2002
to $0.5 million from $0.8 million for 2001. The decrease in other income
(expense), net in 2002 relative to 2001 was due to a declining balance of cash,
cash equivalents and short-term investments with lower rates of return on cash,
cash equivalents and short-term investments, partially offset by $0.2 million
in net grant proceeds received in 2002 from the New York disaster relief
program associated with the events of September 11, 2001. Other income
(expense), net changed from a net expense of $0.5 million for 2000 to a net
income of $0.8 million for 2001. The change in other income (expense), net in
2001 relative to the prior year was due to lower interest expenses in 2001 due
to the retirement of debt and higher interest income in 2001 due to an
increased balance of cash and cash equivalents, and short-term investments.

Liquidity and Capital Resources

We have funded our operations since inception primarily from product and
services revenue, the net proceeds of $31.3 million from our August 2000
initial public offering of common stock, lines of credit with related parties
and financial institutions, and, to a lesser extent, the proceeds of
approximately $6.4 million from the sale of Series B preferred stock in
December 1999.

We had cash and cash equivalents of $4.8 million as of December 31, 2002
and $7.5 million as of December 31, 2001. For 2002, we had a net cash outflow
of $2.7 million resulting primarily from net cash used in operations of $5.9
million, which was offset by proceeds from net sales of short-term investments
of $3.4 million. The net cash used in operations primarily reflected a net
loss of $7.6 million, a decrease in accrued liabilities and other of $1.3
million and a decrease in deferred revenue and customer deposits of $0.2
million, but was partially offset by a decrease in accounts receivable of $2.0
million, a decrease in prepaid expenses and other current assets of $0.5
million and non-cash stock compensation expense of $0.4 million. The cash
outflows associated with the net loss, reduced accrued liabilities and reduced
accounts receivable reflect the smaller scale of our business in 2002 relative
to 2001.

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

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

Expenditures for property and equipment for 2002 were approximately $0.1
million. At December 31, 2002, we did not have any material commitments for
future capital expenditures. We anticipate spending approximately $0.4 million
in capital expenditures in the next 12 months.

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Under a line of credit we obtained prior to 1999, we had $2.0 million
outstanding at December 31, 1999. We incurred a total of $82,000 in interest
expense on this line of credit during 2000, at an average interest rate of 15%.
This line of credit was retired using a portion of the proceeds from a $4.0
million one-year line of credit we obtained from a financial institution in
June 2000. This replacement line of credit was subsequently repaid and retired
in December 2000 with a portion of our proceeds from our August 2000 initial
public offering. No interest expense was incurred during 2002. We had no
outstanding borrowings at December 31, 2002 from our previous lines of credit.

On February 27, 2002, we entered into a Loan and Security Agreement with a
financial institution to borrow up to $4.5 million as a revolving line of
credit and $0.5 million as an equipment term loan. The first $1.0 million of
the revolving line was available on a non-formula basis and the remainder was
limited to 80% of our eligible accounts receivable. As collateral under this
Loan and Security Agreement, we granted a first priority interest in all our
assets, excluding intellectual property. The revolving line of credit and the
equipment term loan required certain covenants to be met. On December 15, 2002,
we entered into an amendment to the Loan and Security Agreement to increase the
maximum funds available there under to $6.0 million and extend the term of the
agreement. The amended Loan and Security Agreement, as further amended in
March 2003, has an expiration date of February 27, 2004. The agreement, as
amended, retains a first priority security interest in all our assets,
excluding intellectual property. Gerald Burnett, our Chairman and Chief
Executive Officer has provided a collateralized guarantee, assuring
payment of our obligations under the
agreement and as a consequence, a number of restrictive covenants from the
original Loan and Security agreement have been deleted in the amendment,
allowing us greater access to the full amount of the facility.  In addition, Gerald
Burnett has provided to us a commitment to provide funds up
to $6.0 million (inclusive of any funds drawn by us and subject to his collateralized guarantee of our obligation to the Bank) through February 27, 2004 in the event
that the amended Loan and Security Agreement is not sufficiently
available to us for any reason. As of December
31, 2002 we did not have any outstanding borrowings under this line of credit
and we were eligible to borrow up to $6.0 million.

We intend to continue to invest in the development of new products and
enhancements to our existing products. We currently believe that existing cash
and cash equivalents balances, short-term investments and available borrowings
under the Loan and Security Agreement, as amended, and the commitment
from our CEO will provide us with
sufficient funds to finance our operations for the next 12 months. Our future
liquidity and capital requirements will depend upon numerous factors, including
without limitation, general economic conditions and conditions in the financial
services industry in particular, the level and timing of revenue, the costs and
timing of our product development efforts and the success of these development
efforts, the costs and timing of our sales and marketing activities, the extent
to which our existing and new products gain market acceptance, competing
technological and market developments, the costs involved in maintaining and
enforcing patent claims and other intellectual property rights including,
without limitation, the costs and result of CPIs litigation with Polycom and
other factors, all of which may impact our ability to achieve and maintain
profitability.

We expect that we will need to arrange for the availability of additional
funding upon the expiration of the Loan and Security Agreement, either through
the execution of an extension of the Loan and Security Agreement or through
other means, in order to meet our future business requirements for the
following 12 months. We may be required to raise additional funds and
additional financing may not be available on
favorable terms, or at all. If we are unable to obtain additional funding
on acceptable terms, we may not be able to develop or enhance our products,
take advantage of future opportunities, or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business, financial
condition, results of operations and ability to continue operations. There can be no assurance that such
funding will be available on terms attractive to us, or at all. Furthermore,
any additional equity financing may be dilutive to stockholders and such equity
securities may have rights, preferences or privileges senior to those of the
holders of our common stock, and debt financing, if available, may involve
significant fees, interest payment obligations and restrictive covenants.
Strategic arrangements, if necessary to raise additional funds, may require us
to relinquish our rights to certain of our technologies or products.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 revises the accounting for
specified employee and contract terminations that are part of restructuring
activities. Companies will be able to record a liability for a cost associated
with an exit or disposal activity only when the liability is incurred and can
be measured at fair value. Commitment to an exit plan or a plan of disposal
expresses only managements intended future actions and therefore, does not
meet the requirement for recognizing a liability and related expense. SFAS 146
only applies to termination benefits offered for a specific termination event
or a specified period. SFAS 146 will not affect accounting for the costs to
terminate a capital lease. We are required to adopt this statement for exit or
disposal activities initiated after December 31, 2002. We do not expect the of
SFAS 146 adoption to have a significant impact on our financial position or
results of operations.

In December 2002, the FASB issued SFAS 148, Summary of Statement 148
Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment
of FASB Statement 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent

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disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. We do not expect the
adoption of SFAS 148, effective for our fiscal year ending December 31, 2002, to have a significant
impact on our financial position or results of operations.

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Factors Affecting Future Operating Results

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

Our ability to achieve profitability depends in large part on the
widespread adoption of networked video communications systems. If the market
for our system fails to grow or grows more slowly than we anticipate, we may
not be able to increase revenue or achieve profitability. The market for our
system is relatively new and 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
or may invest substantial resources in video products may be reluctant or slow
to adopt our system. Similarly, customers using existing information systems
in which they have made significant investments may refuse to adopt our system
if they perceive that our offerings will not complement their existing systems.
Consequently, the conversion from traditional methods of communication to the
extensive use of networked video may not occur as rapidly as we wish.

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

We incurred net losses of $7.6 million for 2002, $7.9 million for 2001,
and $4.7 million for 2000. As of December 31, 2002, our accumulated deficit
was $72.1 million. Our revenue may not increase, or even remain at its current
level. In addition, our operating expenses may increase as we continue to
develop our business in the future. As a result, to become profitable, we will
need to increase our revenue by increasing sales to existing customers and by
attracting additional customers. If our expenses increase more rapidly than
our revenue, or if revenue and expense levels remain the same, we may never
become profitable. If we fail to achieve our plan of generating positive cash
flow from operations over the next 12 months, we may be required to raise
additional funds, and additional financing may not be available on favorable
terms, if at all. Although our Chairman and Chief Executive Officer has
guaranteed our Loan and Security Agreement, we cannot be certain that he will
continue to do so.

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 be adversely impacted.

General economic conditions have and may continue to reduce our revenues
and harm our business.

Economic growth in the United States has slowed to the point where
industries are delaying or reducing technology purchases. These conditions
have negatively affected our business in 2002 and 2001, and will in the future
if these conditions persist. If our customers and potential customers continue
to delay ordering our products, we will fall short of our revenue expectations
for 2003 and beyond. The outlook for the video communications industry is
uncertain and it is very difficult to predict how long the current slowdown
will last. Slower growth among our customers, tightening of customers
operating budgets, retrenchment in the capital markets and other general
economic factors all have had and could continue to have a materially adverse
effect on our revenue, capital resources, financial condition and results of
operations.

We have filed a complaint alleging patent infringement against Polycom,
Inc. The prosecution of this lawsuit could require us to expend significant
financial and managerial resources and may have a material negative impact on
our business. If we do not prevail, we may be required to pay monetary
damages.

On September 23, 2002, CPI, our wholly-owned subsidiary, commenced a
patent infringement lawsuit against Polycom, Inc. alleging that several Polycom
videoconferencing products infringe four patents held by our wholly-owned
subsidiary, CPI. The suit was filed in the United States District Court for the
Northern District of California. The four patents involved are U.S. Patent
Nos. 5,867,654, 5,896,500, 6,212,547 and 6,343,314. These patents cover
technologies relating to video and data conferencing over
unshielded twisted pair (UTP) networks, distributed call-state management,
separate monitors for simultaneous computer-based data sharing and
videoconferencing and remote participant hold and disconnect functions in
multi-party conferencing. Polycom responded to CPIs claims on November 14,
2002, at which time it both answered the complaint and asserted counterclaims
against CPI for non-infringement, invalidity and unenforceability. On January
31, 2003 Polycom filed a motion with the court requesting permission to amend
its counterclaims to incorporate claims of alleged infringements by Avistar
Communications of four PictureTel patents that Polycom has told us it has had
assigned to it. A hearing was held on March 7, 2003, at which time the judge
granted Polycoms motion to amend its counterclaims. A trial date for CPIs
claims against Polycom and Polycoms proposed counterclaims has not yet been
set. The prosecution of this lawsuit and the defense of the proposed Polycom
counterclaim may require us to expend significant financial and managerial
resources and therefore may have a material negative impact on our business.
The duration and ultimate

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outcome of this litigation are uncertain. In
addition, an adverse judgment, if entered against CPI or Avistar, could require
CPI or Avistar to pay substantial compensation and/or damages to Polycom, which
could harm our business, financial position and results of operations and cause
our stock price to decline substantially. It should be noted that Avistars
agreement with a third-party supplier (whose products are implicated by
Polycoms claims of alleged patent infringement), provides for indemnification
to Avistar by that third party. Nevertheless, litigation such as this suit can
take years to resolve and can be expensive to prosecute. Regardless of the
outcome, the prosecution of our claims in this lawsuit may require us to obtain
additional financing.

Our expected future working capital needs may require that we seek additional
debt or equity funding which, if not available, could cause our business to
suffer.

Our future liquidity and working capital requirements will depend upon
numerous factors, including:



| |  |  | general economic conditions and conditions in the financial services industry in particular;                                                             
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the level and timing of our revenue;                                                                                                                     
|
| |  |  | the costs and timing of product development efforts and the success
of these development efforts;                                                        
|
| |  |  | the costs and timing of sales and marketing activities;                                                                                                  
|
| |  |  | the extent to which our existing and new products gain market acceptance;                                                                                
|
| |  |  | competing technological and market developments;                                                                                                         
|
| |  |  | the costs involved in maintaining and enforcing patent claims and
other IP rights, including the costs associated with CPIs litigation
with Polycom; and
|
| |  |  | available borrowings under line of credit arrangements and other
factors.                                                                                

Although we have renewed our Loan and Security Agreement, which provides a
credit line of $6.0 million with Comerica Bank  California, we may need to
arrange for the availability of additional funding in order to meet our future
business requirements. If we are unable to obtain additional funding when
needed on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities, respond to competitive
pressures or unanticipated requirements, or finance our litigation with
Polycom, which could seriously harm our business, financial
condition, results of operations and ability to continue operations. There can be no assurance that such funding will be
available on terms attractive to us, or at all. Our Chairman and Chief
Executive Officer has personally guaranteed the Loan and Security Agreement. We
cannot be sure that he will be willing to continue to guarantee our borrowings
based on the available terms, if at all. Furthermore, any additional equity
financing may be dilutive to stockholders and such equity securities may have
rights, preferences or privileges senior to those of the holders of our common
stock, and debt financing, if available, may involve restrictive covenants.
Strategic arrangements, if
necessary to raise additional funds, may require us to relinquish our
rights to certain of our technologies or products.

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
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, or for 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 in performing internal reviews and obtaining capital
expenditure approvals. Current economic conditions have contributed to
additional deliberation, and an associated delay in the sales cycle.

Our lengthy sales cycle is one of the factors that has caused, and may in
the future continue to cause, our operating results to vary significantly from
quarter to quarter and year to year. This makes it difficult for us to
forecast revenue, and could cause volatility in

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the market price of our common
stock. A lost or delayed order could result in lower revenue than expected in
a particular quarter or year.

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

Our customers typically place limited initial orders for our networked
video communications system, as they seek to evaluate its usefulness and value.
Our strategy is to pursue additional and larger follow-on orders after these
initial orders. Revenue generated from follow-on orders accounted for
approximately 95% of our revenue in 2002 and 91% in 2001. Current economic
conditions have led to decreases in our clients capital spending, and we have
experienced a decrease in the size and number of follow-on orders. Our future
financial performance depends on successful initial installations of our system
and successful generation of follow-on orders as the Avistar network expands
within a customer organization. If our system does not meet the needs and
expectations of customers, 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 and JP Morgan Chase and their
affiliates. Collectively, these customers accounted for 66% of our revenue for
2002. This contribution reflects the acquisition by Deutsche Bank of other
financial services firms that were previously Avistar customers, as well as the
purchase of Avistar technology by Deutsche Bank for new accounts as part of
Deutsche Banks client connectivity program. For 2001, Deutsche Bank, JP
Morgan Chase and UBS Warburg LLC and their affiliates accounted for 65% of our
revenue. We expect to continue to depend upon a limited number of customers
for a substantial portion of our revenue. As of December 31, 2002,
approximately 65% of our accounts receivable were concentrated with one
customer. As of December 31, 2001, approximately 49% of our accounts
receivable were concentrated with two customers, each of whom represented more
than 10% of our total accounts receivable balance.

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

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

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



| |  |  | rapid technological change;                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | significant development costs;                                                                                   
|
| |  |  | changes in the requirements of our customers and their communities of users;                                     
|
| |  |  | evolving industry standards; and                                                                                 
|
| |  |  | transition to Internet protocol connectivity for video at the
desktop, with increasing availability of bandwidth.

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

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in response to evolving industry standards or customers demands, our system could become
obsolete, which would harm our financial condition and reputation.

Difficulties or delays in installing our products could harm our revenue
and margins.

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

Competition could reduce our market share and decrease our revenue.

Currently, our competition comes from many other kinds of companies, including
communication equipment, integrated solution, broadcast video and stand-alone
point solution providers. Within the video-enabled network communications
market, we compete primarily against Polycom, Tandberg Inc. and VCON
Telecommunications Ltd. We believe we may face increasing competition in the
future from alternative video communications solutions that employ new
technologies or new combinations of technologies from companies such as Cisco
Systems, Inc., Hewlett-Packard Company, Microsoft Corporation, RealNetworks,
Inc. and WebEx Communications, Inc., that enable web-based or network-based
video communications with low-cost digital camera systems. The market in which
we operate is highly competitive. In addition, because our industry is
relatively new and one which is characterized by rapid technological change,
evolving user needs, developing industry standards and protocols and the
frequent introduction of new products and services, it is difficult for us to
predict whether or when new competing technologies or new competitors will
enter our market.

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

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

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

We regard our system as open but proprietary. In an effort to protect our
proprietary rights, we rely primarily on a combination of patent, copyright,
trademark and trade secret laws, as well as licensing, non-disclosure and other
agreements with our consultants, suppliers, customers and employees. However,
these laws and agreements provide only limited protection of our proprietary
rights. In addition, we may not have signed agreements in every case and the
contractual provisions that are in place and the protection they produce may
not provide us with adequate protection in all circumstances. Although CPI
holds patents and has 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. In the
event that we believe a third party is infringing our intellectual property
rights, an infringement claim brought by us could, regardless of the outcome,
result in substantial cost to us, divert our managements attention and
resources, be time consuming to prosecute and result in unpredictable damage
awards. A third party may also develop similar technology independently,
without infringing upon our patents and copyrights. In addition, the laws of
some countries in which we sell our system may not protect our software and
intellectual property rights to the same extent as the laws of the United
States. Unauthorized copying, use or reverse engineering of our system could
harm our business, financial condition or results of operations.

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

A third party could claim that our technology infringes upon its
proprietary rights. As the number of software systems in our target market
increases and the functionality of these systems overlap, we believe that the
number of infringement suits filed by software developers may increase. In the
existing lawsuit in which CPI is claiming that Polycom infringes four CPI
patents, Polycom has filed a motion with the court requesting permission to
amend its counterclaims to incorporate claims of alleged infringements by
Avistar Communications of four PictureTel patents that Polycom has told us it
has had assigned to it. A hearing was held on March 7, 2003, at which time the
judge granted Polycoms motion to amend its counterclaims. A trial date for
CPIs claims against Polycom and Polycoms proposed counterclaims has not yet
been set. It should be noted that Avistars agreement with a third-party
supplier (whose products are implicated by Polycoms claims of alleged patent
infringement), provides for indemnification to Avistar by that third party.
Nevertheless, defending against any infringement claims, even those that are
not meritorious, could result in the expenditure of significant financial and
managerial resources, could take years to resolve and may require us to obtain
additional financing. In addition, if we are found liable for infringement, it
could require CPI or Avistar to pay substantial compensation and/or damages to
Polycom and we may not be able to continue offering that portion of our system
that is found to be infringing. Redesigning our system components to avoid
alleged or actual infringement could result in the expenditure of significant
and managerial resources and diminish the value of our system, which could
harm our business, financial position and results of operations and cause our
stock price to decline substantially.

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

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

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

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

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

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

We depend on outside contract manufacturers to produce components of our
systems. Most of our compression and decompression product, or gateway
product, is currently supplied by a single source, Tandberg, Inc. In addition,
we depend on various third party suppliers for the cameras, microphones,
speakers and monitors that we install at desktops and in conference rooms as a
part of each video communications network system. Two of these contract
manufacturers, SAE Materials Inc. and Pacific Corporation, are single source
suppliers for key components of our products. Another supplier, Equator
Technologies Inc., is our only current source of a component to be used in
products recently introduced to the marketplace. Our reliance on these third
parties involves a number of risks, including:

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

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

If we are unable to expand our direct sales force and/or add 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,
product partners and/or value-added resellers, or effect sales through our
customers. If we are unable to maintain or increase our direct sales force or
add indirect distribution channels due to our own cost constraints, limited
availability of qualified personnel or other reasons, our future revenue growth
may be limited and our future operating results may suffer. There is intense
pressure to contain our sales and marketing costs in response to continued
weakness in demand for our products. We cannot assure you that we will be
successful in attracting, integrating, motivating and retaining sales
personnel. Furthermore, it can take several months before a new hire becomes a
productive member of our sales force. The loss of existing direct and/or
indirect salespeople, or the failure of new salespeople and/or indirect sales
partners to develop the necessary skills in a timely manner, could reduce our
revenue growth.

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

Our products and technologies are complex and to successfully implement
our business strategy and manage our business, an in-depth understanding of
video communication and collaboration technologies and their potential uses is
required. We depend on the continued services of our executive officers and
other key personnel. We do not have long-term employment agreements with our
executive officers or other key personnel and 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.

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

Our plans call for growth in our business, and our inability to achieve or
manage growth could harm our business.

Failure to achieve or manage growth effectively will harm our business,
financial condition and operating results. Furthermore, in order to remain
competitive or to expand our business, we may find it
necessary or desirable in the future 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.

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

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 49% of total
revenue for 2002 and 47% for 2001. Some of the risks we may encounter in
conducting international business activities include the following:



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

International political instability may increase our cost of doing
business and disrupt our business.

Increased international political instability, evidenced by the threat or
occurrence of terrorist attacks, enhanced national security measures and/or
sustained military action may halt or hinder our ability to do business, may
increase our costs and may adversely affect our stock price. This increased
instability has had and may continue to have negative effects on financial
markets, including significant price and volume fluctuations in securities
markets. If this international political instability continues or escalates,
our business and results of operations could be harmed and the market price of
our common stock could decline.

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.

We may not meet the continued listing criteria for the NASDAQ SmallCap
Market, which could materially adversely affect the price and liquidity of our
stock, our business and our financial condition.

Until October 30, 2002, our common stock was listed on the NASDAQ National
Market. Continued listing on the NASDAQ National Market requires that the
minimum closing bid price of our common stock not fall below $1.00 for 30
consecutive trading days. On July 24, 2002, we received notification from the
NASDAQ Stock Market that we were out of compliance with the minimum closing bid
price requirement of $1.00 per share set forth in Marketplace Rule 4450(a)(5).
Therefore, our common stock became subject
to delisting from trading on the NASDAQ National Market on or about
October 22, 2002 when the minimum closing bid price of our common stock did not
equal or exceed $1.00 for a minimum of ten consecutive trading days.

On October 8, 2002, we applied for trading of our common stock on The NASDAQ
SmallCap Market. NASDAQ approved this application and our common stock was
transferred to The NASDAQ SmallCap Market on October 30, 2002 despite the fact
that the closing bid price of our common stock was below the minimum closing
bid price requirement of The NASDAQ SmallCap Market on that date. NASDAQ
allows companies that meet the listing requirements of the NASDAQ SmallCap
Market (other than the minimum closing bid price) an initial grace period of
180 days to regain compliance by posting a minimum closing bid price of $1.00
for at least ten consecutive trading days. With the acceptance of our
application to switch to The NASDAQ SmallCap Market, our 90-day grace period to
achieve the minimum bid requirements, which commenced July 24, 2002, was
extended to 180 days, or through January 21, 2003. On January 22, 2003, we
were notified by NASDAQ that we had been extended an additional 180-day grace
period to meet the $1.00 minimum closing bid price requirement, or until July
19, 2003. The closing bid price of our common stock remained above

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$1.00 for at least ten consecutive
trading days in February 2003. NASDAQ has advised us that we have met the
minimum closing bid price requirement for continued listing on The NASDAQ
SmallCap Market as of February 28, 2003. However, there can be no assurance
that we will continue to meet all requirements for continued listing on The
NASDAQ SmallCap Market, including the minimum bid price requirement, the
requirement for a minimum stockholders equity of $2.5 million or the other
continued listing standards of such market.

If we are unable to continue to list our common stock for trading on The
NASDAQ SmallCap Market, there may be adverse impact on the market price and
liquidity of our common stock, and our stock may be subject to the penny stock
rules contained in Section 15(g) of the Securities Exchange Act of 1934, as
amended, and the rules promulgated there under. Delisting of our common stock
from The NASDAQ SmallCap Market could also materially adversely affect our
business, including, among other things: our ability to raise additional
financing to fund our operations; our ability to attract and retain customers;
and our ability to attract and retain personnel, including management
personnel. In addition, if we were unable to list our common stock for trading
on NASDAQ, many institutional investors would no longer be able to retain their
interests in and/or make further investments in our common stock because of
their internal rules and protocols.

Our common 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 trading price of our common stock has in the past been and could in
the future be subject to significant fluctuations in response to:



| |  |  | quarterly variations in our results of operations;                                                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | announcements regarding our product developments;                                                                                                                           
|
| |  |  | announcements of technological innovations or new products by us, our customers or competitors;                                                                             
|
| |  |  | announcements of competitive product introductions by our competitors or our customers;                                                                                     
|
| |  |  | sales or the perception in the market of possible sales of a
large number of shares of our common stock by our directors, officers,
employees or principal stockholders; and
|
| |  |  | developments or disputes concerning patents or proprietary
rights, including our litigation with Polycom, or other events.                                                  

If our revenue and results of operations are below the expectations of
public market securities analysts or investors, then significant fluctuations
in the market price of our common stock could occur. In addition, the
securities markets have, from time to time, experienced significant price and
volume fluctuations, which have particularly affected the market prices for
high technology companies and which often are unrelated and disproportionate to
the operating performance of particular companies. These broad market
fluctuations, as well as general economic, political and market conditions, may
negatively affect the market price of our common stock.

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. Our share price has, in the past, experienced price volatility,
and may continue to do so in the future. If the market value of our common
stock experiences adverse fluctuations and we become involved in this type of
litigation, regardless of the merits or outcome, we could incur substantial
legal costs and our managements attention could be diverted, causing our
business, financial condition and operating results to suffer.

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

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

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

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

Our executive officers, directors and entities affiliated with them, in
the aggregate, beneficially owned approximately 78% of our common stock as of
December 31, 2002. If they were to act together, these stockholders would be
able to exercise control over most matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. These actions may be taken even if they are opposed by
other investors. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our company, which could cause
the market price of our common stock to decline.

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Item 7a.Quantitative and Qualitative Disclosures About Market Risk

We develop products primarily in the United States and sell those products
primarily in North America, Europe and Asia. International revenue, which
consists of sales to customers with operations principally in Western Europe
and Asia, comprised 49% of total revenue for the year ended December 31, 2002
and 47% for the year ended December 31, 2001. As a result, our financial
condition could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all of our
sales are currently made in United States dollars, a strengthening of the
United States dollar could make our products less competitive in foreign
markets. We do not use derivative financial instruments for speculative or
trading purposes, nor do we engage in any foreign currency hedging
transactions.

Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are
in short-term instruments. We expect that our interest income will be
negatively affected by declines in short-term interest rates.

Cash and Cash Equivalents and Short-Term Investments

Cash equivalents consist primarily of commercial paper and money market
and municipal bond funds acquired with remaining maturity periods of three
months or less and are stated at cost, plus accrued interest that approximates
market value. Short-term investments consist of corporate notes that are
classified as available for sale and are stated at fair value. We would not
expect our operating results or cash flow to be significantly impacted by the
effect of sudden changes in market interest rates given the nature of our
short-term investments.

The following table provides information about our investment portfolio.
For investment securities, the table presents cash and cash equivalents and
short-term investments and related weighted average interest rates by category
at December 31, 2002.

|                                                   |                                 |  |                |       |               |  |                  |      |  
|-------------------------------------------------- | ------------------------------- |  | -------------- | ----- | ------------- |  | ---------------- | ---- | -
|                                                   |                                 |  |                |       |               |  | Weighted Average
|                                                   |                                 |  | Amounts        |       | Interest Rate
|                                                   |                                 |  |                |       |              
|                                                   |                                 |  | (in thousands) |       |               |  |                 
|Description                                        |                                 |  |                |       |               |  |                  |     
|Cash, cash equivalents and short-term investments: |                                 |  |                |       |               |  |                  |     
|                                                   | Cash                            |  | $              | 2,057 |               |  |                  |     |  
|                                                   | Commercial paper                |  |                | 1,425 |               |  |                  | 1.35 | %
|                                                   | Market preferreds               |  |                | 1,300 |               |  |                  | 1.54 | %
|                                                   | Other cash equivalents          |  |                | 1     |               |  |                  | 1.34 | %
|                                                   | Short-term investments          |  |                | 2,402 |               |  |                  | 4.62 | %
|                                                   |                                 |  |                |       |               |  |                  |     
|                                                   | Fair Value at December 31, 2002 |  | $              | 7,185 |               |  |                  |      |  
|                                                   |                                 |  |                |       |               |  |                  |     




Item 8.Financial Statements and Supplementary Data

Our consolidated financial statements and the independent auditors report
appear on pages F-1 through F-20 of this Report.




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

On May 3, 2002, we dismissed Arthur Andersen LLP as our independent public
accountants, and on such date also selected KPMG LLP to replace Arthur Andersen
in this role. This change in our independent accountants was the subject of our
Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 8, 2002.

38



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##### Table of Contents






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 2003 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 Principal Stockholders
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 Principal Stockholders and Record Date and Principal
Share Ownership and the table captioned Equity Compensation Plan Information
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.




Item 14. Controls and Procedures



| | (a) |  | Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated
under the Securities Exchange Act of 1934, as amended (the Exchange
Act), within 90 days of the filing date of this report. Based on their
evaluation, our principal executive officer and principal financial
officer concluded that Avistars disclosure controls and procedures are
effective. In designing and evaluating our disclosure controls and
procedures, we recognized that any controls and procedures, no matter
how well designed and operated, can provide only a reasonable assurance
of achieving the desired control objective. Our management was required
to apply their judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our
internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation referenced in
paragraph (a) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            




PART IV




Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)Financial Statements

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

|                                                                                                     |  |      |     | 
|---------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                     |  | Page
|                                                                                                     |  |     
|Independent Auditors Report                                                                         |  |      | F-2 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                         |  |      | F-3 | 
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000           |  |      | F-4 | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2002, 2001 and 2000 |  |      | F-5 | 

39



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|                                                                                           |  |  |     | 
|------------------------------------------------------------------------------------------ |  |  | --- | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 |  |  | F-6 | 
|Notes to the Financial Statements                                                          |  |  | F-7 | 

(a)(2) Financial Statement Schedules

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

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

(a)(3) Exhibits

|           |  |                                                                                                                                                                                                   
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2(1)     |  | Restated Certificate of Incorporation                                                                                                                                                             
|           |  |                                                                                                                                                                                                   
|3.3(2)     |  | Bylaws of Avistar Communications Corporation                                                                                                                                                      
|           |  |                                                                                                                                                                                                   
|4.1(1)     |  | Specimen Certificate evidencing shares of Common Stock                                                                                                                                            
|           |  |                                                                                                                                                                                                   
|4.2(1)     |  | Avistar Systems Corporation Registration and Information Rights Agreement dated December 9, 1999                                                                                                  
|           |  |                                                                                                                                                                                                   
|10.1(1)    |  | Avistar Communications Corporation 1997 Stock Option Plan, as amended                                                                                                                             
|           |  |                                                                                                                                                                                                   
|10.1.1(1)  |  | Avistar Systems Corporation 1997 Stock Option Plan Stock Option Agreement                                                                                                                         
|           |  |                                                                                                                                                                                                   
|10.2(1)    |  | Avistar Communications Corporation 2000 Stock Option Plan                                                                                                                                         
|           |  |                                                                                                                                                                                                   
|10.3(3)    |  | Avistar Communications Corporation 2000 Director Option Plan, as amended                                                                                                                          
|           |  |                                                                                                                                                                                                   
|10.4(1)    |  | Avistar Communications Corporation Director Option Agreement                                                                                                                                      
|           |  |                                                                                                                                                                                                   
|10.5(4)    |  | Avistar Communications Corporation 2000 Employee Stock Purchase Program, as amended                                                                                                               
|           |  |                                                                                                                                                                                                   
|10.6(1)    |  | Form of Avistar Communications Corporation Indemnification Agreement                                                                                                                              
|           |  |                                                                                                                                                                                                   
|10.7(1)    |  | 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
|           |  |                                                                                                                                                                                                   
|10.8(1)    |  | Sublease by and between Entex Information Services, Inc. and Avistar Systems Corporation, dated July 23,
1999                                                                                     
|           |  |                                                                                                                                                                                                   
|10.9(5)   |  | Preferred Supplier Agreement dated June 24, 1997 by and between Avistar and Tandberg, Inc., including
modifications Nos. 1, 2, 3 and 4                                                            
|           |  |                                                                                                                                                                                                   
|10.9.1(1) |  | Modification No. 5 to the Preferred Supplier Agreement referenced in Exhibit 10.8, dated June 27, 2000                                                                                            
|           |  |                                                                                                                                                                                                   
|10.9.2(2) |  | Modification No. 6 to the Preferred Supplier Agreement referenced in Exhibit 10.8, dated November 27, 2000                                                                                        
|           |  |                                                                                                                                                                                                   
|10.10(6)   |  | Settlement Agreement and Release between the Registrant and R. Stephen Heinrichs dated April 26, 2001                                                                                             
|           |  |                                                                                                                                                                                                   
|10.11      |  | Master Loan and Security Agreement between the Registrant and Comerica Bank  California dated February
27, 2002                                                                                  
|           |  |                                                                                                                                                                                                   
|10.11.1   |  | First Amendment dated December 17, 2002 to Master Loan and Security Agreement between the Registrant and
Comerica BankCalifornia                                                                 
|           |  |                                                                                                                                                                                                   
|10.11.2   |  | Unconditional Guaranty of the Gerald J. Burnett and Marjorie J. Burnett Revocable Trust dated December
17, 2002                                                                                   
|           |  |                                                                                                                                                                                                   
|10.11.3   |  | Unconditional Guaranty of Gerald J. Burnett dated December 17, 2002                                                                                                                               
|           |  |                                                                                                                                                                                                   
|10.11.4    |  | Second Amendment dated March 10, 2003 to Master Loan and Security Agreement between the Registrant and
Comerica Bank  California                                                                 
|           |  |                                                                                                                                                                                                   
|10.11.5    |  | Guaranty of Gerald J. Burnett dated March 10, 2003                                                                                                                                                
|           |  |                                                                                                                                                                                                   
|21.1       |  | Subsidiaries of the Company                                                                                                                                                                       

40



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|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|23.1 |  | Consent of KPMG LLP                                                                     
|     |  |                                                                                         
|24.1 |  | Power of Attorney (see page 42)                                                         
|     |  |                                                                                         
|99.1 |  | Certifications of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



---

|   |  | 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.                 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | 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.    
|   
|(2) |  | Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for
the three months ended March 31, 2002 filed with the Securities and
Exchange Commission on April 30, 2002.
|   
|(3) |  | Filed as an exhibit to the Registrants Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on June 27, 2001.                                      
|   
|(4) |  | Filed as an exhibit to the Registrants Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on August 16, 2000.                                    
|   
|(5) |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 21, 2002.           
|   
|(6) |  | Filed as an exhibit to the Registrants Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 8, 2001.                                                

(b)  Reports on Form 8-K.On October 29, 2002, the Company filed a Current
Report on Form 8-K reporting that its application for transfer of its common
stock from The NASDAQ National Market to The NASDAQ SmallCap Market had been
approved by NASDAQ and that the transfer of its common stock to The NASDAQ
SmallCap Market would be effective at the start of trading on October 30, 2002.

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

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

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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 Annual
Report on Form 10K to be signed on its behalf by the undersigned, thereunto
duly authorized.

| |  |  |                                    |                      
| |  |  | ---------------------------------- | ---------------------
| |  |  | AVISTAR COMMUNICATIONS
CORPORATION
| |  |  |                                    |                      
| |  |  | By:                                | /s/ GERALD J. BURNETT
| |  |  |                                    |                      
| |  |  |                                    | Gerald J. Burnett    
| |  |  |                                    | Chief Executive      
| |  |  |                                    | Officer and Chairman 

Date: March 25, 2003

POWER OF ATTORNEY

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

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

| |  |                                                   |  |                                                                      |  |               
| |  | ------------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
| |  | Signature                                         |  | Title                                                                |  | Date          
| |  |                                                   |  |                                                                      |  |               
|
| |  | /s/ GERALD J. BURNETT

 Gerald J. Burnett         |  | Chief Executive Officer and Chairman
(Principal Executive Officer)   |  | March 25, 2003
| |  |                                                   |  |                                                                      |  |               
| |  | /s/ Robert J. Habig

    Robert J. Habig          |  | Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 25, 2003
| |  |                                                   |  |                                                                      |  |               
| |  | /s/ William L. Campbell

    William L. Campbell  |  | Executive Vice President and Director                                |  | March 25, 2003
| |  |                                                   |  |                                                                      |  |               
| |  | /s/ R. Stephen Heinrichs

   R. Stephen Heinrichs |  | Director                                                             |  | March 25, 2003
| |  |                                                   |  |                                                                      |  |               
| |  | /s/ Robert P. Latta

   Robert P. Latta           |  | Director                                                             |  | March 25, 2003
| |  |                                                   |  |                                                                      |  |               
| |  | /s/ Robert M. Metcalfe

   Robert M. Metcalfe     |  | Director                                                             |  | March 25, 2003
| |  |                                                   |  |                                                                      |  |               
| |  | /s/ David M. Solo

   David M. Solo               |  | Director                                                             |  | March 25, 2003

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##### Table of Contents



Section 302 Certification for Reports on Form 10-K

I, Gerald J. Burnett, certify that:

1.          I have reviewed this annual report on Form 10-K of Avistar Communications
Corporation;

2.          Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.          Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.          The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)          designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b)          evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c)          presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.          The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a)          all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b)          any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.          The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

/s/ Gerald J. Burnett
Gerald J. Burnett
Chief Executive Officer

43



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##### Table of Contents



Section 302 Certification for Reports on Form 10-K

I, Robert J. Habig, certify that:

1.          I have reviewed this annual report on Form 10-K of Avistar Communications
Corporation;

2.          Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.          Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.          The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)          designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b)          evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c)          presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.          The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a)          all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b)          any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.          The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

/s/ Robert J. Habig
Robert J. Habig
Chief Financial Officer

44



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##### Table of Contents






INDEX TO FINANCIAL STATEMENTS

|                                                                                                     |  |      |     | 
|---------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                     |  | Page
|                                                                                                     |  |     
|Independent Auditors Report                                                                         |  |      | F-2 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                         |  |      | F-3 | 
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000           |  |      | F-4 | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2002, 2001 and 2000 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  |      | F-6 | 
|Notes to the Financial Statements                                                                    |  |      | F-7 | 

F-1



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##### Table of Contents



Independent Auditors Report

The Board of Directors and Stockholders
Avistar Communications Corporation:

We have audited the accompanying consolidated balance sheet of Avistar
Communications Corporation and subsidiaries as of December 31, 2002 and the
related consolidated statements of operations, stockholders equity and cash
flows for the year then ended. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. The 2001 and 2000 financial
statements and financial statement schedule of Avistar Communications
Corporation were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements and
financial statement schedule in their report dated January 23,
2002 (except with respect to a certain matter as to which the date is
February 27, 2002).

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

In our opinion, the consolidated financial statements as of and for the
year ended December 31, 2002 referred to above present fairly, in all material
respects, the financial position of Avistar Communications Corporation and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related 2002 financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.

/s/ KPMG LLP

Mountain View, California
January 17, 2003, except as to
Note 3, which is as of
March 10, 2003

F-2



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
as of December 31, 2002 and 2001
(in thousands, except share and per share data)

|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |        | 
|------------------------------------- | --------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------ | ------ | ---- | - | ------- | ------ | 
|                                      |                       |                                                                                                                                                                                  |                                            |   | December 31,
|                                      |                       |                                                                                                                                                                                  |                                            |   | 2002         |        | 2001
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |     
|Assets:                               |                       |                                                                                                                                                                                  |                                            |   |              |        |      |  
|                                      | Current assets:       |                                                                                                                                                                                  |                                            |   |              |        |      |   |        
|                                      |                       | Cash and cash equivalents                                                                                                                                                        |                                            | $ | 4,783        |        |      | $ | 7,455   |       
|                                      |                       | Short-term investments                                                                                                                                                           |                                            |   | 2,402        |        |      |   | 5,831   |       
|                                      |                       | Accounts receivable, net of allowance for doubtful
accounts of $69 and $232 at December 31, 2002 and 2001, respectively                                                          |                                            |   | 740          |        |      |   | 2,760   |       
|                                      |                       | Inventories, including inventory shipped to customers sites, not
yet installed of $71 and $262 at December 31, 2002 and 2001, respectively                                       |                                            |   | 1,148        |        |      |   | 1,096   |       
|                                      |                       | Prepaid expenses and other current assets                                                                                                                                        |                                            |   | 629          |        |      |   | 1,121   |       
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       
|                                      |                       |                                                                                                                                                                                  | Total current assets                       |   |              | 9,702  |      |   |         | 18,263 | 
|                                      |                       | Property and equipment, net                                                                                                                                                      |                                            |   | 378          |        |      |   | 599     |       
|                                      |                       | Other assets                                                                                                                                                                     |                                            |   | 320          |        |      |   | 403     |       
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       
|                                      |                       |                                                                                                                                                                                  | Total assets                               |   | $            | 10,400 |      |   | $       | 19,265 | 
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       
|Liabilities and Stockholders Equity: |                       |                                                                                                                                                                                  |                                            |   |              |        |      |  
|                                      | Current liabilities:  |                                                                                                                                                                                  |                                            |   |              |        |      |   |        
|                                      |                       | Bank overdraft                                                                                                                                                                   |                                            | $ |             |        |      | $ | 149     |       
|                                      |                       | Accounts payable                                                                                                                                                                 |                                            |   | 558          |        |      |   | 633     |       
|                                      |                       | Deferred revenue and customer deposits                                                                                                                                           |                                            |   | 996          |        |      |   | 1,205   |       
|                                      |                       | Accrued liabilities and other                                                                                                                                                    |                                            |   | 898          |        |      |   | 2,237   |       
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       
|                                      |                       |                                                                                                                                                                                  | Total current liabilities                  |   |              | 2,452  |      |   |         | 4,224  | 
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       
|                                      | Stockholders equity: |                                                                                                                                                                                  |                                            |   |              |        |      |   |        
|                                      |                       | Common stock, $0.001 par value; 250,000,000 shares authorized
at December 31, 2002 and 2001; 26,465,058 and 26,362,603 shares
issued at December 31, 2002 and 2001, respectively |                                            |   | 26           |        |      |   | 26      |       
|                                      |                       | Less: treasury common stock, 1,179,625 and 1,166,125 shares at
December 31, 2002 and 2001, respectively, at cost                                                                 |                                            |   | (51          | )      |      |   | (40     | )     
|                                      |                       | Additional paid-in-capital                                                                                                                                                       |                                            |   | 80,254       |        |      |   | 80,039  |       
|                                      |                       | Deferred stock compensation                                                                                                                                                      |                                            |   | (135         | )      |      |   | (493    | )     
|                                      |                       | Other comprehensive income                                                                                                                                                       |                                            |   | 2            |        |      |   | 79      |       
|                                      |                       | Accumulated deficit                                                                                                                                                              |                                            |   | (72,148      | )      |      |   | (64,570 | )     
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       
|                                      |                       |                                                                                                                                                                                  | Total stockholders equity                 |   |              | 7,948  |      |   |         | 15,041 | 
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       
|                                      |                       |                                                                                                                                                                                  | Total liabilities and stockholders equity |   | $            | 10,400 |      |   | $       | 19,265 | 
|                                      |                       |                                                                                                                                                                                  |                                            |   |              |        |      |   |         |       

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

F-3



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)

|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |        |  
|----------------------------------------------------------------------------------- | --------------------------------------------- | --------------------------------- | ------ | ----------------------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                    |                                               |                                   |        | Year Ended December 31,
|                                                                                    |                                               |                                   |        | 2002                    |        | 2001 |        | 2000  
|                                                                                    |                                               |                                   |        |                         |        |      |        |       
|Revenue:                                                                            |                                               |                                   |        |                         |        |      |        |        |        |   |         |       
|                                                                                    | Product                                       |                                   | $      | 4,430                   |        |      | $      | 11,366 |        |   | $       | 16,925 |       
|                                                                                    | Services, maintenance and support             |                                   |        | 4,369                   |        |      |        | 4,830  |        |   |         | 4,489  |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|                                                                                    |                                               | Total revenue                     |        |                         | 8,799  |      |        |        | 16,196 |   |         |        | 21,414 |  
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Cost of revenue:                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |       
|                                                                                    | Product                                       |                                   |        | 2,129                   |        |      |        | 4,961  |        |   |         | 7,287  |       
|                                                                                    | Services, maintenance and support             |                                   |        | 2,348                   |        |      |        | 2,683  |        |   |         | 2,167  |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|                                                                                    |                                               | Total cost of revenue             |        |                         | 4,477  |      |        |        | 7,644  |   |         |        | 9,454  |  
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|                                                                                    |                                               | Gross margin                      |        |                         | 4,322  |      |        |        | 8,552  |   |         |        | 11,960 |  
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Operating Expenses:                                                                 |                                               |                                   |        |                         |        |      |        |        |        |   |         |       
|                                                                                    | Research and development                      |                                   |        | 3,699                   |        |      |        | 5,280  |        |   |         | 4,123  |       
|                                                                                    | Sales and marketing                           |                                   |        | 3,728                   |        |      |        | 6,066  |        |   |         | 5,627  |       
|                                                                                    | General and administrative                    |                                   |        | 4,593                   |        |      |        | 5,002  |        |   |         | 4,283  |       
|                                                                                    | Amortization of deferred stock
compensation * |                                   |        | 358                     |        |      |        | 898    |        |   |         | 2,049  |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|                                                                                    |                                               | Total operating expenses          |        |                         | 12,378 |      |        |        | 17,246 |   |         |        | 16,082 |  
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|                                                                                    |                                               | Loss from operations              |        |                         | (8,056 | )    |        |        | (8,694 | ) |         |        | (4,122 | )
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Other income (expense)                                                              |                                               |                                   |        |                         |        |      |        |        |        |   |         |       
|                                                                                    | Interest expense                              |                                   |        |                        |        |      |        | (2     | )      |   |         | (1,184 | )     
|                                                                                    | Interest income                               |                                   |        | 269                     |        |      |        | 758    |        |   |         | 650    |       
|                                                                                    | Other income, net                             |                                   |        | 227                     |        |      |        |       |        |   |         |       |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|                                                                                    |                                               | Total other income (expense), net |        |                         | 496    |      |        |        | 756    |   |         |        | (534   | )
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Loss before provision for
(recovery from) income taxes                              |                                               |                                   | (7,560 | )                       |        |      | (7,938 | )      |        |   | (4,656  | )     
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Provision for (recovery from)
income taxes                                          |                                               |                                   | 18     |                         |        |      | (19    | )      |        |   | 15      |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Net loss                                                                            |                                               |                                   | (7,578 | )                       |        |      | (7,919 | )      |        |   | (4,671  | )     
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Beneficial conversion
related to convertible
preferred stock                        |                                               | $                                 |       |                         |        | $    |       |        |        | $ | (37,783 | )     
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Net loss attributable to common
stockholders                                        |                                               | $                                 | (7,578 | )                       |        | $    | (7,919 | )      |        | $ | (42,454 | )     
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Net loss per share - basic and diluted                                              |                                               | $                                 | (0.30  | )                       |        | $    | (0.31  | )      |        | $ | (4.46   | )     
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|Weighted average shares
used in calculating
basic and diluted net loss per share    |                                               |                                   | 25,260 |                         |        |      | 25,168 |        |        |   | 9,510   |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|* Amortization of deferred stock
compensation excluded from the
following expenses: |                                               |                                   |        |                         |        |      |        |        |        |   |         |       
|                                                                                    | Cost of revenue                               |                                   | $      | 41                      |        |      | $      | 120    |        |   | $       | 263    |       
|                                                                                    | Research and development                      |                                   |        | 32                      |        |      |        | 101    |        |   |         | 223    |       
|                                                                                    | Sales and marketing                           |                                   |        | 278                     |        |      |        | 657    |        |   |         | 1,516  |       
|                                                                                    | General and administrative                    |                                   |        | 7                       |        |      |        | 20     |        |   |         | 47     |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       
|                                                                                    |                                               | $                                 | 358    |                         |        | $    | 898    |        |        | $ | 2,049   |       
|                                                                                    |                                               |                                   |        |                         |        |      |        |        |        |   |         |        |       

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

F-4





---



##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
for the years ended December 31, 2002, 2001 and 2000
(in thousands, except share amounts)

|                                                                                             |  |                 |             |              |  |                |     |        |  |        |            |        |  |   |    |  |  |  |           |  |  |   |     |  
|-------------------------------------------------------------------------------------------- |  | --------------- | ----------- | ------------ |  | -------------- | --- | ------ |  | ------ | ---------- | ------ |  | - | -- |  |  |  | --------- |  |  | - | --- | -
|                                                                                             |  | Convertible     |             |              |  |                |     |        |  |        |            |        |  |   |    |  |  | 
|                                                                                             |  | Preferred Stock |             | Common Stock |  | Treasury Stock
|                                                                                             |  | shares          |             | amount       |  | shares         |     | amount |  | shares |            | amount
|                                                                                             |  |                 |             |              |  |                |     |        |  |        |            |       
|Balance at December 31, 1999                                                                 |  |                 | 17,067,369  |              |  | $              | 17  |        |  |        | 2,818,950  |        |  | $ | 3  |  |  |  | 1,139,625 |  |  | $ | (40 | )
|Issuance of common stock pursuant
to initial public offering (net of
related offering costs) |  |                 |            |              |  |                |    |        |  |        | 3,000,000  |        |  |   | 3  |  |  |  |          |  |  |   |    |  
|Issuance of common stock to employees
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 terminations                                        |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  | 4,000     |  |  |   |    |  
|Deferred stock compensation                                                                  |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Amortization of deferred
stock compensation                                                  |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Net loss                                                                                     |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|                                                                                             |  |                 |             |              |  |                |     |        |  |        |            |        |  |   |    |  |  |  |           |  |  |   |     |  
|Balance at December 31, 2000                                                                 |  |                 |            |              |  |                |    |        |  |        | 26,266,990 |        |  |   | 26 |  |  |  | 1,143,625 |  |  |   | (40 | )
|Purchase of common stock pursuant to
stock repurchase program                                |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  | 22,500    |  |  |   |    |  
|Issuance of common stock to employees
pursuant to employee stock purchase
plan               |  |                 |            |              |  |                |    |        |  |        | 63,776     |        |  |   |   |  |  |  |          |  |  |   |    |  
|Issuance of common stock to employees
pursuant to exercise of options                        |  |                 |            |              |  |                |    |        |  |        | 31,837     |        |  |   |   |  |  |  |          |  |  |   |    |  
|Amortization of deferred stock
compensation, net of forfeitures                              |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Non-employee stock-based compensation                                                        |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Unrealized gain on short-term
investments                                                    |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Net loss                                                                                     |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|                                                                                             |  |                 |             |              |  |                |     |        |  |        |            |        |  |   |    |  |  |  |           |  |  |   |     |  
|Balance at December 31, 2001                                                                 |  |                 |            |              |  |                |    |        |  |        | 26,362,603 |        |  |   | 26 |  |  |  | 1,166,125 |  |  |   | (40 | )
|Purchase of common stock pursuant to
stock repurchase program                                |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  | 13,500    |  |  |   | (11 | )
|Issuance of common stock to employees
pursuant to employee stock purchase
plan               |  |                 |            |              |  |                |    |        |  |        | 98,305     |        |  |   |   |  |  |  |          |  |  |   |    |  
|Issuance of common stock to employees
pursuant to exercise of options                        |  |                 |            |              |  |                |    |        |  |        | 4,150      |        |  |   |   |  |  |  |          |  |  |   |    |  
|Amortization of deferred stock
compensation, net of forfeitures                              |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Non-employee stock-based compensation                                                        |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Unrealized loss on short-term
investments                                                    |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|Net loss                                                                                     |  |                 |            |              |  |                |    |        |  |        |           |        |  |   |   |  |  |  |          |  |  |   |    |  
|                                                                                             |  |                 |             |              |  |                |     |        |  |        |            |        |  |   |    |  |  |  |           |  |  |   |     |  
|Balance at December 31, 2002                                                                 |  |                 |            |              |  | $              |    |        |  |        | 26,465,058 |        |  | $ | 26 |  |  |  | 1,179,625 |  |  | $ | (51 | )
|                                                                                             |  |                 |             |              |  |                |     |        |  |        |            |        |  |   |    |  |  |  |           |  |  |   |     |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                             |  |            |        |              |  |               |        |            |  |                  |     |       |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | ---------- | ------ | ------------ |  | ------------- | ------ | ---------- |  | ---------------- | --- | ----- |  | - | ------- | - |  | - | ------ | -
|                                                                                             |  | Additional |        | Deferred     |  | Other         |        |            |  |                  |     | Total
|                                                                                             |  | Paid-In    |        | Stock        |  | Comprehensive |        | Accumulate |  | Stockholders   
|                                                                                             |  | Capital    |        | Compensation |  | Income        |        | Deficit    |  | Equity (Deficit)
|                                                                                             |  |            |        |              |  |               |        |            |  |                 
|Balance at December 31, 1999                                                                 |  | $          | 9,304  |              |  | $             | (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 to employees
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 terminations                                        |  |            |       |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   |       |  
|Deferred stock compensation                                                                  |  |            | 1,720  |              |  |               | (1,720 | )          |  |                  |    |       |  |   |        |   |  |   |       |  
|Amortization of deferred
stock compensation                                                  |  |            |       |              |  |               | 2,049  |            |  |                  |    |       |  |   |        |   |  |   | 2,049  |  
|Net loss                                                                                     |  |            |       |              |  |               |       |            |  |                  |    |       |  |   | (4,671  | ) |  |   | (4,671 | )
|                                                                                             |  |            |        |              |  |               |        |            |  |                  |     |       |  |   |         |   |  |   |        |  
|Balance at December 31, 2000                                                                 |  |            | 80,184 |              |  |               | (1,755 | )          |  |                  |    |       |  |   | (56,651 | ) |  |   | 21,764 |  
|Purchase of common stock pursuant to
stock repurchase program                                |  |            | (34    | )            |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | (34    | )
|Issuance of common stock to employees
pursuant to employee stock purchase
plan               |  |            | 201    |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | 201    |  
|Issuance of common stock to employees
pursuant to exercise of options                        |  |            | 21     |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | 21     |  
|Amortization of deferred stock
compensation, net of forfeitures                              |  |            | (364   | )            |  |               | 1,262  |            |  |                  |    |       |  |   |        |   |  |   | 898    |  
|Non-employee stock-based compensation                                                        |  |            | 31     |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | 31     |  
|Unrealized gain on short-term
investments                                                    |  |            |       |              |  |               |       |            |  |                  | 79  |       |  |   |        |   |  |   | 79     |  
|Net loss                                                                                     |  |            |       |              |  |               |       |            |  |                  |    |       |  |   | (7,919  | ) |  |   | (7,919 | )
|                                                                                             |  |            |        |              |  |               |        |            |  |                  |     |       |  |   |         |   |  |   |        |  
|Balance at December 31, 2001                                                                 |  |            | 80,039 |              |  |               | (493   | )          |  |                  | 79  |       |  |   | (64,570 | ) |  |   | 15,041 |  
|Purchase of common stock pursuant to
stock repurchase program                                |  |            |       |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | (11    | )
|Issuance of common stock to employees
pursuant to employee stock purchase
plan               |  |            | 109    |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | 109    |  
|Issuance of common stock to employees
pursuant to exercise of options                        |  |            | 4      |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | 4      |  
|Amortization of deferred stock
compensation, net of forfeitures                              |  |            |       |              |  |               | 358    |            |  |                  |    |       |  |   |        |   |  |   | 358    |  
|Non-employee stock-based compensation                                                        |  |            | 102    |              |  |               |       |            |  |                  |    |       |  |   |        |   |  |   | 102    |  
|Unrealized loss on short-term
investments                                                    |  |            |       |              |  |               |       |            |  |                  | (77 | )     |  |   |        |   |  |   | (77    | )
|Net loss                                                                                     |  |            |       |              |  |               |       |            |  |                  |    |       |  |   | (7,578  | ) |  |   | (7,578 | )
|                                                                                             |  |            |        |              |  |               |        |            |  |                  |     |       |  |   |         |   |  |   |        |  
|Balance at December 31, 2002                                                                 |  | $          | 80,254 |              |  | $             | (135   | )          |  | $                | 2   |       |  | $ | (72,148 | ) |  | $ | 7,948  |  
|                                                                                             |  |            |        |              |  |               |        |            |  |                  |     |       |  |   |         |   |  |   |        |  

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

F-5





---



##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS
for the years ended December 31, 2002, 2001 and 2000
(in thousands)

|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |       |        |  
|------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | ------ | ----------------------- | ------ | ---- | ------- | ---- | ------ | - | ------- | ----- | ------ | -
|                                      |                                                                             |                                               |                                           |        | Year Ended December 31,
|                                      |                                                                             |                                               |                                           |        | 2002                    |        | 2001 |         | 2000
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |     
|Cash Flows from Operating Activities: |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |        
|                                      | Net loss                                                                    |                                               | $                                         | (7,578 | )                       |        | $    | (7,919  | )    |        | $ | (4,671  | )    
|                                      | Adjustments to reconcile net loss to net cash
used in operating activities: |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      |                                                                             | Depreciation                                  |                                           |        | 326                     |        |      |         | 300  |        |   |         | 136   |       
|                                      |                                                                             | Stock compensation expense, net               |                                           |        | 358                     |        |      |         | 898  |        |   |         | 2,049 |       
|                                      |                                                                             | Compensation on options issued to consultants |                                           |        | 102                     |        |      |         | 31   |        |   |         |      |       
|                                      |                                                                             | Provision for doubtful accounts               |                                           |        | 56                      |        |      |         | 52   |        |   |         | 72    |       
|                                      |                                                                             | Changes in current assets and liabilities:    |                                           |        |                         |        |      |         |      |        |   |         |       |       
|                                      |                                                                             |                                               | Accounts receivable                       |        |                         | 1,964  |      |         |      | 900    |   |         |       | (1,743 | )
|                                      |                                                                             |                                               | Inventories                               |        |                         | (52    | )    |         |      | 1,060  |   |         |       | (567   | )
|                                      |                                                                             |                                               | Prepaid expenses and other current assets |        |                         | 492    |      |         |      | (687   | ) |         |       | (310   | )
|                                      |                                                                             |                                               | Other assets                              |        |                         | 83     |      |         |      | (145   | ) |         |       | 60     |  
|                                      |                                                                             |                                               | Accounts payable                          |        |                         | (75    | )    |         |      | (1,373 | ) |         |       | 849    |  
|                                      |                                                                             |                                               | Deferred revenue and customer deposits    |        |                         | (209   | )    |         |      | (921   | ) |         |       | 813    |  
|                                      |                                                                             |                                               | Accrued liabilities and other             |        |                         | (1,339 | )    |         |      | (170   | ) |         |       | 1,078  |  
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      | Net cash used in operating activities                                       |                                               |                                           | (5,872 | )                       |        |      | (7,974  | )    |        |   | (2,234  | )    
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|Cash Flows from Investing Activities: |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |        
|                                      | Purchase of short-term investments                                          |                                               |                                           |       |                         |        |      | (5,852  | )    |        |   |        |      
|                                      | Sale of short-term investments                                              |                                               |                                           | 3,352  |                         |        |      | 100     |      |        |   |        |      
|                                      | Purchase of property and equipment                                          |                                               |                                           | (105   | )                       |        |      | (816    | )    |        |   |        |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      | Net cash provided by (used in) investing activities                         |                                               |                                           | 3,247  |                         |        |      | (6,568  | )    |        |   |        |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|Cash Flows from Financing Activities: |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |        
|                                      | Net borrowings (payments) under line of credit                              |                                               |                                           |       |                         |        |      |        |      |        |   | (1,998  | )    
|                                      | Increase in bank overdraft                                                  |                                               |                                           |       |                         |        |      | 149     |      |        |   |        |      
|                                      | Decrease in bank overdraft                                                  |                                               |                                           | (149   | )                       |        |      |        |      |        |   |        |      
|                                      | Payments on notes payable to related parties                                |                                               |                                           |       |                         |        |      |        |      |        |   | (12,623 | )    
|                                      | Borrowings from related parties                                             |                                               |                                           |       |                         |        |      |        |      |        |   | 900     |      
|                                      | Proceeds from issuance of common stock (net of offering costs)              |                                               |                                           | 113    |                         |        |      | 222     |      |        |   | 31,383  |      
|                                      | Repurchases of common stock                                                 |                                               |                                           | (11    | )                       |        |      | (34     | )    |        |   |        |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      | Net cash provided by (used in) financing activities                         |                                               |                                           | (47    | )                       |        |      | 337     |      |        |   | 17,662  |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      | Net increase (decrease) in cash and cash equivalents                        |                                               |                                           | (2,672 | )                       |        |      | (14,205 | )    |        |   | 15,428  |      
|                                      | Cash and cash equivalents, beginning of year                                |                                               |                                           | 7,455  |                         |        |      | 21,660  |      |        |   | 6,232   |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      | Cash and cash equivalents, end of year                                      |                                               | $                                         | 4,783  |                         |        | $    | 7,455   |      |        | $ | 21,660  |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|Supplemental Cash Flow Information:   |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |        
|                                      | Cash paid for income taxes                                                  |                                               | $                                         |       |                         |        | $    |        |      |        | $ | 5       |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      | Cash paid for interest                                                      |                                               | $                                         |       |                         |        | $    |        |      |        | $ | 1,530   |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      
|                                      | Beneficial conversion related to convertible preferred stock                |                                               | $                                         |       |                         |        | $    |        |      |        | $ | 37,783  |      
|                                      |                                                                             |                                               |                                           |        |                         |        |      |         |      |        |   |         |      

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

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

Business

Avistar Communications Corporation (Avistar or the Company) provides
the Avistar vBusiness integrated suite of video-enabled applications, including
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, develops,
markets, sells, manufactures and/or assembles and installs and supports its
products. Avistars real-time and non-real-time products are based upon its
architecture and Video Operating System (AvistarVOS) platform, which
facilitates distribution over local and wide area networks using telephony or
Internet services as appropriate. Avistars services include software
development, consulting, implementation, training, maintenance and support. In
addition, Avistar seeks to prosecute, maintain, support and license the
intellectual property developed by the Company through its wholly-owned
subsidiary, Collaboration Properties, Inc., a Nevada corporation (CPI).

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 6) 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 5 and Note 6).
Accordingly, the accounts of CPI and VCT have been combined at historical cost
with those of ASC for all periods presented since their inception.

Reorganization

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

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

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

Initial Public Offering

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

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

Basis of Presentation

The accompanying financial statements as of December 31, 2002 and 2001
present the consolidated financial position of Avistar and its two wholly-owned
operating subsidiaries, Avistar Systems U.K. Limited (ASUK) and CPI after
elimination of all intercompany accounts and transactions. The consolidated
results are referred to, collectively, as those of Avistar or the Company in
these notes.

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

The Companys fiscal year end is December 31. Certain reclassifications
were made to the prior year presentation to conform to the current period
presentation.

Risks and Uncertainties

The markets for the Companys products and services are in the early
stages of development. 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, particularly when
there are adverse conditions in the economy. 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 this evolving marketplace. The Company has
generated losses since inception and had an accumulated deficit of $72.1
million as of December 31, 2002. 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 economic environment, the adoption of different
distribution channels, and the timing of new product announcements by the
Company or its competitors.

The Companys future liquidity and capital requirements will depend upon
numerous factors, including, but not limited to, the costs and timing of its
expansion of product development efforts and the success of these development
efforts, the costs and timing of its expansion of sales and marketing
activities, the extent to which its existing and new products gain market
acceptance, competing technological and market developments, the costs involved
in maintaining, enforcing and defending patent claims and other intellectual
property rights, the level and timing of revenue and other factors. The
Company may need to raise additional funds, and additional financing may not be
available on favorable terms, if at all. If the Company cannot raise funds, if
needed, on acceptable terms, the Company may not be able to develop or enhance
its products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could seriously harm the
Companys business, financial condition, results of operations
and ability to continue operations. If
additional funds are raised through the issuance of equity securities, the
Companys net tangible book value per share is likely to decrease, the
percentage ownership of then current stockholders will be diluted and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Companys common stock (See Note 3).

2.     Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents and Short-term Investments

The Company considers all investment instruments purchased with a
remaining maturity of three months or less to be cash equivalents. The
Companys cash equivalents at December 31, 2002 and December 31, 2001 consisted
of money market funds and short-term securities. The Company has classified
all investments not classified as cash equivalents as short term since it has
the intent and ability to redeem them within one year. The Company classifies
its short-term investments as available for sale with

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unrealized gains or losses reported as a separate component of
stockholders equity. The fair value of the Companys investments was
determined based on quoted market prices at the reporting date for those
instruments. Short-term investments as of December 31, 2002 and 2001 consisted
of the following:

|            |                       |  |                     |       |              |  |   |       | 
|----------- | --------------------- |  | ------------------- | ----- | ------------ |  | - | ----- | 
|            |                       |  | 2002 (in thousands)
|            |                       |  | Cost                |       | Market Value
|            |                       |  |                     |       |             
|Investments |                       |  |                     |       |              |  |   |      
|            | Corporate obligations |  | $                   | 1,900 |              |  | $ | 1,902 | 
|            | Other                 |  |                     | 500   |              |  |   | 500   | 
|            |                       |  |                     |       |              |  |   |       | 
|            | Total                 |  | $                   | 2,400 |              |  | $ | 2,402 | 
|            |                       |  |                     |       |              |  |   |       | 

|            |                        |  |                     |       |              |  |   |       | 
|----------- | ---------------------- |  | ------------------- | ----- | ------------ |  | - | ----- | 
|            |                        |  | 2001 (in thousands)
|            |                        |  | Cost                |       | Market Value
|            |                        |  |                     |       |             
|Investments |                        |  |                     |       |              |  |   |      
|            | Government obligations |  | $                   | 637   |              |  | $ | 638   | 
|            | Corporate obligations  |  |                     | 3,815 |              |  |   | 3,893 | 
|            | Other                  |  |                     | 1,300 |              |  |   | 1,300 | 
|            |                        |  |                     |       |              |  |   |       | 
|            | Total                  |  | $                   | 5,752 |              |  | $ | 5,831 | 
|            |                        |  |                     |       |              |  |   |       | 

At December 31, 2002, investments with scheduled maturities within one
year were $2.4 million. As of December 31, 2001, investments with scheduled
maturities within one year were $3.8 million and from one to two years were
$2.0 million. The Company has classified all investments as short term since
it has the intent and ability to redeem them within one year.

Supplemental Cash Flow Information

During 2002 and 2001, no cash was paid for income taxes or interest.

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 2002, 2001 and 2000:

|           |  |      |    |      |  |      |    |   |  |  |    |  
|---------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  | 2002 |    | 2001 |  | 2000
|           |  |      |    |      |  |     
|Customer A |  |      | 55 | %    |  |      | 33 | % |  |  | 33 | %
|Customer B |  |      | 11 | %    |  |      | 10 | % |  |  | 13 | %
|Customer C |  |      | *  |      |  |      | 22 | % |  |  | 23 | %
|Customer D |  |      | *  |      |  |      | *  |   |  |  | 11 | %



---

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

Any change in the relationship with these customers could have a
potentially adverse effect on the Companys financial position.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. The Company has cash and investment policies that limit
the amount of credit exposure to any one financial institution and restrict
placement of these investments to financial institutions evaluated as highly
credit worthy. Concentration of credit risk with respect to trade receivables
relate to those trade receivables from both United States and foreign entities.
As of December 31, 2002, approximately 65% of accounts receivable were
concentrated with one customer. As of December 31, 2001, approximately 49% of
accounts receivable were concentrated with two customers, each of whom
represented more than 10% of the Companys total accounts receivable balance.

Fair Value of Financial Instruments

The carrying amounts of the Companys financial assets and liabilities,
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, short-term borrowings and notes payable at
December 31, 2002 and 2001, approximate fair value because of the short
maturity of these instruments.

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Inventories

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

|                                                       |  |              |       |      |  |   |       |  
|------------------------------------------------------ |  | ------------ | ----- | ---- |  | - | ----- | -
|                                                       |  | December 31,
|                                                       |  |             
|                                                       |  | 2002         |       | 2001
|                                                       |  |              |       |     
|Raw materials and subassemblies                        |  | $            | 118   |      |  | $ | 169   |  
|Finished goods                                         |  |              | 1,074 |      |  |   | 1,018 |  
|Inventory shipped to customer sites, not yet installed |  |              | 71    |      |  |   | 262   |  
|Less: Allowance for obsolescence                       |  |              | (115  | )    |  |   | (353  | )
|                                                       |  |              |       |      |  |   |       |  
|                                                       |  | $            | 1,148 |      |  | $ | 1,096 |  
|                                                       |  |              |       |      |  |   |       |  

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, 2002 and December 31, 2001, the Company had billed
approximately $0.3 million and $0.6 million, respectively, to customers related
to these shipments, but did not record the revenue, as the installations had
not been completed and confirmed by the customer. Although customers are
billed in accordance with customer agreements, these deferred revenue amounts
are netted against accounts receivable until the customer confirms
installation.

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 years)
of the assets. Repairs and maintenance are expensed as incurred. Property and
equipment consisted of the following (in thousands):

|                                  |  |              |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2002         |        | 2001
|                                  |  |              |        |     
|Computer equipment                |  | $            | 1,997  |      |  | $ | 1,906  |  
|Computer software                 |  |              | 312    |      |  |   | 308    |  
|Furniture, fixtures and equipment |  |              | 359    |      |  |   | 348    |  
|                                  |  |              |        |      |  |   |        |  
|                                  |  |              | 2,668  |      |  |   | 2,562  |  
|Less: Accumulated depreciation    |  |              | (2,290 | )    |  |   | (1,963 | )
|                                  |  |              |        |      |  |   |        |  
|                                  |  | $            | 378    |      |  | $ | 599    |  
|                                  |  |              |        |      |  |   |        |  

Accrued Liabilities and Other

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

|                                         |  |              |     |      |  |   |       | 
|---------------------------------------- |  | ------------ | --- | ---- |  | - | ----- | 
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2002         |     | 2001
|                                         |  |              |     |     
|Accrued consulting and professional fees |  | $            | 283 |      |  | $ | 497   | 
|Accrued payroll and related benefits     |  |              | 261 |      |  |   | 583   | 
|Accrued commissions and bonuses          |  |              | 40  |      |  |   | 314   | 
|Accrued inventory purchases              |  |              | 38  |      |  |   | 264   | 
|Other                                    |  |              | 276 |      |  |   | 579   | 
|                                         |  |              |     |      |  |   |       | 
|                                         |  | $            | 898 |      |  | $ | 2,237 | 
|                                         |  |              |     |      |  |   |       | 

Patent Costs

Due to uncertainties about the estimated future economic benefits and
lives of the Companys patents and patent applications, all related outside
patent costs have been expensed as incurred. Outside patent costs were
approximately $0.2 million, $0.5 million and $0.4 million for 2002, 2001 and
2000, respectively, and are reflected in general and administrative expenses in
the accompanying statements of operations.

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Revenue Recognition and Deferred Revenue

The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition (SOP 97-2), and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions. The Company recognizes revenue from product sales when
all of the following conditions are met: the product has been shipped, an
arrangement exists with the customer at a fixed price and 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.

When the Company provides installation services, the product and
installation revenue is recognized upon completion of the installation process
and receipt of customer confirmation, subject to the satisfaction of the
revenue recognition criteria described above. When the customer or a third
party provides installation services, the product revenue is recognized upon
shipment, subject to satisfaction of the revenue recognition criteria described
above. Payment for product is due upon shipment, subject to specific payment
terms. Payment for installation and professional services are due upon
providing the services, subject to specific payment terms. If payments for
systems are made in advance of the completion of installation, such amounts are
deferred and recorded as deferred revenue and customer deposits in the
accompanying balance sheets until installation has occurred and the customer
has provided confirmation. Reimbursements received for out-of-pocket expenses
incurred during installation and support services, which have not been
significant to date, are recognized as revenue in accordance with Emerging
Issues Task Force (EITF) Issue No. 01-14 (EITF 01-14), Income Statement
Characterization of Reimbursements Received for Out of Pocket Expenses
Incurred.

The price charged for maintenance and/or support is defined in the
contract, and is based on a percentage of product list prices as stipulated in
the customer agreement. Customers have the option to renew the maintenance
and/or support arrangement in subsequent periods at the same rate as paid in
the initial year. Revenue from maintenance and support services is deferred
and recognized pro-rata over the maintenance and/or support term, which is
typically one year in length. Payments for services made in advance of the
provision of services are recorded as deferred revenue and customer deposits in
the accompanying balance sheets. Training services are offered independently
of the purchase of product. The value of these training services is determined
based on the price charged when such services are sold separately, and training
revenue is recognized upon performance of the service.

The Company recognizes service revenue from software development contracts in
accordance with SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Revenue related to contracts for software
development is recognized using the percentage of completion method, when all
of the following conditions are met: a contract exists with the customer at a
fixed price, the Company has fulfilled all of its material contractual
obligations to the customer for each deliverable of the contract, verification
of completion of the deliverable has been received, and collection of the
receivable is probable. The amounts billed to customers in excess of revenues
recognized to date are deferred and recorded as deferred revenue and customer
deposits in the accompanying balance sheets. Assumptions used for recording
revenue and earnings are adjusted in the period of change to reflect revisions
in contract value and estimated costs to complete the contract. Any
anticipated losses on contracts in progress are charged to earnings when
identified.

Warranty

The Company accrues the estimated costs of fulfilling the warranty
provisions of its contracts over the warranty period, which is typically 90
days. The warranty accrual was approximately $20,000 as of December 31, 2002
and approximately $60,000 as of December 31, 2001, and was included in accrued
liabilities in the accompanying balance sheets.

Stock-Based Compensation

The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123 (see
Note 7). The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and unvested awards
in each period.

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|                                                                                                                            |             |   |                          |       |      |   |         |       |   |   |         |       |  
|--------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------------ | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                            |             |   | Year Ending December 31,
|                                                                                                                            |             |   |                         
|                                                                                                                            |             |   | 2002                     |       | 2001 |   | 2000   
|                                                                                                                            |             |   |                          |       |      |   |        
|Net loss, as reported                                                                                                       |             | $ | (7,578                   | )     |      | $ | (7,919  | )     |   | $ | (42,454 | )    
|Add stock  based employee compensation expense
included in reported net income, net of
tax                                 |             |   | 358                      |       |      |   | 898     |       |   |   | 2,049   |      
|Deduct total stock-based employee compensation
expense determined
under fair-value-based method for all
rewards, net of tax |             |   | (3,995                   | )     |      |   | (3,713  | )     |   |   | (2,546  | )    
|                                                                                                                            |             |   |                          |       |      |   |         |       |   |   |         |      
|Pro forma net income                                                                                                        |             | $ | (11,215                  | )     |      | $ | (10,734 | )     |   | $ | (42,951 | )    
|Basic and diluted loss per share                                                                                            |             |   |                          |       |      |   |         |       |   |   |         |      
|                                                                                                                            | As reported |   | $                        | (0.30 | )    |   | $       | (0.31 | ) |   | $       | (4.46 | )
|                                                                                                                            | Pro forma   |   | $                        | (0.44 | )    |   | $       | (0.43 | ) |   | $       | (4.52 | )

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 revises the accounting for
specified employee and contract terminations that are part of restructuring
activities. Companies will be able to record a liability for a cost associated
with an exit or disposal activity only when the liability is incurred and can
be measured at fair value. Commitment to an exit plan or a plan of disposal
expresses only managements intended future actions and therefore, does not
meet the requirement for recognizing a liability and related expense. SFAS 146
only applies to termination benefits offered for a specific termination event
or a specified period. SFAS 146 will not affect accounting for the costs to
terminate a capital lease. The Company is required to adopt this statement for
exit or disposal activities initiated after December 31, 2002. The Company
does not expect the adoption to have a significant impact on the Companys
financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Summary of Statement No. 148
Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment
of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
does not expect the adoption of SFAS 148, effective for our fiscal
year ending December 31, 2002, to
have a significant impact on the Companys financial position or results of
operations.

Other Comprehensive Income

The FASB issued SFAS No. 130 (SFAS 130), Reporting Comprehensive
Income, which establishes standards for reporting and display of comprehensive
income (loss) and its components. 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 income includes certain changes in
equity that are excluded from the net income or loss. The comprehensive loss
for 2002 and 2001 was $7.7 and $7.8 million, respectively. For 2000, the
comprehensive loss presented equaled the net loss. The change in net unrealized
gains and losses on investments during fiscal 2002 is mainly attributable to a
decrease of approximately $77,000 in the fair value of investments.

The components of comprehensive loss are as follows:

|                                   |                                                          |  |                          |  |      |   |        |     |   |   |        |    |  |   |         |   | 
|---------------------------------- | -------------------------------------------------------- |  | ------------------------ |  | ---- | - | ------ | --- | - | - | ------ | -- |  | - | ------- | - | 
|                                   |                                                          |  | Year Ending December 31,
|                                   |                                                          |  |                         
|                                   |                                                          |  | 2002                     |  | 2001 |   | 2000  
|                                   |                                                          |  |                          |  |      |   |       
|Net loss                           |                                                          |  |                          |  |      | $ | (7,578 | )   |   | $ | (7,919 | )  |  | $ | (42,454 | )
|Other comprehensive income (loss): |                                                          |  |                          |  |      |   |        |     |   |   |        |    |  |   |         |  
|                                   | Change in net unrealized gains and losses on
investments |  |                          |  |      |   |        | (77 | ) |   |        | 79 |  |   |         |  | 
|                                   |                                                          |  |                          |  |      |   |        |     |   |   |        |    |  |   |         |  
|Total comprehensive loss           |                                                          |  |                          |  |      | $ | (7,655 | )   |   | $ | (7,840 | )  |  | $ | (42,454 | )
|                                   |                                                          |  |                          |  |      |   |        |     |   |   |        |    |  |   |         |  

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3. Line of Credit

On February 27, 2002, the Company entered into a Loan and Security
Agreement with a financial institution to borrow up to $4.5 million as a
revolving line of credit and $0.5 million as an equipment term loan. The first
$1.0 million of the revolving line was available on a non-formula basis, and
the remainder was limited to 80% of the Companys eligible accounts receivable.
As collateral under this Loan and Security Agreement, the Company granted a
first priority interest in all of the Companys assets, excluding intellectual
property. The revolving line of credit and the equipment term loan required
certain covenants to be met. On December 15, 2002, the Company entered into an
amendment to the Loan and Security Agreement to increase the maximum funds
available there under to $6.0 million and extend the term of the agreement.
The amended Loan and Security Agreement, as further amended in March 2003, has
an expiration date of February 27, 2004. The agreement, as amended, retains a
first priority security interest in all of the Companys assets, excluding
intellectual property. Furthermore, Gerald Burnett, Chairman and Chief
Executive Officer of the Company has provided a collateralized
guarantee, assuring payment of the
Companys obligations under the agreement and as a consequence, restrictive
covenants from the original Loan and Security agreement have been deleted in
the amendment, except for a quick ratio covenant, allowing the Company greater
access to the full amount of the facility. In addition, Gerald
Burnett has provided to the Company a commitment to provide funds up
to $6.0 million (inclusive of any funds drawn by the Company and
subject to his collateralized guarantee of the
Companys obligation to the Bank) through February 27, 2004 in the event
that the amended Loan and Security Agreement is not sufficiently
available to the Company for any reason. As of December 31, 2002 the Company
did not have any outstanding borrowings under this line of credit and the
Company was eligible to borrow up to $6.0 million under the line of credit (See
Note 13).

4. Commitments and Contingencies

The Company leases its facilities under operating leases that expire
through April 2011. As of December 31, 2002, the future minimum lease
commitments under all leases were as follows (in thousands):

|                             |  |        |       | 
|---------------------------- |  | ------ | ----- | 
|Year Ending December 31,     |  | Amount
|                             |  |       
|2003                         |  | $      | 913   | 
|2004                         |  |        | 167   | 
|2005                         |  |        | 220   | 
|2006                         |  |        | 220   | 
|2007                         |  |        | 220   | 
|Thereafter                   |  |        | 733   | 
|                             |  |        |       | 
|Total minimum lease payments |  | $      | 2,473 | 
|                             |  |        |       | 

Rent expense under all operating leases for each of 2002, 2001 and 2000
was approximately $1.4 million, $1.4 million and $1.2 million, respectively.

5. Related Party Transactions

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

Rent Sublease

Beginning in September 1999 the Company sub-leased certain office space,
at cost, to Vicor, an affiliated entity, through common ownership. The Company
received approximately $34,000 and $136,000 for 2001 and 2000, respectively,
from Vicor under this sublease agreement. The sublease was terminated in July
2001. There were no outstanding receivables from Vicor as of December 31, 2002
and 2001.

Support Services

The Company maintains a seven-day a week, 24 hour a day support center to
receive first level support calls. The support center handled support calls for
WDS in addition to those for the Company. Pursuant to an agreement between the
Company and WDS, the Company charged WDS for its share of support center costs.
For 2000, the Company charged WDS $0.5 million under the agreement. Such
reimbursement from WDS was recorded as a reduction in the costs incurred for
the support center. The agreement was terminated in December 2000. There were
no outstanding receivables from WDS as of December 31, 2002 and 2001.

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Revenue from a Related Party

UBS Warburg LLC, which is an affiliate of UBS AG, is a stockholder of the
Company and is also a customer of the Company. As of December 31, 2002 and
2001, UBS Warburg held less than 5% of the Companys stock. Revenue from UBS
Warburg LLC and its affiliates represented less than 10%, and approximately 22%
and 23% of total revenue for 2002, 2001 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,
2002 and 2001, the Company had accounts receivable outstanding from UBS Warburg
LLC and its affiliates of approximately $50,000 and 400,000, respectively.

Fees to Related Parties

Robert P. Latta, a member of the law firm Wilson Sonsini Goodrich &
Rosati, Professional Corporation (WSGR), has served as a director of the
Company since February 2001. Mr. Latta and WSGR have represented the Company
and its predecessors as corporate counsel since 1997. During 2002 and 2001,
payments of approximately $145,000 and $272,000, respectively, were made to
WSGR for legal services provided to the Company.

During 2002 and 2001, payments for consulting fees of approximately
$211,000 and $119,000, respectively, were made to R. Stephen Heinrichs, a
former officer of the Company, who is also a member of the Board of Directors,
pursuant to a Separation Agreement between Mr. Heinrichs and the Company dated
April 26, 2001.

6. Stockholders Equity

Stock Spilt

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

Stock Repurchase Plan

On March 22, 2001, the Company announced that its Board authorized the
repurchase of up to $2.0 million of its common stock in the open market.
During 2002, the Company repurchased 13,500 shares at an aggregate cost of
approximately $11,000. During 2001, the Company repurchased 22,500 shares at an
aggregate cost of approximately $34,000.

Preferred Stock

In April 2000, the stockholders of the Company authorized 10,000,000
shares of convertible preferred stock, effective upon completion of its initial
public offering in August 2000. As of December 31, 2002 and 2001, the Company
had 10,000,000 shares of convertible preferred stock authorized, at $0.001 per
share par value. No shares were issued or outstanding as of December 31, 2002
and 2001.

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 in August 2000, all 16,000,000 of the outstanding
shares of Series A convertible preferred stock were converted into 19,148,578
shares of common stock, which represents the sum of (1) 16,000,000 shares of
common stock plus (2) an additional 3,148,578 shares of common stock
representing a beneficial conversion feature equal to the quotient of (A) the
conversion amount, which was $37.8 million at August 16, 2000, and which
includes an amount equal to $0.2167 per share per annum, pro rated based on the
number of days elapsed in the year, divided by (B) the initial offering price
of $12.00 per share. The shares of Series A preferred stock had the same
voting rights as the shares of common stock into which they were converted.
The Series A preferred stock had a liquidation preference of $2.009 per share
plus all declared and unpaid dividends on each share of Series A preferred
stock.

Deferred Stock Compensation

In connection with the grant of stock options to purchase shares of common
stock to employees during 2000, the Company recorded deferred compensation of
approximately $1.7 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. This amount is presented as a reduction of

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stockholders equity and is being amortized ratably over the service
period of the applicable options (generally four years). Amortization expense,
net of forfeitures related to deferred stock compensation was approximately
$0.4 million, $0.9 million and $2.0 million in 2002, 2001 and 2000,
respectively. Compensation expense is decreased in the period of forfeiture
for any accrued but unvested compensation arising from the termination of an
option holders services.

7. 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 in August 2000, the Board
terminated the 1997 Plan as to future grants effective August 17, 2000. Under
the 1997 Plan, incentive stock options to purchase shares of common stock were
granted only to employees at not less than 100% of the fair market value at the
grant date as determined by the Board. Additionally, nonqualified stock
options to purchase shares of common stock were granted to employees and
consultants at not less than 85% of the fair market value at the grant date.
Options granted generally had a life of ten years.

Options granted under the plan vest over a four-year period, with 25%
vesting after one year and the remaining vesting 6.25% per quarter. Under the
1997 Plan plan, the Company granted options to purchase approximately 1.2
million common shares in 2000. In 2002 and 2001, the Company had no grants
under this plan. At December 31, 2002 options to purchase a total of 1,468,780
shares were outstanding under the 1997 Plan and no options were available for
grant.

2000 Stock Option Plan

In April 2000, the Board established the 2000 Stock Option Plan (the 2000
Plan). Initially, a total of 3,000,000 shares of common stock were 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. In
January 2001, the Board approved an increase of 1,004,936 shares. In January
2002, the Board approved an increase of 1,007,858 shares. As of December 31,
2002, a total of 5,012,794 shares have been approved. The term of the options
granted under this plan may not exceed 10 years and in the case of the grantees
who own more than 10% of the Companys outstanding stock at the time of grant,
the term of the option may not exceed 5 years. Options granted under the 2000
Plan vest and become exercisable as set forth in each option agreement. In the
event of a merger or sale of substantially all assets, these options must be
assumed by the successor and if not assumed, will fully vest. The 2000 Plan
will terminate in 2010. As a result of the increases, a maximum of 15,000,000
shares of common stock could be issued under the 2000 Plan. The Company
granted options to purchase approximately 1.2 million common shares in 2000
under this plan. In 2001, the Company granted options to purchase
approximately 2.3 million common shares under this plan. In 2002, the Company
granted options to purchase approximately 1.3 million common shares under this
plan. At December 31, 2002 options to purchase a total of
3,477,950 shares were
outstanding under the 2000 Plan and 526,985 options were available for future
grant.

2000 Director Option Plan

In April 2000, the Company adopted the 2000 Director Option Plan (the
Director Plan). Initially, a total of 90,000 shares of common stock were
approved by the Board, for issuance under the plan, together with an annual
increase in the number of shares of common stock reserved thereunder as
provided in the plan beginning on the first day of the Companys fiscal year,
commencing January 1, 2001. In January 2001, the Board approved the annual
increase of 12,000 shares. In May 2001, the Board approved an additional
198,000 shares under this plan. In January 2002, the Board approved the annual
increase of 30,000 shares. As of December 31, 2002, the Company has authorized
a total of 330,000 shares for issuance under this plan. As a result of the
annual increases, a maximum of 1,050,000 shares of common stock could be issued
over the 10-year life of the plan. Options to purchase 12,000 shares were
granted in 2000. In 2001, the Company granted options to purchase 270,000
shares under this plan. In 2002, the Company granted options to purchase 18,000
shares under this plan. At December 31, 2002 options to purchase a total of
234,000 shares were outstanding under the Director Plan and 66,000 options were
available for future grant.

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A summary of the 1997 Plan, the 2000 Plan, and the Director Plan activity
and related information for the years ended December 31, 2000, 2001 and 2002
follows:

|                           |                      |  |           |            |        |  |                     |  |  |  |           |            |         |   |          |       | 
|-------------------------- | -------------------- |  | --------- | ---------- | ------ |  | ------------------- |  |  |  | --------- | ---------- | ------- | - | -------- | ----- | 
|                           |                      |  |           |            |        |  | Options Outstanding
|                           |                      |  |           |            |        |  |                    
|                           |                      |  |           |            |        |  |                     |  |  |  |           |            |         |   | Weighted
|                           |                      |  | Options   |            |        |  |                     |  |  |  |           |            | Average
|                           |                      |  | Available |            | Shares |  | Exercise Price     
|                           |                      |  |           |            |        |  |                    
|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 |  |           | (3,485,383 | )      |  |                     |  |  |  |           | (87,300    | )       |   |          | 7.17  | 
|                           |                      |  |           |            |        |  |                     |  |  |  |           |            |         |   |          |      
|Balance, December 31, 2000 |                      |  | 853,342   |            |        |  |                     |  |  |  | 3,277,357 |            |         | $ | 8.20     |      
|                           | Authorized           |  |           | 1,214,936  |        |  |                     |  |  |  |           |           |         |   |          |      | 
|                           | Granted              |  |           | (2,528,200 | )      |  |                     |  |  |  |           | 2,528,200  |         |   |          | 2.00  | 
|                           | Exercised            |  |           |           |        |  |                     |  |  |  |           | (31,837    | )       |   |          | 0.63  | 
|                           | Canceled/repurchased |  |           | 477,950    |        |  |                     |  |  |  |           | (870,013   | )       |   |          | 8.18  | 
|                           |                      |  |           |            |        |  |                     |  |  |  |           |            |         |   |          |      
|Balance, December 31, 2001 |                      |  | 18,028    |            |        |  |                     |  |  |  | 4,903,707 |            |         | $ | 5.05     |      
|                           | Authorized           |  |           | 1,041,957  |        |  |                     |  |  |  |           |           |         |   |          |      | 
|                           | Granted              |  |           | (1,311,000 | )      |  |                     |  |  |  |           | 1,311,000  |         |   |          | 1.21  | 
|                           | Exercised            |  |           |           |        |  |                     |  |  |  |           | (4,150     | )       |   |          | 0.90  | 
|                           | Canceled/repurchased |  |           | 844,000    |        |  |                     |  |  |  |           | (1,029,827 | )       |   |          | 3.41  | 
|                           |                      |  |           |            |        |  |                     |  |  |  |           |            |         |   |          |      
|Balance, December 31, 2002 |                      |  | 592,985   |            |        |  |                     |  |  |  | 5,180,730 |            |         | $ | 4.42     |      
|                           |                      |  |           |            |        |  |                     |  |  |  |           |            |         |   |          |      

|                    |  |                |           |                |  |                     |      |                |  |                |       |        |  |  |           |  |  |   |       | 
|------------------- |  | -------------- | --------- | -------------- |  | ------------------- | ---- | -------------- |  | -------------- | ----- | ------ |  |  | --------- |  |  | - | ----- | 
|Options Outstanding |  |                |           |                |  | Options Exercisable
|                    |  |                |           |                |  |                    
|                    |  | Number         |           |                |  |                     |      |                |  |                |       | Number |  |  |           | 
|                    |  | Outstanding at |           | Weighted-      |  | Weighted-           |      | Exercisable at |  | Weighted-     
|Range of            |  | December 31,   |           | Average        |  | Average             |      | December 31,   |  | Average       
|Exercise Prices     |  | 2002           |           | Remaining Life |  | Exercise Price      |      | 2002           |  | Exercise Price
|                    |  |                |           |                |  |                     |      |                |  |               
|$0.25               |  |                | 217,500   |                |  |                     | 5.28 |                |  | $              | 0.25  |        |  |  | 205,000   |  |  | $ | 0.25  | 
|$0.40  0.76        |  |                | 93,282    |                |  |                     | 8.69 |                |  |                | 0.66  |        |  |  | 1,657     |  |  |   | 0.43  | 
|$0.95  1.30        |  |                | 1,460,450 |                |  |                     | 8.55 |                |  |                | 1.13  |        |  |  | 371,550   |  |  |   | 0.97  | 
|$1.45  2.21        |  |                | 1,666,750 |                |  |                     | 7.96 |                |  |                | 1.77  |        |  |  | 601,318   |  |  |   | 1.72  | 
|$2.45  3.45        |  |                | 85,909    |                |  |                     | 7.01 |                |  |                | 3.42  |        |  |  | 83,359    |  |  |   | 3.44  | 
|$3.95  5.75        |  |                | 317,889   |                |  |                     | 7.35 |                |  |                | 4.26  |        |  |  | 255,791   |  |  |   | 4.13  | 
|$8.50  9.35        |  |                | 766,200   |                |  |                     | 6.76 |                |  |                | 8.67  |        |  |  | 458,316   |  |  |   | 8.66  | 
|$14.00  17.25      |  |                | 572,750   |                |  |                     | 7.25 |                |  |                | 17.23 |        |  |  | 391,522   |  |  |   | 17.23 | 
|                    |  |                |           |                |  |                     |      |                |  |                |       |        |  |  |           |  |  |   |       | 
|                    |  |                | 5,180,730 |                |  |                     | 7.73 |                |  | $              | 4.42  |        |  |  | 2,368,513 |  |  | $ | 5.70  | 
|                    |  |                |           |                |  |                     |      |                |  |                |       |        |  |  |           |  |  |   |       | 

The Company has adopted SFAS 123 for disclosure purposes. The weighted
average fair value of options granted during 2002, 2001 and 2000, estimated on
the date of grant using the Black-Scholes option pricing model was $1.15, $1.73
and $4.14, respectively. The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that have vesting
restrictions and are fully transferable. In addition, option-pricing models
require the input of highly subjective assumptions, including a factor to
represent expected stock price volatility. Because the Companys employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Companys options. The fair value of 2002, 2001 and 2000 options granted is
estimated on the date of grant using the following assumptions:

|                                |  |      |     |      |  |      |     |   |  |  |     |  
|------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                |  | 2002 |     | 2001 |  | 2000
|                                |  |      |     |      |  |     
|Expected dividend               |  |      | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Average risk-free interest rate |  |      | 3.8 | %    |  |      | 4.5 | % |  |  | 6.2 | %
|Expected volatility             |  |      | 187 | %    |  |      | 185 | % |  |  | 80  | %
|Expected term (in years)        |  |      | 4   |      |  |      | 4   |   |  |  | 4   |  

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 $3,637,000, $2,815,000 and $497,000 for the years ended December
31, 2002, 2001 and 2000, respectively. The Companys pro forma information for
2002, 2001 and 2000 was as follows:

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##### Table of Contents



|                                                            |             |  |                          |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------- | ----------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                            |             |  | Year Ending December 31,
|                                                            |             |  |                         
|                                                            |             |  | 2002                     |         | 2001 |  | 2000
|                                                            |             |  |                          |         |      |  |     
|Net loss attributable to common stockholders (in thousands) |             |  |                          |         |      |  |      |         |   |  |   |        
|                                                            | As reported |  | $                        | (7,578  | )    |  | $    | (7,919  | ) |  | $ | (42,454 | )
|                                                            | Pro forma   |  | $                        | (11,215 | )    |  | $    | (10,734 | ) |  | $ | (42,951 | )
|Basic and diluted loss per share                            |             |  |                          |         |      |  |      |         |   |  |   |        
|                                                            | As reported |  | $                        | (0.30   | )    |  | $    | (0.31   | ) |  | $ | (4.46   | )
|                                                            | Pro forma   |  | $                        | (0.44   | )    |  | $    | (0.43   | ) |  | $ | (4.52   | )

2000 Employee Stock Purchase Plan

In April 2000, the Company adopted the 2000 Employee Stock Purchase Plan
(Employee Stock Purchase Plan). Initially, a total of 1,500,000 shares of
common stock were approved by the Board, for issuance under the plan, together
with an annual increase in the number of shares of common stock reserved
thereunder as provided in the plan beginning on the first day of the Companys
fiscal year, commencing January 1, 2001. In January 2001, the Board approved
an increase of 753,702 shares. As of December 31, 2002, the Company has
authorized a total of 2,253,702 shares for issuance under this plan. As a
result of these annual increases, a maximum of 10,500,000 shares could be sold
over the 10-year life of the plan. The Employee Stock Purchase Plan permits
employees to purchase common stock through payroll deductions, which may not
exceed 15% of an employees compensation, at 85% of the lower of the fair
market value of the Companys common stock on the first or the last day of each
offering period. A total of 98,305 shares were sold under this plan in 2002.

Common Stock Reserved for Future Issuance

As of December 31, 2002, the Company had reserved the following shares of
common stock for issuance in connection with:

|                                       |       |  |           |           | 
|-------------------------------------- | ----- |  | --------- | --------- | 
|Stock options under stock option plans |       |  | 5,342,795 |          
|Employee stock purchase plan           |       |  | 2,253,702 |          
|                                       |       |  |           |          
|                                       | Total |  |           | 7,596,497 | 
|                                       |       |  |           |          

8. Legal Proceedings

On September 23, 2002, CPI, the Companys wholly owned subsidiary, filed a
patent infringement lawsuit against Polycom, Inc., alleging that several
Polycom videoconferencing products infringe four patents of CPI. Polycom
responded to CPIs claims on November 14, 2002, at which time it both answered
the complaint and asserted counterclaims against CPI for non-infringement,
invalidity and unenforceability. On January 31, 2003 Polycom filed a motion
with the court requesting permission to amend its counterclaims to incorporate
claims of alleged infringements by Avistar Communications of four PictureTel
patents that Polycom has told us it has had assigned to it. A hearing was held
on March 7, 2003, at which time the judge granted Polycoms motion to amend its
counterclaims. A trial date for CPIs claims against Polycom and Polycoms
proposed counterclaims has not yet been set.

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 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.

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The provision for (recovery from) income taxes relates to foreign tax.
The Company provided for income taxes for its subsidiary in the United Kingdom
(ASUK) of approximately $18,000 and $15,000 in 2002 and 2000, respectively. In
2001, the Company had a recovery of approximately $19,000 for taxes previously
expensed at ASUK.

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

|                    |         |   |                         |        |      |   |        |        |   |   |        |      |  
|------------------- | ------- | - | ----------------------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ---- | -
|                    |         |   | Year Ended December 31,
|                    |         |   |                        
|                    |         |   | 2002                    |        | 2001 |   | 2000  
|                    |         |   |                         |        |      |   |       
|Current:            |         |   |                         |        |      |   |        |        |   |   |        |     
|                    | Federal |   | $                       |       |      |   | $      |       |   |   | $      |     |  
|                    | State   |   |                         |       |      |   |        |       |   |   |        |     |  
|                    | Foreign |   |                         | 18     |      |   |        | (19    | ) |   |        | 15   |  
|                    |         |   |                         |        |      |   |        |        |   |   |        |      |  
|                    |         |   | 18                      |        |      |   | (19    | )      |   |   | 15     |     
|Deferred benefits:  |         |   |                         |        |      |   |        |        |   |   |        |     
|                    | Federal |   |                         | (2,352 | )    |   |        | (6,729 | ) |   |        | (985 | )
|                    | State   |   |                         | (601   | )    |   |        | (574   | ) |   |        | (141 | )
|                    |         |   |                         |        |      |   |        |        |   |   |        |      |  
|                    |         |   | (2,953                  | )      |      |   | (7,303 | )      |   |   | (1,126 | )   
|Valuation allowance |         |   | 2,953                   |        |      |   | 7,303  |        |   |   | 1,126  |     
|                    |         |   |                         |        |      |   |        |        |   |   |        |      |  
|                    |         | $ | 18                      |        |      | $ | (19    | )      |   | $ | 15     |     
|                    |         |   |                         |        |      |   |        |        |   |   |        |      |  

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

|                                                                                               |  |                         |        |      |  |      |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                               |  | Year Ended December 31,
|                                                                                               |  |                        
|                                                                                               |  | 2002                    |        | 2001 |  | 2000
|                                                                                               |  |                         |        |      |  |     
|Expected tax benefit at federal statutory rate                                                 |  | $                       | (2,646 | )    |  | $    | (2,792 | ) |  | $ | (1,630 | )
|Foreign and state taxes, net                                                                   |  |                         | 18     |      |  |      | (458   | ) |  |   | (268   | )
|Permanent non-deductible                                                                       |  |                         | 136    |      |  |      |       |   |  |   | 732    |  
|Current year operating losses and temporary
differences for which no tax benefit is recognized |  |                         | 2,510  |      |  |      | 3,289  |   |  |   | 1,126  |  
|Other                                                                                          |  |                         |       |      |  |      | (58    | ) |  |   | 55     |  
|                                                                                               |  |                         |        |      |  |      |        |   |  |   |        |  
|Provision for (recovery from) income taxes                                                     |  | $                       | 18     |      |  | $    | (19    | ) |  | $ | 15     |  
|                                                                                               |  |                         |        |      |  |      |        |   |  |   |        |  

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 consisted of the
following as of December 31, 2002 and 2001 (in thousands):

|                              |                                          |   |        |         |      |   |       |        |  
|----------------------------- | ---------------------------------------- | - | ------ | ------- | ---- | - | ----- | ------ | -
|                              |                                          |   | 2002   |         | 2001
|                              |                                          |   |        |         |     
|Deferred income tax assets:   |                                          |   |        |         |      |   |       |       
|                              | Federal net operating loss carryforwards |   | $      | 9,545   |      |   | $     | 6,729  |  
|                              | State net operating loss carryforwards   |   |        | 541     |      |   |       | 574    |  
|                              | Tax credit carry forward                 |   |        | 1,549   |      |   |       | 1,306  |  
|                              | Reserves                                 |   |        | 334     |      |   |       | 407    |  
|                              |                                          |   |        |         |      |   |       |        |  
|                              |                                          |   | 11,969 |         |      |   | 9,016 |       
|                              | Valuation allowance                      |   |        | (11,969 | )    |   |       | (9,016 | )
|                              |                                          |   |        |         |      |   |       |        |  
|Net deferred income tax asset |                                          | $ |       |         |      | $ |      |       
|                              |                                          |   |        |         |      |   |       |        |  

Net operating loss carryforwards at December 31, 2002 were approximately
$27.3 million and $9.4 million, for Federal and state income tax purposes,
respectively. The net operating loss carryforwards expire on various dates
through the year 2022. The Federal net operating loss carryforwards expire on
various dates through the year 2022. The California net operating loss
carryforwards expire on various dates through the year 2013.

As of December 31, 2002, unused research and development tax credits of
approximately $0.9 million and $1.0 million are available to reduce future
Federal and California income taxes, respectively. Federal credit
carryforwards expire beginning in year 2013. California credits will carry
forward indefinitely.

The Internal Revenue Code of 1986, as amended, contains provisions that
may limit the net operating loss carryforwards to be used in any given year
upon the occurrence of certain events, including a significant change in
ownership interest. The Company believes sufficient uncertainty exists
regarding the realizability of the net operating loss and tax credit
carryforwards and other timing differences. Accordingly, a valuation allowance
has been provided for the entire net deferred tax asset.

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10. Net Loss Per Share

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

In accordance with SFAS 128, basic net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Diluted net loss per share is
computed on the basis of the weighted average number of shares and common
equivalent shares outstanding during the period. Common equivalent shares
result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method. The Company has
excluded all convertible preferred stock, outstanding stock options and shares
subject to repurchase from the calculation of diluted net loss per share for
2002, 2001 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 was 4,694,564, 2,346,597 and 916,933 for 2002, 2001 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 as-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 net loss
per share and pro forma basic and diluted net loss per share reflecting the
effect of assumed conversion of convertible preferred stock and beneficial
conversion related to the Series A convertible preferred stock (in thousands,
except per share data):

|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                                                                                                                                           |  | Year Ended December 31,
|                                                                                                                                                                                           |  |                        
|                                                                                                                                                                                           |  | 2002                    |        | 2001 |  | 2000
|                                                                                                                                                                                           |  |                         |        |      |  |     
|Net Loss                                                                                                                                                                                   |  | $                       | (7,578 | )    |  | $    | (7,919 | ) |  | $ | (4,671  | )
|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|Beneficial Conversion Related To Convertible
Preferred Stock                                                                                                                               |  |                         |       |      |  |      |       |   |  | $ | (37,783 | )
|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|Net Loss Attributable To Common Stockholders                                                                                                                                               |  | $                       | (7,578 | )    |  | $    | (7,919 | ) |  | $ | (42,454 | )
|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|Weighted Average Shares Of Common Stock Used In
Computing Net Loss Per Share                                                                                                               |  |                         | 25,260 |      |  |      | 25,168 |   |  |   | 9,510   |  
|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|Net Loss Per Share Basic and Diluted                                                                                                                                                       |  | $                       | (0.30  | )    |  | $    | (0.31  | ) |  | $ | (4.46   | )
|Pro Forma:                                                                                                                                                                                 |  |                         |        |      |  |      |        |   |  |   |         |  
|Weighted Average Shares Of Common Stock Used In
Computing Basic And Diluted Net Loss Per Share                                                                                             |  |                         | N/A    |      |  |      | N/A    |   |  |   | 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 |  |                         | N/A    |      |  |      | N/A    |   |  |   | 15,525  |  
|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|Weighted Average Shares Of Common Stock Used In
Computing Pro Forma Basic And Diluted Net Loss Per Share                                                                                   |  |                         | N/A    |      |  |      | N/A    |   |  |   | 25,035  |  
|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|Pro forma basic and diluted net loss per share                                                                                                                                             |  |                         | N/A    |      |  |      | N/A    |   |  | $ | (1.70   | )
|                                                                                                                                                                                           |  |                         |        |      |  |      |        |   |  |   |         |  

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11. Segment Reporting

Disclosure of segments is presented in accordance with SFAS No. 131 (SFAS
131), Disclosures About Segments of an Enterprise and Related Information.
SFAS 131 establishes standards for disclosures regarding 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
(Avistar in 2002 and 2001, Avistar and ASC in 2000) and (2) the prosecution,
maintenance, support and licensing of the intellectual property used in the
Companys products (CPI). Service revenue relates mainly to the maintenance,
support, training, software development and installation of products and is
included in Avistar for purposes of reporting and decision-making. Avistar
also engages in the corporate functions and provides financing and services to
the subsidiaries. The Companys chief operating decision maker, its Chief
Executive Officer, monitors the Companys operations based upon the information
reflected in the following table (in thousands):

|                             |                          |  |                |         |     |  |     |        |       |  |   |         |   |  |   |         |  
|---------------------------- | ------------------------ |  | -------------- | ------- | --- |  | --- | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                             |                          |  | ASC            |         | CPI |  | ACC |        | Total
|                             |                          |  |                |         |     |  |     |        |      
|                             |                          |  | (In thousands)
|Year Ended December 31, 2002 |                          |  |                |         |     |  |     |        |       |  |   |         |   |  |   |        
|                             | Revenue                  |  | $              |        |     |  | $   |       |       |  | $ | 8,799   |   |  | $ | 8,799   |  
|                             | Gross margin             |  |                |        |     |  |     |       |       |  |   | 4,322   |   |  |   | 4,322   |  
|                             | Depreciation expense     |  |                |        |     |  |     | (5     | )     |  |   | (321    | ) |  |   | (326    | )
|                             | Total operating expenses |  |                |        |     |  |     | (1,209 | )     |  |   | (11,169 | ) |  |   | (12,378 | )
|                             | Interest income          |  |                |        |     |  |     |       |       |  |   | 269     |   |  |   | 269     |  
|                             | Interest expense         |  |                |        |     |  |     |       |       |  |   |        |   |  |   |        |  
|                             | Net loss                 |  |                |        |     |  |     | (1,209 | )     |  |   | (6,369  | ) |  |   | (7,578  | )
|                             | Assets                   |  |                |        |     |  |     | 179    |       |  |   | 10,221  |   |  |   | 10,400  |  
|Year Ended December 31, 2001 |                          |  |                |         |     |  |     |        |       |  |   |         |   |  |   |        
|                             | Revenue                  |  | $              |        |     |  | $   |       |       |  | $ | 16,196  |   |  | $ | 16,196  |  
|                             | Gross margin             |  |                |        |     |  |     |       |       |  |   | 8,552   |   |  |   | 8,552   |  
|                             | Depreciation expense     |  |                |        |     |  |     | (13    | )     |  |   | (287    | ) |  |   | (300    | )
|                             | Total operating expenses |  |                |        |     |  |     | (1,076 | )     |  |   | (16,170 | ) |  |   | (17,246 | )
|                             | Interest income          |  |                |        |     |  |     |       |       |  |   | 758     |   |  |   | 758     |  
|                             | Interest expense         |  |                |        |     |  |     |       |       |  |   | (2      | ) |  |   | (2      | )
|                             | Net loss                 |  |                |        |     |  |     | (1,179 | )     |  |   | (6,740  | ) |  |   | (7,919  | )
|                             | Assets                   |  |                |        |     |  |     | 78     |       |  |   | 19,187  |   |  |   | 19,265  |  
|Year Ended December 31, 2000 |                          |  |                |         |     |  |     |        |       |  |   |         |   |  |   |        
|                             | Revenue                  |  | $              | 21,414  |     |  | $   |       |       |  | $ |        |   |  | $ | 21,414  |  
|                             | Gross margin             |  |                | 11,960  |     |  |     |       |       |  |   |        |   |  |   | 11,960  |  
|                             | Depreciation expense     |  |                | (121    | )   |  |     | (15    | )     |  |   |        |   |  |   | (136    | )
|                             | Total operating expenses |  |                | (11,797 | )   |  |     | (1,204 | )     |  |   | (3,081  | ) |  |   | (16,082 | )
|                             | Interest income          |  |                | 179     |     |  |     | 42     |       |  |   | 429     |   |  |   | 650     |  
|                             | Interest expense         |  |                | (674    | )   |  |     | (167   | )     |  |   | (343    | ) |  |   | (1,184  | )
|                             | Net loss                 |  |                | (847    | )   |  |     | (830   | )     |  |   | (2,994  | ) |  |   | (4,671  | )
|                             | Assets                   |  |                | 7,569   |     |  |     | 155    |       |  |   | 20,579  |   |  |   | 28,303  |  

International revenue, which consists of domestic sales to customers with
operations principally in Western Europe and Asia comprised 49%, 47% and 46% of
total revenue for 2002, 2001 and 2000, respectively. For 2002, 2001 and 2000,
respectively, international revenues to customers in the United Kingdom
accounted for 26%, 21% and 28%, respectively, of total revenue. The Company
had no significant net sales or long-lived assets in any country other than in
the United States for any period presented.

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##### Table of Contents



12. Selected Quarterly Results of Operations (unaudited)

The following tables set forth, for the periods indicated, the Companys
unaudited financial information for the last eight quarters. The Company
believes that the financial statements used to prepare this information include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of this information when read in conjunction with the
Companys financial statements and notes to financial statements. The
operating results for any quarter do not necessarily indicate the results
expected for any future period.

|                                             |  |                                      |        |               |  |          |        |           |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | ------------------------------------ | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ | - |  | - | ------ | -
|                                             |  | Quarter Ended                       
|                                             |  |                                     
|                                             |  | December 31,                         |        | September 30, |  | June 30, |        | March 31,
|                                             |  | 2002                                 |        | 2002          |  | 2002     |        | 2002     
|                                             |  |                                      |        |               |  |          |        |          
|                                             |  | (In thousands except per share data)
|Total revenue                                |  | $                                    | 1,755  |               |  | $        | 2,342  |           |  | $ | 2,002  |   |  | $ | 2,700  |  
|Gross margin                                 |  |                                      | 837    |               |  |          | 1,272  |           |  |   | 836    |   |  |   | 1,377  |  
|Total operating expenses                     |  |                                      | 2,942  |               |  |          | 3,022  |           |  |   | 3,042  |   |  |   | 3,372  |  
|Net loss attributable to common shareholders |  | $                                    | (2,064 | )             |  | $        | (1,697 | )         |  | $ | (1,909 | ) |  | $ | (1,908 | )
|Net loss per share  Basic/Diluted           |  | $                                    | (0.08  | )             |  | $        | (0.07  | )         |  | $ | (0.08  | ) |  | $ | (0.08  | )
|Weighted average shares                      |  |                                      | 25,285 |               |  |          | 25,273 |           |  |   | 25,250 |   |  |   | 25,231 |  

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

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##### Table of Contents



Item 15(a)

AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                |                   |  |                |     |            |  |            |     |        |  |            |      |   |  |   |     | 
|------------------------------- | ----------------- |  | -------------- | --- | ---------- |  | ---------- | --- | ------ |  | ---------- | ---- | - |  | - | --- | 
|                                |                   |  | Balance at     |     | Additions  |  |            |     |        |  | Balance at
|                                |                   |  | Beginning of   |     | Charged to |  |            |     |        |  | End of    
|                                |                   |  | Period         |     | Operations |  | Write-Offs |     | Period
|                                |                   |  |                |     |            |  |            |     |       
|                                |                   |  | (In thousands)
|Allowance for Doubtful Accounts |                   |  |                |     |            |  |            |     |        |  |            |      |   |  |   |    
|Period Ended:                   |                   |  |                |     |            |  |            |     |        |  |            |      |   |  |   |    
|                                | December 31, 2002 |  | $              | 232 |            |  | $          | 56  |        |  | $          | (219 | ) |  | $ | 69  | 
|                                | December 31, 2001 |  | $              | 312 |            |  | $          | 52  |        |  | $          | (132 | ) |  | $ | 232 | 
|                                | December 31, 2000 |  | $              | 240 |            |  | $          | 117 |        |  | $          | (45  | ) |  | $ | 312 | 

S-1



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##### Table of Contents






INDEX TO EXHIBITS

|           |  |                                                                                                                                                                                                   
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits   |  |                                                                                                                                                                                                   
|           |  |                                                                                                                                                                                                   
|3.2(1)     |  | Restated Certificate of Incorporation                                                                                                                                                             
|           |  |                                                                                                                                                                                                   
|3.3(2)     |  | Bylaws of Avistar Communications Corporation                                                                                                                                                      
|           |  |                                                                                                                                                                                                   
|4.1(1)     |  | Specimen Certificate evidencing shares of Common Stock                                                                                                                                            
|           |  |                                                                                                                                                                                                   
|4.2(1)     |  | Avistar Systems Corporation Registration and Information Rights Agreement dated December 9, 1999                                                                                                  
|           |  |                                                                                                                                                                                                   
|10.1(1)    |  | Avistar Communications Corporation 1997 Stock Option Plan, as amended                                                                                                                             
|           |  |                                                                                                                                                                                                   
|10.1.1(1)  |  | Avistar Systems Corporation 1997 Stock Option Plan Stock Option Agreement                                                                                                                         
|           |  |                                                                                                                                                                                                   
|10.2(1)    |  | Avistar Communications Corporation 2000 Stock Option Plan                                                                                                                                         
|           |  |                                                                                                                                                                                                   
|10.3(3)    |  | Avistar Communications Corporation 2000 Director Option Plan, as amended                                                                                                                          
|           |  |                                                                                                                                                                                                   
|10.4(1)    |  | Avistar Communications Corporation Director Option Agreement                                                                                                                                      
|           |  |                                                                                                                                                                                                   
|10.5(4)    |  | Avistar Communications Corporation 2000 Employee Stock Purchase Program, as amended.                                                                                                              
|           |  |                                                                                                                                                                                                   
|10.6(1)    |  | Form of Avistar Communications Corporation Indemnification Agreement                                                                                                                              
|           |  |                                                                                                                                                                                                   
|10.7(1)    |  | 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
|           |  |                                                                                                                                                                                                   
|10.8(1)    |  | Sublease by and between Entex Information Services, Inc. and Avistar Systems Corporation, dated July 23,
1999                                                                                     
|           |  |                                                                                                                                                                                                   
|10.9(5)   |  | Preferred Supplier Agreement dated June 24, 1997 by and between Avistar and Tandberg, Inc., including
modifications Nos. 1, 2, 3 and 4                                                            
|           |  |                                                                                                                                                                                                   
|10.9.1(1) |  | Modification No. 5 to the Preferred Supplier Agreement referenced in Exhibit 10.8, dated June 27, 2000                                                                                            
|           |  |                                                                                                                                                                                                   
|10.9.2(2) |  | Modification No. 6 to the Preferred Supplier Agreement referenced in Exhibit 10.8, dated November 27, 2000                                                                                        
|           |  |                                                                                                                                                                                                   
|10.10(6)   |  | Settlement Agreement and Release between the Registrant and R. Stephen Heinrichs dated April 26, 2001.                                                                                            
|           |  |                                                                                                                                                                                                   
|10.11      |  | Master Loan and Security Agreement between the Registrant and Comerica Bank  California dated February
27, 2002                                                                                  
|           |  |                                                                                                                                                                                                   
|10.11.1   |  | First Amendment dated December 17, 2002 to Master Loan and Security Agreement between the Registrant and
Comerica BankCalifornia                                                                 
|           |  |                                                                                                                                                                                                   
|10.11.2   |  | Unconditional Guaranty of the Gerald J. Burnett and Marjorie J. Burnett Revocable Trust dated December
17, 2002                                                                                   
|           |  |                                                                                                                                                                                                   
|10.11.3   |  | Unconditional Guaranty of Gerald J. Burnett dated December 17, 2002                                                                                                                               
|           |  |                                                                                                                                                                                                   
|10.11.4    |  | Second Amendment dated March 10, 2003 to Master Loan and Security Agreement between the Registrant and
Comerica Bank  California                                                                 
|           |  |                                                                                                                                                                                                   
|10.11.5    |  | Guaranty of Gerald J. Burnett dated March 10, 2003                                                                                                                                                
|           |  |                                                                                                                                                                                                   
|21.1       |  | Subsidiaries of the Company                                                                                                                                                                       
|           |  |                                                                                                                                                                                                   
|23.1       |  | Consent of KPMG LLP                                                                                                                                                                               
|           |  |                                                                                                                                                                                                   
|24.1       |  | Power of Attorney (see page 42)                                                                                                                                                                   
|           |  |                                                                                                                                                                                                   
|99.1       |  | Certifications of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          



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##### Table of Contents





| |    |  | 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.                 
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) |  | 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.    
|
| | (2) |  | Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for
the three months ended March 31, 2002 filed with the Securities and
Exchange Commission on April 30, 2002.
|
| | (3) |  | Filed as an exhibit to the Registrants Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on June 27, 2001.                                      
|
| | (4) |  | Filed as an exhibit to the Registrants Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on August 16, 2000.                                    
|
| | (5) |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 21, 2002.           
|
| | (6) |  | Filed as an exhibit to the Registrants Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 8, 2001.