** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.20549**

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**FORM 10–Q**

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period endedSeptember 30, 2001**

**Commission filenumber 000–25475**

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**LATITUDE COMMUNICATIONS,INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    |   | **94–3177392**                   |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |

**2121Tasman Drive, Santa Clara, CA 95054**

(Address of principal executive offices, including zip code)

**(408)988–7200**

(Registrant’stelephone number, including area code)

----

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes ý                    No o

As of November 5, 2001, there were 19,388,000 shares of theregistrant’s Common Stock outstanding.

 

**INDEX**

** **
|          |                      |                                                                                                                                                                                                 |   |
|---------------|---------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **PART I.**   | **FINANCIAL INFORMATION** |                                                                                                                                                                                                 |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item 1.**               | **Financial Statements**                                                                                                                                                                             |   |
|          |                      |                                                                                                                                                                                                 |   |
|          |                      | Condensed  consolidated balance sheets at September 30, 2001 and December 31, 2000                                                                                                                   |   |
|          |                      |                                                                                                                                                                                                 |   |
|          |                      | Condensed  consolidated statements of operations and comprehensive income (loss) for the  three months ended September 30, 2001 and 2000; and for the nine months ended  September 30, 2001 and 2000 |   |
|          |                      |                                                                                                                                                                                                 |   |
|          |                      | Condensed  consolidated statements of cash flows for the nine months ended September 30,  2001 and 2000                                                                                              |   |
|          |                      |                                                                                                                                                                                                 |   |
|          |                      | Notes  to condensed consolidated financial statements                                                                                                                                                |   |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item  2.**              | **Management’s  Discussion and Analysis of Financial Conditionand Results of Operations**                                                                                                       |   |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item  3.**              | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                                                                      |   |
|          |                      |                                                                                                                                                                                                 |   |
| **PART II.**  | **OTHER INFORMATION**     |                                                                                                                                                                                                 |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item 1.**               | **Legal Proceedings**                                                                                                                                                                                |   |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item  2.**              | **Changes  in Securities and Use of Proceeds**                                                                                                                                                       |   |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item  3.**              | **Defaults  Upon Senior Securities**                                                                                                                                                                 |   |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item  4.**              | **Submission  of Matters to a Vote of Security Holders**                                                                                                                                             |   |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item 5.**               | **Other Information**                                                                                                                                                                                |   |
|          |                      |                                                                                                                                                                                                 |   |
|          | **Item 6.**               | **Exhibits and  Reports on Form 8K**                                                                                                                                                                 |   |
|          |                      |                                                                                                                                                                                                 |   |
| **SIGNATURE** |                      |

**PART I.         FINANCIAL INFORMATION**

**Item 1.            Financial Statements.**

**LATITUDECOMMUNICATIONS, INC.CONDENSED CONSOLIDATED BALANCESHEETS(in thousands, except per share data)**

 
|                                                                                                         |   | **September 30, 2001** |         | **December 31, 2000** |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------|--------------|-----------------------|--------|
| **ASSETS**                                                                                                   |   | **(Unaudited)**        |         |                  |   |
| Current assets:                                                                                              |   |                   |         |                  |   |
| Cash and cash  equivalents                                                                                   |   | $                      |  15,191 |                  | $      |  23,993 |   |
| Short–term  investments                                                                                 |   | 8,948                  |         | 14,203                |   |
| Accounts  receivable, net                                                                                    |   | 6,485                  |         | 10,044                |   |
| Inventory                                                                                                    |   | 2,015                  |         | 1,662                 |   |
| Prepaids and  other assets                                                                                   |   | 2,102                  |         | 2,790                 |   |
| Deferred tax  assets                                                                                         |   | 2,751                  |         | 2,779                 |   |
| Total current  assets                                                                                        |   | 37,492                 |         | 55,471                |   |
| Property and  equipment, net                                                                                 |   | 4,907                  |         | 4,062                 |   |
| Long–term  investments                                                                                  |   | 10,044                 |         | 2,301                 |   |
| Deferred tax  assets                                                                                         |   | 3,990                  |         | 794                   |   |
| Deposits and  other long-term assets                                                                         |   | 1,010                  |         | 530                   |   |
| Total assets                                                                                                 |   | $                      |  57,443 |                  | $      |  63,158 |   |
|                                                                                                         |   |                   |         |                  |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                               |   |                   |         |                  |   |
| Current  liabilities:                                                                                        |   |                   |         |                  |   |
| Accounts payable                                                                                             |   | $                      |  624    |                  | $      |  875 |   |
| Accrued  liabilities                                                                                         |   | 5,037                  |         | 3,565                 |   |
| Deferred revenue                                                                                             |   | 5,180                  |         | 6,434                 |   |
| Current portion  of long–term debt                                                                      |   | 257                    |         | 362                   |   |
| Total current  liabilities                                                                                   |   | 11,098                 |         | 11,236                |   |
| Long–term  debt                                                                                         |   | —                 |         | 106                   |   |
| Total  liabilities                                                                                           |   | 11,098                 |         | 11,342                |   |
|                                                                                                         |   |                   |         |                  |   |
| Stockholders’  equity:                                                                                  |   |                   |         |                  |   |
| Preferred stock,  $0.001 par value                                                                           |   |                   |         |                  |   |
| Authorized:  5,000 shares at September 30, 2001 and December 31, 2000                                        |   |                   |         |                  |   |
| Issued and  outstanding: No shares at September 30, 2001 and December 31, 2000                               |   | —                 |         | —                |   |
| Common stock,  $0.001 par value                                                                              |   |                   |         |                  |   |
| Authorized:  74,860 and 75,000 shares at September 30, 2001 and December 31, 2000,  respectively             |   |                   |         |                  |   |
| Issued and  outstanding: 19,284 and 19,302 shares at September 30, 2001 and December 31,  2000, respectively |   | 19                     |         | 19                    |   |
| Additional paid–in  capital                                                                             |   | 57,645                 |         | 57,675                |   |
| Notes receivable  from common stockholders                                                                   |   | (5                     | )            | (10                   | )      |
| Deferred stock  compensation                                                                                 |   | (301                   | )            | (620                  | )      |
| Accumulated  other comprehensive income                                                                      |   | 160                    |         | 46                    |   |
| Accumulated  deficit                                                                                         |   | (11,173                | )            | (5,294                | )      |
| Total  stockholders’ equity                                                                             |   | 46,345                 |         | 51,816                |   |
| Total  liabilities and stockholders’ equity                                                             |   | $                      |  57,443 |                  | $      |  63,158 |   |

*The accompanying notesare an integral part of these condensed consolidated financial statements.*

**LATITUDECOMMUNICATIONS, INC.CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(in thousands, except per share amounts)(Unaudited)**

 
|                                                                                                         |   | **Three Months Ended September 30,** |      | **Nine Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                                                                                                         |   | **2001**                             |      | **2000**                            |   | **2001** |   | **2000** |   |
| Revenue:                                                                                                     |   |                                 |      |                                |   |   |   |   |   |
| **Product**                                                                                                  |   | **$**                                | **1,640** | ** **                          | **$**  | **6,413** | ** ** | **$** | **10,780** | ** ** | **$** | **22,107** | ** ** |
| Service                                                                                                      |   | 4,984                                |      | 3,750                               |   | 14,313 |   | 10,110 |   |
| Total revenue                                                                                                |   | 6,624                                |      | 10,163                              |   | 25,093 |   | 32,217 |   |
| Cost of revenue:                                                                                             |   |                                 |      |                                |   |   |   |   |   |
| Product                                                                                                      |   | 651                                  |      | 990                                 |   | 2,328 |   | 3,722 |   |
| Service  (includes non-cash stock compensation of $2, $2, $6 and $24, respectively)                          |   | 2,761                                |      | 1,976                               |   | 7,915 |   | 5,278 |   |
| Total cost of  revenue                                                                                       |   | 3,412                                |      | 2,966                               |   | 10,243 |   | 9,000 |   |
| Gross profit                                                                                                 |   | 3,212                                |      | 7,197                               |   | 14,850 |   | 23,217 |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Operating  expenses:                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Research and  development (includes non-cash stock compensation of $16, $18, $51 and $57,  respectively)     |   | 1,425                                |      | 1,342                               |   | 4,596 |   | 4,483 |   |
| Marketing and  sales (includes non-cash stock compensation of $23, $24, $45 and $75,  respectively)          |   | 4,635                                |      | 4,889                               |   | 15,401 |   | 14,283 |   |
| General and  administrative (includes non-cash stock compensation of $63, $68, $193 and  $198, respectively) |   | 1,332                                |      | 1,013                               |   | 4,492 |   | 2,868 |   |
| Restructuring  charge                                                                                        |   | —                               |      | —                              |   | 870 |   | — |   |
| Total operating  expenses                                                                                    |   | 7,392                                |      | 7,244                               |   | 25,359 |   | 21,643 |   |
| Income (loss)  from operations                                                                               |   | (4,180                               | )         | (47                                 | )      | (10,509 | ) | 1,583 |   |
| Interest income,  net                                                                                        |   | 387                                  |      | 600                                 |   | 1,436 |   | 1,769 |   |
| Income (loss)  before benefit from (provision for) income tax                                                |   | (3,793                               | )         | 553                                 |   | (9,073 | ) | 3,352 |   |
| Benefit from  (provision for) income tax                                                                     |   | 1,328                                |      | (253                                | )      | 3,194 |   | (1,409 | ) |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Net income  (loss)                                                                                           |   | $                                    | (2,465    | )                                   | $      | 300 |   | $ | (5,879 | ) | $ | 1,943 |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Other  comprehensive income, net of tax—                                                                |   |                                 |      |                                |   |   |   |   |   |
| Unrealized gain  on securities                                                                               |   | 147                                  |      | 178                                 |   | 115 |   | 61 |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Cumulative  translation adjustment                                                                           |   | (27                                  | )         | —                              |   | (3 | ) | — |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Comprehensive  income (loss)                                                                                 |   | $                                    | (2,345    | )                                   | $      | 478 |   | $ | (5,767 | ) | $ | 2,004 |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Net income  (loss) per share—basic                                                                      |   | $                                    | (0.13     | )                                   | $      | 0.02 |   | $ | (0.30 | ) | $ | 0.10 |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Shares used in  per share calculation—basic                                                             |   | 19,415                               |      | 18,718                              |   | 19,411 |   | 18,693 |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Net income  (loss) per share—diluted                                                                    |   | $                                    | (0.13     | )                                   | $      | 0.02 |   | $ | (0.30 | ) | $ | 0.10 |   |
|                                                                                                         |   |                                 |      |                                |   |   |   |   |   |
| Shares used in  per share calculation—diluted                                                           |   | 19,415                               |      | 19,827                              |   | 19,411 |   | 19,929 |   |

*The accompanying notesare an integral part of these condensed consolidated financial statements.*

**LATITUDECOMMUNICATIONS, INC.CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(Amounts in thousands)(Unaudited)**

 
|                                                                                  |   | **Nine months Ended September 30,** |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                  |   | **2001**                            |   | **2000** |   |
| Cash flows from  operating activities:                                                |   |                                |   |   |   |
| Net income  (loss)                                                                    |   | $                                   | (5,879 | ) | $ | 1,943 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |   |                                |   |   |   |
| Depreciation and  amortization                                                        |   | 1,869                               |   | 1,240 |   |
| Amortization of  capitalized software                                                 |   | 416                                 |   | — |   |
| Provision for  excess and obsolete inventory                                          |   | —                              |   | 258 |   |
| Provision for  doubtful accounts                                                      |   | 800                                 |   | 139 |   |
| Amortization of  deferred stock compensation                                          |   | 295                                 |   | 354 |   |
| Deferred income  taxes                                                                |   | (3,230                              | )      | — |   |
| Change in  deferred revenue                                                           |   | (1,254                              | )      | 280 |   |
| Changes in  operating assets and liabilities:                                         |   |                                |   |   |   |
| Accounts  receivable                                                                  |   | (2,745                              | )      | (4,778 | ) |
| Inventory                                                                             |   | (353                                | )      | (953 | ) |
| Prepaids and  other assets                                                            |   | 272                                 |   | (726 | ) |
| Accounts payable                                                                      |   | (251                                | )      | (77 | ) |
| Accrued  liabilities                                                                  |   | 1,472                               |   | 1,211 |   |
| Net cash used in  operating activities                                                |   | (3,098                              | )      | (1,109 | ) |
|                                                                                  |   |                                |   |   |   |
| Cash flows from  investing activities:                                                |   |                                |   |   |   |
| Purchases of  property and equipment                                                  |   | (2,714                              | )      | (2,489 | ) |
| Purchases of  available for sale securities                                           |   | (32,787                             | )      | (26,649 | ) |
| Maturities of  available for sale securities                                          |   | 30,475                              |   | 33,626 |   |
| Increase in  deposits and other long-term assets                                      |   | (480                                | )      | (97 | ) |
| Net cash  provided by (used in) investing activities                                  |   | (5,506                              | )      | 4,391 |   |
|                                                                                  |   |                                |   |   |   |
| Cash flows from  financing activities:                                                |   |                                |   |   |   |
| Proceeds from  issuance of common stock                                               |   | 205                                 |   | 863 |   |
| Repurchase of  common stock                                                           |   | (197                                | )      | — |   |
| Repayment of  notes receivable from common stockholders                               |   | 5                                   |   | 51 |   |
| Repayment of  notes payable and capital lease obligations                             |   | (211                                | )      | (428 | ) |
| Other                                                                                 |   | —                              |   | (20 | ) |
| Net cash  provided by (used in) financing activities                                  |   | (198                                | )      | 466 |   |
|                                                                                  |   |                                |   |   |   |
| Net decrease in  cash and cash equivalents                                            |   | (8,802                              | )      | (3,748 | ) |
| Cash and cash  equivalents, beginning of period                                       |   | 23,993                              |   | 10,847 |   |
| Cash and cash  equivalents, end of period                                             |   | $                                   | 15,191 |   | $ | 14,595 |   |

*The accompanying notesare an integral part of these condensed consolidated financial statements.*

**LATITUDECOMMUNICATIONS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1—The Company andBasis of Presentation**

LatitudeCommunications, Inc. (the "Company") is a leading provider ofenterprise e-conferencing solutions. The Company develops, markets and supportsits MeetingPlace system and services, which enables real-time collaborationthrough meetings via Web browsers, groupware applications such as Outlook andNotes, and PSTN and IP phones. MeetingPlace also allows users to share and editlive documents, record, and access meeting content. Highly scalable anddesigned to be deployed as part of a company's standard communicationsinfrastructure, MeetingPlace can support tens of thousands of users. TheCompany distributes its product and services through distributors and a directsales force to companies across many industries in the United States, Europeand Asia.

Theaccompanying unaudited condensed consolidated financial statements reflect alladjustments which, in the opinion of management, are necessary for a fairpresentation of the results for the periods shown. The results of operationsfor such periods are not necessarily indicative of the results expected for thefull fiscal year or for any future period. The balance sheet at December 31,2000 was derived from audited financial statements, however, it does notinclude all disclosures required by generally accepted accounting principles inthe United States of America.

Thefinancial statements and related disclosures have been prepared with thepresumption that users of the interim financial information have read or haveaccess to the audited financial statements for the preceding fiscal year.Accordingly, these financial statements should be read in conjunction with the auditedfinancial statements and the related notes thereto contained in the Company'sAnnual Report on Form 10-K for the year ended December 31, 2000.

**Note 2—Recent Accounting Pronouncements**

InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations.” SFAS 141 requires the purchase method of accounting for businesscombinations initiated after June 30, 2001 and eliminates thepooling-of-interests method.

InJuly 2001, the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective forfiscal years beginning after March 15, 2001. SFAS 142 requires, among otherthings, the discontinuance of goodwill amortization. In addition, the standardincludes provisions upon adoption for the reclassification of certain existingrecognized intangibles as goodwill, reassessment of the useful lives ofexisting recognized intangibles, reclassification of certain intangibles out ofpreviously reported goodwill and the testing for impairment of existinggoodwill and other intangibles. We believe that the adoption of SFAS 142 willnot have a significant impact on our financial position and results of operations.

InAugust 2001, the FASB issued Statement of Financial Accounting Standards No.143 (“SFAS 143”), “Accounting for Asset Retirement Obligations”. SFAS 143requires, among other things, retirement obligations to be recognized when theyare incurred and displayed as liabilities, with a corresponding amountcapitalized as part of the related long-lived asset. The capitalized element isrequired to be expensed using a systematic and rational method over its usefullife. SFAS 143 will be adopted by the Company in the first quarter of fiscal2002 and is not expected to have a significant impact on the Company’sfinancial position or results of operations.

InOctober 2001, the FASB issued Statement of Financial Accounting Standards No.144 (“SFAS 144”), "Accounting for the Impairment or Disposal of Long-LivedAssets". SFAS 144 supercedes Statement of Financial Accounting StandardsNo. 121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of." SFAS 144 applies to all long-livedassets, including discontinued operations, and consequently amends AccountingPrinciples Board Opinion No. 30, "Reporting Results of OperationsReporting the Effects of Disposal of a Segment of a Business". SFAS 144develops one accounting model for long-lived assets that are to be disposed ofby sale. SFAS 144 requires that long-lived assets that are to be disposed of bysale be measured at the lower of book value or fair value less selling costs.Additionally, SFAS 144 expands the scope of discontinued operations to includeall components of an entity with operations that (1) can be distinguished fromthe rest of the entity and (2) will be eliminated from the ongoing operationsof the entity in a disposal transaction. The provisions of SFAS 144 arerequired to be adopted during the Company’s fiscal year beginning January 1,2002. The Company does not expect the adoption of SFAS 144 to have asignificant impact on its financial position or results of operations.

**Note 3—Inventory**

|           |   | **September 30, 2001** |   | **December 31, 2000** |   |
|----------------|--------|------------------------|--------|-----------------------|--------|
|           |   | **(Unaudited)**        |   |                  |   |
| Raw materials  |   | $                      | 1,505  |                  | $      | 1,216 |   |
| Finished goods |   | 510                    |   | 446                   |   |
|           |   | $                      | 2,015  |                  | $      | 1,662 |   |

**Note 4—Net Income (Loss) Per Share**

Basic net income (loss)per share is computed by dividing net income (loss) available to commonstockholders by the weighted average number of vested common shares outstandingfor the period. Diluted net income (loss) per share is computed giving effectto all potentially dilutive common shares, including options, warrants andpreferred stock.

A reconciliation of thenumerator and denominator of basic and diluted EPS is provided as follows (inthousands, except per share amounts).

 
|                                                                                             |   | **Three  Months Ended September 30** |         | **Nine  Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------------|--------------------------------------|--------|
|                                                                                             |   | **2001**                             |         | **2000**                             |   | **2001** |   | **2000** |   |
|                                                                                             |   | **(Unaudited)**                      |         | **(Unaudited)**                      |   |
| Net income (loss) per  share, basic and diluted:                                                 |   |                                 |         |                                 |   |   |   |   |   |
| Numerator for net income (loss), basic and diluted                                               |   | $                                    |  (2,465 | )                                    | $      |  300 |   | $ |  (5,879 | ) | $ |  1,943 |   |
| Denominator for basic net income (loss) per share:                                               |   |                                 |         |                                 |   |   |   |   |   |
| Weighted average vested common shares outstanding                                                |   | 19,415                               |         | 18,718                               |   | 19,411 |   | 18,693 |   |
| Net income (loss) per share basic                                                                |   | $                                    |  (0.13  | )                                    | $      |  0.02 |   | $ |  (0.30 | ) | $ |  0.10 |   |
|                                                                                             |   |                                 |         |                                 |   |   |   |   |   |
| Denominator for diluted earnings per share:                                                      |   |                                 |         |                                 |   |   |   |   |   |
| Weighted average vested common shares outstanding                                                |   | 19,415                               |         | 18,718                               |   | 19,411 |   | 18,693 |   |
| Effect of dilutive securities:                                                                   |   |                                 |         |                                 |   |   |   |   |   |
| Nonvested common shares                                                                          |   | —                               |         | 419                                  |   | — |   | 379 |   |
| Common stock options                                                                             |   | —                               |         | 657                                  |   | — |   | 819 |   |
| Warrants                                                                                         |   | —                               |         | 33                                   |   | — |   | 38 |   |
| Weighted average  common and common equivalent shares                                            |   | 19,415                               |         | 19,827                               |   | 19,411 |   | 19,929 |   |
|                                                                                             |   |                                 |         |                                 |   |   |   |   |   |
| Net income per  share diluted                                                                    |   | $                                    |  (0.13  | )                                    | $      |  0.02 |   | $ |  (0.30 | ) | $ |  0.10 |   |
| Securities not included in the calculation of  diluted EPS because the effect is anti-dillutive: |   |                                 |         |                                 |   |   |   |   |   |
| Nonvested common shares                                                                          |   | 77                                   |         | —                               |   | 403 |   | — |   |

**Note 5—Restructuring**

During the quarter endedJune 30, 2001, the Company initiated a restructuring program. As a part of thisrestructuring program, the Company recorded costs and other charges of $870,000classified as operating expenses.  Ofthis amount, $442,000 related to a reduction in the workforce by approximately40 regular employees across all functional areas of the Company, $228,000related primarily to non-cancellable lease costs arising from the consolidationof excess facilities and $200,000 related to asset write-offs.

 A summary of the restructuring costs is asfollows (in thousands):

 

|                                                |   | **Severance  and Benefits** |   | **Facilities  and Other Charges** |   | **Asset  Write-Offs** |   | **Total** |   |
|-----------------------------------------------------|--------|-----------------------------|--------|-----------------------------------|--------|-----------------------|--------|-----------|--------|
|                                                |   |                        |   |                              |   |                  |   |      |   |
| Restructuring reserve  balance at June 30, 2001     |   | $                           | 442    |                              | $      | 228                   |   | $         | 200    |   | $ | 870 |   |
|                                                |   |                        |   |                              |   |                  |   |      |   |
| Cash paid during the quarter                        |   | (222                        | )      | (35                               | )      | —                |   | (257      | )      |
| Non-cash charges                                    |   | (31                         | )      | —                            |   | (200                  | )      | (231      | )      |
| Restructuring reserve balance at September 30, 2001 |   | $                           | 189    |                              | $      | 193                   |   | $         | — |   | $ | 382 |   |

The remaining cashexpenditures relating to workforce reductions, and other charges will besubstantially paid in the fourth quarter of fiscal 2001. The amounts related tonon-cancelable lease costs will be paid over the respective lease terms throughfiscal 2003.

**Note 6 – Share RepurchaseProgram**

On July 24, 2001 theCompany’s Board of Directors approved a Share Repurchase Program of up to1,000,000 shares of common stock.  As ofSeptember 30, 2001, the Company has purchased 140,400 shares under this programat a weighted average cost of $1.41.

**Item 2.            Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

ThisManagement's Discussion and Analysis of Financial Condition and Results ofOperations and other parts of this Form 10-Q include a number of forward-lookingstatements that reflect our current views with respect to future events andfinancial performance. We use words such as "anticipates,""believes," "expects," "future," and"intends," and similar expressions to identify forward-lookingstatements. You should not place undue reliance on these forward-lookingstatements, which apply only as of the date of this Quarterly Report on Form10-Q. These forward-looking statements are subject to risks and uncertaintiesthat could cause actual results to differ materially from historical results orour predictions. These risks are described in " Factors Affecting FutureOperating Results " and elsewhere in this Form 10-Q. Readers are cautionednot to place undue reliance on these forward-looking statements, which reflectmanagement's analysis only as of the date hereof. The Company assumes noobligation to update these forward-looking statements to reflect actual resultsor changes in factors or assumptions affecting such forward-looking statements.

**Overview**

Weare a leading provider of enterprise e-conferencing solutions that enablegeographically dispersed  organizationsto collaborate in real time. The Company's award-winning MeetingPlace system isdesigned for enterprise-wide deployment to improve the ability of employees,partners, and customers to meet and work. With MeetingPlace, participants canschedule and attend a meeting, view, share and edit documents, and captureand  retrieve meeting content.MeetingPlace is designed to be an enterprise-wide resource and to leverageexisting technologies such as telephones, cellular phones and personalcomputers.

Wegenerate revenue from sales of our MeetingPlace products and from customersupport, hosting and consulting services. Revenue derived from product salesconstituted 25% of total revenue in the third quarter of 2001 and 63% duringthe corresponding period of 2000. Product revenue is generally recognized uponshipment if a signed contract exists, the fee is fixed or determinable,collection of the resulting receivable is reasonably assured, product returnsare reasonably estimable and, if applicable, acceptance has been obtained. Wecalculate an allowance for returns based on historical rates. Service revenueincludes revenue from hosting, implementation and integration services, systemmanagement services, warranty coverage and customer support. Revenue fromhosting, implementation and system integration services is recognized as theservices are performed, while revenue from system management services, warrantycoverage and customer support is recognized ratably over the period of thecontract. Beginning in 2001, we have expanded our service offerings byproviding hosted services to our customers. Accordingly, future revenue fromthis new service offering will increase the proportion of total revenue derivedfrom services. To the extent that prospective customers elect to purchase thehosted service rather than an on-premises MeetingPlace system, our productrevenue could be adversely affected.

Wesell our MeetingPlace products and services primarily through our direct salesforce and, to a lesser extent, through indirect distribution channels. Themajority of our revenue is derived from Fortune 1000 companies, many of whichinitially purchase MeetingPlace servers and later expand deployment of ourproducts as they require additional capacity for voice and web conferencing. In1997, we expanded into international markets by opening a sales and supportoffice in the United Kingdom and establishing distributor relationships in HongKong and Singapore, and in 1998, we established a distributor relationship inAustralia. While we intend to increase sales through indirect channels andinternationally, we cannot assure you that we will be successful. In 1998, we expandedthe breadth of our support services by establishing a consulting services groupto provide expanded implementation services, system management services andcustomized project consulting. In 1999, we opened a sales and support office inSingapore. In addition, in 1999 and 2000, we increased our distributionpartners to include global partnerships, application service providers andpartners focused on the U.S. federal government.

Totalcost of revenue consists of component and materials costs, direct labor costs,warranty costs, royalties and overhead related to manufacturing of ourproducts, as well as materials, travel and labor costs related to personnelengaged in our service operations. Product gross margin is impacted by theproportion of product revenue derived from software sales, which typicallycarry higher margins than hardware sales, and from indirect distributionchannels, which typically carry lower margins than direct sales. Service grossmargin is impacted by the mix of services we provide, which have differentlevels of profitability, and the efficiency with which we provide support toour customers. We record an allowance for excess and obsolete inventory byidentifying inventory components either considered excess based on estimates offuture usage or obsolete due to changes in our products. As a result oftechnological changes, our products may become obsolete or we could be requiredto redesign our products.

**Results Of Operations**

The followingtable lists, for the periods indicated, the percentage of total revenue of eachline item from our condensed consolidated statement of operations to totalrevenues:

 
|                                                            |   | **Three  Months Ended September 30,** |   | **Nine  months Ended September 30,** |   |
|-----------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                            |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
| Revenue:                                                        |   |                                  |   |                                 |   |   |   |   |   |
| Product                                                         |   | 24.8                                  | %      | 63.1                                 | %      | 43.0 | % | 68.6 | % |
| Service                                                         |   | 75.2                                  |   | 36.9                                 |   | 57.0 |   | 31.4 |   |
| Total revenue                                                   |   | 100.0                                 |   | 100.0                                |   | 100.0 |   | 100.0 |   |
| Cost of revenue:                                                |   |                                  |   |                                 |   |   |   |   |   |
| Product                                                         |   | 9.8                                   |   | 9.7                                  |   | 9.3 |   | 11.5 |   |
| Service                                                         |   | 41.7                                  |   | 19.5                                 |   | 31.5 |   | 16.4 |   |
| Total cost of revenue                                           |   | 51.5                                  |   | 29.2                                 |   | 40.8 |   | 27.9 |   |
| Gross profit                                                    |   | 48.5                                  |   | 70.8                                 |   | 59.2 |   | 72.1 |   |
|                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Operating expenses:                                             |   |                                  |   |                                 |   |   |   |   |   |
| Research and development                                        |   | 21.5                                  |   | 13.2                                 |   | 18.3 |   | 13.9 |   |
| Marketing and sales                                             |   | 70.0                                  |   | 48.1                                 |   | 61.4 |   | 44.4 |   |
| General and administrative                                      |   | 20.1                                  |   | 10.0                                 |   | 17.9 |   | 8.9 |   |
| Restructuring charge                                            |   | 0.0                                   |   | 0.0                                  |   | 3.4 |   | 0.0 |   |
| Total operating expenses                                        |   | 111.6                                 |   | 71.3                                 |   | 101.0 |   | 67.2 |   |
| Income (loss) from operations                                   |   | (63.1                                 | )      | (0.5                                 | )      | (41.8 | ) | 4.9 |   |
| Interest income, net                                            |   | 5.9                                   |   | 5.9                                  |   | 5.7 |   | 5.5 |   |
| Income (loss) before benefit from (provision) for  income taxes |   | (57.2                                 | )      | 5.4                                  |   | (36.1 | ) | 10.4 |   |
| Benefit from (provision for) income taxes                       |   | 20.0                                  |   | (2.5                                 | )      | 12.7 |   | (4.4 | ) |
| Net income (loss)                                               |   | (37.2                                 | )%     | 2.9                                  | %      | (23.4 | )% | 6.0 | % |

*Product Revenue*

Productrevenue decreased $4.8 million, or 74%, to $1.6 million for the three monthsended September 30, 2001 from $6.4 million for the three months ended September30, 2000. Product revenue decreased $11.3 million, or 51%, to $10.8 million forthe nine months ended September 30, 2001 from $22.1 million for the nine monthsended September 30, 2000. The decreases were due primarily to reduced capitalspending and longer sales cycles at our existing and potential customers,resulting in fewer MeetingPlace systems sales in the current year.  These factors were magnified in the quarterended September 30, 2001 by the terrorist attacks of September 11, 2001.  International sales representedapproximately 35.2% and 4.8% of product revenue in the three months endedSeptember 30, 2001 and 2000, respectively, and approximately 19.8% and 8.9% ofproduct revenue in the nine months ended September 30, 2001 and 2000,respectively. The increase in the percentage of international product revenueis primarily due to the decline in total revenue.

*Service Revenue*

Servicerevenue increased $1.2 million, or 33%, to $5.0 million for the three monthsended September 30, 2001 from $3.8 million for the three months ended September30, 2000. Service revenue increased $4.2 million, or 42%, to $14.3 million forthe nine months ended September 30, 2001 from $10.1 million for the nine monthsended September 30, 2000.  The increaseswere attributable primarily to growth in our customer base during this period,which led to increased sales of full care support services, as well as theintroduction of additional services such as hosted and managed services. Weexpect service revenue to continue to increase in absolute dollars.

*Total Cost of Revenue*

Totalcost of revenue increased $400,000, or 15%, to $3.4 million for the threemonths ended September 30, 2001 from $3.0 million for the three months endedSeptember 30, 2000.  Total cost of  revenue increased $1.2 million or 14%, to$10.2 million for the nine months ended September 30, 2001 from $9.0 millionfor the nine months ended September 30, 2000. The increase in total cost of revenue year to date was attributableprimarily to a change in the mix of revenues from higher margin product revenueto lower margin service revenue, and we expect this trend to continue.

Grossprofit decreased $4.0 million, or 55%, to $3.2 million for the three monthsended September 30, 2001 from $7.2 million for the three months ended September30, 2000. Gross profit decreased $8.4 million, or 36%, to $14.9 million for thenine months ended September 30, 2001 from $23.2 million for the nine monthsended September 30, 2000.  Gross profitdecreased to 48.5% as a percentage of revenue for the three months endedSeptember 30, 2001 from 70.8% for the three months ended September 30, 2000.Gross profit decreased to 59.2% as a percentage of revenue for the nine monthsended September 30, 2001 from 72.1% for the nine months ended September 30,2000. The decline in gross profit is due to the decline in product revenue.

Productgross profit decreased to 60.3% as a percentage of product revenue for thethree months ended September 30, 2001 from 84.6% for the three months endedSeptember 30, 2000. Product gross profit decreased to 78.4% as a percentage ofrevenue for the nine months ended September 30, 2001 from 83.2% for the ninemonths ended September 30, 2000. We expect that product gross margin maycontinue to be lower than historical levels in the future due in part topotential pricing pressure as well as overhead costs spread over fewerMeetingPlace systems.

Servicegross profit decreased to 44.6% as a percentage of service revenue for thethree months ended September 30, 2001 from 47.3% for the three months endedSeptember 30, 2000. Service gross profit decreased to 44.7% as a percentage ofrevenue for the nine months ended September 30, 2001 from 47.8% for the ninemonths ended September 30, 2000.  Weexpect the future service gross profit percentage to generally range from 44%to 50% of service revenue.

*Research and DevelopmentExpenses*

Researchand development expenses consist primarily of compensation and related costsfor research and development personnel, facilities expenses for testing spaceand equipment and purchased software. Research and development expensesincreased $100,000, or 6%, to $1.4 million for the three months ended September30, 2001 from $1.3 million for the three months ended September 30, 2000.Research and development expenses increased $100,000, or 3%, to $4.6 millionfor the nine months ended September 30, 2001 from $4.5 million for the threemonths ended September 30, 2000.  As apercentage of total revenues, research and development expenses were 21.5% and13.2% for the three months ended September 30, 2001 and 2000 and were 18.3% and13.9% for the nine months ended September 30, 2001 and 2000. The increase inresearch and development expenses as a percentage of total revenues was dueprimarily to a decline in total revenues. We expect to continue to makesubstantial investments in research and development and anticipate thatresearch expenses will continue to increase in absolute dollars.

*Marketingand Sales Expenses*

Marketingand sales expenses consist primarily of promotional expenditures andcompensation and related costs for marketing and sales personnel. Marketing andsales expenses decreased $300,000, or 5%, to $4.6 million for the three monthsended September 30, 2001 from $4.9 million for the three months ended September30, 2000. Marketing and sales expenses increased $1.1 million, or 8%, to $15.4million for the nine months ended September 30, 2001 from $14.3 million for thenine months ended September 30, 2000. As a percentage of total revenues,marketing and sales expenses were 70.0% and 48.1% for the three months endedSeptember 30, 2001 and 2000 and were 61.4% and 44.4% for the nine months ended September30, 2001 and 2000. The increase in marketing and sales expenses as a percentageof revenue was due primarily to decreased revenue. The decrease in absolutedollars between the three months ended September 30, 2001 and 2000 is dueprimarily to lower commission expenses on lower revenues.  The increases in absolute dollars betweenthe nine months ended September 30, 2001 and 2000 reflected increased employeerelated expenses in the sales and marketing organizations.

*General and Administrative Expenses*

Generaland administrative expenses consist primarily of personnel expenses, legal andaccounting expenses and other general corporate expenses. General andadministrative expenses increased $300,000, or 32%, to $1.3 million for thethree months ended September 30, 2001 from $1.0 million for the three monthsended September 30, 2000. General and administrative expenses increased $1.6million, or 57%, to $4.5 million for the nine months ended September 30, 2001from $2.9 million for the nine months ended September 30, 2000. As a percentageof total revenues, general and administrative expenses were 20.1% and 10.0% forthe three months ended September 30, 2001 and 2000 and were 17.9% and 8.9% forthe nine months ended September 30, 2001 and 2000. The increase in absolutedollars between the three months ended September 30, 2001 and the three monthsended September 30, 2000 consisted primarily of $150,000 in incremental baddebt expense and $150,000 in incremental salaries and related costs. Theincrease in absolute dollars between the nine months ended September 30, 2001and the nine months ended September 30, 2000 consisted primarily of $650,000 inincremental bad debt expense, $500,000 in incremental salaries and relatedcosts, $150,000 in incremental insurance costs, as well as various other costcategories with smaller increases.

*Amortizationof Deferred Stock Compensation*

Inconnection with the completion of our initial public offering in May 1999,options granted in the last quarter of 1997, 1998 and the first quarter of 1999have been considered to be compensatory. Total remaining deferred stockcompensation associated with these options as of September 30, 2001 amounted to$301,000. This amount is being amortized based on the remaining vesting periodof these options and we expect amortization of approximately $90,000 over theremainder of 2001 and $201,000 in 2002 related to the options presentlyoutstanding.

*Interest Income, Net*

Interestincome, net of interest expense, decreased 36% to $387,000 for the three monthsended September 30, 2001 from $600,000 for the three months ended September 30,2000. Interest income, net of interest expense, decreased 19% to $1.4 millionfor the nine months ended September 30, 2001 from $1.8 million for the ninemonths ended September 30, 2000. The decrease in net interest income wasattributable primarily to lower average yields on our portfolio of cash andinvestments.  We expect that projecteduse of cash and investments for working capital and capital equipment purchasestotaling $8 million to $10 million during the next year will result in furtherdeclines in interest income.

*Income Taxes*

Forthe three months ended September 30, 2001, the benefit from income taxes was$1.3 million, compared to a provision of $253,000 in the three months endedSeptember 30, 2000.  For the nine monthsended September 30, 2001, the benefit from income taxes was $3.2 million,compared to a provision of $1.4 million in the nine months ended September 30,2000.  Our effective tax rate was approximately(35)% for the three months and nine months ended September 30, 2001 andapproximately 46% for the three months and 42% for the nine months endedSeptember 30, 2000. The decline in the effective rate was due to certainminimum taxes payable even in a loss situation, which offset the benefit fromincome taxes otherwise available to offset the net loss in 2001.

**Liquidity and CapitalResources**

InMay 1999, we completed an initial public offering of common stock, resulting innet proceeds to us of approximately $33.8 million. As of September 30, 2001, wehad $34.2 million of cash, cash equivalents and investments, which represented60% of total assets.

Cashused in operating activities was $2.8 million for the nine months endedSeptember 30, 2001, compared to cash used in operating activities of  $1.1 million in the same period of2000.  The difference between the netincome (loss) for the period and net cash provided by or used in operatingactivities are non-cash items and changes in components of working capital.

Cashused in investing activities in the first nine months of 2001 was $5.9 million,which consisted primarily of the purchase of investments of $33.0 million andpurchase of property and equipment of $2.7 million, partially offset by maturitiesof investments of $30.5 million. For the first nine months in 2000, cashprovided by investing activities of $4.4 million consisted primarily of thepurchase of investments of $26.7 million and purchase of property and equipmentof $2.5 million, more than offset by maturities of investments of $33.6million.

Cashused in financing activities in the first nine months of 2001 of $301,000consisted primarily of repurchases of common stock of $197,000 and payments onobligations under capital leases and notes payable of $211,000, partiallyoffset by proceeds from issuance of common stock under employee benefit plansof $102,000. For the first nine months of 2000, cash provided by financingactivities of $374,000 consisted primarily of the proceeds from issuance ofcommon stock under employee benefit plans of $863,000, partially offset bypayments on obligations under capital leases and notes payable of $428,000.

Webelieve that our current cash, cash equivalents and marketable securities willbe sufficient to meet our anticipated cash needs for working capital andcapital expenditures for at least the next 12 months.

**Impact of Recently IssuedAccounting Standards**

InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations.” SFAS 141 requires the purchase method of accounting for businesscombinations initiated after June 30, 2001 and eliminates thepooling-of-interests method.

InJuly 2001, the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective forfiscal years beginning after March 15, 2001. SFAS 142 requires, among otherthings, the discontinuance of goodwill amortization. In addition, the standardincludes provisions upon adoption for the reclassification of certain existingrecognized intangibles as goodwill, reassessment of the useful lives ofexisting recognized intangibles, reclassification of certain intangibles out ofpreviously reported goodwill and the testing for impairment of existinggoodwill and other intangibles. We believe that the adoption of SFAS 142 willnot have a significant impact on our financial position and results ofoperations.

InAugust 2001, the FASB issued Statement of Financial Accounting Standards No.143 (“SFAS 143”), “Accounting for Asset Retirement Obligations”. SFAS 143requires, among other things, retirement obligations to be recognized when theyare incurred and displayed as liabilities, with a corresponding amountcapitalized as part of the related long-lived asset. The capitalized element isrequired to be expensed using a systematic and rational method over its usefullife. SFAS 143 will be adopted by the Company in the first quarter of fiscal2002 and is not expected to have a significant impact on the Company’sfinancial position or results of operations.

InOctober 2001, the FASB issued Statement of Financial Accounting Standards No.144 (“SFAS 144”), "Accounting for the Impairment or Disposal of Long-LivedAssets". SFAS 144 supercedes Statement of Financial Accounting StandardsNo. 121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of." SFAS 144 applies to all long-livedassets, including discontinued operations, and consequently amends AccountingPrinciples Board Opinion No. 30, "Reporting Results of OperationsReporting the Effects of Disposal of a Segment of a Business". SFAS 144develops one accounting model for long-lived assets that are to be disposed ofby sale. SFAS 144 requires that long-lived assets that are to be disposed of bysale be measured at the lower of book value or fair value less selling costs.Additionally, SFAS 144 expands the scope of discontinued operations to includeall components of an entity with operations that (1) can be distinguished fromthe rest of the entity and (2) will be eliminated from the ongoing operationsof the entity in a disposal transaction. The provisions of SFAS 144 arerequired to be adopted during the Company’s fiscal year beginning January 1,2002. The Company does not expect the adoption of SFAS 144 to have asignificant impact on its financial position or results of operations.

**Factors That May AffectFuture Results**

Inaddition to the other information in this report, the following factors shouldbe considered carefully in evaluating the Company’s business and prospects:

*Ourfuture profitability is uncertain due to our limited operating history.*Wehave a limited operating history and cannot assure you that our revenue willgrow or that we will return to profitability in the future. Our financialstatements must be considered in light of the risks and uncertaintiesencountered by companies in the early stages of development. We rely substantiallyon sales of our MeetingPlace products and services, which have limited marketacceptance.

Recenteconomic developments have caused many companies to reduce headcount andoverhead expenses and to reconsider or delay capital expenditures. This hashad, and may continue to have, an adverse effect on our ability to growrevenue.

Inaddition, we are unable to predict our future product development, sales andmarketing, and administrative expenses. To the extent that these expensesincrease, we will need to increase revenue to sustain profitability. Ourability to increase revenue and achieve profitability also depends on the otherrisk factors described in this section.

*Ouroperating results may fluctuate significantly.*Our operatingresults are difficult to predict. Our future quarterly operating results mayfluctuate and may not meet the expectations of securities analysts orinvestors. If this occurs, the price of our common stock would likely decline.The factors that may cause fluctuations of our operating results include thefollowing:

·      changes in our mix of revenues generatedfrom product sales and services;

·      changes by existing customers in theirlevels of purchases of our products and services;

·      changes in our mix of sales channelsthrough which our products and services are sold; and

·      changes in our mix of domestic andinternational sales.

Additionally,we are expanding our service offerings by providing hosted services to ourcustomers. Accordingly, future revenue from this new service offering willincrease the proportion of total revenue derived from services. To the extentthat prospective customers elect to purchase the hosted service rather than anon-premises MeetingPlace system, our product revenue could be adverselyaffected.

Ordersat the beginning of each quarter typically do not equal expected revenue forthat quarter. In addition, a significant portion of our orders is received inthe last month of each fiscal quarter. If we fail to ship products by the endof a quarter in which the order is received, or if our prospective customersdelay their orders or delivery schedules until the following quarter, we mayfail to meet our revenue objectives.

*Ourmarket is highly competitive.*Because of intense marketcompetition, we may not be successful. Currently, our principal competitorsinclude:

·      major telecommunications carriers thatoperate service bureaus for voice conferencing, such as AT&T Corp., MCIWorldcom, Inc. and Sprint Corporation;

·      private branch exchange, or PBX, vendorsthat sell systems with voice conferencing capabilities, such as LucentTechnologies Inc. and Nortel Networks; and

·      companies that offer web–based voiceand data conferencing products and services.

Manyof these companies have longer operating histories, stronger brand names andsignificantly greater financial, technical, marketing and other resources thanwe do. These companies also may have existing relationships with many of ourprospective customers. In addition, these companies may be able to respond morequickly than we can to new or emerging technologies and changes in customerrequirements.

In addition, we expectcompetition to persist and intensify in the future, which could adverselyaffect our ability to increase sales, penetrate new markets and maintain averageselling prices. In the future, we may experience competition from potentialcompetitors that include:

·      networking companies, such as CiscoSystems, Inc., 3Com Corporation, Lucent Technologies Inc. and Nortel Networksthat are focusing on enabling the transmission of voice over the Internet andthat may offer voice and web conferencing functionality; and

·      collaborative software providers, such asMicrosoft Corporation and Lotus Development Corporation, that are focusing onweb conferencing products and that may in the future incorporate voiceconferencing functionality into their products.

*Ourmarket is in an early stage of development, and our products and services maynot be adopted.*If the market for our integrated voice andweb conferencing products and services fails to grow or grows more slowly thanwe anticipate, we may not be able to increase revenues or return toprofitability. The market for integrated real–time voice and webconferencing is relatively new and rapidly evolving. Our ability to beprofitable depends in large part on the widespread adoption by end users ofreal–time voice and web conferencing.

Wewill have to devote substantial resources to educate prospective customersabout the uses and benefits of our products and services. In addition,businesses that have invested substantial resources in other conferencingproducts may be reluctant or slow to adopt our products, which might replace orcompete with their existing systems. Our efforts to educate potential customersmay not result in our products achieving market acceptance.

*Rapidtechnological changes could cause our products and services to become obsoleteor require us to redesign our products.*The market in whichwe compete is characterized by rapid technological change, frequent new productintroductions, changes in customer requirements and emerging industrystandards. In particular, we expect that the growth of the Internet andInternet–based telephony applications, as well as general technologytrends such as migrations to new operating systems, will require us to adaptour product to remain competitive. This adaptation could be costly and time–consuming.Our products and services could become obsolete and unmarketable if productsand services using new technologies are introduced and new industry standardsemerge. For example, the widespread acceptance of competing technologies, suchas video conferencing and the transmission of voice over the Internet, coulddiminish demand for our current products and services. As a result, the lifecycle of our products and services is difficult to estimate.

Tobe successful, we will need to develop and introduce new products and productenhancements that respond to technological changes or evolving industrystandards, such as the transmission of voice over the Internet, in a timelymanner and on a cost effective basis. We cannot assure you that we willsuccessfully develop these types of products and product enhancements or thatour products will achieve broad market acceptance.

*Oursales cycle is lengthy and unpredictable.*Any delay in salesof our products and services could cause our quarterly revenue and operatingresults to fluctuate. The typical sales cycle of our products is lengthy,generally between six to twelve months, unpredictable, and involves significantinvestment decisions by prospective customers, as well as our education ofpotential customers regarding the use and benefits of our products.Furthermore, many of our prospective customers have neither budgeted expenses forvoice and web conferencing systems nor have personnel specifically dedicated toprocurement and implementation of these conferencing systems. As a result, ourcustomers spend a substantial amount of time before purchasing our products inperforming internal reviews and obtaining capital expenditure approvals. Oursales cycle has lengthened in 2001 and we cannot be certain that this cyclewill not lengthen in the future. The emerging and evolving nature of the real–timevoice and web conferencing market may lead to confusion in the market, whichmay cause prospective customers to postpone their purchase decisions.

*If wefail to expand our sales and distribution channels, our business could suffer.*Ifwe are unable to expand our sales and distribution channels, we may not be ableto increase revenue or achieve market acceptance of our MeetingPlace productand services. We plan to recruit additional sales personnel who will requiretraining and take time to achieve full productivity, and there is strong competitionfor qualified sales personnel in our business. In addition, we believe that ourfuture success is dependent upon establishing successful relationships with avariety of distribution partners. To date, we have entered into agreements withonly a small number of these distribution partners. We cannot be certain thatwe will be able to reach agreement with additional distribution partners on atimely basis or at all, or that these distribution partners will devoteadequate resources to selling our products. Furthermore, if our distributionpartners fail to adequately market or support our products, the reputation ofour products in the market may suffer. In addition, we will need to managepotential conflicts between our direct sales force and third–party resellingefforts.

*Ourability to expand into international markets is uncertain.*Weintend to continue to expand our operations into new international markets. Inaddition to general risks associated with international expansion, such asforeign currency fluctuations and political and economic instability, we facethe following risks and uncertainties any of which could prevent us fromselling our products and services in a particular country or harm our businessoperations once we have established operations in that country:

·      the difficulties and costs of localizingproducts and services for foreign markets, including the development ofmultilingual capabilities in our MeetingPlace system;

·      the need to modify our products to complywith local telecommunications certification requirements in each country; and

·      our lack of a direct sales presence inother countries, our need to establish relationships with distribution partnersto sell our products in these markets and our reliance on the capabilities and performanceof these distribution partners.

*If wefail to integrate our products with third–party technology, our salescould suffer.*Our products and services are designed tointegrate with our customers’ data and voice networks, as well as withenterprise applications such as browsers and collaborative softwareapplications. If we are unable to integrate our products and services withthese networks and systems, sales of our products and services could suffer.

Inaddition, we may be required to engage in costly and time–consumingredesigns of our products because of technology enhancements or upgrades ofthese systems. We may not be able to redesign our products or be certain thatany of these redesigns will achieve market acceptance. In addition, we will needto continually modify our products as newer versions of the enterpriseapplications with which our products integrate are introduced. Our ability todo so largely depends on our ability to gain access to the advanced programminginterfaces for these applications, and we cannot assure you that we will haveaccess to necessary advanced programming interfaces in the future.

*We mayexperience difficulties managing our future growth.*We expectthat any future growth may strain our management systems and resources, whichcould hinder our ability to continue to grow in the future. We may alsoexperience difficulties meeting the demand for our products and services. If weare unable to provide training and support for our products, the implementationprocess will be longer and customer satisfaction may be lower.

Wemay not be able to install management information and control systems in anefficient and timely manner, and our current or planned personnel, systems,procedures and controls may not be adequate to support our future operations.

*Ourbusiness could suffer if we lose the services of our current management team.*Ourfuture success depends on the ability of our management to operate effectively,both individually and as a group. If we were to lose the services of any ofthese key employees we may encounter difficulties finding qualified personnelto replace them.

*Theloss of our right to use technology licensed to us by third parties could harmour business.*We license technology that is incorporated intoour products and services from third parties, including digital signalprocessing algorithms and the MeetingPlace server’s operating system andrelational database. Any interruption in the supply or support of any licensedsoftware could disrupt our operations and delay our sales, unless and until wecan replace the functionality provided by this licensed software. Because ourproducts incorporate software developed and maintained by third parties, wedepend on these third parties to deliver and support reliable products, enhancetheir current products, develop new products on a timely and cost–effectivebasis and respond to emerging industry standards and other technologicalchanges.

*Anyinterruption in supply of components from outside manufacturers and supplierscould hinder our ability to ship products in a timely manner*.We rely on third parties to obtain most of the components of the MeetingPlaceserver and integrate them with other standard components, such as the centralprocessing unit and disk drives. If these third parties are no longer able tosupply and assemble these components or are unable to do so in a timely manner,we may experience delays in shipping our products and have to invest resourcesin finding an alternative manufacturer or manufacture our products internally.

Inaddition, we obtain key hardware components, including the processors anddigital signal processing devices used in the MeetingPlace server, from solesource suppliers. In the past, we have experienced problems in obtaining someof these components in a timely manner from these sources, and we cannot becertain that we will be able to continue to obtain an adequate supply of thesecomponents in a timely manner or, if necessary, from alternative sources. If weare unable to obtain sufficient quantities of components or to locatealternative sources of supply, we may experience delays in shipping ourproducts and incur additional costs to find an alternative manufacturer ormanufacture our products internally.

*Ourproducts and services may suffer from defects, errors or breaches of security*.Software and hardware products and services as complex as ours are likely tocontain undetected errors or defects, especially when first introduced or whennew versions are released. Any errors or defects that are discovered aftercommercial release could result in loss of revenue or delay in marketacceptance, diversion of development resources, damage to our customerrelationships or reputation and increased service and warranty cost. Our productsand services may not be free from errors or defects after commercial shipmentshave begun, and we are aware of instances in which some of our customers haveexperienced product failures or errors.

Manyof our customers conduct confidential conferences, and transmit confidentialdata, using MeetingPlace. Concerns over the security of information sent overthe Internet and the privacy of its users may inhibit the market acceptance ofour products. In addition, unauthorized users in the past have gained, and inthe future may be able to gain, access to our customers’ MeetingPlace systemsor our hosted services. Any compromise of security could deter people fromusing MeetingPlace and could harm our reputation and business and result inclaims against us.

In2001, we have expanded our service offerings to include hosted services for ourcustomers. The success of our hosted services will depend on the efficient anduninterrupted operation of our computer and communication hardware and softwaresystems. In addition, some of our communications hardware and software for ourservices businesses are hosted at third party co-location facilities.  These systems and operations are vulnerableto damage or interruption as a result of human error, telecommunications failures,break-ins, acts of vandalism, computer viruses and natural disasters. Systemsfailure or damage could cause an interruption of our services and result inloss of customers, difficulties in attracting new customers and could adverselyimpact our operating results.  Inaddition, if the number of customers who purchase our hosted services increasesover time, our systems must be able to accommodate increased usage. If we areunable to increase our capacity to accommodate growth in usage, we could encountersystem performance issues, which could harm our relationships with customersand our reputation.

*We maybe unable to adequately protect our proprietary rights, and we may be subjectto infringement claims.*Unauthorized parties may copy aspectsof our products and obtain and use information that we regard as proprietary,which could cause our business to suffer. Furthermore, the laws of many foreigncountries do not protect our intellectual property rights to the same extent asthe laws of the United States.

Inthe future, we may be subject to legal proceedings and claims for allegedinfringement of third party proprietary rights. Any of these claims, even ifnot meritorious, could result in costly litigation, divert management’sattention and resources, or require us to enter into royalty or licenseagreements which are not advantageous to us. Parties making these claims may beable to obtain injunctive or other equitable relief, which could prevent usfrom selling our products.

DellComputer Corporation has registered the “Latitude” mark for computers in theUnited States and in other countries. Dell’s United States trademarkregistration and Canadian application have blocked our ability to register the“Latitude Communications” and “Latitude” with logo marks in the United Statesand the “Latitude Communications” mark in Canada. Since we believe that we havepriority of trade name usage in the United States, we have petitioned to cancelDell’s United States registration and opposed its Canadian application. Theoutcome of these proceedings is uncertain. If Dell’s registration for the“Latitude” mark is not canceled or if we are unable to obtain consent from Dellfor our registration of our marks, we may not be able to register our marks andwould have to rely solely on common law protection for these marks. We cannotassure you that we will be free from challenges of or obstacles to our use orregistration of our marks.

*We aresubject to government regulation, and our failure to comply with these regulationscould harm our business.*Our products are subject to a widevariety of safety, emissions and compatibility regulations imposed bygovernmental authorities in the United States or in other countries in which wesell our products and services. If we are unable to obtain necessary approvalsor maintain compliance with the regulations of any particular jurisdiction, wemay be prohibited from selling our products in that territory. In addition, tosell our products and services in many international markets, we are requiredto obtain certifications that are specific to the local telephonyinfrastructure.

*Ourstock price may be volatile.*We expect that the market priceof our common stock will fluctuate as a result of variations in our quarterlyoperating results. These fluctuations may be exaggerated if the trading volumeof our common stock is low. In addition, due to the technology–intensiveand emerging nature of our business, the market price of our common stock mayrise and fall in response to:

·      announcements of technological orcompetitive developments;

·      acquisitions or strategic alliances by usor our competitors; or

·      the gain or loss by us of significantorders.

*Ourexecutive officers and directors and their affiliates own a large percentage ofour voting stock and could control the voting power of the common stock*.Our executive officers and directors and their affiliates beneficially own, inthe aggregate, a large percentage of our outstanding common stock. As a result,these stockholders are able to exercise control over all matters requiringstockholder approval, including the election of directors and approval ofsignificant corporate transactions. This concentration of ownership may delay,deter or prevent transactions that would result in the change of control, whichin turn could reduce the market price of our common stock.

*Futuresales of our common stock may depress our stock price*.

Ifour stockholders sell substantial amounts of common stock, including sharesissued upon the exercise of outstanding options and warrants, in the publicmarket, the market price of our common stock could fall.

**Item 3.            Quantitative and QualitativeDisclosures About Market Risk.**

Ourexposure to market risk for changes in interest rates relates primarily to ourinvestment portfolio. We do not use derivative financial instruments in ourinvestment portfolio. We place our investments with high credit quality issuersand, by policy, limit the amount of credit exposure to any one issuer. Theportfolio includes only marketable securities with maturities of three to 24months and with active secondary or resale markets to ensure portfolioliquidity. We have no investments denominated in foreign country currencies andtherefore are not subject to foreign currency risk on such investments.

The table below presentsprincipal amounts and related weighted average interest rates by year ofmaturity for our investment portfolio at September 30, 2001 (in thousands).

 

|                      |   | **2001** |   | **2002** |   | **2003** |   | **Total** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|-----------|--------|
|                      |   |     |   |     |   |     |   |      |   |
| Corporate notes and bonds |   | $        | 2,002  |     | $      | 11,821   |   | $         | 2,095  |   | $ | 15,918 |   |
| Average interest rate     |   | 7.18     | %      | 5.03     | %      | 4.68     | %      | 5.25      | %      |
| Federal agencies          |   | $        | — |     | $      | —   |   | $         | 3,074  |   | $ | 3,074 |   |
| Average interest rate     |   | —   |   | —   |   | 4.28     | %      | 4.28      | %      |

Currently,the majority of our sales and expenses are denominated in U.S. dollars and, asa result, we have not experienced significant foreign exchange gains and lossesto date. While we do expect to effect some transactions in foreign currenciesin the next 12 months, we do not anticipate that foreign exchange gains andlosses will be significant. We have not engaged in foreign currency hedgingactivities to date.

**PART II.        OTHERINFORMATION**

**Item 1.            Legal Proceedings—Not Applicable.**

**Item 2.            Changes in Securities and Use ofProceeds.**

OnMay 6, 1999, in connection with the Company’s initial public offering, aRegistration Statement on Form S–1 (No. 333–72935) was declaredeffective by the Securities and Exchange Commission, pursuant to which3,125,000 shares of the Company’s Common Stock were offered and sold for theaccount of the Company at a price of $12.00 per share, generating grossoffering proceeds of $37.5 million. The managing underwriters were CreditSuisse First Boston Corporation, Hambrecht & Quist LLC and Dain RauscherWessels. After deducting approximately $2.6 million in underwriting discountsand $1.1 million in other related expenses, the net proceeds of the offeringwere approximately $33.8 million. The Company has not yet used any of the fundsfrom the initial public offering, and the $33.8 million has been invested indemand deposits and investment grade, interest bearing securities. The Companyintends to use such remaining proceeds for capital expenditures, including theacquisition of redundant computer and communication systems, and for general corporatepurposes, including working capital to fund increased accounts receivable andinventory levels.

**Item 3.            Defaults Upon Senior Securities—NotApplicable.**

**Item 4.            Submission of Matters to a Vote ofSecurity Holders—Not Applicable.**

**Item 5.            Other Information—Not Applicable.**

**Item 6.            Exhibits and Reports on Form 8–K.**

** **
| (a)   | Exhibits:                                                                                               |
|-------|---------------------------------------------------------------------------------------------------------|
| 10.13 | Loan Agreement  dated July 16, 2001 between the Company and Rick M. McConnell and Angela A.  McConnell. |
| (b)   | Reports on Form  8–K—None                                                                     |
|       |                                                                                                         |  |

**SIGNATURE**

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

** **
|   | **Latitude  Communications, Inc.** |
|--------|------------------------------------|
|   |                               |
|   |                               |
|   | By:                                | /s/ JOSEPH J. COONEY |
|   |                               | Joseph J. Cooney

Vice President, Finance and Acting Chief Financial Officer (Principal  Financial and Accounting Officer) |
|   |                               |
|   |                               |

Date:  November 14, 2001