<PAGE>
 
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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
 
                               ----------------
 
                                  FORM 10-KSB
 
 (MARK ONE)
 
   [X]Annual report under Section 13 or 15(d) of the Securities Exchange Act
   of 1934
     For the fiscal year ended December 31, 1996
 
   [_]Transition report under Section 13 or 15(d) of the Securities Exchange
   Act of 1934
     For the transition period from       to
 
                       COMMISSION FILE NUMBER: 000-21415
 
                               ----------------
 
                           WHITE PINE SOFTWARE, INC.
                (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
               DELAWARE                              04-3151064
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
 
    542 AMHERST STREET, NASHUA, NEW                     03063
               HAMPSHIRE                             (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
                                (603) 886-9050
               (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                               ----------------
 
  Securities registered under Section 12(b) of the Exchange Act: None
 
  Securities registered under Section 12(g) of the Exchange Act: Common stock,
par value $.01 per share
 
  Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [_]
 
  Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to be the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]
 
  State issuer's revenues for its most recent fiscal year. $11,666,000
 
  The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1997, was $23,352,572, based on a total of
4,916,331 shares held by non-affiliates and on the last published sale price
on the Nasdaq National Market of $4 3/4.
 
  The number of shares outstanding of the Registrant's common stock as of
February 28, 1997 was 9,084,313.
 
  Transitional Small Business Disclosure Format (check one):
 
                                Yes [_]  No [X]
 
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                               TABLE OF CONTENTS
 
<TABLE>
 <C>      <S>                                                               <C>
 PART I
 Item 1.  Description of Business........................................     3
 Item 2.  Description of Property........................................    27
 Item 3.  Legal Proceedings..............................................    27
 Item 4.  Submission of Matters to a Vote of Security Holders............    28
 PART II
 Item 5.  Market for Common Equity and Related Stockholder Matters.......    28
 Item 6.  Management's Discussion and Analysis or Plan of Operation......    29
 Item 7.  Financial Statements...........................................    34
 Item 8.  Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure..........................................    34
 PART III
 Item 9.  Directors, Executive Officers, Promoters and Control Persons;
           Compliance With Section 16(a) of the Exchange Act.............    35
 Item 10. Executive Compensation.........................................    37
 Item 11. Security Ownership of Certain Beneficial Owners and
           Management....................................................    39
 Item 12. Certain Relationships and Related Transactions.................    40
 Item 13. Exhibits, List and Reports on Form 8-K.........................    42
</TABLE>
 
                                       2
<PAGE>
 
  This Annual Report contains and incorporates by reference forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual
results could differ materially from the results contemplated in the forward-
looking statements as a result of a number of factors, including the risk
factors set forth under Item 1A below.
 
ITEM 1. DESCRIPTION OF BUSINESS
 
  White Pine Software, Inc. (the "Company") develops, markets and supports
multiplatform desktop connectivity software that facilitates worldwide video
and audio communication and data collaboration across the Internet, intranets
and other networks that use the Internet Protocol ("IP"). The Company's
desktop videoconferencing software products, Enhanced CU-SeeMe and the White
Pine Reflector, create a client-server solution that allows users to
participate in real-time, multipoint videoconferences over the Internet and
intranets. The Company recently introduced WebTerm Toolbox, which allows users
to access host applications from within the browser, as a new suite of
products geared to providing Advanced Intranet Solutions to corporations,
educational organizations and government agencies. The Company also offers its
eXodus line of desktop X Windows software, which enables seamless
interoperability between local and remote environments, and its 5PM line of
terminal emulation software, which provides desktop access to data and
applications residing on enterprise legacy systems.
 
  EXODUS, WHITE PINE, 5PM TERM and WEBTERM are trademarks of the Company. CU-
SEEME is a registered trademark of Cornell Research Foundation, Inc. All other
trademarks or trade names referred to in this Annual Report are the property
of their respective owners.
 
INDUSTRY BACKGROUND
 
  As computer usage and functionality have grown over the last two decades,
businesses and other organizations have realized that they can greatly enhance
the value of their computing resources by increasing interconnectivity between
legacy host systems and networks of desktop personal computers ("PCs").
Terminal and X Windows emulation can be used within an enterprise to enable
desktop PCs to access data and applications residing in legacy systems. In the
1970s, connectivity across enterprise boundaries was further enhanced through
the development of IP, a communications protocol standard. In the 1990s, IP's
networking potential has been more fully realized with the emergence of the
Internet as a mass communications medium capable of transmitting text and
graphics and, more recently, audio and video. Organizations have also begun to
use IP to establish intranets, which use the Internet to connect information
systems within an enterprise as well as provide access to information systems
of other enterprises.
 
 Legacy System Connectivity
 
  Terminal emulators were developed in the early 1980s to mimic "dumb"
terminals that linked users to mainframe computers through a variety of
proprietary communication protocols. Subsequently, vendors developed cost-
effective, software-only products that both enabled PCs to emulate text
terminals for a variety of mainframe platforms and capitalized on the expanded
graphical capabilities of PCs by developing high-end, graphical software
emulators. Software terminal emulation, which can now be performed over the
Internet through IP, continues to provide easier and wider access to mission-
critical data and applications residing on enterprise legacy systems.
 
  In 1984, software engineers at the Massachusetts Institute of Technology
broadly expanded enterprise connectivity by developing the X Window System ("X
Windows") as a standard, independent of platforms, networks and operating
systems, for workstations and PCs. X Windows, which is based on a client-
server computing model, permits a user to run multiple graphical applications
simultaneously on a variety of platforms from a single X Windows terminal.
Since 1990, virtually all X Windows applications have used IP networks to
establish connectivity for desktop PCs, enabling large numbers of PCs to
access data and applications across the enterprise, regardless of the
platform, network or operating system.
 
                                       3
<PAGE>
 
 Communication on the Internet and Intranets
 
  Use of the Internet, an interconnected network of numerous public and
private networks that links over 130 countries, has exploded in the 1990s as a
result of the growing installed base of PCs and the emergence of the user-
friendly World Wide Web (the "Web"). At its heart lies IP, which allows for
uniform, seamless communications in a multi-vendor, multi-provider public
network. Recognizing that similar benefits can be realized by applying IP
within an enterprise, businesses and other organizations have begun to
establish private intranets that enable them to better distribute information
to employees, connect disparate equipment and protect their investment in
computer resources, as well as to share information with customers, vendors,
partners and others.
 
  The rapid growth of the Internet has been largely attributable to its use as
a communications medium. Initially, the Internet facilitated text-based
communication applications. As multimedia PCs become commonplace, Internet
usage is expanding to take advantage of new multimedia capabilities for real-
time communications using Internet telephony and, ultimately,
videoconferencing.
 
  Videoconferencing consists of real-time, one-way or two-way audio and video
communication. It enables users at remote locations to enjoy many of the
benefits of face-to-face meetings without the time and expense of travel.
Today, a substantial portion of videoconferencing systems remain hardware-
based with proprietary communication protocols and fit into three principal
classes: room-based systems priced at or above $40,000, "roll-about" systems
priced at less than $20,000, and hardware-based desktop systems priced as low
as $1,000. In the early 1990s, the International Telecommunications Union (the
"ITU") began to establish standards for interactive audio, video and data
communication over digital networks. By 1992, a number of vendors had
introduced, and demonstrated interoperability among, hardware-based
videoconferencing systems that complied with early ITU standards. While the
implementation of emerging industry standards and other technological
improvements have helped to increase sales of hardware-based videoconferencing
systems in recent years, the relatively high price and limited
interoperability of these systems have impeded the widespread adoption of
videoconferencing as a mass communication medium.
 
  In an effort to expand the availability of videoconferencing as a
communications tool, a number of developers commenced efforts to develop
software-based videoconferencing technology that did not require expensive
proprietary hardware. In 1992, Cornell Information Technologies, a research
institute at Cornell University, introduced freeware known as CU-SeeMe
("Freeware CU-SeeMe"). This real-time black-and-white desktop
videoconferencing software enables users to communicate over the Internet,
independent of computer hardware and operating system, using low-cost, easily
available hardware, such as 28.8 kbps modems and standard videocapture boards
and video cameras.
 
  Although Freeware CU-SeeMe lacks the reliability, functionality and features
that are necessary to succeed in today's commercial marketplace, its
popularity has demonstrated the potential market for a software-based
videoconferencing solution that is able to connect users through the Internet.
As industry standards for Internet-based videoconferencing emerge, more
developed IP-based solution are transforming the multimedia PCs already
installed in homes and offices into videoconferencing terminals at a fraction
of the price of today's hardware-based systems. Software solutions for
videoconferencing over the Internet and other IP-based networks not only
provide videoconferencing capabilities at a lower price but also permit the
addition of new features and the implementation of emerging standards.
 
THE WHITE PINE SOLUTION
 
  White Pine develops, markets and supports a variety of cross-platform
connectivity software products, the majority of which the Company designed by
applying its substantial IP connectivity experience. The Company seeks to
develop innovative, lower-priced, software alternatives to hardware
connectivity products and to enhance its software solutions through additional
functionality and features. White Pine has been a leader in developing
standards-based connectivity products that allow customers to access
information within and across enterprises through local area networks
("LANs"), wide area networks ("WANs"), the Internet and intranets.
 
                                       4
<PAGE>
 
  The Company's videoconferencing products, Enhanced CU-SeeMe and the White
Pine Reflector, create a software-only client-server solution for real-time,
multipoint audio and video communication and data collaboration over the
Internet. By developing videoconferencing products that require no proprietary
hardware, White Pine is able to offer videoconferencing at a substantially
lower price than vendors of traditional hardware-based systems and thereby
encourage businesses and others to adopt it as a mass communication medium.
The Company's exclusive license agreement with Cornell Research Foundation,
Inc. (the "Cornell Foundation"), the technology licensing organization
associated with Cornell University, provided the Company with the underlying
technology for Enhanced CU-SeeMe and the White Pine Reflector and afforded the
Company brand name recognition, an installed base and a time-to-market
advantage over other vendors seeking to develop software videoconferencing
solutions.
 
  Enhanced CU-SeeMe is available on multiple platforms and can be installed on
most multimedia PCs without any proprietary hardware. By operating over the
Internet, Enhanced CU-SeeMe substantially broadens the base of businesses,
organizations and individuals able to engage in videoconferencing. The White
Pine Reflector, the software-only server component of the Company's
videoconferencing solution, allows users of Enhanced CU-SeeMe to participate
in multipoint videoconferences with a nearly unlimited number of users. The
White Pine Reflector also solves the complex problem of enabling real-time
multipoint communication over the Internet between users operating at
different connection speeds without degrading the quality of the entire
conference to that of the slowest connection speed. Together, Enhanced CU-
SeeMe and the White Pine Reflector, with their low prices, cross-platform
capabilities and ease of use, enable corporations, government organizations,
educational institutions and individuals worldwide to interact in real time
without the time and expense of travel.
 
  White Pine recently introduced WebTerm Toolbox, which allows users to access
host applications from within a World Wide Web ("Web") browser, as a new suite
of products geared to providing Advanced Intranet Solutions to corporations,
educational organizations and government agencies. White Pine's eXodus and 5PM
products allow users throughout an enterprise to access mission-critical data
and applications residing on legacy systems. These software products are
competitively priced and easy to use, and they include a comprehensive set of
features allowing for seamless integration with existing enterprise systems
and newer intranet applications.
 
STRATEGY
 
  White Pine's principal business objective is to be a supplier of leading-
edge network connectivity solutions. The Company plans to build upon its
position as a leader in Internet-based videoconferencing and to offer
customers complete intranet solutions by continuing to expand its connectivity
product offerings. The key components of White Pine's strategy are as follows:
 
  Maintain Technological and Time-to-Market Leadership. The Company's Enhanced
CU-SeeMe, introduced in March 1996, was the first commercially available
Internet-based videoconferencing product. The Company believes that Enhanced
CU-SeeMe's Internet-based videoconferencing technology, cross-platform
capabilities, software-only and hardware-independent architecture, and
scalability over a broad range of bandwidths provide significant competitive
advantages. Enhanced CU-SeeMe has been featured in a number of on-line and
industry publications and has won C/net's Best Buy January 1997, PC
Computing's five-star rating in its February 1997 issue, New Media Magazine's
"1996 Hyper Award," and Byte Magazine's "Best of PC Expo '96 Winner."
 
  Leverage Name Recognition and Installed Base of Freeware CU-SeeMe. The
Company seeks to leverage the brand name recognition of its videoconferencing
product, Enhanced CU-SeeMe, and its predecessor, Freeware CU-SeeMe.
 
  Leverage Strength of White Pine Reflector Technology. The Company believes
its success in the Internet-based videoconferencing market derives in part
from the capabilities of the White Pine Reflector, the Company's software-only
server technology for group videoconferencing. The Company plans to release
the next version of the White Pine Reflector, to be renamed "MeetingPoint," in
the second quarter of 1997. Meeting Point 3.0 is
 
                                       5
<PAGE>
 
expected to incorporate advanced billing and tracking functionality,
standards-based whiteboard sharing, and interoperability supporting other
vendors' client software through the recently ratified H.323 standard for
audio/video communication. As industry standards develop, the Company intends
to release standards-compliant versions of the White Pine Reflector to permit
end-users to take advantage of its capabilities, regardless of whether they
are using Enhanced CU-SeeMe or a videoconferencing client system from another
vendor.
 
  Establish and Extend Strategic Relationships. The Company intends to
establish new strategic and original equipment manufacturer ("OEM")
relationships and extend existing relationships with multinational firms that
provide unique marketing or distribution opportunities or technological
capabilities for Enhanced CU-SeeMe. The Company has already established
marketing and distribution relationships with companies such as Ingram Micro,
Inc., Tech Data Corporation, BBN Planet Corporation, Winnov, Inc., Philips and
Symantec. The Company also intends to use technology relationships to
accelerate the delivery of enhanced product features and services to the
Enhanced CU-SeeMe market. The Company has already established technology
relationships with Voxware, Inc. for voice compression technology, Four11
Corporation for global Internet conferencing "white pages," Utopia Inc. for
Web and intranet integration services and Databeam for standards-based
whiteboard sharing.
 
  Continue Standards Implementation for Interoperability. The Company believes
that the continued adoption and implementation of industry standards for
interoperability are crucial to the growth of the videoconferencing market.
The Company is committed to implementing standards-based functionality into
upcoming releases of the White Pine Reflector. The Company actively
participates in key standards bodies, such as the International Multimedia
Teleconferencing Consortium, the Internet Engineering Task Force and the
X Consortium, and follows the development of standards by the ITU.
 
  Increase Market Penetration Outside North America. The Company intends to
increase its international marketing activities for both the Company's
videoconferencing products and its legacy connectivity products by identifying
and engaging complementary distributors in each major international market.
The Company believes that this strategy will enable it to leverage each
distributor's presence and experience in its local market. To that end, the
Company has already established distribution relationships in Australia,
France, Hong Kong, Japan, Korea and the United Kingdom.
 
  Extend Multiplatform Product Line to Web Browsers. Based upon the rapid
growth of the Internet and the Web, the Company believes that users will
increasingly rely less on computer operating systems, such as Microsoft
Windows and Macintosh OS, and more on Web browsers, such as Microsoft Internet
Explorer and Netscape Navigator, to access information and applications. To
meet the needs of businesses and other organizations that have increased their
use of the Internet and intranets, the Company has recently developed
connectivity packages, such as WebTerm, which utilize standard Web browsers to
provide complete terminal emulation over the Internet or a corporate intranet.
 
PRODUCTS
 
  White Pine develops, markets and sells a variety of cross-platform software
connectivity products for use over the Internet, intranets and other IP-based
networks. The Company seeks to develop innovative, lower-priced software
alternatives to hardware solutions and to enhance its software solutions
through additional functionality and features. White Pine has been a leader in
developing standards-based connectivity products that allow customers to
access information within and across enterprises through LANs, WANs, the
Internet and intranets.
 
 Videoconferencing
 
  White Pine develops, markets and sells Enhanced CU-SeeMe and the White Pine
Reflector, which together create a software client-server videoconferencing
solution for businesses, educational institutions, government organizations
and individuals. These products enable a user to participate in live one-way,
two-way or multipoint
 
                                       6
<PAGE>
 
audio and video communication and data collaboration over the Internet and
other IP networks at a significantly lower price than traditional hardware-
based videoconferencing solutions.
 
  The following table sets forth the Company's videoconferencing products and
their respective platforms, dates of initial shipment, descriptions and
suggested retail prices.
 
<TABLE>
<CAPTION>
                                             INITIAL                              SUGGESTED
                          OPERATING SYSTEM  SHIPMENT                               RETAIL
     CURRENT PRODUCT          PLATFORMS       DATE           DESCRIPTION            PRICE
     ---------------      ----------------  --------         -----------          ---------
 <C>                      <C>               <C>       <S>                        <C>
 Enhanced CU-SeeMe 2.0    Macintosh PowerPC June 1996 Desktop client software        $99
                          Mac 68000                   for videoconferencing
                                                      over IP networks
 Enhanced CU-SeeMe 2.1    Windows           December  Desktop client software        $99
                                              1996    for videoconferencing
                                                      over IP networks
 White Pine Reflector 2.1 Windows           December  Server software for        $995 and up
                          NT,95,UNIX          1996    multipoint
                                                      videoconferencing set-up
                                                      and control
</TABLE>
 
  The Company also licenses Enhanced CU-SeeMe and the White Pine Reflector as
a bundled package and offers site licenses and volume discounts for larger
purchases.
 
ENHANCED CU-SEEME
 
  Installed on a multimedia PC equipped with low-cost, easily available
hardware, such as a 28.8 kbps modem, a standard videocapture board and a
standard video camera, Enhanced CU-SeeMe enables real-time audio and video
communication and data collaboration over the Internet and other IP networks.
Enhanced CU-SeeMe has the following capabilities and features:
 
  .  simultaneous viewing of up to eight videoconferencing participants;
 
  .  data collaboration through the WhitePineBoard, a form of whiteboard
     software;
 
  .  participation in live "cybercast" events;
 
  .  intuitive, dynamic windowing of videoconferencing participants through
     the Participants List, which indicates presence by video, voice or chat;
 
  .  automatic call initiation for frequently called addresses stored in the
     Phone Book, with contact card exchange and software functions equivalent
     to call-waiting and caller-ID;
 
  .  directory services for locating people on the Internet;
 
  .  browser support for direct launch of Enhanced CU-SeeMe from any Web
     page; and
 
  .  ""chat'' function.
 
  Enhanced CU-SeeMe allows users to videoconference over bandwidths as low as
28.8 kbps and to improve video resolution and frame rate by taking advantage
of the wider bandwidths provided by ISDN lines, LANs, cable modems and other
technologies. Enhanced CU-SeeMe incorporates a variety of audio and video
compression/decompression software ("codecs") for use with different
bandwidths and allows a user to select the appropriate audio and video codecs
for the user's particular bandwidth. Enhanced CU-SeeMe is designed to be
easily installed as a result of its interoperability with most standard, non-
proprietary hardware configurations.
 
  White Pine commenced shipments of Enhanced CU-SeeMe 2.0 for certain Windows
and MacIntosh platforms in March 1996 and June 1996, respectively, and
released Enhanced CU-SeeMe 2.1 for Windows in October 1996, which provides
additional multicasting capability, improved audio performance and integrated
directory services. The Company intends to release Enhanced CU-SeeMe 3.0 for
Windows in the second quarter of 1997. Version 3.0 is expected to incorporate
new features such as enhanced directory services, and improved
 
                                       7
<PAGE>
 
ease of use. The Company expects that Enhanced CU-SeeMe 3.0 in combination
with the Reflector 3.0 will support relevant Internet and ITU standards such
as H.323 that enable interoperability among videoconferencing systems of
different vendors and other application frameworks. The Company has also
announced its plans to provide interoperability between the Reflector and
Microsoft Corporation's NetMeeting communications and collaboration software.
 
  Enhanced CU-SeeMe has been featured in a number of on-line and industry
publications and has won C/Net's Best Buy in January 1997, PC Computing's
five-star rating in its February 1997 issue, New Media Magazine's "1996 Hyper
Award," and Byte Magazine's "Best of PC Expo '96 Winner".
 
WHITE PINE REFLECTOR
 
  The White Pine Reflector is the software-only server component of White
Pine's client/server videoconferencing solution. The White Pine Reflector
software allows groups of users to interact together in real-time utilizing
text chat and whiteboard sharing to full audio/video conferencing. The White
Pine Reflector can bring nearly any size group together, from traditional, 3-
or 4-person videoconferences to interactive cybercasts involving hundreds or
thousands of participants. Furthermore, the White Pine Reflector can connect
disparate types of end-users, bridging the variety of end-users operating
systems and network connection without dragging the quality of the conference
down to the lowest common denominator. The White Pine Reflector has the
following capabilities and features:
 
  .  capacity to accommodate up to an aggregate of 100 participants in one or
     more simultaneous videoconferences on a single White Pine Reflector,
     depending on the processing power of the computer on which the White
     Pine Reflector is installed and the participants' connection speeds;
 
  .  videoconferencing with a nearly unlimited number of conference
     participants through linkages to other White Pine Reflectors;
 
  .  ability to "cybercast" live events to large audiences through linkages
     to other White Pine Reflectors;
 
  .  controlled bandwidth management;
 
  .  ability to utilize multicast-capable networks;
 
  .  conference security through conference identification, password and IP
     address verification; and
 
  .  compatibility with multiple platforms, including Windows 95, Windows NT
     and eleven versions of UNIX, including those offered by Sun
     Microsystems, Inc., Digital Equipment Corporation, International
     Business Machines Corporation, Hewlett-Packard Company and Santa Cruz
     Operations, as well as Linux.
 
  The following diagrams illustrate the use of Enhanced CU-SeeMe and the White
Pine Reflector in a simple group conference, an intranet group conference and
a cybercast.
 
SIMPLE GROUP CONFERENCE
 
[Graphic: A depiction of a computer monitor containing the word "Reflector"
  ("Reflector Symbol") connected by four lines of various widths to four
  depictions of persons facing PCs. Above each of the four lines, in order of
  decreasing width, are the terms "LAN," "WAN," "ISDN" and "28.8."]
 
  The White Pine reflector allows videoconferencing among users with different
connection speeds without having to use the lowest common bandwidth.
 
INTRANET GROUP CONFERENCE
 
[Graphic: Two Reflector Symbols connected by a thick line. The words "Intranet
  or Corporate WAN" appear above the line. The Reflector Symbol on the left is
  connected by two lines of different widths to three depictions of persons
  facing PCs. The word "ISDN" appears above the thinner line, and the word
  "LAN" appears above the thicker line. The words "Home Office" appear below
  the Reflector Symbol on the left. The Reflector
 
                                       8
<PAGE>
 
  Symbol on the right is connected by a line to three depictions of persons
  facing PCs. The word "LAN" appears above the line. The words "Remote Office"
  appear below the Reflector Symbol on the right.]
 
Multiple White Pine Reflectors can work together to maximize conference
quality and minimize bandwith use.
 
CYBERCAST MODE
 
[Graphic: A depiction of a person facing a PC connected by a line to a
  Reflector Symbol, which in turn is connected by lines to three other
  Reflector Symbols, two of which are connected by lines to two depictions of
  persons facing PCs and one of which is connected by lines to three
  depictions of persons facing PCs.]
 
White Pine Reflectors can be linked to reach a nearly unlimited number of
recipients.
 
  The White Pine Reflector deploys software-only technology to allow users
with different connection speeds to conference with each other without
degrading the quality of the entire conference to that of the slowest
connection speed. The White Pine Reflector manages video and audio streams and
utilizes multicasting, if available, to minimize bandwidth use. For example,
groups of White Pine Reflectors can work together to minimize traffic over the
WAN, while utilizing multicast technology to minimize LAN traffic. The
Reflector also provides a significant point of control that network managers
can use to roll out videoconferencing in a controlled fashion and offers
conferencing services to both end-users and administrators, such as conference
security, conference monitoring, and remote configuration. The White Pine
Reflector runs on Windows NT/95 and 8 versions of UNIX, including those
offered by Sun, HP, IBM, Digital, and Silicon Graphics.
 
  The Company commenced shipments of Version 2.0 of the White Pine Reflector
for certain platforms in the second quarter of 1996. Version 2.1, released in
December of 1996, fully utilizes standards-based multicasting technology and
added an intuitive graphical user interface for remotely configuring and
monitoring multiple White Pine Reflectors, and support for Internet
service/content providers to track and bill customers for video services. In
the second quarter of 1997 the Company expects to release the next version, to
be renamed "MeetingPoint," incorporating new conference management features
for intranet and Internet service provider ("ISP") customers such as advanced
billing and tracking functionality, and T.120 standards-based whiteboard
sharing. In addition, White Pine plans on supporting other vendors' client
software through the recently ratified H.323 standard for audio/video
communication over packet networks.
 
  The Company believes that, to date, most users of Enhanced CU-SeeMe take
advantage of publicly available White Pine Reflectors and freeware multipoint
conferencing servers for group conferencing and cybercasts, such as the White
Pine Reflectors maintained by the National Aeronautics and Space
Administration, the National Science Foundation and the Global Schoolhouse
Project. The Company expects that an increasing number of White Pine
Reflectors will be maintained by businesses and other enterprises to permit
private videoconferencing and cybercasting over LANs, WANs and intranets.
Certain ISPs, such as BBN Planet Corporation and Utopia Inc., also maintain
White Pine Reflectors for use by their respective subscribers.
 
 Legacy Connectivity Products
 
  The Company offers legacy connectivity products that allow businesses and
other organizations to access data and applications residing on host
workstations, mini-computers and mainframe computers from most widely-used
desktop operating systems. Because the Company believes that users will
increasingly rely less on computer operating systems and more on Web browsers
to access information and applications, the Company intends to develop Web-
enabled versions of its legacy connectivity products for major Web browsers.
 
  WebTerm
 
  White Pine's WebTerm line of products provides both graphical windowing and
text-based emulation through Web browsers, such as Microsoft Internet Explorer
and Netscape Navigator. WebTerm Toolbox terminal plug-ins began shipping in
December 1996 and offer both Windows and Macintosh users complete VT420,
TN3270, and TN5250 terminal emulation through an organization's intranet for
total point-to-point access to their host computers. WebTerm Toolbox is
designed to simplify the installation and configuration of software
 
                                       9
<PAGE>
 
and reduce the amount of product training required for users. The WebTerm
Toolbox's suggested retail price is $69 per emulation or $189 for all three
emulations.
 
  WebTerm X, expected to ship in the second quarter 1997, offers a similar
product design but provides the ability to run native UNIX or VMS windowing
environments, known as X Windows, from within the user's Web browser on a
Windows 95 or Windows NT desktop computer. This provides access through the
Internet or an intranet to all applications on most types of workstations,
including those manufactured by IBM, Sun, Hewlett-Packard and Silicon Graphics.
The suggested retail price of WebTerm X is expected to be $169.
 
  Graphical Windowing
 
  White Pine's eXodus products provide a comprehensive line of multiplatform X
Windows solutions that permit seamless interoperability between local and
remote environments. The Company's predecessor introduced the first eXodus
product in 1989, and the Company most recently introduced eXodus 6.1 for
Macintosh in March 1997. Each eXodus product incorporates an X server that
connects users of most widely used desktop operating systems to UNIX, Windows
NT, VMS and other multi-user computer platforms. These products permit users to
establish connections over high-speed LANs as well as over standard telephone
lines.
 
  Version 6.1 of eXodus has been developed to operate seamlessly with Microsoft
Internet Explorer and Netscape Navigator to offer integration into today's
expanding corporate Intranets. eXodus can also operate over high speed LANs,
ISDN lines, or standard analog telephone lines. The suggested retail price for
eXodus is $295.
 
  Graphical Host Connectivity
 
  White Pine offers software available to provide users on both Macintosh and
Windows computers with access to host applications using the well-established
ReGIS graphic format made popular on VMS host computers by Digital Equipment
Corporation. The suggested retail price of this software is $349.
 
  Text-based Host Connectivity
 
  White Pine's 5PM products provide terminal emulation solutions to access data
and applications residing on a variety of platforms, including those offered by
Digital Equipment Corporation, International Business Machines Corporation and
Hewlett-Packard Company, as well as those offered by Siemens AG and Unisys
Corporation, whose host systems are widely used in Europe. The Company offers
5PM Term, which provides full terminal emulation, scripting, hot keys, network
and serial connection software, file transfer utilities, keyboard pallets and
other features. All 5PM products have an identical interface regardless of
platform, allowing customers with large installed bases to purchase terminal
emulation solutions from a single vendor and thereby minimize support and
training costs. The suggested retail prices of 5PM Term for Macintosh range
from $249 for a single emulation to $399 for all emulations.
 
RESEARCH AND DEVELOPMENT
 
  Since its inception, the Company has specialized in IP-based connectivity
solutions for corporate customers and now provides what it believes to be the
broadest line of multiplatform, software connectivity solutions in the market.
Over the past two years, the Company has successfully introduced new X server
and terminal emulation products for Windows and now offers competitive cross-
platform solutions. In June 1995, the Company secured from the Cornell Research
Foundation, Inc. (the "Cornell Foundation") the exclusive worldwide rights to
license the Freeware CU-SeeMe videoconferencing software and has since focused
its development efforts on producing commercial versions of this software.
 
  The Company's research and development expenditures totalled $3,819,000,
$1,866,000 and $1,301,000 in the fiscal years ended December 31, 1996, and
1995, and the nine months ended December 31, 1994, respectively. The Company
intends to continue to devote substantial resources to research and
development.
 
 
                                       10
<PAGE>
 
  Based upon the rapid growth of the Internet and the Web, the Company believes
that users will increasingly rely less on computer operating systems and more
on Web browsers to access information and applications. As a result, the
Company has redirected its X server and terminal emulation development efforts
towards Web-enabled and plug-in products that will integrate with Web browsers
such as Microsoft Internet Explorer and Netscape Navigator. The Company began
shipping these Web-enabled products during the fourth quarter of 1996.
 
MARKETING AND DISTRIBUTION
 
  The Company markets and sells its products through a combination of
distributors, OEMs and strategic partners, its direct sales organization and
over the Internet. The Company conducts marketing programs, including direct
mail, advertising, public relations, distribution of product literature and
other programs to support each of the channels, in order to position and
promote its products and services. The Company maintains a Web site where
prospective customers can obtain information about the Company's products and
services and download certain software for evaluation. Marketing personnel
provide price lists and product descriptions and assist the direct sales force
through lead generation and sales training. The Company's primary strategy for
marketing and distributing its videoconferencing products is to establish new
strategic and OEM relationships and extend existing relationships with
multinational firms that provide unique marketing or distribution opportunities
or technological capabilities for the Company's videoconferencing products. The
Company has already established distribution relationships in Australia,
France, Hong Kong, Japan, Korea and the United Kingdom. The Company has also
formed OEM or bundling relationships in order to provide customers with turnkey
solutions and to facilitate product sales through distribution channels. The
Company has established such relationships with Symantec, a developer and
marketer of software, Philips, a manufacturer of digital cameras, and Digital
Visions Inc. and Winnov, Inc., manufacturers of video boards. In 1996, the
Company began to employ Tech Data and Ingram Micro as first tier distributors
to deliver Enhanced CU-SeeMe to consumers through retail channels including
store chains and superstores, such as CompUSA, Egghead Software and RCS. The
Company also sells its software videoconferencing products and WebTerm Toolbox
directly from its Web site.
 
  The Company also promotes its videoconferencing products by actively
participating in major videoconferencing and other tradeshows such as the
Networld+Interop, PC Expo, Comdex, Internet World, Telcon and MacWorld. The
Company periodically sponsors special events, such as cybercasts of the Little
League 50th Anniversary World Series and the 1996 Republican National
Convention, in an effort to enhance the visibility of the Company and its
products.
 
  The Company markets and sells its legacy connectivity products in the United
States through its direct sales force and distributors and in other countries
primarily through distributor relationships.
 
  International sales represented 30%, 23% and 11% of total revenue in the
fiscal years ended December 31, 1996 and 1995, and the nine months ended
December 31, 1994, respectively.
 
  The Company's sales force is located in Nashua, New Hampshire, San Jose,
California and LaGaude, France.
 
CUSTOMERS
 
  The Company's customers include businesses, government organizations,
educational institutions and individual consumers. The Company sells its
software to end users and to OEMs that bundle the Company's software with other
products.
 
  Sales to Ingram Micro, Inc. represented 14%, 16% and 21% of the Company's
total revenue in the fiscal years ended December 31, 1996 and 1995, and the
nine months ended December 31, 1994, respectively. See Note 8 of Notes to the
Company's Consolidated Financial Statements. The loss of this customer could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
CUSTOMER SERVICE AND SUPPORT
 
  White Pine is committed to maintaining customer satisfaction and loyalty.
White Pine employs technical customer representatives located in New Hampshire,
California and France to support and service its customer base. In the future,
the Company intends to hire additional technical customer representatives to
support the
 
                                       11
<PAGE>
 
increasing installed base of Enhanced CU-SeeMe. In the event demand for
customer service outpaces the Company's expectations, the Company may employ a
third-party help-desk organization to provide additional support. The Company
believes that certain of its distributors and OEM customers maintain separate
customer support organizations for their respective customers. The Company
provides back-up support to such organizations.
 
  The Company maintains a technical support hotline to answer customer
inquiries and provides an on-line database of technical product information.
The Company's support staff also responds to e-mail inquiries and monitors
several e-mail mailing lists. Customer support specialists diagnose and solve
technical problems related not only to the Company's products but also to other
hardware and software with which the Company's products may interact. The
Company tracks all support requests, including current status reports and
historical customer interaction logs, using a series of customer databases. The
Company uses customer feedback as a source of ideas for product improvements
and enhancements.
 
  The Company intends to provide maintenance for Enhanced CU-SeeMe through a
program of periodic technical upgrades. For a fee, the Company will provide
extended maintenance services to its White Pine Reflector customers and to
certain volume purchasers of Enhanced CU-SeeMe. Customers who purchase site
licenses for the White Pine Reflector are required to enter into a customer
support and maintenance agreement. The Company's X Windows and terminal
emulation customers can obtain service and support through the Company's eXtend
Support Program, which for a fee entitles customers to priority service through
a toll-free number and to free, automatic shipments of all enhancements and
upgrades for legacy connectivity products licensed from the Company.
 
COMPETITION
 
  The market for videoconferencing products and services is extremely
competitive, and the Company expects that competition will intensify in the
future. The Company believes that the principal competitive factors in the
videoconferencing industry are price, video and audio quality,
interoperability, functionality, reliability, service and support, hardware
platforms supported, and vendor and product reputation. The Company believes
that its ability to compete successfully will depend on a number of factors
both within and outside its control, including the adoption and evolution of
industry standards, the pricing policies of its competitors and suppliers, the
timing of the introduction of new software products and services by the Company
and others, the Company's ability to hire and retain employees, and industry
and general economic trends. The Company anticipates that in the near future
the videoconferencing market will experience intense competition in the form of
product bundling or significant price reductions.
 
  The Company currently competes, or expects to compete, directly or indirectly
with the following categories of companies: (i) traditional hardware-based
videoconferencing companies, such as PictureTel Corporation, VTEL Corporation
and Compression Labs, Incorporated; (ii) emerging videoconferencing technology
companies, such as Cinecom Corporation, Connectix Corporation, Creative Labs,
Inc. and VDONet Corp.; (iii) vendors of operating systems and browsers such as
Microsoft Corporation, which recently introduced NetMeeting, a product that
enables point-to-point audio and data communication over the Internet, and
Netscape Communications Corporation, which recently acquired Insoft, Inc. and
its audio and videoconferencing technology; (iv) videoconferencing support
companies, such as VideoServer, Inc., Lucent Technologies, Inc. and Accord
Ltd.; and (v) other companies developing videoconferencing systems. Because the
barriers to entry in the software market are relatively low and the potential
market is large, the Company anticipates continued growth in the industry and
the entrance of new competitors in the future. Enhanced CU-SeeMe also competes
with videoconferencing software that is available on the Internet and can be
downloaded by users for either no charge or for extended evaluation. Freeware
CU-SeeMe and its related server are freely available over the Internet. See "--
Proprietary Rights."
 
  In the market for X Windows products, the Company faces significant direct
competition from a number of PC X server software vendors, including
Hummingbird Communications Ltd., NetManage, Inc., Network Computing Devices,
Inc. and Walker Richer and Quinn Inc., as well as indirect competition from
manufacturers of dedicated X terminals. The Company's principal competitor in
this market is Hummingbird Communications
 
                                       12
<PAGE>
 
Ltd., the largest supplier of X server software products for the PC platform.
To the extent that these and other companies introduce new or enhanced PC X
server software products, the Company will face increased competition.
 
  In the terminal emulation market, the Company currently competes with the
following categories of companies: (i) vendors of International Business
Machines Corporation host connectivity products, including Attachmate Corp. and
Wall Data Incorporated; (ii) vendors of TCP/IP terminal emulation products,
including FTP Software, Inc. and NetManage, Inc.; and (iii) vendors of Digital
Equipment Corporation and Hewlett-Packard Company host connectivity products,
including Walker Richer and Quinn Inc. In the Web-based terminal emulation
environment, the Company expects to compete, directly or indirectly, with
International Business Machines Corporation, Open Connect, Wall Data
Incorporated, Attachmate Corp., and Walker Richer and Quinn Inc.
 
  Many of the Company's current and potential competitors, including
Hummingbird Communications Ltd., Intel Corporation, International Business
Machines Corporation, Microsoft Corporation, Netscape Communications
Corporation and PictureTel Corporation, have significantly longer operating
histories and/or significantly greater managerial, financial, marketing,
technical and other competitive resources, as well as greater name recognition,
than the Company. As a result, the Company's competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements or may be able to devote greater resources to the promotion and
sale of their products and services. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors. In
addition, competition could increase if new companies enter the market or if
existing competitors expand their service offerings. An increase in competition
could result in material price reductions or loss of market share by the
Company and could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  To remain competitive, the Company will need to continue to invest in
research and development and sales and marketing. There can be no assurance
that the Company will have sufficient resources to make such investments or
that the Company will be able to make the technological advances necessary to
remain competitive. In addition, current and potential competitors have
established or may in the future establish collaborative relationships among
themselves or with third parties, including third parties with whom the Company
has a relationship, to increase the visibility and utility of their products
and services. Accordingly, it is possible that new competitors or alliances may
emerge and rapidly acquire a significant market share. Such an eventuality
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
GOVERNMENT REGULATION
 
  At present, there are few laws or regulations that specifically address
access to or commerce on the Internet. The increasing popularity and use of the
Internet, however, enhance the risk that the governments of the United States
and other countries in which the Company sells or expects to sell its products
will seek to regulate videoconferencing and the Internet with respect to, among
other things, user privacy, pricing, and the characteristics and quality of
products and services. Any such regulation could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, because the Internet has only recently come into widespread use, it
is not yet clear how existing laws governing issues such as libel, privacy and
the ownership of intellectual property will apply to communications over the
Internet. The Company is unable to predict the impact, if any, that existing or
future legislation, legal decisions or regulations may have on its business,
financial condition or results of operations.
 
  The Telecommunications Act of 1996, which was enacted in February 1996,
purports to impose criminal liability on (i) any person that sends or displays
in a manner available to minors indecent or patently offensive material on an
interactive computer service such as the Internet and (ii) any entity that
knowingly permits facilities under its control to be used for such activities.
In June 1996, a special three-judge panel in federal district court found these
provisions unconstitutional and issued a preliminary injunction against their
enforcement. The U.S. Department of Justice has appealed this decision to the
U.S. Supreme Court. If these provisions are upheld or if similar provisions are
enacted in the future, they may inhibit the growth or use of the
 
                                       13
<PAGE>
 
Internet and chill the development of Internet content, thereby decreasing the
demand for the Company's Internet videoconferencing products or otherwise
having a material adverse effect on the Company's business, financial condition
and results of operations.
 
  In March 1996, the America's Carriers Telecommunication Association ("ACTA"),
a group of telecommunications common carriers, filed a petition (the "ACTA
Petition") with the Federal Communications Commission (the "FCC"), arguing that
providers (such as the Company) of computer software products that enable voice
transmission over the Internet (Internet "telephone" services) are operating as
common carriers without complying with various regulatory requirements and
without paying certain charges required by law. The ACTA Petition argues that
the FCC has the authority to regulate both the Internet and the providers of
Internet "telephone" services and requests that the FCC declare its authority
over interstate and international telecommunications services using the
Internet, initiate rulemaking proceedings to consider rules governing the use
of the Internet for the provision of telecommunications services, and order
providers of Internet "telephone" software to immediately cease the sale of
such software pending such rulemaking. Certain parties have filed comments with
the FCC regarding the ACTA Petition. The Company is unable to predict the
outcome of this proceeding. In December 1996 the FCC stated that it intended to
address the legal questions raised by the ACTA Petition in a future proceeding.
Any action by the FCC to grant the relief sought by ACTA or otherwise to
regulate use of the Internet as a medium of communication, including any action
to permit local exchange carriers to impose additional charges for connections
used for Internet access, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1A. Risk
Factors--Competition."
 
PROPRIETARY RIGHTS
 
  The Company's videoconferencing products, Enhanced CU-SeeMe and the White
Pine Reflector, are commercial versions of Freeware CU-SeeMe and its related
server. Freeware CU-SeeMe and its related server were developed by Cornell
Information Technologies, a research institute at Cornell University, and are
freely available on the Web. In June 1995, the Company and the Cornell
Foundation entered into an Exclusive Software License Agreement (the "License
Agreement") that granted to the Company the exclusive worldwide right to
develop, modify, market, distribute and sublicense commercial versions of
Freeware CU-SeeMe and its related server, as well as the rights to appoint
licensee distributors and to use the trademark "CU-SeeMe." The License
Agreement requires that the Company pay royalties based on the Company's net
revenue from its commercial versions of Freeware CU-SeeMe and its related
server (subject to certain minimum per-copy royalties) and share sublicensing
income with the Cornell Foundation. The License Agreement also requires that
the Company make certain annual minimum royalty payments, including minimum
payments based on royalties from sublicenses. As of December 31, 1996, the
Company has not paid the minimum amount payable with respect to sublicensing
royalties for the period from June 1, 1995 through November 30, 1996. There can
be no assurance that the Company will meet its royalty obligations for the
current license period or any subsequent license year. Under the License
Agreement, the Company issued to the Cornell Foundation a warrant, which
Cornell exercised during December 1996 to purchase 20,000 shares of Common
Stock at an exercise price of $3.00 per share. The License Agreement has an
initial term expiring December 1, 1998 and renews automatically for periods of
one year unless and until terminated by either party for "cause" or by the
Company for convenience. For purposes of the License Agreement, "cause" means
failure by the Company to pay any amount due under the License Agreement
(including the failure by the Company to pay the minimum amount payable with
respect to sublicensing royalties for the period from June 1, 1995 through
November 30, 1996), if not cured within 30 days of written notice of such
failure to pay, or any material breach of the License Agreement by either
party, if not cured within 90 days of written notice of such breach. "Material
breach" includes failure to exercise due diligence to develop, manufacture and
market commercial versions of Freeware CU-SeeMe and its related server, failure
to grant sublicenses as required by the License Agreement, failure to maintain
quality control over the Company's commercial versions of Freeware CU-SeeMe and
its related server, and failure to develop and exploit the market to the extent
necessary to meet the Company's minimum royalty obligations under the License
Agreement. The failure of the Company to meet certain staffing, product
introduction and sublicensing obligations will permit the Cornell Foundation to
terminate the exclusivity provisions of the License Agreement.
 
 
                                       14
<PAGE>
 
  As part of the License Agreement, the Cornell Foundation, acting through
Cornell Information Technologies, and the Company agreed to provide technical
support to each other to maintain the compatibility and interoperability of
Freeware CU-SeeMe and Enhanced CU-SeeMe and their respective servers. The
Cornell Foundation and Cornell University are entitled to use any portion of
the source code of the Company's commercial versions of Freeware CU-SeeMe and
its related server that may be necessary to maintain basic compatibility and
interoperability with Freeware CU-SeeMe and such server. The Company must
provide to the Cornell Foundation and Cornell University, at no cost, all
information required to maintain such compatibility and interoperability.
 
  Under the terms of the License Agreement, the Company also agreed to offer
sublicenses to the source code of Freeware CU-SeeMe and its related server for
a nominal fee, provided that any sublicensee agrees (i) to distribute only
executable versions of Freeware CU-SeeMe and its related server, (ii) to
realize no profit or gain, either directly or indirectly, from the use or
distribution of Freeware CU-SeeMe or its related server, (iii) to grant each of
the Company and the Cornell Foundation, at no cost, a royalty-free, perpetual,
irrevocable, unrestricted license to use modifications and enhancements to
Freeware CU-SeeMe and its related server developed and distributed by the
sublicensee, as well as related documentation, and (iv) to freely distribute on
the Internet the executable code for Freeware CU-SeeMe and its related server
as modified by the sublicensee. Moreover, the Company agreed to permit third
parties to use unmodified source code of Freeware CU-SeeMe and its related
server for the development, manufacture and marketing of commercial products in
executable code form that incorporate unmodified or re-engineered versions of
Freeware CU-SeeMe or its related server, subject to reasonable licensing terms.
 
  Under the terms of the License Agreement, the Cornell Foundation retained the
right on behalf of Cornell University to issue licenses and maintenance and
other releases of Freeware CU-SeeMe and its related server to third parties as
not-for-profit freeware. The Cornell Foundation and Cornell University may also
use any portion of Freeware CU-SeeMe and its related server to develop
commercial products and services to be licensed to others, provided that those
products and services do not compete directly with the Company's commercial
versions of Freeware CU-SeeMe and its related server. See "Item 1A. Risk
Factors--Dependence Upon License Agreement; Limited Proprietary Protection" and
"--Dependence Upon Third-Party Software."
 
EMPLOYEES
 
  At February 28, 1997, the Company had 147 employees, including 54 in research
and development, 47 in sales and marketing, 20 in technical support, 22 in
general and administrative and in software manufacturing. Twenty four of these
employees were located in France and, in accordance with applicable law, were
represented by a labor union. The Company's remaining employees were located in
the United States and were not represented by any labor organization. The
Company has experienced no work stoppages and believes that its relations with
its employees are good.
 
FACILITIES
 
  The Company's principal offices are located in Nashua, New Hampshire. In May
1996, the Company entered into a five-year lease, effective August 1, 1996, for
facilities in Nashua, New Hampshire with approximately 27,000 square feet of
office space. The Company also leases office space in San Jose, California and
LaGaude, France. The Company believes that its facilities are adequate for its
needs and that suitable additional or substitute space will be available as
needed. The Company also believes that its properties are adequately covered by
insurance.
 
ITEM 1A. RISK FACTORS
 
RECENT OPERATING LOSSES
 
  The Company incurred losses from operations of $3,790,000 in the year ended
December 31, 1996 and $3,646,000 in the fiscal year ended December 31, 1995
(including a non-recurring write-off of purchased research and development
costs of $3,200,000). At December 31, 1996, the Company had an accumulated
deficit of approximately $13,612,000. In the fiscal years ended December 31,
1996 and 1995, the Company made
 
                                       15
<PAGE>
 
significant expenditures for product development and sales and marketing in
support of the product launch of Enhanced CU-SeeMe, which became commercially
available in March 1996. The Company expects that it will be required to
continue to invest heavily in product development and sales and marketing
programs in order to be competitive and capture market share, particularly in
the videoconferencing market. In addition, the Company has hired a significant
number of employees since January 1995 and expects to continue hiring
additional sales, customer service, management, software development and
technical support employees during 1997 as the Company continues to develop and
expand its operations. This significant increase in its workforce may
negatively impact the Company's results of operations in the future,
particularly if sales of new products fall below expectations.
 
  Sales to Ingram Micro, Inc. represented 14%, 16% and 21% of the Company's
total revenue in the fiscal years ended December 31, 1996, 1995 and 1994,
respectively. The loss of, or a significant curtailment of purchases by, Ingram
Micro, Inc., including a loss or curtailment due to factors outside of the
Company's control, would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1.
Description of Business--Customers" and Note 8 of Notes to the Company's
Consolidated Financial Statements.
 
  As a result of the foregoing factors, the Company may incur further losses in
the future. There can be no assurance that the Company will achieve profitable
operations in any future period. In addition, as a result of the Company's
acquisition of About Software Corporation S.A. ("ASC") on a purchase accounting
basis in the fourth quarter of fiscal 1995 and the Company's decision to shift
its focus to the development, marketing and support of videoconferencing
software, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. See "--Transition of Product Focus;
Dependence on New Products" and "Item 6. Management's Discussion and Analysis
or Plan of Operation."
 
COMPETITION
 
  The market for videoconferencing products and services is extremely
competitive, and the Company expects that competition will intensify in the
future. The Company believes that the principal competitive factors in the
videoconferencing industry are price, video and audio quality,
interoperability, functionality, reliability, service and support, hardware
platforms supported, and vendor and product reputation. The Company believes
that its ability to compete successfully will depend on a number of factors
both within and outside its control, including the adoption and evolution of
industry standards, the pricing policies of its competitors and suppliers, the
timing of the introduction of new software products and services by the Company
and others, the Company's ability to hire and retain employees, and industry
and general economic trends. The Company anticipates that in the near future
the videoconferencing market will experience intense competition in the form of
product bundling or significant price reductions. The Company currently
competes, or expects to compete, directly or indirectly with the following
categories of companies: (i) traditional hardware-based videoconferencing
companies, such as PictureTel Corporation and VTEL Corporation; (ii) emerging
videoconferencing technology companies, such as VDONet Corp., Connectix
Corporation and Creative Labs, Inc. (iii) vendors of operating systems and
browsers such as Microsoft Corporation, which introduced NetMeeting, a product
that enables point-to-point audio and data communication over the Internet, and
announced NetShow, a product that enables broadcasting by videostreaming, and
Netscape Communications Corporation, which announced Communicator, a product
that enables point-to-point communication over the Internet (iv)
videoconferencing support companies, such as VideoServer, Inc., Lucent
Technologies, Inc. and Accord Ltd.; and (v) other companies developing
videoconferencing systems. PictureTel Corporation and Intel Corporation each
announced plans in 1996 to license products competitive with Enhanced CU-SeeMe
to manufacturers of personal computers and modems for inclusion in prepackaged
multimedia and other systems. In July 1996, Intel Corporation also announced a
cross-licensing agreement with Microsoft Corporation to share implementations
of certain industry standards and application frameworks, which the Company
expects will enhance the competitiveness of the products offered by both
companies. In addition, because the barriers to entry in the software market
are relatively low and the potential market is large, the Company anticipates
continued growth in the industry and the entrance of new
 
                                       16
<PAGE>
 
competitors in the future. Enhanced CU-SeeMe and the White Pine Reflector also
compete with videoconferencing software that is available on the Internet and
can be downloaded by users for either no charge or extended evaluation. The
Cornell Foundation makes Freeware CU-SeeMe and a related server freely
available over the Internet. See "Item 1. Description of Business--Proprietary
Rights."
 
  In the market for X Windows products, the Company faces significant direct
competition from a number of PC X server software vendors, including
Hummingbird Communications Ltd., NetManage, Inc., Network Computing Devices,
Inc. and Walker Richer and Quinn Inc., as well as indirect competition from
manufacturers of dedicated X terminals. The Company's principal competitor in
this market is Hummingbird Communications Ltd., the largest supplier of X
server software products for the PC platform. To the extent that these and
other companies introduce new or enhanced PC X server software products, the
Company will face increased competition.
 
  In the terminal emulation market, the Company currently competes with the
following categories of companies: (i) vendors of International Business
Machines Corporation host connectivity products, including Attachmate Corp. and
Wall Data Incorporated; (ii) vendors of TCP/IP terminal emulation products,
including FTP Software, Inc. and NetManage, Inc.; and (iii) vendors of Digital
Equipment Corporation and Hewlett-Packard Company host connectivity products,
including Walker Richer and Quinn Inc. In the Web-based terminal emulation
environment, the Company expects to compete, directly or indirectly, with
International Business Machines Corporation, Open Connect, Wall Data
Incorporated, Attachmate Corp., and Walker Richer and Quinn Inc.
 
  Many of the Company's current and potential competitors, including
Hummingbird Communications Ltd., Intel Corporation, International Business
Machines Corporation, Microsoft Corporation, Netscape Communications
Corporation and PictureTel Corporation, have significantly longer operating
histories and/or significantly greater managerial, financial, marketing,
technical and other competitive resources, as well as greater name recognition,
than the Company. As a result, the Company's competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements and may be able to devote greater resources to the promotion and
sale of their products and services. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors. In
addition, competition could increase if new companies enter the market or if
existing competitors expand their service offerings. An increase in competition
could result in material price reductions or loss of market share by the
Company and could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  To remain competitive, the Company will need to continue to invest in
research and development and sales and marketing. There can be no assurance
that the Company will have sufficient resources to make such investments or
that the Company will be able to make the technological advances necessary to
remain competitive. In addition, current and potential competitors have
established or may in the future establish collaborative relationships among
themselves or with third parties, including third parties with whom the Company
may have relationships, to increase the visibility and utility of their
products and services. In addition, in 1996 and the first two months of 1997 a
number of the Company's competitors have acquired or made equity investments in
other companies in the videoconferencing and related industries, including
other competitors of the Company. Accordingly, it is possible that new
competitors or alliances may emerge and rapidly acquire significant market
shares. Such an eventuality could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S NEW PRODUCTS
 
  The market for audio and video services and related software products for the
Internet and intranets, such as Enhanced CU-SeeMe and the White Pine Reflector,
has only recently begun to develop, is evolving rapidly and is expected to be
characterized by an increasing number of market entrants. The Company's future
success will depend in large part on the adoption of the Internet as a
principal medium for commercial and consumer videoconferencing. As is typical
in a new and rapidly evolving industry, demand for and market acceptance of
recently introduced products, such as Enhanced CU-SeeMe and the White Pine
Reflector, are subject to a high level of uncertainty. Certain factors,
including the present inability of subscribers of certain widely used on-line
Internet access providers to use Enhanced CU-SeeMe over these providers'
networks, the present inability to
 
                                       17
<PAGE>
 
videoconference with users of other vendors' videoconferencing systems,
difficulties in locating people on the Internet and uncertainty regarding
vendors' willingness to adopt industry standards, may limit demand for and
market acceptance of Enhanced CU-SeeMe and the White Pine Reflector, and may
have a material adverse effect on sales of Enhanced CU-SeeMe and the White Pine
Reflector and on the Company's business, financial condition and results of
operations. Also, enterprises that have already invested substantial resources
in other means of communicating information may be reluctant or slow to adopt
Internet videoconferencing. As a result of networking latencies, data packet
loss and significant variations in Internet infrastructure and users' set-ups
and configurations, the quality of audio communications over the Internet is
inferior to the quality of conventional telephone conversations and the quality
of video communications over the Internet may vary from connection to
connection and in certain instances may be inferior to the quality of hardware-
based videoconferencing systems. As a result, there can be no assurance that
videoconferencing communications over the Internet and intranets will become
widespread or that Enhanced CU-SeeMe or the White Pine Reflector will become
widely installed.
 
  The market for connectivity packages which utilize standard web browsers,
such as WebTerm Toolbox, has only recently developed, is evolving rapidly and
is expected to be characterized by an increasing number of market entrants. The
future success of the Company's WebTerm product line will depend in large part
on the adoption of intranets as a principal medium for commercial usage for
connectivity of desktop PCs to host systems.
 
  Moreover, the market for Internet services and software has developed only
recently. Commercial use of the Internet has been constrained by customer
demands for increased accessibility, reliability, speed, security and support,
and there can be no assurance that the infrastructure or complementary products
necessary for the Internet to become a viable medium of business communications
and activity in general, and as a medium of videoconferencing communications in
particular, will develop. In particular, there can be no assurance that access
to the Internet will continue to be available on a widespread basis, that the
Internet will not experience dramatic and unforeseen technological
difficulties, that the Internet will not be plagued by computer viruses or
other destructive technologies, that the introduction of complementary products
and technologies such as high speed modems and security procedures for
commercial transactions will not be delayed, that the development and adoption
of new standards and communications protocols will not be delayed, that the
current pricing structure for access to the Internet will continue, or that
growth in the number of users or the level of usage of the Internet will not
exceed the capacity of the Internet infrastructure to serve all potential
users. Moreover, critical issues concerning the commercial use of, distribution
of information on, and governmental regulation of the Internet (including
access, security, quality of services, price, ease of use, property ownership,
and liability and other legal issues) remain unresolved and may affect both the
growth of the Internet and the Company's business. As the Internet and the
related infrastructure continue to evolve, there can be no assurance that the
Internet will not develop in unforeseen directions that will have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, because the performance of the Company's products
depends on, among other things, the availability of adequate bandwidth on
network connections, any significant reduction in the rate of improvement of
the available speed of network data transmission could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  If for any reason the market for Internet videoconferencing services fails to
grow, grows more slowly than anticipated or becomes saturated with competitors'
products, the Company's business, financial condition and results of operations
will be materially and adversely affected.
 
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
 
  The Company has experienced fluctuations in its quarterly results of
operations and anticipates that such fluctuations will continue and could
increase. The Company's quarterly results of operations may vary significantly
depending on a number of factors, some of which are outside of the Company's
control. These factors include the timing of the introduction or acceptance of
new products offered by the Company or its competitors, changes in demand for
Internet services, changes in the mix of products provided by the Company,
changes in pricing strategies by the Company and its competitors, changes in
the markets served by the Company, changes in regulations affecting the
industry, changes in the Company's operating expenses, capital expenditures and
other costs relating to the expansion of operations, changes in its personnel
and general economic conditions. In addition, fluctuations in exchange rates
may render the Company's products less
 
                                       18
<PAGE>
 
competitive relative to local product offerings or result in foreign exchange
losses. To date, the Company has not engaged in exchange rate hedging
activities to minimize the risks of such fluctuations. Although the Company may
seek to implement hedging techniques in the future with respect to its foreign
currency transactions, there can be no assurance that such hedging techniques
will be successful. Historically, the Company's revenue in the third quarter of
each calendar year has been adversely affected by seasonal reductions in
business activity in Europe and certain other parts of the world during the
summer months. There can be no assurance that the Company will be able to
achieve or maintain profitability in the future or that its levels of
profitability will not vary significantly among quarterly periods. Fluctuations
in results of operations may result in volatility in the price of the Common
Stock.
 
  A significant portion of the Company's expenses are fixed and difficult to
reduce in the event that revenue does not meet the Company's expectations, thus
magnifying the adverse effect of any revenue shortfall. Furthermore,
announcements by the Company or its competitors of new products, services or
technologies could cause customers to defer or cancel purchases of the
Company's products. Any such deferral or cancellation could have a material
adverse effect on the Company's business, financial condition and results of
operations. Accordingly, revenue shortfalls can cause significant variations in
results of operations from quarter to quarter and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  As a result of the foregoing factors, it is possible that in some future
quarter the Company's results of operations will be below prior results or the
expectations of public market analysts and investors. In such event, the price
of the Common Stock would likely be materially and adversely affected. See
"Item 6. Management's Discussion and Analysis or Plan of Operation."
 
ABILITY TO MANAGE CHANGE
 
  The Company has recently experienced significant growth in the number of its
employees, the demands on its operating and financial systems, and the
geographic area of its operations. This growth has resulted in new and
increased responsibilities for the Company's administrative, operational,
development and financial personnel. Additional expansion by the Company may
further strain the Company's management, financial and other resources. There
can be no assurance that the Company will be successful in hiring the personnel
necessary to manage its changing business. The Company's success depends to a
significant extent on the ability of its new executive officers to operate
effectively, both independently and as a group, and this ability may be impeded
by past and future geographic expansion of the Company internationally and
domestically. There can be no assurance that the Company's systems, procedures
and controls will be adequate to support expansion of the Company's operations.
The Company's future results of operations will depend on the ability of its
officers and key employees to manage changing business conditions and to
continue to improve its operational and financial control and reporting
systems. Any failure of the Company's management to manage change effectively
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1. Description of Business--
Employees" and "--Facilities" and "Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act."
 
TRANSITION OF PRODUCT FOCUS; DEPENDENCE ON NEW PRODUCTS
 
  Since its inception, the Company has derived a substantial portion of its
revenue from licenses of terminal emulation and X Windows software products.
These products are expected to continue to generate a significant but declining
portion of the Company's revenue for the foreseeable future. As a result, any
factor adversely affecting sales of these products, such as shifting of
management focus and Company resources, increased price competition, the
introduction of technologically superior products by competitors or the release
of competing products by companies with significantly greater resources and
name recognition, could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
  The Company introduced, in December 1996, connectivity packages which utilize
standard web browsers. These products are expected to initially generate a
small but increasing amount of revenue. As a result, any factor adversely
affecting sales of these products, such as the introduction of technologically
superior products by competitors or the release of competing products by
companies with significantly greater resources, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
                                       19
<PAGE>
 
  In June 1995, the Company and the Cornell Foundation entered the License
Agreement which granted to the Company the exclusive worldwide right to
develop, modify, market, distribute and sublicense commercial versions of
Freeware CU-SeeMe and its related server. Since that time, the Company has
significantly redirected its efforts, and particularly its product development
and marketing efforts, to focus on its videoconferencing products. The Company
began shipping Enhanced CU-SeeMe and the White Pine Reflector in March 1996 and
May 1996, respectively, and therefore has had only a limited opportunity to
determine the extent to which these products will succeed in the marketplace. A
number of companies have introduced, or have announced plans to introduce,
videoconferencing software that will compete with Enhanced CU-SeeMe and the
White Pine Reflector, including software for use over the Internet. The
Company's future success will depend in significant part on its ability to
develop and introduce new products and to continue to improve the performance,
features and reliability of its products, including Enhanced CU-SeeMe and the
White Pine Reflector, in response to both competing product offerings and
evolving marketplace demands. There can be no assurance that the Company will
be successful in developing new products or that any new products will be
accepted in the marketplace. The Company's future success will also depend on
its ability to comply with developing industry standards for videoconferencing
over the Internet. The introduction of competing products that incorporate new
technology or the emergence of new industry standards may render the Company's
existing products obsolete and unmarketable. Any failure or inability of
Enhanced CU-SeeMe, the White Pine Reflector or other new products to perform
substantially as anticipated or to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1. Description of Business--Products" and "--
Competition."
 
DEPENDENCE UPON LICENSE AGREEMENT; LIMITED PROPRIETARY PROTECTION
 
  The Company's success is heavily dependent upon its proprietary technology.
The Company's videoconferencing products, Enhanced CU-SeeMe and the White Pine
Reflector, are commercial versions of Freeware CU-SeeMe and its related server.
The Company's ability to develop, modify, market, distribute and sublicense
Enhanced CU-SeeMe and the White Pine Reflector, as well as the right to use the
trademark "CU-SeeMe," derives entirely from the License Agreement with the
Cornell Foundation. In order to maintain the exclusivity provisions of the
License Agreement, the Company must meet certain staffing, product introduction
and sublicensing obligations. There can be no assurance that the Company will
meet these obligations. Any failure to meet such obligations will permit the
Cornell Foundation to grant licenses to other companies, including competitors
of the Company, to develop, sell and sublicense commercial versions of Freeware
CU-SeeMe and its related server. In addition, the Company's right to issue
sublicenses is contingent upon the Company's continued marketing of commercial
versions of Freeware CU-SeeMe and its related server. Even if the Company
fulfills such obligations, the License Agreement has a fixed term ending
December 1, 1998. Although the License Agreement contains certain provisions
for automatic annual renewal, the License Agreement may be terminated by the
Cornell Foundation for "cause." Under the License Agreement, "cause" includes
failure by the Company to pay any amount due under the License Agreement, if
not cured within 30 days of written notice of such failure to pay, or any
"material breach" of the License Agreement by the Company, if not cured within
90 days of written notice of such breach. "Material breach" includes failure to
exercise due diligence to develop, manufacture and market commercial versions
of Freeware CU-SeeMe and its related server, failure to grant sublicenses as
required by the License Agreement, failure to maintain quality control over the
Company's commercial versions of Freeware CU-SeeMe and its related server, and
failure to develop and exploit the market to the extent necessary to meet the
Company's minimum royalty obligations under the License Agreement. Any
termination of the License Agreement would have a material adverse effect on
the Company's business, financial condition and results of operations. The
License Agreement requires that the Company pay royalties based on the
Company's net revenue from its commercial versions of Freeware CU-SeeMe and its
related server (subject to certain minimum per-copy royalties) and share
sublicensing income with the Cornell Foundation. The License Agreement also
requires that the Company make certain annual minimum royalty payments,
including minimum payments based on royalties from sublicensing. The failure to
pay any such minimum amount would constitute "cause" for termination of the
License Agreement, as described above. Moreover, Freeware CU-SeeMe and its
related server are freely available on the Internet. Such availability may
adversely affect sales of licenses for Enhanced CU-SeeMe and the White Pine
Reflector. The
 
                                       20
<PAGE>
 
Company also depends upon the Cornell Foundation, as the owner of the trademark
"CU-SeeMe," to protect and enforce rights in the trademark. Any failure of the
Cornell Foundation to protect or enforce such rights could substantially impair
the value of such trademark and the Company's rights to use such trademark.
 
  The Company currently has no patents and relies primarily on copyright,
trademark and trade secrets law, as well as employee and third-party non-
disclosure agreements, to protect its intellectual property. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to prevent misappropriation of its technology or independent
development by others of similar technology. Certain of the Company's products,
including Enhanced CU-SeeMe and the White Pine Reflector, are licensed to
customers under "shrink wrap" licenses included as part of the product
packaging. Although in certain sales the Company's shrink wrap licenses are
accompanied by specifically negotiated agreements signed by the licensee, in
most cases its shrink wrap licenses are not negotiated with or signed by
individual licensees. Certain provisions of the Company's shrink wrap licenses,
including provisions limiting the Company's liability and protecting against
unauthorized use, copying, transfer and disclosure of the licensed program, may
be unenforceable under the laws of certain jurisdictions. Also, the Company has
delivered certain technical data and information relating to Enhanced CU-SeeMe
and the White Pine Reflector to the United States government and, as a result,
the United States government may have unlimited rights to use such technical
data and information or to authorize others to use such technical data and
information. There can be no assurance that the United States government will
not authorize others to use such technical data and information for purposes
competitive with those of the Company. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do laws in the United States. There can be no assurance that the protections
afforded by the laws of such countries will be adequate to protect the
Company's proprietary rights, the unenforceability of any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation may be necessary to enforce the Company's
intellectual property rights or to protect the Company's trade secrets. Any
such litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
  Although the Company believes that its products and technology do not
infringe the proprietary rights of others, there can be no assurance that third
parties will not assert infringement and other claims against the Company or
that such claims will not be successful. From time to time, the Company has
received and may receive in the future notice of claims of infringement of
other parties' proprietary rights. Many participants in the software industry
have an increasing number of patents and have frequently demonstrated a
readiness to commence litigation based on allegations of patent or other
intellectual property infringement. Third parties may assert exclusive patent,
trademark, copyright and other intellectual property rights to technologies
that are important to the Company. There can be no assurance that infringement
or invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted or prosecuted against the Company or that any such
assertion or prosecution will not have a material adverse effect on the
Company's business, financial condition or results of operations. Regardless of
the validity or the successful assertion of any such claims, the Company could
incur significant costs and diversion of resources in defending such claims,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, any party making such claims
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief, which could effectively block the Company's ability to
make, use, sell, distribute or market its products and services in the United
States or abroad. Any such judgment could have a material adverse effect on the
Company's business, financial condition and results of operations. In
circumstances where claims relating to proprietary technology or information
are asserted against the Company, the Company may seek licenses to such
intellectual property. There can be no assurance, however, that such licenses
would be available or, if available, that such licenses could be obtained on
terms that are commercially reasonable and acceptable to the Company. The
failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of the Company's products and, therefore,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1. Description of Business--
Proprietary Rights."
 
                                       21
<PAGE>
 
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
 
  Revenue from international sales represented 30%, 23% and 11% of the
Company's total revenue in the fiscal years ended December 31, 1996, 1995 and
1994, respectively. The increased level of international revenue in the fiscal
years ended December 31, 1996 and 1995 reflected the acquisition of ASC on a
purchase accounting basis effective as of November 1, 1995. ASC generates a
majority of its revenue from outside the United States. As part of its business
strategy, the Company intends to seek opportunities to expand its product and
service offerings into additional international markets. The Company believes
that expansion into new international markets is critical to the Company's
ability to continue to grow and to market its products and services. There can
be no assurance that the Company will be successful in developing localized
versions of its products for new international markets or in marketing or
distributing products and services in these markets. The Company's
international business may be adversely affected by changing economic
conditions in foreign countries. The majority of the Company's sales are
currently denominated in U.S. dollars, but there can be no assurance that a
significantly higher level of future sales will not be denominated in foreign
currencies. To the extent the Company makes sales denominated in currencies
other than U.S. dollars, fluctuations in exchange rates may contribute to
fluctuations in the Company's business, financial condition and results of
operations. Conducting an international business inherently involves a number
of other difficulties and risks, such as export restrictions, export controls
relating to technology, compliance with existing and changing regulatory
requirements, tariffs and other trade barriers, difficulties in staffing and
managing international operations, longer payment cycles, problems in
collecting accounts receivable, software piracy, political instability,
seasonal reductions in business activity in Europe and certain other parts of
the world during the summer months, and potentially adverse tax consequences.
There can be no assurance that one or more of these factors will not have a
material adverse effect on any international operations established by the
Company and, consequently, on the Company's business, financial condition and
results of operations. See "Item 1. Description of Business--Strategy."
 
DEPENDENCE ON KEY PERSONNEL
 
  The Company's success to date has depended to a significant extent on Howard
R. Berke, its Chairman, President and Chief Executive Officer, David O. Bundy,
its Vice President of Engineering, Killko A. Caballero, its Senior Vice
President of Research and Development and Chief Technology Officer, Richard M.
Darer, Chief Financial Officer and Vice President of Administration, and a
number of other key management, engineering, research and development, sales
and operational personnel. Mr. Darer has resigned from the Company effective
March 21, 1997. White Pine has begun to search for a successor to Mr. Darer,
and may engage an interim chief financial officer until that search is
completed. Pending the appointment of a successor chief financial officer, no
assurance can be given that the departure of Mr. Darer will not adversely
affect the Company's business, financial condition and results of operations.
Further, the additional loss of the services of Mr. Berke, Mr. Bundy, or Mr.
Caballero or any of the Company's other key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes that its future success will depend in large
part on its ability to attract and retain highly qualified management,
engineering, research and development, sales and operational personnel. In
particular, the Company will need to hire and train additional software
developers in order to support and increase its recent software licensing
activities. Competition for all of these personnel is intense and there can be
no assurance that the Company will be successful in attracting and retaining
key personnel. The failure of the Company to hire, train and retain qualified
personnel could have a material adverse effect upon the Company's business,
financial condition and results of operations. The Company does not maintain
key person life insurance policies on its key personnel, except for a policy
with respect to Mr. Berke in the amount of $1.0 million. See "Item 1.
Description of Business--Employees" and "Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act."
 
RISKS ASSOCIATED WITH CREATING AND ACCESSING NEW DISTRIBUTION CHANNELS
 
  The Company's primary strategy for marketing Enhanced CU-SeeMe and the White
Pine Reflector is to form channel relationships in key markets with major
distributors. The Company also intends to license Enhanced CU-SeeMe and the
White Pine Reflector to OEMs, value-added resellers ("VARs") and additional
 
                                       22
<PAGE>
 
distributors for bundling with their products and services. The Company expects
that its future success will depend in large part upon these OEMs, VARs and
distributors. The performance of these OEMs, VARs and distributors will be
outside the control of the Company, and the Company is unable to predict the
extent to which these organizations will be successful in marketing and selling
Enhanced CU-SeeMe or the White Pine Reflector or products incorporating
Enhanced CU-SeeMe or the White Pine Reflector. The Company's failure to
establish relationships with OEMs, VARs and distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company is currently seeking to establish
distribution relationships with retail channels, including store chains,
superstores and catalog sales, for Enhanced CU-SeeMe. The Company has no prior
experience in selling software through retail channels, and no assurance can be
given that it will succeed in establishing a retail network for Enhanced CU-
SeeMe or that, if established, such a network will not result in unexpected
expenses for inventory, returned software, distribution or otherwise. The
Company's distributors typically carry the products of competitors of the
Company, many of whom have substantially greater financial resources than the
Company. The distributors have limited capital to invest in inventory, and
their decisions to purchase the Company's products and, in the case of retail
stores, to give them critical shelf space, are partly a function of pricing,
terms and special promotions offered by the Company and its competitors, over
which the Company has no control and which it cannot predict. See "Item 1.
Description of Business--Marketing and Distribution."
 
  The Company also distributes certain of its products electronically through
the Internet. By distributing its products through the Internet, the Company
may decrease demand for its products and increase the likelihood of
unauthorized copying and use of its software. The Company has allowed and
intends to continue to allow customers to download certain of its products for
a free evaluation period.
 
RISK OF PRODUCT DEFECTS
 
  Software developed and incorporated by the Company may contain significant
undetected errors when first released or as new versions are released. Although
the Company tests its software before commercial release, there can be no
assurance that errors in the software will not be found after customers begin
to use the software. Enhanced CU-SeeMe 2.1 for Windows, which was released in
the fourth quarter of 1996, corrects a number of such errors in Enhanced CU-
SeeMe 2.0. The Company intends to ship Enhanced CU-SeeMe 3.0, which the Company
expects will support relevant Internet and International Telecommunications
Union standards and incorporate a number of new features, in the first half of
1997. Any error in Enhanced CU-SeeMe 3.0, the White Pine Reflector or the
Company's other products may result in decreased revenue or increased expenses
because of adverse publicity, reduced orders, product returns, uncollectible
accounts receivable, delays in collecting accounts receivable, and additional
and unexpected costs of further product development to correct the errors. Any
of these results could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
  The Company is a defendant in 10 lawsuits pending in New York federal and
state courts in which the plaintiffs claim to suffer from carpal tunnel
syndrome, or "repetitive stress injuries," as a result of having used computer
keyboards that are alleged to have been defectively designed by a predecessor
of the Company. None of these suits has reached trial and additional
information detrimental to the Company could be developed in the course of
discovery. Although the Company has established a reserve for these suits that
the Company believes is adequate, there can be no assurance that the Company's
liabilities under these suits will not substantially exceed that reserve. See
"Item 3. Legal Proceedings."
 
DEPENDENCE ON THIRD-PARTY SOFTWARE
 
  In addition to Freeware CU-SeeMe and its related server, the Company depends
upon certain other software and products that it licenses from third parties,
including voice compression technology from Voxware, Inc., global Internet
conferencing "white pages" software from Four11 Corporation, video codec
software from Crystal Net Corporation ("Crystal Net") and whiteboard software
from Group Technologies, Inc. d/b/a Group Logic, Inc. and DataBeam Corporation.
Certain of these licenses are for limited terms, have certain minimum royalty
obligations or may be terminated if the Company breaches the terms of the
license. There can be no assurance that these suppliers will continue to
license this software to the Company on commercially reasonable
 
                                       23
<PAGE>
 
terms. In late January 1997, Crystal Net delivered notice to the Company of
alleged breaches by the Company of certain terms of the existing license
agreement between the two companies. The Company is in the process of
investigating and responding to these allegations, but believes that the
resolution of these issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.
 
  Most of the Company's third-party licenses are non-exclusive and there can be
no assurance that the Company's competitors will not obtain licenses to and
utilize such software in competition with the Company. There can be no
assurance that licensors of software utilized in the Company's products will
continue to provide, enhance or support such software in the form utilized by
the Company, nor can there be any assurance that the Company will be able to
modify its own software to adapt to any changes in the licensed software. In
addition, there can be no assurance that financial or other difficulties that
may be experienced by such third-party suppliers will not have a material
adverse effect on the availability, quality or support of software incorporated
in the Company's products, or that, if such software becomes unavailable, the
Company would be able to find suitable alternatives on a timely basis and on
commercially reasonable terms. The loss of or inability to maintain any of
these licenses could result in the discontinuation of, or delays or reductions
in, product shipments unless and until equivalent technology is identified,
licensed and integrated with the Company's software, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Item 1. Description of Business--Proprietary Rights."
 
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
 
  The Company may acquire or invest in companies, technologies or products that
complement the Company's business or its product offerings. Any future
acquisitions may result in a potentially dilutive issuance of equity
securities, the incurrence of additional debt, the write-off of software
development costs or the amortization of expenses related to goodwill and other
intangible assets, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. Future
acquisitions would involve numerous additional risks, including difficulties in
the assimilation of the operations, services, products and personnel of any
acquired company, the diversion of management's attention from other business
concerns, the disruption of the Company's business, the entry into markets in
which the Company has little or no direct prior experience and the potential
loss of key employees of any acquired company. There can be no assurance that
the Company would be successful in overcoming these risks or any other problems
encountered in connection with any such acquisition.
 
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
 
  At present, there are few laws or regulations that specifically address
access to or commerce on the Internet. The increasing popularity and use of the
Internet, however, enhance the risk that the governments of the United States
and other countries in which the Company sells or expects to sell its products
will seek to regulate videoconferencing and the Internet with respect to, among
other things, user privacy, pricing, and the characteristics and quality of
products and services. Any such regulation could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, because the Internet has only recently come into widespread use, it
is not yet clear how existing laws governing issues such as libel, privacy and
the ownership of intellectual property will apply to communications over the
Internet. The Company is unable to predict the impact, if any, that existing or
future legislation, legal decisions or regulations may have on its business,
financial condition or results of operations. The Telecommunications Act of
1996, which was enacted in February 1996, purports to impose criminal liability
on (i) any person that sends or displays in a manner available to minors
indecent or patently offensive material on an interactive computer service such
as the Internet and (ii) any entity that knowingly permits facilities under its
control to be used for such activities. In June 1996, a special three-judge
panel in federal district court found these provisions unconstitutional and
issued a preliminary injunction against their enforcement. The U.S. Department
of Justice has appealed this decision to the U.S. Supreme Court. If these
provisions are upheld or if similar provisions are enacted in the future, they
may inhibit the growth or use of the Internet and chill the development of
Internet content, thereby decreasing the demand for the Company's Internet
videoconferencing products or otherwise having a material adverse effect on the
Company's business, financial condition and results of operations. In March
1996, the America's Carriers Telecommunication Association ("ACTA"), a group of
telecommunications common carriers, filed a petition
 
                                       24
<PAGE>
 
(the "ACTA Petition") with the Federal Communications Commission (the "FCC"),
arguing that providers (such as the Company) of computer software products that
enable voice transmission over the Internet (Internet "telephone" services) are
operating as common carriers without complying with various regulatory
requirements and without paying certain charges required by law. The ACTA
Petition argues that the FCC has the authority to regulate both the Internet
and the providers of Internet "telephone" services and requests that the FCC
declare its authority over interstate and international telecommunications
services using the Internet, initiate rulemaking proceedings to consider rules
governing the use of the Internet for the provision of telecommunications
services, and order providers of Internet "telephone" software to immediately
cease the sale of such software pending such rulemaking. Certain parties have
filed comments with the FCC regarding the ACTA Petition. The Company is unable
to predict the outcome of this proceeding. In December 1996 the FCC stated that
it intended to address the legal questions raised by the ACTA Petition in a
future proceeding. Any action by the FCC to grant the relief sought by ACTA or
otherwise to regulate use of the Internet as a medium of communication,
including any action to permit local exchange carriers to impose additional
charges for connections used for Internet access, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Item 1. Description of Business--Government Regulation."
 
POSSIBLE VOLATILITY OF STOCK PRICE
 
  Factors such as quarterly variations in the Company's results of operations,
announcements of technological innovations or new products by the Company, its
competitors and others, market conditions in the industry and changes in
financial estimates by public market analysts may cause the market price of the
Common Stock to fluctuate significantly. In addition, the stock market in
general has recently experienced substantial price and volume fluctuations,
which have affected the market prices of many high technology companies,
particularly Internet-related companies, and which have often been unrelated to
the operating performance of such companies. These broad market fluctuations
may materially and adversely affect the market price of the Common Stock.
Following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Any such litigation against the Company could result in substantial
costs and diversion of management's attention and other resources, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Item 5. Market for Common Equity and Related
Stockholder Matters."
 
SUBSTANTIAL INFLUENCE OF EXISTING STOCKHOLDERS
 
  As of February 28, 1997, the Company's executive officers, directors and five
percent stockholders beneficially owned an aggregate of approximately 24.8% of
the outstanding shares of Common Stock. As a result, these stockholders, if
acting together, would effectively be able to control most matters requiring
the approval of stockholders of the Company, including the election of
directors or the approval of significant corporate matters. This concentration
of ownership by existing stockholders may also have the effect of delaying or
preventing a change in control of the Company. See "Item 11. Security Ownership
of Certain Beneficial Owners and Management."
 
ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, BY-LAWS AND DELAWARE LAW
 
  The Restated Charter and the Restated By-Laws contain provisions that could
discourage takeover attempts or make more difficult the acquisition of a
substantial block of the Common Stock. The Restated Charter provides that
stockholders may act only at meetings of stockholders and not by written
consent in lieu of a stockholders' meeting. The Restated By-Laws provide that
special meetings of the Company's stockholders may be called by the President
and must be called by the President or the Secretary at the written request of
a majority of the directors. The Restated By-Laws provide that nominations for
directors may not be made by a stockholder at any annual or special meeting
thereof unless the stockholder intending to make a nomination notifies the
Company of its intentions a specified number of days in advance of the meeting
and furnishes to the Company certain information regarding itself and the
intended nominee. The Restated By-Laws also require a stockholder to provide to
the Secretary of the Company advance notice of business to be brought by such
stockholder before any annual or special meeting of stockholders as well as
certain information regarding such stockholder and others known to support such
proposal and any material interest they may have in the proposed business.
These
 
                                       25
<PAGE>
 
provisions could delay any stockholder actions that are favored by the holders
of a majority of the outstanding stock of the Company until the next
stockholders' meeting. These provisions may also discourage another person or
entity from making a tender offer for the Common Stock, because such person or
entity, even if it acquired a majority of the outstanding stock of the Company,
could only take action at a duly called stockholders' meeting and not by
written consent. In addition, the Board of Directors is authorized to issue
shares of Common Stock and Preferred Stock which, if issued, could dilute and
adversely affect various rights of the holders of Common Stock and, in
addition, could be used to discourage an unsolicited attempt to acquire control
of the Company.
 
  The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibit the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 may limit the ability of
stockholders to approve a transaction that they may deem to be in their best
interests. The foregoing and other provisions of the Restated Charter and the
Restated By-Laws and the application of Section 203 of the Delaware General
Corporation Law could deter certain takeovers or tender offers or could delay
or prevent certain changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.
 
ABSENCE OF DIVIDENDS
 
  The Company has never declared or paid any cash dividends on its capital
stock and does not currently expect to pay any cash dividends in the
foreseeable future. In addition, the terms of the Company's existing bank line
of credit and term loan prohibit the Company from declaring or paying cash
dividends on the Common Stock. See "Item 5. Market for Common Equity and
Related Stockholder Matters."
 
ITEM 2. DESCRIPTION OF PROPERTY
 
  The Company conducts its operations from its headquarters in Nashua, New
Hampshire and facilities in San Jose, California and LaGaude, France. The
facility in New Hampshire contains approximately 27,000 square feet, including
16,000 square feet for engineering and office space, 4,500 square feet for
production space, and 6,500 square feet for storage.
 
  The facility in California contains approximately 10,000 square feet of
engineering and office space. The facility in France contains approximately
8,000 square feet of engineering and office space and 2,000 square feet of
production space.
 
  The Company leases its office in New Hampshire from an unaffiliated party
under the terms of a five year lease ending July 1, 2001 in which the Company
is responsible for maintenance, repairs, taxes, insurance, and utilities. Base
rent is $112,405 for 1997, $128,184 for 1998, $141,797 for 1999, $155,409 for
2000, and $95,287 till the lease ends in 2001. Renewal options for 3 two year
terms are available to the Company.
 
  The Company leases its office in California from an unaffiliated party under
the terms of a five year lease ending December 31, 2001. The Company is
responsible only for its own utility expenses and increases in common operating
expenses beyond the level incurred in the first year of the lease. Base rent is
$153,936 for 1997, $153,936 for 1998, $163,176 for 1999, $163,176 for 2000, and
$172,968 in 2001. The Company has the right to exit the lease, with proper
notice, at any time after July 1, 1999.
 
  The Company leases its office in France from several unaffiliated parties
under a series of similar leases which end July 31, 1999 in which the Company
is responsible for maintenance, repairs, taxes, insurance, and utilities. Base
rent is $87,101 for 1997, $69,851 for 1998 and $38,045 till the lease ends in
1999. No further option periods are available at this time.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is a defendant in 10 lawsuits pending in New York federal and
state courts (the "RSI Suits") in which the plaintiffs claim to suffer from
carpal tunnel syndrome, or "repetitive stress injuries," as a result of having
used computer keyboards (the "Keyboards") that are alleged to have been
defectively designed. The
 
                                       26
<PAGE>
 
Keyboards were supplied, and possibly designed and manufactured, by Ontel
Corporation. The assets of Ontel Corporation were purchased in 1982 by Visual
Technology, Inc. ("Visual"), a predecessor of Visual T.I., Inc. ("VTI"), which
in turn is a predecessor of the Company. See "The Company." The RSI Suits,
which seek money damages, were brought from February 1992 to June 1996 by
employees of New York Telephone, which purchased the Keyboards from Lockheed
Electronics Corporation. One or more of Visual, Ontel Corporation, Lockheed
Electronics Corporation and Key Tronics Corporation, a subcontractor for
certain of the Keyboards, are named as co-defendants in certain of the RSI
Suits. New York Telephone employees have also commenced 38 suits that name as
defendants only Visual and/or Ontel Corporation. The Company could be named as
a defendant in these cases. None of the RSI Suits has reached trial and
additional information detrimental to the Company could be developed in the
course of discovery.
 
  In May 1993, VTI's product liability coverage terminated. Certain of the RSI
Suits appear to be based on claims that allegedly arose after May 1993, and
therefore may be uninsured. The insurers for VTI, the Company and others (the
"Insurers") are defending the RSI Suits under a reservation of rights. To date,
the Company's proportionate share of the defense costs of the RSI Suits has not
been material. There can be no assurance, however, that the Company will not
incur material legal expenses defending the RSI Suits. The Company has a
reserve of approximately $292,000 in connection with the RSI Suits, based upon
the Company's belief that (i) certain of the RSI Suits are covered by product
liability insurance, (ii) the Company is contractually indemnified by Lockheed
Electronics Corporation and/or Key Tronics Corporation against all or a portion
of the damages to which the Company may be subject and (iii) the Company has
defenses to substantially all of the claims under the RSI Suits. Although the
Company believes that its reserve for the RSI Suits is adequate, there can be
no assurance that the Company's liabilities under the RSI Suits will not
substantially exceed that reserve. New York Telephone and others may continue
to use certain of the Keyboards and, accordingly, there can be no assurance
that additional product liability claims will not be asserted against the
Company in the future.
 
  From time to time, the Company has received and may receive in the future
notice of claims of infringement of other parties' proprietary rights. Although
the Company believes that its products and technology do not infringe the
proprietary rights of others, there can be no assurance that additional third
parties will not assert infringement and other claims against the Company or
that any infringement claims will not be successful. See "Risk Factors--
Dependence Upon License Agreement; Limited Proprietary Protection."
 
  From time to time, the Company may be exposed to litigation arising out of
its products, services and operations. As of the date of this Prospectus, the
Company is not engaged in any legal proceedings of a material nature, other
than the RSI Suits.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matter was submitted to a vote of securities holders of the Company during
the fourth quarter of the fiscal year ended December 31, 1996.
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's Common Stock commenced trading on the Nasdaq National Market on
October 11, 1996 under the symbol "WPNE". Prior to October 11, 1996, the Common
Stock was not publicly traded. The following table sets forth the high and low
closing sales price for each quarterly period since October 11, 1996 for the
Common Stock, as reported by the Nasdaq National Market.
 
<TABLE>
<CAPTION>
                                                                     HIGH   LOW
                                                                     ----- -----
     <S>                                                             <C>   <C>
     FISCAL 1996
       Fourth Quarter (commencing October 11, 1996)................. 9 1/8 6 1/2
</TABLE>
 
  As of February 28, 1997 there were 160 holders of record of the Common Stock
who held an aggregate of 9,079,313 shares of Common Stock as nominees for an
undisclosed number of beneficial holders.
 
 
                                       27
<PAGE>
 
  The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain future earnings,
if any, to fund the development and growth of its business and therefore does
not expect to pay any cash dividends in the foreseeable future. Payment of
future dividends, if any, will be at the discretion of the Company's Board of
Directors after taking into account various factors, including the Company's
financial condition, results of operations, current and anticipated cash needs,
and plans for expansion. The terms of the Company's existing bank line of
credit and term loan prohibit the Company from declaring or paying cash
dividends on Common Stock. See "Item 6. Management's Discussion and Analysis or
Plan of Operation--Liquidity and Capital Resources."
 
                                       28
<PAGE>
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
OVERVIEW
 
  White Pine develops, markets and supports multiplatform desktop connectivity
software that facilitates worldwide video and audio communication and data
collaboration across the Internet, intranets and other networks that use the
IP. The Company's desktop videoconferencing software products, Enhanced CU-
SeeMe and the White Pine Reflector, create a client-server solution that
allows users to participate in real-time, multipoint videoconferences over the
Internet and intranets. The Company recently introduced WebTerm Toolbox, which
allows users to access host applications from within the browser, as a new
suite of products geared to providing Advanced Intranet Solutions to
corporations, educational organizations and government agencies. The Company
also offers its eXodus line of desktop X Windows software, which enables
seamless interoperability between local and remote environments, and its 5PM
line of terminal emulation software, which provides desktop access to data and
applications residing on enterprise legacy systems.
 
  In June 1995, as a part of its continuing plan to focus on software
connectivity products, the Company entered into the License Agreement with the
Cornell Foundation, which granted to the Company the exclusive worldwide right
to develop, modify, market, distribute and sublicense commercial versions of
Freeware CU-SeeMe and its related software-only multipoint conferencing
server. The Company commenced shipments of the initial commercial versions of
Enhanced CU-SeeMe and the White Pine Reflector in March 1996 and May 1996,
respectively. The Company anticipates that its revenue growth, if any, will
depend on increased sales of Enhanced CU-SeeMe and the White Pine Reflector
and on sales of new software connectivity products, such as WebTerm Toolbox,
for the Internet and intranets. Accordingly, the Company intends to devote a
substantial portion of its research and development and sales and marketing
resources to technologies related to the Internet and intranets.
 
  The Company's revenue is derived from software license fees and fees for
services related to its software products, primarily software maintenance
fees. The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountants Statement of Position No. 91-1, "Software
Revenue Recognition." Software license revenue is recognized upon execution of
a contract or purchase order and shipment of the software, net of allowances
for estimated future returns, provided that no significant obligations on the
part of the Company remain outstanding and collection of the related
receivable is deemed probable by management. An allowance for product returns
is recorded by the Company at the time of sale and is measured periodically to
adjust to changing circumstances, including changes in retail sales. Software
maintenance fees, which are generally payable in advance and are non-
refundable, are recognized ratably over the period of the maintenance
contract, typically twelve months. Revenue from training and consulting
services is recognized as services are provided. Software license fees,
consulting fees and training fees that have been prepaid or invoiced but that
do not yet qualify for recognition as revenue under the Company's policy, and
prepaid maintenance fees not yet recognized as revenue, are reflected as
deferred revenue.
 
  Research and development expenses are charged to income as incurred. In
accordance with the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes software development costs once the
technological feasibility of a product has been established, which the Company
considers to occur when a commercially viable working model of a product has
been produced and tested. The total amount of capitalized software development
costs ($145,000 at December 31, 1996) is included in other assets.
 
  Effective April 1, 1994, the Company changed its fiscal year end from March
31 to December 31.
 
 
                                      29
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table sets forth certain consolidated financial data from the
Company's statement of operations as a percentage of total revenue for the
fiscal years ended December 31, 1994, 1995 and 1996.
 
<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                                -----------------------------
                                                  1994      1995       1996
                                                --------  --------   --------
<S>                                             <C>       <C>        <C>
Revenue:
  Software license fees........................     87.9%     83.8%      90.0%
  Services and other...........................     12.1      16.2       10.0
                                                --------  --------   --------
    Total revenue..............................    100.0     100.0      100.0
Cost of revenue................................     13.2      17.4       19.0
Gross Profit...................................     86.8      82.6       81.0
                                                --------  --------   --------
Operating expenses:
  Sales and marketing..........................     32.9      35.0       56.8
  Research and development.....................     26.2      26.0       32.7
  General and administrative...................     22.3      27.8       23.9
  Write-off of purchased research and
   development costs...........................      --       44.5        --
                                                --------  --------   --------
    Total operating expenses...................     81.4     133.3      113.5
                                                --------  --------   --------
Income (loss) from operations..................      5.4     (50.7)     (32.5)
Interest income and other, net.................      2.9       2.0        2.0
Provision for income taxes.....................     (0.4)     (0.4)      (0.7)
                                                --------  --------   --------
Net income (loss)..............................      7.9%    (49.1)%    (31.2)%
                                                ========  ========   ========
</TABLE>
 
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
 
  The Company acquired all of the stock of ASC effective as of November 1,
1995 and accounted for the acquisition as a purchase transaction. As a result,
comparisons of the Company's results of operations for the year ended December
31, 1995 and 1996 are not necessarily meaningful. ASC developed the Company's
5PM line of terminal emulators.
 
  Revenue. Total revenue increased by 62% to $11,666,000 in the year ended
December 31, 1996 from $7,184,000 in the year ended December 31, 1995. The
increase resulted primarily from the revenues generated from Enhanced CU-SeeMe
since its introduction in March 1996, and to a lesser extent from the
acquisition of ASC effective as of November 1, 1995. The increase was offset
in part by a moderate decrease in revenue from the Company's eXodus products
for the year ended December 31, 1996.
 
  Revenue from sales outside the United States comprised 30% and 23% of total
revenue for the years ended December 31, 1996 and 1995, respectively. The
increase in revenue from sales outside the United States for the year ended
December 31, 1996 was directly related to the acquisition of ASC, which
generates a majority of its revenue from sales in Europe, and to a lesser
extent to increased sales of Enhanced CU-SeeMe through distributors in the
Asia-Pacific region.
 
  During the years ended December 31, 1996 and 1995, Ingram Micro, Inc.
accounted for approximately 14% and 16%, respectively, of the Company's total
revenue.
 
  Cost of Revenue. Cost of revenue consists principally of costs of product
media, manuals, packaging materials, product localization for international
markets, duplication and shipping, as well as royalties and associated
amortization of paid license fees relating to third-party software included in
the Company's products. In addition, cost of revenue includes a warranty
reserve, measured on a periodic basis, for the costs of upgrades and services.
 
 
                                      30
<PAGE>
 
  Cost of revenue as a percentage of total revenue increased to 19% for the
year ended December 31, 1996 as compared to 17% for the year ended December
31, 1995. The percentage increase resulted primarily from the higher cost of
revenue attributable to the new Enhanced CU-SeeMe product line as compared to
the Company's other products. Certain third-party software incorporated within
Enhanced CU-SeeMe bears higher royalty rates than the software incorporated in
the Company's other product lines and also requires payment of upfront fees
that are amortized over the respective periods of the software licenses. The
Company intends to continue its strategy of improving the features and
functionality of its products, particularly Enhanced CU-SeeMe, through the
incorporation of third-party software and, as a result, the cost of revenue as
a percentage of total revenue may continue to fluctuate.
 
  Sales and Marketing. Sales and marketing expense consists primarily of costs
associated with sales and marketing personnel, sales commissions, trade shows,
advertising and promotional materials. Sales and marketing expense increased
by 163% to $6,632,000 in the year ended December 31, 1996 from $2,517,000 in
the year ended December 31, 1995, and increased as a percentage of total
revenue to 57% in the year ended December 31, 1996 from 35% in the year ended
December 31, 1995.
 
  The dollar and percentage increases in sales and marketing expense for the
year ended December 31, 1996 were attributable to (i) the strengthening of the
Company's sales and marketing organization through the hiring of additional
personnel in channel development, marketing communication, technical support
and sales, (ii) the launch of Enhanced CU-SeeMe, which included increased
advertising, trade show participation and other marketing-related programs,
and (iii) to a lesser extent, the additional sales force in Europe employed as
part of the acquisition of ASC, effective as of November 1, 1995. The Company
intends to continue to increase sales and marketing efforts in connection with
its marketing and sales of Enhanced CU-SeeMe and to hire sales and marketing
personnel, but at a slower rate of increase than during the year ended
December 31, 1996.
 
  Research and Development. Research and development expense consists
primarily of costs of personnel and equipment. Research and development
expense increased by 105% to $3,819,000 in the year ended December 31, 1996
from $1,866,000 in the year ended December 31, 1995; research and development
expense represented 33% and 26% of total revenue for the year ended December
31, 1996 and 1995, respectively.
 
  The dollar and percentage increases in research and development expenses for
the year ended December 31, 1996 were attributable primarily to (i) the hiring
of additional personnel for the Enhanced CU-SeeMe product development team and
for the introduction of new products, such as Web-enabled versions of the
Company's access connectivity products, and (ii) to a lesser extent, the
employment of additional engineers as a result of the acquisition of ASC.
 
  General and Administrative. General and administrative expense consists of
administrative, financial and general management activities, including legal,
accounting and other professional fees. General and administrative expense
increased by 40% to $2,794,000 in the year ended December 31, 1996 from
$2,001,000 in the year ended December 31, 1995 and decreased as a percentage
of total revenue to 24% in the year ended December 31, 1996 from 28% in the
year ended December 31, 1995.
 
  The dollar increase in general and administrative expenses for the year
ended December 31, 1996 was attributable primarily to (i) the administrative
support of the Company's new European Headquarters in LaGaude, France as a
result of the acquisition of ASC and (ii) to a lesser extent, increased
personnel and systems costs related to the improved communications
infrastructure for the Company's Internet and intranet access and to the
strengthening of the Company's finance organization in preparation for the
Company's initial public offering.
 
  Write-off of Purchased Research and Development Costs. The Company acquired
ASC effective as of November 1, 1995 and accounted for the acquisition as a
purchase transaction. The assets acquired from ASC included "in-process
technology" with a fair value of approximately $3,200,000. These costs were
charged to
 
                                      31
<PAGE>
 
operations in fiscal 1995 upon consummation of the acquisition, due to a
determination that there was no future value to the Company.
 
  Provision for Income Taxes. The Company's provision for income taxes
consists of federal alternative minimum taxes and state and foreign income
taxes. The Company expects that its effective tax rate for the foreseeable
future will be lower than the combined federal and state statutory rate
primarily as a result of the realization of net operating loss carryforwards.
See Note 5 of Notes to the Company's Consolidated Financial Statements.
 
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR (NINE MONTHS)
ENDED DECEMBER 31, 1994
 
  Effective April 1, 1994, the Company changed its fiscal year end from March
31 to December 31. As a result, comparisons of the Company's results of
operations for the fiscal years ended December 31, 1994 and 1995 are not
necessarily meaningful.
 
  Revenue. Total revenue, consisting of revenues from eXodus and 5PM software
connectivity products and related services, increased by 45% to $7,184,000 in
the fiscal year ended December 31, 1995 from $4,965,000 in the fiscal year
ended December 31, 1994. Of this increase, approximately $1,400,000 was due to
the inclusion of an additional three months of operations in the fiscal year
ended December 31, 1995 and approximately $500,000 was due to the inclusion of
two months of operations of ASC in that fiscal year. To a lesser extent, the
increase in total revenue also reflected an increase in revenue from services
and other fees attributable to a contract for one customer; the Company does
not expect to continue to generate revenue from this customer at the same
level in the future, as the contract for services expired pursuant to its
terms.
 
  Revenue from sales outside the United States comprised 23% and 11% of total
revenue for the fiscal years ended December 31, 1995 and 1994, respectively.
During the fiscal years ended December 31, 1995 and 1994, Ingram Micro, Inc.
accounted for approximately 16% and 21%, respectively, of the Company's total
revenue.
 
  Cost of Revenue. Cost of revenue as a percentage of total revenue increased
to 17% for the fiscal year ended December 31, 1995 as compared to 13% for the
fiscal year ended December 31, 1994. This percentage increase resulted
primarily from the amortization of royalties and other fees under the License
Agreement for the Enhanced CU-SeeMe product line incurred after the execution
of the License Agreement in June 1995, but prior to the commercial
introduction of Enhanced CU-SeeMe.
 
  Sales and Marketing. Sales and marketing expense increased by 54% to
$2,517,000 in the fiscal year ended December 31, 1995 as compared to
$1,637,000 in fiscal year ended December 31, 1994 and increased as a
percentage of total revenue to 35% from 33%. The percentage increase primarily
reflected increased trade show participation. The percentage increase also
resulted from the inclusion of European sales and marketing expense after the
acquisition of ASC, and to a lesser extent from the addition of sales and
marketing personnel, including staffing for channel development, technical
publications, technical support, marketing communication and sales, in
anticipation of the introduction of Enhanced CU-SeeMe.
 
  Research and Development. Research and development expense increased by 43%
to $1,866,000 in the fiscal year ended December 31, 1995 as compared to
$1,301,000 for the fiscal year ended December 31, 1994 and represented 26% of
total revenue in both periods. The dollar increase was primarily attributable
to additions to the product development team for Enhanced CU-SeeMe.
 
  General and Administrative. General and administrative expense increased by
81% to $2,001,000 in the fiscal year ended December 31, 1995 as compared to
$1,106,000 in the fiscal year ended December 31, 1994 and increased as a
percentage of total revenue to 28% from 22%. The dollar and percentage
increases were attributable approximately equally to the administrative
support of the Company's new office in LaGaude, France as a result of the
acquisition of ASC, increased personnel and other costs related to the
communications infrastructure for the Company's Internet and intranet access,
and higher professional fees.
 
 
                                      32
<PAGE>
 
  Write-off of Purchased Research and Development Costs. The Company acquired
ASC effective as of November 1, 1995 and accounted for the acquisition as a
purchase transaction. The assets acquired from ASC included "in-process
technology" with a fair value of approximately $3,200,000. These costs were
charged to operations in fiscal 1995 upon consummation of the acquisition, due
to a determination that there was no future value to the Company.
 
  Provision for Income Taxes. The Company's provision for income taxes in the
fiscal years ended December 31, 1995 and 1994 consisted of federal alternative
minimum taxes and state and foreign income taxes. The Company expects that its
effective tax rate for the foreseeable future will be lower than the combined
federal and state statutory rate primarily as a result of the realization of
net operating loss carryforwards. See Note 5 of Notes to the Company's
Consolidated Financial Statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  During the year ended December 31, 1996, the Company financed its operations
primarily through the use of cash and other liquid assets, a private placement
of equity securities in March and April 1996 and its initial public offering
of common stock in October 1996.
 
  The Company's operating activities used cash of $3,069,000 in the year ended
December 31, 1996, primarily as a result of increased sales and marketing and
research and development activities related to the release, support and
promotion of Enhanced CU-SeeMe in March 1996. Accounts receivable increased to
$2,553,000 from $1,439,000 on December 31, 1995, primarily related to the
increase in revenue in the year ended December 31, 1996 as compared to the
year ended December 31, 1995.
 
  The Company's investing activities used cash of $1,121,000 in the year ended
December 31, 1996. Cash used in investing activities was primarily for the
purchase of capital expenditures, and for third-party software licenses.
Capital expenditures totaled $703,000 for the year ended December 31, 1996.
These expenditures consisted principally of purchases of computer and
networking systems and office equipment.
 
  The Company's financing activities provided cash of $25,689,000 in the year
ended December 31, 1996. The Company received gross proceeds of $2,300,000
from a private placement of equity securities in March and April 1996. On
October 17, 1996, the Company completed its initial public offering of common
stock. The Company issued and sold 3,000,000 shares of common stock in the
public offering for net proceeds of approximately $23,743,000, after deducting
the underwriting discount and an estimated $1,350,000 of offering expenses.
 
  On December 20, 1996, the Company entered into a new commercial loan
agreement with Fleet Bank-NH (the "Bank") providing for a $3,000,000 revolving
line of credit and a separate term loan in the initial principal amount of
$53,000. The revolving line of credit expires on June 30, 1998. Borrowings
under the line of credit and the term loan are secured by substantially all of
the Company's assets, including a $515,000 certificate of deposit and all of
the Company's computer software products (including all source code, object
code, copyrights, trademarks and patents, if any, relating thereto). Amounts
outstanding under the line of credit and the term loan bear interest at the
Bank's prime rate plus 0.5% (8.75% at December 31, 1996).
 
  The commercial loan agreement requires that the Company provide the Bank
with certain periodic financial reports and comply with certain financial and
other ratios, including maintenance of a minimum net worth, a maximum ratio of
total liabilities to tangible net worth, a minimum ratio of current assets to
current liabilities and cumulative profitability levels for the years 1997 and
1998. At December 31, 1996 and December 31, 1995, no borrowings were
outstanding under the revolving line of credit and $38,867 and $49,000 were
outstanding under the term loan, respectively. At December 31, 1996 the
available borrowing amount was $1,939,000 based on qualified accounts
receivables.
 
  At December 31, 1996, the Company had cash and cash equivalents of
$23,298,000 and working capital of $22,570,000. The Company believes that its
current cash and cash equivalents (including proceeds from its initial
 
                                      33
<PAGE>
 
public offering), funds (if any) generated from operations and borrowings
under its bank line of credit, will be sufficient to fund the Company's
operations and capital expenditures through fiscal 1997. Thereafter, the
Company's liquidity will be materially dependent upon its internally generated
funds and its ability to obtain funds from additional equity or debt
financings from external sources.
 
INFLATION
 
  Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial condition or results of operations to date.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
  In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 121 addresses the accounting for the impairment
of long-lived assets, certain identifiable intangible assets and goodwill when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Company's adoption of SFAS No. 121 in 1996
has not had, and is not expected to have, a material impact on its results of
operations or financial condition.
 
  In November 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 addresses the
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 permits an entity either to record the
effects of stock-based employee compensation plans in its financial statements
or to present pro forma disclosures in the notes to its financial statements.
In connection with its adoption of SFAS No. 123 during 1996, the Company has
elected to provide the appropriate disclosures in Note 9 of its consolidated
financial statements.
 
ITEM 7. FINANCIAL STATEMENTS
 
  The following statements are included after page 46 of this Annual Report
and form a part hereof.
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of Independent Auditors............................................ F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996.............. F-2
Consolidated Statements of Operations for the nine months ended December
 31, 1994 and the years ended December 31, 1995 and 1996.................. F-3
Consolidated Statements of Stockholders' Equity for the nine months ended
 December 31, 1994 and the years ended December 31, 1995 and 1996......... F-4
Consolidated Statements of Cash Flows for the nine months ended December
 31, 1994 and the years ended December 31, 1995 and 1996.................. F-5
Notes to Consolidated Financial Statements................................ F-6
</TABLE>
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  There were no changes or disagreements with accountants on accounting or
financial disclosure matters during the nine months ended December 31, 1994,
and the fiscal years ended December 31, 1995 and 1996.
 
 
                                      34
<PAGE>
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
    COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
  The Directors and executive officers of the Company, and their ages and
positions as of February 28, 1997, are as follows:
 
<TABLE>
<CAPTION>
   NAME                  AGE                     POSITION
   ----                  ---                     --------
<S>                      <C> <C>
Howard R. Berke.........     Chairman, President, Chief Executive Officer and
                          42 Director
Richard M. Darer........  43 Chief Financial Officer and Vice President of
                             Administration(1)
Killko A. Caballero.....  37 Senior Vice President of Research and
                             Development, Chief Technology Officer and
                             Director
David O. Bundy..........  38 Vice President of Engineering
Jack A. Dutzy...........  52 Vice President of Sales, Americas
Carl A. Koppel..........  46 Vice President of Sales, International
Brian L. Lichorowic.....  35 Vice President of Marketing
Arthur H. Bruno(2)(3)...  62 Director
Jonathan G. Morgan(2)...  42 Director
Pierre-Gabriel            35
 Vallee(3)..............     Director
</TABLE>
--------
(1) Mr. Darer resigned effective March 21, 1997
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
 
  HOWARD R. BERKE has been the President and Chief Executive Officer of the
Company since January 1994 and has also served as the Chairman and a director
of the Company since February 1994. Mr. Berke served as the President and
Chief Executive Officer of Grafpoint, a software company, from April 1992 to
December 1993. Mr. Berke was a founder of Rehabilitation Technologies, Inc., a
medical products company, and served as its Executive Vice President from June
1988 to April 1992. Mr. Berke received an M.B.A. from the University of
Chicago and a B.A. from Yale University.
 
  RICHARD M. DARER joined the Company in May 1996 as Chief Financial Officer
and Vice President of Administration and resigned effective March 21, 1997.
Mr. Darer served as Vice President, Treasurer and Controller of Sequoia
Systems, Inc., a computer systems company, from January 1996 to May 1996, and
Corporate Controller from July 1994 to December 1995. From 1982 to 1994, Mr.
Darer held several positions in financial management at Computervision
Corporation, a CAD/CAM software and services company, the most recent of which
was the Controller of the Computervision Group. Mr. Darer received an M.B.A.
from the Harvard Graduate School of Business Administration, an M.S. from
Northeastern University and a B.S. from the Polytechnic Institute of Brooklyn.
 
  KILLKO A. CABALLERO has been a director of the Company and has served as the
Company's Senior Vice President of Research and Development and Chief
Technology Officer since November 1995. Mr. Caballero was a co-founder of ASC
and served as its President, Chief Executive Officer and Chairman of the Board
from July 1991 until he joined the Company. Mr. Caballero received a B.A. in
computer science from the University of Geneva and a degree in mechanical
engineering from the Engineering School of Geneva, Switzerland.
 
  DAVID O. BUNDY has served as the Company's Vice President of Engineering
since January 1994. Mr. Bundy was the Vice President and Principal Engineer of
the Company (then known as Visual International, Inc.) from August 1993 to
December 1993, of Visual T.I., Inc. from September 1991 until it merged into
Visual International, Inc. in August 1993, and of Visual Technology, Inc. from
September 1988 until it merged with Visual T.I., Inc. in September 1991.
 
 
                                      35
<PAGE>
 
  JACK A. DUTZY joined the Company in October 1995 as Vice President of
Marketing and Strategic Sales and was elected Vice President of Sales,
Americas in July 1996. Mr. Dutzy served as Director of Sales--Americas of
Proteon, Inc., a networking company, from January 1987 to July 1992 and as its
Director of Sales and Marketing--Americas from April 1994 to April 1995. From
July 1992 to December 1992, Mr. Dutzy served as Vice President of Sales and
Marketing of Microtouch Systems, Inc., a touch screen company. Mr. Dutzy
received a B.S. in Physics from Michigan State University.
 
  CARL A. KOPPEL has served as the Company's Vice President of Sales,
International since July 1996. Mr. Koppel served as the Company's Vice
President of Sales from November 1995 to July 1996 and as Director of
International Sales from April 1994 to October 1995. Mr. Koppel served as Vice
President of International Sales and Marketing for Grafpoint from September
1992 until he joined the Company. Mr. Koppel served as President of U.S.
operations of JSB Corporation, a computer software company headquartered in
the United Kingdom, from July 1991 to September 1992. Mr. Koppel received a
B.Sc. in Electrical Engineering from the Strathclyde University in Scotland.
 
  BRIAN L. LICHOROWIC joined the Company in August 1996 as Vice President of
Marketing. From January 1996 to August 1996, Mr. Lichorowic served as
Executive Director Strategic Alliance for CyberCash Inc., a company
specializing in secure Internet transactions. Mr. Lichorowic was a co-founder
of InterCon Systems Corporation, a wholly owned subsidiary of PSINet Inc. that
specializes in software and Internet services, and served as its Vice
President of Marketing from January 1991 to December 1995. Mr. Lichorowic
received a B.A. in Business Administration from Boston University and an
M.B.A. from Lynn University.
 
  ARTHUR H. BRUNO has served as a director of the Company since February 1994.
Mr. Bruno is the Chairman, President and Chief Executive Officer of Castelle,
a networking and telecommunications company, positions that he has held since
October 1993. Since July 1991, Mr. Bruno has served as a Vice President of and
consultant to Hambrecht & Quist LLC, a venture capital company. From 1991 to
1993, Mr. Bruno served as the Company's Chairman and Chief Executive Officer.
 
  JONATHAN G. MORGAN has served as a director of the Company since May 1996.
Since June 1993, Mr. Morgan has been Managing Director/Group Head of
Investment Banking-Technology of Prudential Securities Incorporated, an
investment banking firm. From June 1992 to June 1993, Mr. Morgan was Managing
Director/Group Head of Corporate Finance of the San Francisco office of Sutro
& Co., Inc., an investment banking firm. From January 1992 to June 1992, he
acted as an independent financial consultant and from May 1985 to January 1992
he served as the Managing Director/Head of Mergers and Acquisitions of
Montgomery Securities, an investment banking firm.
 
  PIERRE-GABRIEL VALLEE has served as a director of the Company since May
1994. Since December 1994, Mr. Vallee has been acting as Managing Director of
Innolion SA, a subsidiary of the French bank Credit Lyonnais. From 1991 to
1993, Mr. Vallee was Chairman of Opindus/Speic, a group of companies in the
mechanical engineering field. Mr. Vallee holds degrees from L'Ecole Nationale
Superieure des Arts et Metiers, L'Institute d'Etudes Politiques Paris and
L'Institut de Haute Finance.
 
  Directors of the Company are elected to serve until the next annual meeting
of stockholders (or special meeting in lieu thereof) and until their
successors are duly elected and qualified. Executive officers of the Company
are appointed by and serve at the discretion of the Board of Directors.
 
  The Board of Directors has a Compensation Committee, which provides
recommendations concerning salaries and incentive compensation for directors,
officers and employees of and consultants to the Company, and an Audit
Committee, which reviews the results and scope of the audit and other services
provided by the Company's independent auditors.
 
  The Company does not pay fees to members of the Board of Directors and
presently has no plans to pay directors' fees. On July 18, 1996, the Company
granted Mr. Morgan a nonqualified option to purchase 5,000 shares of Common
Stock at an exercise price of $6.00 per share.
 
                                      36
<PAGE>
 
SECTION 16(A) REPORTING COMPLIANCE
 
  Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and Directors, and persons who own more than ten percent of the
Company's Common Stock, to file with the Securities and Exchange Commission
reports of ownership on Form 3 and reports of changes in ownership on Forms 4
and 5. Such officers, Directors and ten-percent stockholders are also required
to furnish the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such forms received by the Company
and on written representations from certain reporting persons that no Form 5s
were required by the Company for such persons, the Company believes that all
Section 16(a) reports applicable to its officers, Directors and ten-percent
stockholders with respect to the fiscal year ended December 31, 1996 were
filed on a timely basis, with the exception of Form 4s for David O. Bundy,
Jack A. Dutzy and Carl A. Koppel reporting purchases of Common Stock on
October 17, 1996, all of which Form 4s were filed in January 1997.
 
ITEM 10. EXECUTIVE COMPENSATION
 
  The following table sets forth certain information concerning the
compensation earned by the Company's Chief Executive Officer and the other
three executive officers whose compensation for services rendered in all
capacities to the Company was in excess of $100,000 for the fiscal years ended
December 31, 1996 (collectively, the "Named Executive Officers").
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                LONG-TERM
                                      ANNUAL COMPENSATION      COMPENSATION
                                      ----------------------   ------------
                                                                  AWARDS
                                                               ------------
                                                                SECURITIES
                                                                UNDERLYING    ALL OTHER
                                                                 OPTIONS/    COMPENSATION
  NAME AND PRINCIPAL POSITION YEAR    SALARY ($)   BONUS ($)    SARS(#)(1)       ($)
  --------------------------- ----    ----------   ---------   ------------  ------------
<S>                           <C>     <C>          <C>         <C>           <C>
Howard R. Berke.......        1996     $165,600         -- (2)       --            --
Chief Executive
 Officer and President        1995     $148,433     $50,000          --            --
                              1994(3)  $ 91,750     $37,000      209,067(4)    $79,812(5)
Killko A. Caballero...        1996     $ 90,420     $10,000          --            --
Senior Vice President
 of Research and              1995     $ 15,070         --           --            --
Development and Chief
 Technology Officer           1994(3)       --          --           --            --
David O. Bundy........        1996     $110,000     $15,000       10,000(6)        --
Vice President of
 Engineering                  1995     $ 89,661     $20,000          --            --
                              1994(3)  $ 76,750     $ 3,500       15,000(7)        --
Jack A. Dutzy.........        1996     $103,000(8)  $13,557       25,000(9)        --
Vice President of
 Sales, Americas              1995     $ 22,917     $ 2,500          --            --
                              1994(3)       --          --           --            --
</TABLE>
--------
(1) All of the options have a maximum term of 10 years, subject to earlier
    termination in the event of the optionee's cessation of service with the
    Company. The options are exercisable during the optionee's lifetime only
    by the optionee; they are exercisable by the optionee only while the
    optionee is an employee or advisor of the Company and for certain limited
    periods of time thereafter in the event of termination of employment.
(2) Mr. Berke's bonus for 1996 consisted of options which were granted on
    January 10, 1997 and, upon vesting, will be exercisable to acquire an
    aggregate of 150,000 shares of Common Stock at a price of $6.00 per share.
(3) Fiscal year 1994 consisted of the nine months ended December 31, 1994
(4) Options were granted on February 22, 1994 under the Stock Option Plan
    (1993). One thirty-sixth of the options vest on a monthly basis commencing
    on February 22, 1994.
(5) Represents relocation expenses.
(6) Options were granted on February 29, 1996 and May 6, 1996 under the Stock
    Option Plan (1995) and the Stock Option Plan (1993), respectively. One
    thirty-sixth of the options granted vest on a monthly basis commencing on
    the respective dates of grant.
(7) Options were granted on June 2, 1994 under the Stock Option Plan (1994).
    One thirty-sixth of the options vest on a monthly basis commencing on June
    2, 1994.
(8) Includes $14,252 earned as commissions.
(9) Options were granted on February 29, 1996. Five thirty-sixths of the
    options vested on March 1, 1996, and one thirty-sixth of the options vest
    on a monthly basis thereafter.
 
                                      37
<PAGE>
 
OPTION GRANTS AND EXERCISE
 
  The following table summarizes (i) option grants to the Named Executive
Officers during the year ended December 31, 1996 and (ii) the value of the
options held by the Named Executive Officers at December 31, 1996. No options
were granted to Mr. Berke or Mr. Caballero during the year ended December 31,
1996.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
                               INDIVIDUAL GRANTS
 
<TABLE>
<CAPTION>
                                                                             POTENTIAL REALIZABLE VALUE
                          NUMBER OF   PERCENT OF                              AT ASSUMED ANNUAL RATES
                         SECURITIES  TOTAL OPTIONS                           OF STOCK PRICE APPRECIATION
                         UNDERLYING   GRANTED TO    EXERCISE OR                  FOR OPTION TERM(1)
                           OPTIONS   EMPLOYEES IN  BASE PRICE PER EXPIRATION ----------------------------
          NAME           GRANTED (#)  FISCAL YEAR   SHARE(#/SH)      DATE         5%            10%
          ----           ----------- ------------- -------------- ---------- ------------- --------------
<S>                      <C>         <C>           <C>            <C>        <C>           <C>
David O. Bundy..........   5,000(2)      1.8%          $2.50       2/29/06   $       7,861 $      19,922
                           5,000(3)      1.8%          $5.00        5/6/01   $      15,722 $      39,844
Jack A. Dutzy...........  25,000(4)      8.7%          $2.50       2/29/06   $      39,306 $      99,609
</TABLE>
--------
(1) The amounts shown represent hypothetical gains that could be achieved for
    the respective options if exercised at the end of their option terms.
    These gains are based on assumed rates of stock appreciation of five
    percent and ten percent, compounded annually from the date the respective
    options were granted to the date of their expiration. The gains shown are
    net of the option price, but do not include deductions for taxes or other
    expenses that may be associated with the exercise. Actual gains, if any,
    on stock option exercises will depend on future performance of the Common
    Stock, the optionholders' continued employment through the option term and
    the date on which the options are exercised.
(2) Options were granted on February 29, 1996 under the Stock Option Plan
    (1995). One thirty-sixth of the options granted vest on a monthly basis
    commencing on February 29, 1996.
(3) Options were granted on May 6, 1996 under the Stock Option Plan (1993).
    One thirty-sixth of the options granted vest on a monthly basis commencing
    on May 6, 1996.
(4) Options were granted on February 29, 1996. Five thirty-sixths of the
    options vested on March 1, 1996, and one thirty-sixth of the options vest
    on a monthly basis thereafter.
 
  The following table sets forth information with respect to the exercise of
stock options by the Named Executive Officers during the year ended December
31, 1996 and unexercised options held by the Named Executive Officers on
December 31, 1996.
 
                      AGGREGATED OPTION EXERCISES IN LAST
                 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                             NUMBER OF           VALUE OF UNEXERCISED
                                                        UNEXERCISED OPTIONS     IN-THE-MONEY OPTIONS AT
                         SHARES ACQUIRED    VALUE      AT FISCAL YEAR END(#)     FISCAL YEAR END($)(1)
          NAME           ON EXERCISE(#)  REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
          ----           --------------- ----------- ------------------------- -------------------------
<S>                      <C>             <C>         <C>                       <C>
Howard R. Berke.........     20,000       $100,000        183,260/ 5,807          $1,270,375/$36,294
Killko A. Caballero.....        --             --             -- /   --                  -- /   --
David O. Bundy..........        --             --          35,556/ 9,444          $  225,489/$38,261
Jack A. Dutzy...........        --             --           7,079/17,921          $   33,625/$85,125
</TABLE>
--------
(1) The closing sale price for the Company's Common Stock as reported on the
    Nasdaq National Market on December 31, 1996 was $7.25. Value is calculated
    on the basis of the difference between the option exercise price and
    $7.25, multiplied by the number of shares of Common Stock underlying the
    options.
 
                                      38
<PAGE>
 
EMPLOYMENT AGREEMENTS
 
  On January 3, 1994, the Company entered into an agreement with Howard R.
Berke, whereby Mr. Berke agreed to serve as the President and Chief Executive
Officer of the Company. The initial term of the agreement ended on January 3,
1996, but the agreement automatically renews for successive two-year periods
unless it is terminated by either party with at least 30 days' prior written
notice. Pursuant to the agreement, Mr. Berke received an initial base salary
of $165,000, which is reviewed annually and was increased to $175,000 as of
January 1, 1997. Mr. Berke is entitled to receive an incentive bonus of up to
50% of his base compensation, based upon goals established by the Board of
Directors and other performance measures determined in the discretion of the
Board of Directors. Pursuant to the agreement, Mr. Berke was granted a stock
option to purchase 209,067 shares of Common Stock at an exercise price of
$1.00 per share. If Mr. Berke's employment is terminated without cause, Mr.
Berke will be entitled to a pro rata portion of (i) his incentive bonus earned
through the termination date and (ii) his salary for six months or until he
becomes employed elsewhere, whichever occurs first; if his new salary is lower
than his base salary at the Company, however, the Company will pay the
difference for the balance of this six-month period. If his employment is
terminated with cause, he is entitled to receive 15 days' salary. Pursuant to
an amendment to the agreement, the Company reimbursed Mr. Berke for $79,812 in
moving and temporary accommodation expenses in December 1994. Mr. Berke is
entitled to participate in all employee benefits, including health, vision,
dental and retirement plans, that the Company provides to its employees
generally. The agreement provides that Mr. Berke will not directly or
indirectly compete with the Company or solicit its employees, customers or
prospective customers on behalf of himself or any entity that engages in any
business involving the sale, distribution, development or research concerning
computer software in breach of the agreement during the term of the agreement
and for a period of one year following the date of the termination of his
employment.
 
  The Company entered into a Nondisclosure and Noncompetition Agreement with
David O. Bundy dated February 15, 1996. Pursuant to the agreement, Mr. Bundy
agreed that while employed by the Company and for a period of 18 months
following the termination of his employment with the Company for any reason,
he will not, directly or indirectly, compete with the Company or solicit any
of the Company's employees, contractors, suppliers, existing customers or
prospective customers on behalf of himself or any other entity that engages in
the sale, distribution or development of or research concerning computer
software and technology in breach of the agreement. Either party may terminate
the agreement by giving the other party 30 days' prior written notice. If Mr.
Bundy's employment is terminated without cause during the term of the
agreement, he will be entitled to his base salary for six months or until he
becomes employed elsewhere, whichever occurs first; provided, however, that if
his new salary is lower than his base salary at the Company, the Company will
pay the difference for the balance of this six-month period. Pursuant to the
agreement, Mr. Bundy was granted a stock option to purchase 5,000 shares of
Common Stock at an exercise price of $2.50 per share.
 
  On October 10, 1995, the Company entered into a two-year employment
agreement with Killko A. Caballero, whereby Mr. Caballero agreed to serve as
Senior Vice President of Product Development and Chief Technical Officer of
the Company. Pursuant to the agreement, Mr. Caballero receives a base salary
of $100,000, which is reviewed annually, and is eligible to receive an annual
fiscal year incentive bonus with a maximum annual amount of $20,000. During
the first year of the agreement, Mr. Caballero was guaranteed to receive one-
half of the incentive bonus. He is entitled to participate in all employee
benefits, including health, vision, dental and retirement plans, that the
Company provides to its employees generally. If Mr. Caballero's employment is
terminated without cause during the first two years of the term of the
agreement, Mr. Caballero will be entitled to (i) a pro rata portion of his
incentive bonus earned through the termination date and (ii) his salary for
six months or until he becomes employed elsewhere, whichever occurs first;
provided, however, that if his new salary is lower than his base salary at the
Company, the Company will pay the difference for the balance of this six-month
period. During the second year of the agreement, if Mr. Caballero's employment
is terminated without cause and (i) he is entitled to some payment of base
salary and incentive bonus and (ii) he is unable to secure employment in the
United States within ninety days and this results in his deportation, the
Company shall pay him $10,000 in relocation fees. The agreement provides that
Mr. Caballero will not directly or indirectly compete with the Company or
solicit its employees, customers or prospective customers on behalf of himself
or any entity that engages in any business involving the sale, distribution,
development or research concerning computer software in breach of the
agreement during the term of the agreement and for a period of one year
following the date of his termination.
 
                                      39
<PAGE>
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of February 28, 1997, by (i) each
person (or group of affiliated persons) known by the Company to own
beneficially more than five percent of the outstanding shares of Common Stock,
(ii) each of the Directors of the Company, (iii) each of the Named Executive
Officers and (iv) all Directors and executive officers of the Company as a
group:
 
<TABLE>
<CAPTION>
                                                        SHARES      PERCENT
                                                     BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS(1)                                     OWNED        OWNED
-------------------                                  ------------ ------------
<S>                                                  <C>          <C>
Arthur H. Bruno(3)..................................  1,540,358       17.0%
Hambrecht & Quist Group(4)..........................  1,405,234       15.5%
 One Bush Street
 San Francisco, California 94104
Sofinnova Entities(5)...............................    766,286        8.4%
 51 Rue Saint Georges
 Paris, France 75009
Charles Lingel......................................    595,840        6.6%
 c/o Infoconix Inc.
 704 228th Avenue, N.E.
 Suite 414
 Redmond, Washington 98053
Killko A. Caballero.................................    403,325        4.4%
Howard R. Berke(6)..................................    209,067        2.3%
David O. Bundy(6)...................................     39,900        *
Jack A. Dutzy(6)....................................     14,230        *
Jonathan G. Morgan(6)...............................      1,251        *
Pierre-Gabriel Vallee...............................        --         --
All Directors and executive officers as a group (10
 persons)(6)........................................  2,257,428       24.8%
</TABLE>
--------
 *  Represents less than 1% of the outstanding shares of Common Stock.
(1) The address of all persons who are executive officers or Directors of the
    Company is in care of the Company, 542 Amherst Street, Nashua, New
    Hampshire 03063.
(2) Unless otherwise noted, each person or group identified possesses sole
    voting and investment power with respect to such shares, subject to
    community property laws, where applicable. Shares not outstanding but
    deemed beneficially owned by virtue of the right of a person or group to
    acquire them within 60 days of February 28, 1997 are treated as
    outstanding only for purposes of determining the amount and percentages
    beneficially owned by such person or group.
(3) Includes 1,405,234 shares held by the Hambrecht & Quist Group as described
    in Note 4 and 85,000 shares subject to stock options exercisable within 60
    days of February 28, 1997. Mr. Bruno is a Vice President of and a
    consultant to Hambrecht & Quist LLC. Mr. Bruno disclaims beneficial
    ownership of the shares held by the Hambrecht & Quist Group.
(4) Consists of 623,167 shares held by H&Q London Ventures, 7,271 shares held
    by Hambrecht & Quist Group, 206,917 shares held by H & Q Ventures IV,
    206,917 shares held by H&Q Ventures International CV, 444 shares held by
    H&Q Venture Partners, 285,768 shares held by William R. Hambrecht,16
    shares held by Hamquist and 74,734 shares held by Phoenix Venture (BVI),
    Ltd.
 
                                      40
<PAGE>
 
(5) Consists of approximately 221,767 shares held by Sofinnova S.A., 337,499
    shares held by Sofinnova Capital FCPR and 207,020 shares held by C.V.
    Sofinnova Ventures Partners II. Sofinnova S.A., a management and direct
    investment company, manages the funds of Sofinnova Capital FCPR, and its
    wholly-owned subsidiary manages the funds of C.V. Sofinnova Venture
    Partners II.
(6) Includes shares subject to stock options exercisable within 60 days of
    February 28, 1997.
 
ITEM 12. CERTAIN TRANSACTIONS
 
FINANCING AND STOCKHOLDER AGREEMENTS
 
  In December 1995, in connection with the Company's purchase of all of the
outstanding shares of ASC, the Company agreed to issue 403,325 shares of its
Common Stock to Killko A. Caballero, a Director and the Senior Vice President
of Research and Development and Chief Technology Officer of the Company, in
exchange for 7,904 shares of ASC. In the same transaction, the Company agreed
to issue an aggregate of 766,286 shares of Common Stock to Sofinnova S.A.,
Sofinnova Capital FCPR, and CV Sofinnova Ventures Partners II (together, the
"Sofinnova Entities"), which own beneficially more than 5% of the outstanding
shares of Common Stock of the Company, in exchange for an aggregate of 15,017
shares of ASC.
 
  In March 1996, all of the Company's stockholders who then owned beneficially
more than five percent of the outstanding shares of Common Stock, Arthur H.
Bruno, a Director of the Company, and all of the current executive officers of
the Company other than Richard M. Darer entered into an agreement with the
Company and certain other stockholders of the Company (the "Shareholders'
Agreement") pursuant to which the parties to the agreement were granted a right
of participation in and a right of first refusal with respect to certain sales
of shares by certain management stockholders. The parties to the Shareholders'
Agreement were also granted a preemptive right to purchase all or part of their
pro rata shares of New Securities (as defined in the Shareholders' Agreement)
issued by the Company. The Shareholders' Agreement was amended in July 1996
such that it terminated immediately prior to the consummation of the Company's
initial public offering on October 17, 1996.
 
  Pursuant to the Shareholders' Agreement, the parties to the Shareholders'
Agreement entered into a Designation and Election of Directors agreement
whereby the parties agreed to vote all the shares of the Company's stock held
by them so as to fix the number of the Directors of the Company at five and to
elect to the Board of Directors of the Company individuals designated by
specified stockholders and affiliates of the Company. The Directors initially
designated pursuant to this agreement were Arthur H. Bruno, Howard R. Berke,
Pierre-Gabriel Vallee and Killko A. Caballero. A representative of the
Sofinnova Entities served as the fifth director until Jonathan G. Morgan, an
outside director, was elected in May 1996. In addition, the Sofinnova Entities
were granted the right to have a representative attend all meetings of the
Company's Board of Directors in a non-voting capacity as long as they hold at
least 50% of the shares owned by them as of December 15, 1995. This agreement
terminated upon termination of the Shareholders' Agreement, immediately prior
to the consummation of the Company's initial public offering on October 17,
1996.
 
EMPLOYMENT AGREEMENTS
 
  For a description of certain employment and other arrangements between the
Company and its executive officers, see "Management--Executive Compensation"
and "--Employment Agreements."
 
REGISTRATION RIGHTS
 
  In connection with prior issuances of shares of the Company's Common Stock,
$.01 par value per share, and Comon Stock, $5.83 par value per share ("$5.83
Stock"), the Company granted certain rights with respect to the registration
under the Securities Act of 1933, as amended (the "Securities Act"), of the
shares of outstanding Common Stock and the shares of Common Stock issuable upon
the conversion or exercise of any other securities owned by certain
stockholders of the Company. Based on securities outstanding as of February 28,
1997, it is estimated that such stockholders hold an aggregate of 5,844,974
shares of Common Stock, including 394,511 shares of Common Stock (the
"Registrable Converted Shares") issuable upon conversion of outstanding shares
of $5.83 Stock, and options to purchase an aggregate of 294,044 shares of
Common Stock (collectively, the "Registrable Shares").
 
                                       41
<PAGE>
 
  The holders of more than 50% of the then-outstanding Registrable Converted
Shares are entitled, at any time, to request that the Company file a
registration statement under the Securities Act covering the sale of some or
all of the Registrable Converted Shares then held by such holders, provided
that (i) the Company is not required to effect more than one such demand
registration, (ii) the effective date of such registration statement shall not
occur prior to April 10, 1997 and (iii) the aggregate market value of the
Registrable Converted Shares registered pursuant to such request shall not
exceed $2,300,000. The holders of more than 50% of the then-outstanding
Registrable Shares are entitled, at any time after April 9, 1997, to request
that the Company file a registration statement under the Securities Act
covering the sale of some or all of the Registrable Shares then held by such
holders, provided that the Company is not required to effect more than one such
demand registration. Within 75 days of receipt of any such request, the Company
must file a Registration Statement with respect to such Registrable Converted
Shares or Registrable Shares, as the case may be, and must use its best efforts
to cause the offering of such shares to be registered under the Securities Act.
The underwriters (if any) of any offering of such shares have the right,
subject to certain conditions, to limit the number of Registrable Shares
included in the registration. Moreover, the Company must use its best efforts
to qualify for registration on Form S-3 (or any comparable or successor form).
Once the Company has qualified to use Form S-3 to register securities under the
Securities Act, the holders of Registrable Converted Shares shall have the
right to request an unlimited number of registrations on Form S-3, provided
that the Company is not required to register Registrable Shares having an
aggregate market value less than $1,000,000. The Company is not required to
register any Registrable Shares if in the opinion of its counsel such shares
may be sold without registration under the Securities Act in the manner and in
the quantity in which such shares were proposed to be sold.
 
  Each holder of Registrable Shares has agreed that, upon the request of the
Company and the managing underwriter of an offering by the Company of Common
Stock or other securities of the Company pursuant to a registration statement,
such holder shall agree not to sell publicly or otherwise transfer or dispose
of any Registrable Shares or other securities of the Company for up to 180 days
following the effective date of such registration statement, provided that all
holders of Registrable Shares holding not less than the number of shares of
Common Stock held by such holder (including shares of Common Stock issuable
upon exercise or conversion of other securities) and all officers and directors
of the Company shall enter into similar agreements.
 
  In general, all fees, costs and expenses of such registrations (other than
underwriting discounts, selling commissions and certain fees and expenses of
counsel to the selling stockholders) will be borne by the Company. The Company
and the holders of Registrable Shares have agreed to indemnify each other from
certain liabilities relating to any registration in which any Registrable
Shares are included, including liabilities arising under the Securities Act.
The Company has also undertaken that, upon the request of the underwriter of
any offering of Registrable Shares, the Company shall agree to customary
contribution provisions on the part of the Company.
 
                                       42
<PAGE>
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
 
  (a) Exhibits
 
<TABLE>
<CAPTION>
 EXHIBIT NO.                             DESCRIPTION
 -----------                             -----------
 <C>         <S>
    1.1*     Form of Underwriting Agreement
    3.1*     Amended and Restated Certificate of Incorporation of the Company
    3.2*     Proposed form of Amended and Restated Certificate of Incorporation
             of the Company to become effective immediately following the
             offering
    3.3*     By-Laws of the Company, as amended
    3.4*     Proposed form of Amended and Restated By-Laws of the Company to
             become effective upon the closing of the offering
    4.1*     Specimen certificate for common stock, $.01 par value, of the
             Company
    5.1*     Opinion of Foley, Hoag & Eliot LLP
   10.1      Standard Office Lease-Gross (American Industrial Real Estate
             Association) dated October 24, 1996 by and between PBP Limited
             Partnership, as lessor and the Company, as lessee.
   10.2*     White Pine Software, Inc. Stock Option Plan (1993), as amended
   10.3*     White Pine Software, Inc. Stock Option Plan (1994)
   10.4*     White Pine Software, Inc. Stock Option Plan (1995), as amended
   10.5*     White Pine Software, Inc. Stock Option Plan (1996)
   10.6*     White Pine Software, Inc. 1996 Incentive and Nonqualified Stock
             Option Plan
   10.7*     White Pine Software, Inc. 1996 Employee Stock Purchase Plan
   10.8*     Employment Agreement dated January 3, 1994 with Howard R. Berke,
             as amended
   10.9*     Employment Agreement dated October 10, 1995 with Killko A.
             Caballero
   10.10*    Nondisclosure and Noncompetition Agreement dated February 15, 1996
             with David O. Bundy
   10.11+    Exclusive Software License Agreement dated June 1, 1996 between
             Cornell Research Foundation, Inc. and the Company
   10.12*    Common Stock Purchase Warrant of the Company dated July 31, 1996,
             issued to Cornell Research Foundation, Inc.
   10.13*    Commercial Loan Agreement dated December 30, 1994 between Fleet
             Bank--NH and the Company, as amended
   10.16*    Collateral Assignment and Security Agreement dated December 30,
             1994 between Fleet Bank--NH and the Company, as amended
   10.17*    $53,000 Commercial Promissory Note of the Company dated August 25,
             1995, issued to Fleet Bank--NH
   10.20     $3,000,000 Revolving Line of Credit Promissory Note
   10.21*    Stock Purchase Agreement dated March 19, 1996 among certain
             investors and the Company, as amended
   10.22*    Stock Purchase Agreement dated April 17, 1996 between J.F. Shea,
             Co., Inc. and the Company, as amended
   10.23*    Amended and Restated Registration Rights Agreement dated March 19,
             1996 among certain stockholders of the Company and the Company, as
             amended
</TABLE>
 
                                       43
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT NO.                            DESCRIPTION
 -----------                            -----------
 <C>         <S>
   10.24*    Acquisition Agreement dated October 10, 1995 among former
             stockholders of About Software Corporation S.A. and the Company
   10.25*    Indenture of Lease dated May 15, 1996 by Nash-Tamposi Limited
             Partnership, Five N Associates, Ballinger Properties, L.L.C. and
             the Company
   11.1      Statement re computation of per share earnings
   21.1*     List of subsidiaries of the Company
   23.1      Consent of Ernst & Young LLP
   27.1      Financial Data Schedule for fiscal year ended December 31, 1996
</TABLE>
--------
+ Incorporated by reference to the Company's Registration Statement on Form SB-
  2 (File No. 333-09525) in the form in which it was declared effective by the
  Securities and Exchange Commission. Subject to application for confidential
  treatment.
* Incorporated by reference to the Company's Registration Statement on Form SB-
  2 (File No. 333-09525) in the form in which it was declared effective by the
  Securities and Exchange Commission.
 
  (b) Reports on Form 8-K
 
    None.
 
                                       44
<PAGE>
 
                                   SIGNATURES
 
  IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, AS OF MARCH 21, 1997.
 
                                          WHITE PINE SOFTWARE, INC.
 
                                                    /s/ Howard R. Berke
                                          By: _________________________________
                                               HOWARD R. BERKE PRESIDENT AND
                                                  CHIEF EXECUTIVE OFFICER
 
  Each person whose signature appears below hereby appoints Howard R. Berke and
Christine J. Cox and each of them severally, acting alone and without the
other, his (or her) true and lawful attorney-in-fact with the authority to
execute in the name of each such person, and to file with the Securities and
Exchange Commission, together with any exhibits thereto and other documents
therewith, any and all amendments to this Annual Report on Form 10-KSB
necessary or advisable to enable the Registrant to comply with the rules,
regulations, and requirements of the Securities Act of 1934, as amended, in
respect thereof, which amendments may make such other changes in the Annual
Report as the aforesaid attorney-in-fact executing the same deems appropriate.
 
  IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED;
AS OF MARCH 21, 1997.
 
              SIGNATURE                         TITLE                DATE
 
         /s/ Howard R. Berke            President, Chief        March 21, 1997
-------------------------------------    Executive Officer
           HOWARD R. BERKE               and Director
                                         (Principal
                                         Executive Officer)
 
        /s/ Richard M. Darer            Chief Financial         March 21, 1997
-------------------------------------    Officer and Vice
          RICHARD M. DARER               President of
                                         Administration
                                         (Principal
                                         Financial and
                                         Accounting Officer)
 
       /s/ Killko A. Caballero          Director                March 21, 1997
-------------------------------------
         KILLKO A. CABALLERO
 
         /s/ Arthur H. Bruno            Director                March 21, 1997
-------------------------------------
           ARTHUR H. BRUNO
 
       /s/ Jonathan G. Morgan           Director                March 21, 1997
-------------------------------------
         JONATHAN G. MORGAN
 
           /s/                          Director                March 21, 1997
-------------------------------------
        PIERRE-GABRIEL VALLEE
 
                                       45
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
White Pine Software, Inc.
 
  We have audited the accompanying consolidated balance sheets of White Pine
Software, Inc. and subsidiary as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the nine months ended December 31, 1994, and for the years ended
December 31, 1995 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of White Pine
Software, Inc. and subsidiary at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for the nine
months ended December 31, 1994, and for the years ended December 31, 1995 and
1996, in conformity with generally accepted accounting principles.
 
Manchester, New Hampshire
January 26, 1997
 
                                      F-1
<PAGE>
 
                    WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                     -------------------------
                                                        1995          1996
                                                     -----------  ------------
<S>                                                  <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents......................... $ 1,773,855  $ 23,298,274
  Accounts receivable, less allowance of $116,000 at
   December 31, 1995 and $163,000 at December 31,
   1996.............................................   1,438,528     2,552,710
  Inventories.......................................     178,546       113,130
  Prepaid expenses..................................     149,607       422,342
  Other current assets..............................      19,210        27,743
                                                     -----------  ------------
      Total current assets..........................   3,559,746    26,414,199
Property and equipment:
  Computer equipment................................   1,429,560     1,862,502
  Furniture and fixtures............................     371,189       521,364
  Software..........................................     330,972       188,326
  Equipment.........................................     105,204       169,438
  Leasehold improvements............................      25,175       223,922
                                                     -----------  ------------
                                                       2,262,100     2,965,552
Accumulated depreciation and amortization...........  (1,648,839)   (1,901,948)
                                                     -----------  ------------
                                                         613,261     1,063,604
Other assets:
  Third party licenses, less accumulated
   amortization of $242,000 at December 31, 1995 and
   $724,000 at December 31, 1996....................     765,983       701,961
  Goodwill, less accumulated amortization of $40,000
   at December 31, 1995 and $278,000 at December 31,
   1996.............................................   1,152,768       914,855
  Other assets......................................     345,650       309,664
                                                     -----------  ------------
                                                       2,264,401     1,926,480
                                                     -----------  ------------
Total assets........................................ $ 6,437,408  $ 29,404,283
                                                     ===========  ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable.................................. $   465,924  $    363,399
  Accrued expenses and other accrued liabilities....   1,648,260     2,540,775
  Deferred revenue..................................     445,786       827,361
  Current portion of long-term debt.................     217,986       112,321
                                                     -----------  ------------
      Total current liabilities.....................   2,777,956     3,843,856
Long-term debt, less current portion................     385,017       113,339
Long-term portion of accrued third-party licenses...     494,074       210,744
Stockholders' equity:
  Common stock, $.01 par value:
    Authorized shares--7,500,000 at December 31,
     1995 and 15,000,000 at December 31, 1996;
     Issued and outstanding shares--5,589,764 at
     December 31, 1995 and 9,030,730 at December 31,
     1996...........................................      55,898        90,307
  Additional paid-in capital........................  12,637,430    38,669,653
  Accumulated deficit...............................  (9,974,900)  (13,611,558)
  Currency translation adjustments..................      61,933        87,942
                                                     -----------  ------------
      Total stockholders' equity....................   2,780,361    25,236,344
                                                     -----------  ------------
Total liabilities and stockholders' equity.......... $ 6,437,408  $ 29,404,283
                                                     ===========  ============
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                      F-2
<PAGE>
 
                    WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                         NINE MONTHS        YEAR ENDED
                                            ENDED          DECEMBER 31,
                                         DECEMBER 31, ------------------------
                                             1994        1995         1996
                                         ------------ -----------  -----------
<S>                                      <C>          <C>          <C>
Revenue:
  Software license fees................   $4,364,458  $ 6,017,710  $10,500,322
  Services and other...................      600,304    1,166,035    1,165,407
                                          ----------  -----------  -----------
    Total revenue......................    4,964,762    7,183,745   11,665,729
Cost of revenue........................      654,996    1,247,094    2,211,694
                                          ----------  -----------  -----------
Gross profit...........................    4,309,766    5,936,651    9,454,035
Operating expenses:
  Sales and marketing..................    1,636,786    2,516,604    6,631,527
  Research and development.............    1,301,259    1,865,830    3,819,001
  General and administrative...........    1,105,620    2,000,521    2,793,536
  Write-off of purchased research and
   development costs...................          --     3,200,000          --
                                          ----------  -----------  -----------
    Total operating expenses...........    4,043,665    9,582,955   13,244,064
                                          ----------  -----------  -----------
Income (loss) from operations..........      266,101   (3,646,304)  (3,790,029)
Other income (expense):
  Interest income......................       65,785       82,212      251,143
  Other, net...........................       79,809       68,131      (20,595)
                                          ----------  -----------  -----------
                                             145,594      150,343      230,548
                                          ----------  -----------  -----------
Income (loss) before provision for
 income taxes..........................      411,695   (3,495,961)  (3,559,481)
Provision for income taxes.............       18,000       30,024       77,177
                                          ----------  -----------  -----------
Net income (loss)......................   $  393,695  $(3,525,985) $(3,636,658)
                                          ==========  ===========  ===========
Net income (loss) per common and common
 equivalent share......................   $     0.06  $     (0.65) $     (0.55)
                                          ==========  ===========  ===========
Weighted average number of common and
 common equivalent shares outstanding..    6,084,775    5,450,884    6,618,108
                                          ==========  ===========  ===========
</TABLE>
 
 
                 See Notes to Consolidated Financial Statements
 
                                      F-3
<PAGE>
 
                    WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                               COMMON STOCK         ADDITIONAL                  CURRENCY       TOTAL
                          ------------------------   PAID-IN-    ACCUMULATED   TRANSLATION STOCKHOLDERS'
                            SHARES      PAR VALUE     CAPITAL      DEFICIT     ADJUSTMENTS    EQUITY
                          -----------  -----------  -----------  ------------  ----------- -------------
<S>                       <C>          <C>          <C>          <C>           <C>         <C>
Balances at April 1,
 1994...................   35,905,298  $    35,905  $ 8,673,177  $ (6,842,610)       --     $ 1,866,472
 Net income.............                                              393,695                   393,695
 Common Stock issued
  upon exercise of stock
  options...............        4,167            4          414                                     418
 Repurchase and
  cancellation of 50,000
  shares of Common
  Stock.................      (50,000)         (50)      (4,950)                                 (5,000)
                          -----------  -----------  -----------  ------------    -------    -----------
Balances at December 31,
 1994...................   35,859,465       35,859    8,668,641    (6,448,915)       --       2,255,585
 Net loss...............                                           (3,525,985)               (3,525,985)
 Adjustment for one-for-
  ten reverse stock
  split.................  (32,273,518)         --           --
 Common Stock issued in
  connection with a
  business combination
  accounted for as a
  purchase..............    1,990,956       19,910    3,962,002                               3,981,912
 Common Stock issued
  upon exercise of stock
  options...............       12,861          129        6,787                                   6,916
 Currency translation
  adjustment............                                                         $61,933         61,933
                          -----------  -----------  -----------  ------------    -------    -----------
Balances at December 31,
 1995...................    5,589,764       55,898   12,637,430    (9,974,900)    61,933      2,780,361
 Net loss...............                                           (3,636,658)               (3,636,658)
 Common Stock issued as
  $5.83 par value common
  stock redeemable as
  $.01 par value common
  stock.................      394,511    2,300,000      (66,298)                              2,233,702
 Common Stock issued as
  conversion from
  redeemable $5.83 par
  value common stock to
  $.01 par value common
  stock.................                (2,296,055)   2,296,055                                     --
 Common Stock issued in
  connection with an
  initial public
  offering of 3,000,000
  shares................    3,000,000       30,000   23,713,318                              23,743,318
 Common Stock issued in
  connection with the
  exercise of a stock
  warrant...............       20,000          200       59,800                                  60,000
 Common Stock issued
  upon exercise of stock
  options...............       26,512          265       29,347                                  29,612
 Cancellation of
  fractional shares.....          (57)          (1)           1                                     --
 Currency translation
  adjustment............                                                          26,009         26,009
                          -----------  -----------  -----------  ------------    -------    -----------
Balances at December 31,
 1996...................    9,030,730  $    90,307  $38,669,653  $(13,611,558)   $87,942    $25,236,344
                          ===========  ===========  ===========  ============    =======    ===========
</TABLE>
 
 
                 See Notes to Consolidated Financial Statements
 
                                      F-4
<PAGE>
 
                    WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED
                                     NINE MONTHS ENDED      DECEMBER 31,
                                       DECEMBER 31,    ------------------------
                                           1994           1995         1996
                                     ----------------- -----------  -----------
<S>                                  <C>               <C>          <C>
OPERATING ACTIVITIES
Net income (loss)..................     $  393,695     $(3,525,985) $(3,636,658)
Adjustments to reconcile net income
 (loss) to net cash provided by
 (used in) operating activities:
  Depreciation.....................        181,700         238,014      253,109
  Amortization of goodwill and
   third-party licenses............            --          312,717      719,935
  Write-off of purchased research
   and development costs...........            --        3,200,000          --
  Provision for bad debts..........            --          116,449       46,798
  Other............................        (34,066)        (48,316)         --
  Changes in operating assets and
   liabilities:
    Accounts receivable............       (246,425)        (52,014)  (1,160,980)
    Inventories....................        (52,132)          9,730       65,416
    Prepaid expenses...............        (84,906)         45,161     (272,735)
    Other assets...................         19,994         (35,623)      27,453
    Accounts payable...............        (44,321)        148,170     (102,526)
    Accrued expenses and other
     accrued liabilities...........       (312,815)        211,369      609,186
    Deferred revenue...............         46,701          22,149      381,575
                                        ----------     -----------  -----------
Net cash provided by (used in)
 operating activities..............       (132,575)        641,821   (3,069,427)
INVESTING ACTIVITIES
Purchase of property and equipment,
 net...............................       (184,696)       (329,510)    (703,452)
Purchase of third party licenses,
 net...............................            --         (377,438)    (418,000)
Acquisition costs incurred in a
 business combination accounted for
 as a purchase.....................            --         (175,000)         --
Cash acquired in a business
 combination accounted for as a
 purchase..........................            --          117,532          --
Other..............................        (20,181)        (73,095)         --
                                        ----------     -----------  -----------
Net cash used in investing
 activities........................       (204,877)       (837,511)  (1,121,452)
FINANCING ACTIVITIES
Proceeds from long-term debt.......            --           53,000          --
Principal payments on long-term
 debt..............................        (55,118)        (23,336)    (377,343)
Proceeds from common stock issued
 as $5.83 par value common stock
 redeemable as $.01 par value
 common stock......................            --              --     2,233,702
Proceeds from common stock issued
 in connection with an initial
 public offering...................            --              --    23,743,318
Proceeds from common stock issued
 in connection with the exercise of
 a stock warrant...................            --              --        60,000
Proceeds from common stock issued
 upon exercise of stock options....            418           6,916       29,612
Repurchase of common stock.........         (5,000)            --           --
                                        ----------     -----------  -----------
Net cash provided by (used in)
 financing activities..............        (59,700)         36,580   25,689,289
Currency translation effect on cash
 and cash equivalents..............            --           61,933       26,009
                                        ----------     -----------  -----------
Net increase (decrease) in cash and
 cash equivalents..................       (397,152)        (97,177)  21,524,419
Cash and cash equivalents at
 beginning of period...............      2,268,184       1,871,032    1,773,855
                                        ----------     -----------  -----------
Cash and cash equivalents at end of
 period............................     $1,871,032     $ 1,773,855  $23,298,274
                                        ==========     ===========  ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............     $      299     $     8,713  $    37,172
                                        ==========     ===========  ===========
Cash paid for taxes................     $    2,763     $    18,596  $    88,550
                                        ==========     ===========  ===========
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                      F-5
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1996
 
1. ACCOUNTING POLICIES
 
 Description of Business
 
  White Pine Software, Inc. (the Company) develops, markets and supports
multiplatform desktop connectivity software that facilitates worldwide video
and audio communication and data collaboration across the Internet, intranets
and other networks that use the Internet Protocol. The Company's desktop
videoconferencing software products allow users to participate in real-time,
multipoint videoconferences over the Internet and intranets. The Company
recently introduced WebTerm Toolbox, which allows users to access host
applications from within the browser, as a new suite of products geared to
providing Advanced Intranet Solutions to corporations, educational
organizations, and government agencies. The Company also offers desktop X
Windows and terminal emulation software. The Company's customers include
businesses, government organizations, educational institutions and individual
consumers. The Company markets and sells its products in the United States,
Europe, and the Pacific Rim through distributors, a combination of strategic
partners and OEMs, and its direct sales organization, as well as over the
Internet. The Company, formerly known as Visual International, Inc., was
incorporated in April 1992.
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiary, About Software Corporation S.A.
(ASC), and ASC's wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
 
 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Fiscal Year
 
  Effective April 1, 1994, the Company changed its fiscal year end from March
31 to December 31.
 
 Cash and Cash Equivalents
 
  Cash and cash equivalents consist of cash on hand and investments in high
grade commercial paper having maturities of three months or less when
purchased. Commercial paper qualifying as cash equivalents totaled $22,440,000
and $725,000 at December 31, 1996 and 1995, respectively. These investments
have been categorized as held to maturity under the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Accordingly, the balances are stated at amortized
cost, which approximates fair value, because of the short maturity of these
instruments.
 
 Concentration of Credit Risk
 
  Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. Cash and cash equivalents include cash on deposit in
checking accounts, commercial paper, and certificates of deposit. These cash
and cash equivalents are maintained with high credit quality financial
institutions.
 
                                      F-6
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               DECEMBER 31, 1996
 
 
  The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company maintains reserves for potential
credit losses; historically, such losses have not been material and have been
within management's expectations. At December 31, 1996, two customers
accounted for approximately 51% of accounts receivable.
 
  Included in the Company's balance sheet at December 31, 1996 are the assets
of the Company's foreign subsidiary, ASC, of which approximately $637,000 of
tangible assets are located in France.
 
 Fair Value of Financial Instruments
 
  The carrying amounts reported in the balance sheet for the Company's cash
and cash equivalents and borrowings approximate fair value.
 
 Inventories
 
  Inventories are stated at the lower of cost (first-in, first-out method) or
market. Allowances for excess and obsolete items are provided as necessary.
 
 Property and Equipment
 
  Property and equipment are stated at cost and are being depreciated using
the straight-line and accelerated methods over the estimated useful lives of
two to seven years. Leasehold improvements are stated at cost and are being
amortized over the lesser of the term of the lease or the estimated useful
life of the asset.
 
 Third-Party Licenses
 
  The cost of agreements entered into with third parties for the right to use
the third parties' technology in the Company's products is amortized on a
straight-line basis over the lives of the agreements.
 
 Income Taxes
 
  Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
 
 Revenue Recognition
 
  The Company's revenue is derived from software license fees and fees for
services related to its software products, primarily software maintenance
fees. The Company recognizes revenue in accordance with the provisions of
AICPA Statement of Position No. 91-1, Software Revenue Recognition.
 
  Software license revenue is recognized upon receipt of a firm customer order
and shipment of the software, net of allowances for estimated future returns,
provided that no significant obligations remain on the part of the Company and
collection of the related receivable is deemed probable. Revenue under certain
license agreements is recognized upon execution of a signed contract and
fulfillment of the contractual obligations, provided that no significant
obligations remain on the part of the Company and collection is deemed
probable.
 
  Software maintenance fees, which are generally payable in advance and are
non-refundable, are recognized ratably over the period of the maintenance
contract, typically twelve months. Revenue from training and consulting
services is recognized as services are provided.
 
                                      F-7
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               DECEMBER 31, 1996
 
 
  Software license fees, consulting fees, and training fees that have been
prepaid or invoiced but that do not yet qualify for recognition as revenue
under the Company's policy, and prepaid maintenance fees not yet recognized as
revenue, are reflected as deferred revenue.
 
 Capitalized Software
 
  Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon completion
of a commercially viable working model. Costs incurred by the Company between
completion of the commercially viable working model and the point at which the
product is ready for general release have been capitalized. Such amounts,
approximating $145,000 as of December 31, 1996, are included in other assets
and are being amortized over a three-year period; these amounts are
principally attributable to the Company's acquisition of ASC (See Note 2).
 
 Foreign Currency Translation
 
  The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. All balance sheet
amounts have been translated using the exchange rates in effect at the balance
sheet date. Statement of operations amounts have been translated using average
exchange rates. The gains and losses resulting from the changes in exchange
rates from the date of acquisition of ASC (see Note 2) to December 31, 1996
have been reported separately as a component of stockholders' equity.
 
  The aggregate transaction gains and losses were insignificant for all
periods presented.
 
 Advertising Costs
 
  All costs related to advertising the Company's products are expensed in the
period incurred. Amounts charged to expense were $1,179,000, $518,000, and
$314,000 during the years ended December 31, 1996 and 1995, and the nine
months ended December 31, 1994, respectively.
 
 Net Income (Loss) Per Common and Common Equivalent Share
 
  Net income (loss) per common and common equivalent share is computed using
the weighted average number of shares of common stock and dilutive common
equivalent shares outstanding during the period. All shares, options and
warrants issued during the 12-month period prior to the Company's initial
public offering, have been included in the calculation as if they were
outstanding, using the treasury stock method. Common equivalent shares consist
of the incremental common shares issuable upon the exercise of stock options
and warrants using the treasury stock method.
 
2. BUSINESS COMBINATIONS
 
  On November 1, 1995, the Company acquired all of the outstanding common
stock of ASC, a French developer of connectivity software, and its wholly-
owned subsidiary, About Software Corporation, a California corporation. The
acquisition was made with the issuance of 1,990,956 shares of the Company's
common stock, valued at $2.00 per share (exclusive of approximately $175,000
of acquisition costs).
 
  The acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of ASC are included in the
financial statements since the date of acquisition. In connection with the
acquisition, the Company acquired assets with a fair market value of
approximately $4,234,000 and assumed
 
                                      F-8
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               DECEMBER 31, 1996
 
liabilities of approximately $1,270,000. Included in assets acquired was
purchased research and development costs ("in-process technology") with a fair
value of approximately $3,200,000, which was charged to income upon
consummation of the acquisition, due to a determination that there was no
future value to the Company. The excess of the purchase price over the fair
market value of net assets acquired of approximately $1,193,000 has been
allocated to goodwill and is being amortized on a straight-line basis over 5
years.
 
  The following unaudited pro forma information presents a summary of
operating results of the Company and ASC as if the acquisition had been made
as of April 1, 1994:
 
<TABLE>
<CAPTION>
                                                NINE MONTHS ENDED  YEAR ENDED
                                                  DECEMBER 31,    DECEMBER 31,
                                                      1994            1995
                                                ----------------- ------------
   <S>                                          <C>               <C>
   Pro forma revenue...........................    $6,296,000     $ 9,227,000
   Pro forma net loss..........................    $ (566,000)    $(1,171,000)
   Pro forma net loss per common and common
    equivalent share...........................    $     (.09)    $      (.21)
</TABLE>
 
  These pro forma results are for illustrative purposes only and include
certain adjustments, such as additional amortization expense as a result of
goodwill and other intangible assets. They do not purport to be indicative of
the actual operating results which would have occurred had the transaction
been consummated as of those earlier dates, nor are they indicative of results
of operations which may occur in the future.
 
3. INDEBTEDNESS
 
 Line of Credit
 
  The Company has a line of credit with a financial institution which provides
for maximum available borrowings of $3,000,000. Interest on the line is
payable monthly at the bank's prime rate plus .5% (8.75% at December 31,
1996). Borrowings under the line are due on demand and are secured by
substantially all assets of the Company, including a $515,000 certificate of
deposit. This agreement expires on June 30, 1998. At December 31, 1996, there
were no amounts outstanding under the line of credit.
 
  The line of credit agreement contains various restrictive covenants, the
most significant of which include the maintenance of a minimum net worth, a
maximum ratio of total liabilities to tangible net worth, a minimum ratio of
current assets to current liabilities, and profitability levels.
 
 Long-term Debt
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1995     1996
                                                              -------- --------
<S>                                                           <C>      <C>
Secured term bank loans, due in monthly installments of $615
 to $7,237, which includes interest ranging from 7.25% to
 11.55%, with final installments due from March 1998 to
 October 1998 (paid off in December 1996)...................  $344,000      --
Secured, non-interest bearing, term loan from a foreign
 governmental agency, due in annual installments of $50,938,
 with the final installment due in September 1999...........   180,000  186,000
Note payable, due in monthly installments of $883 plus
 interest at 9.5%, with remaining balances due August 2000..    49,000   39,000
Other.......................................................    30,000      --
                                                              -------- --------
                                                               603,000  225,000
Less current portion........................................   218,000  112,000
                                                              -------- --------
                                                              $385,000 $113,000
                                                              ======== ========
</TABLE>
 
                                      F-9
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               DECEMBER 31, 1996
 
 
  Aggregate maturities of long-term debt are as follows: 1997--$112,000;
1998--$61,000; 1999--$45,000; and 2000--$7,000.
 
  Total interest expense for the years ended December 31, 1996 and 1995, and
the nine months ended December 31, 1994, was approximately $37,000, $7,000,
and $0, respectively, and is included in other expense.
 
4. ACCRUED EXPENSES AND OTHER ACCRUED LIABILITIES
 
  Accrued expenses and other accrued liabilities consisted of the following:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         ---------------------
                                                            1995       1996
                                                         ---------- ----------
   <S>                                                   <C>        <C>
   Accrued compensation expense and related benefits.... $  684,000 $  798,000
   Pending litigation...................................    293,000    292,000
   Third-party licenses.................................    136,000    523,000
   Other accruals.......................................    535,000    928,000
                                                         ---------- ----------
                                                         $1,648,000 $2,541,000
                                                         ========== ==========
</TABLE>
 
  The Company is a co-defendant in various lawsuits filed in federal and state
courts in New York. The lawsuits seek damages for alleged injuries sustained
while using products which the plaintiffs assert were designed and
manufactured by a predecessor of the Company. Although the Company is
defending these claims, exposure is partially limited by insurance and
indemnification by the primary contractor. While management believes that
losses from these claims are not probable (as defined for purposes of
Statement of Financial Accounting Standards No. 5), it has an accrual of
approximately $292,000 as of December 31, 1996 for legal fees and potential
losses which could arise from such claims. The actual amount of such losses
may range from $0 to $8,250,000, which represents the sum of the damages
sought by the plaintiffs in such lawsuits.
 
5. INCOME TAXES
 
  The Company's deferred tax assets and related valuation allowances are as
follows:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                          1995         1996
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Deferred tax assets................................ $ 2,700,000  $ 4,200,000
   Valuation allowance for deferred tax assets........  (2,700,000)  (4,200,000)
                                                       -----------  -----------
   Net deferred tax asset............................. $       --   $       --
                                                       ===========  ===========
</TABLE>
 
  Deferred tax assets consist primarily of net operating and capital loss
carryforwards and accrued liabilities.
 
  The Company recorded a valuation allowance of $4,200,000 and $2,700,000 at
December 31, 1996 and 1995, respectively, against its deferred tax assets
since it is believed to be more likely than not that the net operating loss
carryforwards and other temporary differences will not provide a future tax
benefit.
 
  At December 31, 1996, the Company had cumulative federal net operating loss
carryforwards of approximately $9,735,000 for income tax purposes. The
availability of the net operating loss carryforwards to offset future taxable
income is subject to significant annual limitations. The amount available for
fiscal 1997 to
 
                                     F-10
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               DECEMBER 31, 1996
 
reduce future federal income taxes payable is limited to approximately
$3,100,000. The loss carryforwards expire at various dates through 2011.
 
6. PROFIT SHARING PLAN
 
  The Company has a Profit Sharing Plan (the "Plan") under Section 401(k) of
the Internal Revenue Code for all employees meeting age and service
requirements. Eligible employees may elect to contribute up to 16% of their
compensation, subject to limitations established by the Internal Revenue Code.
The Company may elect to contribute a discretionary amount to the Plan which
would be allocated to the employees based upon the employees' contributions to
the Plan. There have been no discretionary contributions to date.
 
7. LEASE COMMITMENTS
 
 Operating Leases
 
  The Company leases its office facilities under various operating leases
expiring at various times through fiscal 2001.
 
  Future minimum annual rental commitments under the lease agreements for the
years ending December 31 are as follows:
 
<TABLE>
     <S>                                                              <C>
     1997............................................................ $  353,000
     1998............................................................    352,000
     1999............................................................    343,000
     2000............................................................    319,000
     2001............................................................    268,000
                                                                      ----------
                                                                      $1,635,000
                                                                      ==========
</TABLE>
 
  Total rent expense for the years ended December 31, 1996 and 1995, and the
nine months ended December 31, 1994 was approximately $399,000, $292,000, and
$200,000, respectively, and is included in general and administrative
expenses.
 
8. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL SALES
 
  During the years ended December 31, 1996 and 1995, and the nine months ended
December 31, 1994, one customer accounted for approximately 14%, 16%, and 21%,
respectively, of the Company's total revenue.
 
  The Company's sales by geographic locations are summarized in the table
below:
 
<TABLE>
<CAPTION>
                                          NINE MONTHS
                                             ENDED      YEAR ENDED   YEAR ENDED
                                          DECEMBER 31, DECEMBER 31, DECEMBER 31,
                                              1994         1995         1996
                                          ------------ ------------ ------------
     <S>                                  <C>          <C>          <C>
     United States and Canada............  $4,404,000   $5,713,000  $ 8,394,000
     Europe..............................     312,000      976,000    1,911,000
     Pacific Rim.........................     249,000      495,000    1,361,000
                                           ----------   ----------  -----------
                                           $4,965,000   $7,184,000  $11,666,000
                                           ==========   ==========  ===========
</TABLE>
 
                                     F-11
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               DECEMBER 31, 1996
 
 
9. STOCKHOLDERS' EQUITY
 
 Stock Option Plans
 
  The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
 
  The Company has various stock option plans which provide for the issuance of
incentive and non-qualified stock options. The Board of Directors, which
administers the plans, has the authority to determine to whom options may be
granted, period of exercise, the option price at the date of grant, and what
other restrictions, if any, should apply. In connection with the acquisition
of ASC on November 1, 1995, the Board of Directors increased the number of
authorized shares reserved under the plans to 970,000 shares and granted
104,500 options to certain ASC employees. The options provide for vesting
schedules and allow for special vesting opportunities in the case of job loss
due to merger activities.
 
  Pro forma information regarding net loss and loss per common and common
equivalent share is required by Statement 123, which also requires that the
information be determined as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of that Statement. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1996 and 1995, respectively: risk-
free interest rates of 6.2% and 6.0%; dividend yields of 0% and 0%; volatility
factors of the expected market price of the Company's common stock of .5 and
 .5; and a weighted-average expected life of the option of 4.9 years and 4
years.
 
  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the 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 its employee stock
options.
 
  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for per share
information):
 
<TABLE>
<CAPTION>
                                                                   1995   1996
                                                                  ------ ------
     <S>                                                          <C>    <C>
     Pro forma net loss.......................................... $3,543 $3,786
     Pro forma loss per share.................................... $  .65 $  .57
</TABLE>
 
  Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1997.
 
                                     F-12
<PAGE>
 
                   WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               DECEMBER 31, 1996
 
 
  A summary of the Company's stock option activity, and related information
for the nine months and years ended December 31 follows:
 
<TABLE>
<CAPTION>
                                                     NUMBER OF  WEIGHTED-AVERAGE
                                                      SHARES     EXERCISE PRICE
                                                     ---------  ----------------
   <S>                                               <C>        <C>
   Balance at April 1, 1994.........................   383,342       $0.52
     Granted........................................   338,664        1.01
     Exercised......................................      (417)       1.00
     Cancelled......................................       --          --
                                                     ---------
   Balance at December 31, 1994.....................   721,589        0.75
     Granted........................................   207,548        1.94
     Exercised......................................   (12,861)       0.54
     Cancelled......................................   (33,527)       1.23
                                                     ---------
   Balance at December 31, 1995.....................   882,749        1.01
     Granted........................................   262,350        6.47
     Exercised......................................   (26,511)       1.12
     Cancelled......................................   (30,151)       2.20
                                                     ---------
   Balance at December 31, 1996..................... 1,088,437       $2.29
                                                     =========
</TABLE>
 
  At December 31, 1996, 803,837 stock options outstanding have exercise prices
ranging from $0.50 to $2.00. The weighted-average exercise price of these
options is $0.93, and the weighted-average remaining contractual life of these
options is 6.67 years. Of these options, 704,262 are exercisable at a
weighted-average exercise price of $0.82.
 
  Also at December 31, 1996, 284,600 stock options outstanding have exercise
prices ranging from $5.00 to $8.00. The weighted-average exercise price of
these options is $6.13, and the weighted-average remaining contractual life of
these options is 9.57 years. Of these options, 262,350 were granted during
1996 at a weighted average fair value of $3.21. In addition, 28,389 are
exercisable at a weighted-average exercise price of $4.24.
 
 Recapitalization
 
  In September 1995, the Company's Board of Directors declared a one-for-ten
reverse stock split of the Company's Common Stock that became effective March
18, 1996. All per share amounts and number of shares in the accompanying
financial statements have been retroactively adjusted to reflect the reverse
stock split.
 
  On February 29, 1996, the Board of Directors and the stockholders approved
an amendment to the Company's charter to authorize 500,000 shares of $5.83 par
value common stock and to decrease the number of authorized shares of $.01 par
value common stock to 7,500,000 shares.
 
  On March 19, 1996, the Company entered into a Stock Purchase Agreement with
certain investors whereby, for consideration of $2,000,000, the Company issued
343,053 shares of $5.83 par value common stock.
 
  On April 17, 1996, the Company entered into a Stock Purchase Agreement with
an additional investor whereby, for consideration of $300,000, the Company
issued 51,458 shares of $5.83 par value common stock.
 
  In October 1996, the Company filed an amendment and restatement of its
charter to, among other things, cause each share of $5.83 par value common
stock to be converted into one share of $.01 par value common stock on the
closing date of the Company's initial public offering (October 17, 1996).
 
                                     F-13