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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

[   ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from  ___________  to  ___________

Commission file number: 000-31121

AVISTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|DELAWARE
(State or other jurisdiction
of incorporation or organization) |  | 88-0463156
(I.R.S. Employer Identification Number)

555 TWIN DOLPHIN DRIVE, SUITE 360, REDWOOD SHORES, CA 94065
(Address of Principal Executive Offices) (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.

Yes   [X]     No    [   ]

At June 30, 2002, 25,250,233 shares of common stock of the Registrant were
outstanding.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                          |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                   
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS         
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS          
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II  OTHER INFORMATION   
|                               | Item 4. Submission Of Matters to a Vote of Security Holders.                                 
|                               | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURES                    
|EXHIBIT INDEX                 
|EXHIBIT 99.1                  



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AVISTAR COMMUNICATIONS CORPORATION

INDEX

|           |  |                                                                                       |  |         
|---------- |  | ------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                       |  | PAGE NO.
|           |  |                                                                                       |  |         
|PART I     |  | FINANCIAL INFORMATION                                                                 |  |         
|Item 1.    |  | Financial Statements                                                                  |  | 3       
|           |  | Condensed Consolidated Balance Sheets                                                 |  | 3       
|           |  | Condensed Consolidated Statements of Operations                                       |  | 4       
|           |  | Condensed Consolidated Statement of Stockholders Equity                              |  | 5       
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | 6       
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 7       
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13      
|           |  | Factors Affecting Future Operating Results                                            |  | 19      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 27      
|PART II    |  | OTHER INFORMATION                                                                     |  |         
|Item 4.    |  | Submission Of Matters to a Vote of Security Holders                                   |  | 28      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 28      
|SIGNATURES |  |                                                                                       |  | 29      

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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1.Financial Statements




AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2002 and December 31, 2001
(in thousands, except share data)

|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |        |        | 
|------------------------------------- | ----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------- | ------ | ----------- | ------ | ------------ | ------ | ------ | ------ | 
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        | June 30,    |        | December 31,
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        | 2002        |        | 2001        
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |             
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        | (unaudited) |        |              |        |       
|Assets:                               |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |             
|                                      | Current assets:                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |       
|                                      |                                           | Cash and cash equivalents                                                                                                                                                                               |                      | $                         | 6,338  |             |        | $            | 7,455  |       
|                                      |                                           | Short-term investments                                                                                                                                                                                  |                      |                           | 3,378  |             |        |              | 5,831  |       
|                                      |                                           | Accounts receivable, net of allowance for doubtful
accounts of $168 and $232, respectively                                                                                                              |                      |                           | 1,410  |             |        |              | 2,760  |       
|                                      |                                           | Inventories, including inventory shipped to customer sites, not
yet installed of $121 and $262, respectively                                                                                            |                      |                           | 1,076  |             |        |              | 1,096  |       
|                                      | Prepaid expenses and other current assets |                                                                                                                                                                                                         |                      | 515                       |        |             |        | 1,121        |       
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       
|                                      |                                           |                                                                                                                                                                                                         | Total current assets |                           |        | 12,717      |        |              |        | 18,263 |       
|                                      | Property and equipment, net               |                                                                                                                                                                                                         |                      | 490                       |        |             |        | 599          |       
|                                      | Other assets                              |                                                                                                                                                                                                         |                      | 411                       |        |             |        | 403          |       
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       
|                                      |                                           |                                                                                                                                                                                                         |                      | Total assets              |        | $           | 13,618 |              |        | $      | 19,265 | 
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       
|Liabilities and Stockholders Equity: |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |             
|                                      | Current liabilities:                      |                                                                                                                                                                                                         |                      |                           |        |             |        |              |       
|                                      |                                           | Bank overdraft                                                                                                                                                                                          |                      | $                         |       |             |        | $            | 149    |       
|                                      |                                           | Accounts payable                                                                                                                                                                                        |                      |                           | 269    |             |        |              | 633    |       
|                                      |                                           | Deferred revenue and customer deposits                                                                                                                                                                  |                      |                           | 508    |             |        |              | 1,205  |       
|                                      |                                           | Accrued liabilities and other                                                                                                                                                                           |                      |                           | 1,302  |             |        |              | 2,237  |       
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       
|                                      |                                           |                                                                                                                                                                                                         |                      | Total current liabilities |        |             | 2,079  |              |        |        | 4,224  | 
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       
|                                      | Stockholders equity:                     |                                                                                                                                                                                                         |                      |                           |        |             |        |              |       
|                                      |                                           | Common stock, $0.001 par value; 250,000,000 shares authorized at June
30, 2002 and December 31, 2001; 25,250,233 and 25,196,478 shares
outstanding at June 30, 2002 and
December 31, 2001, respectively |                      |                           | 26     |             |        |              | 26     |       
|                                      |                                           | Treasury stock, 1,166,125 shares at June 30, 2002 and
December 31, 2001, respectively                                                                                                                   |                      |                           | (40    | )           |        |              | (40    | )     
|                                      | Additional paid-in-capital                |                                                                                                                                                                                                         |                      | 80,181                    |        |             |        | 80,039       |       
|                                      | Deferred stock compensation               |                                                                                                                                                                                                         |                      | (274                      | )      |             |        | (493         | )     
|                                      | Cumulative other comprehensive income     |                                                                                                                                                                                                         |                      | 33                        |        |             |        | 79           |       
|                                      | Accumulated deficit                       |                                                                                                                                                                                                         |                      | (68,387                   | )      |             |        | (64,570      | )     
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       
|                                      |                                           | Total stockholders equity                                                                                                                                                                              |                      |                           | 11,539 |             |        |              | 15,041 |       
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       
|                                      |                                           | Total liabilities and stockholders equity                                                                                                                                                              |                      | $                         | 13,618 |             |        | $            | 19,265 |       
|                                      |                                           |                                                                                                                                                                                                         |                      |                           |        |             |        |              |        |       

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and six months ended June 30, 2002 and 2001
(in thousands, except per share data)

|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |        |  
|----------------------------------------------------------------------------------- |  | -------------------------------------------- | --------------------------------- | - | ------------------ | ------ | ---------------- | - | -------- | ------ | -------- | - | ----- | ------ | ------ | - | ----- | ------ | -
|                                                                                    |  |                                              |                                   |   | Three Months Ended |        | Six Months Ended
|                                                                                    |  |                                              |                                   |   |                    |        |                 
|                                                                                    |  |                                              |                                   |   | June 30,           |        | June 30,         |   | June 30, |        | June 30,
|                                                                                    |  |                                              |                                   |   | 2002               |        | 2001             |   | 2002     |        | 2001    
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |         
|                                                                                    |  |                                              |                                   |   | (unaudited)        |        | (unaudited)     
|Revenue:                                                                            |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |  
|                                                                                    |  | Product                                      |                                   | $ | 901                |        |                  | $ | 2,452    |        |          | $ | 2,416 |        |        | $ | 7,134 |       
|                                                                                    |  | Services, maintenance and support            |                                   |   | 1,101              |        |                  |   | 1,091    |        |          |   | 2,286 |        |        |   | 2,491 |       
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|                                                                                    |  |                                              | Total revenue                     |   |                    | 2,002  |                  |   |          | 3,543  |          |   |       | 4,702  |        |   |       | 9,625  |  
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|Cost of revenue:                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |  
|                                                                                    |  | Product                                      |                                   |   | 523                |        |                  |   | 1,050    |        |          |   | 1,262 |        |        |   | 2,889 |       
|                                                                                    |  | Services, maintenance and support            |                                   |   | 643                |        |                  |   | 739      |        |          |   | 1,227 |        |        |   | 1,535 |       
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|                                                                                    |  |                                              | Total cost of revenue             |   |                    | 1,166  |                  |   |          | 1,789  |          |   |       | 2,489  |        |   |       | 4,424  |  
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|                                                                                    |  |                                              | Gross margin                      |   |                    | 836    |                  |   |          | 1,754  |          |   |       | 2,213  |        |   |       | 5,201  |  
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|Operating Expenses:                                                                 |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |  
|                                                                                    |  | Research and development                     |                                   |   | 941                |        |                  |   | 1,358    |        |          |   | 2,090 |        |        |   | 2,927 |       
|                                                                                    |  | Sales and marketing                          |                                   |   | 894                |        |                  |   | 1,735    |        |          |   | 1,908 |        |        |   | 3,513 |       
|                                                                                    |  | General and administrative                   |                                   |   | 1,114              |        |                  |   | 1,437    |        |          |   | 2,197 |        |        |   | 2,964 |       
|                                                                                    |  | Amortization of deferred stock compensation* |                                   |   | 93                 |        |                  |   | 266      |        |          |   | 219   |        |        |   | 551   |       
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|                                                                                    |  |                                              | Total operating expenses          |   |                    | 3,042  |                  |   |          | 4,796  |          |   |       | 6,414  |        |   |       | 9,955  |  
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|                                                                                    |  |                                              | Loss from operations              |   |                    | (2,206 | )                |   |          | (3,042 | )        |   |       | (4,201 | )      |   |       | (4,754 | )
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|Other income (expense):                                                             |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |  
|                                                                                    |  | Interest expense                             |                                   |   |                   |        |                  |   |         |        |          |   |      |        |        |   | (2    | )     
|                                                                                    |  | Interest income                              |                                   |   | 73                 |        |                  |   | 211      |        |          |   | 164   |        |        |   | 486   |       
|                                                                                    |  | Other, net                                   |                                   |   | 224                |        |                  |   | (5       | )      |          |   | 220   |        |        |   | 28    |       
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|                                                                                    |  |                                              | Total other income (expense), net |   |                    | 297    |                  |   |          | 206    |          |   |       | 384    |        |   |       | 512    |  
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|Net loss                                                                            |  | $                                            | (1,909                            | ) |                    | $      | (2,836           | ) |          | $      | (3,817   | ) |       | $      | (4,242 | )
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|Net loss per share  basic and diluted                                              |  | $                                            | (0.08                             | ) |                    | $      | (0.11            | ) |          | $      | (0.15    | ) |       | $      | (0.17  | )
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|Weighted average shares used in calculating
basic and diluted net loss per share    |  |                                              | 25,250                            |   |                    |        | 25,145           |   |          |        | 25,241   |   |       |        | 25,147 |  
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|* Amortization of deferred stock compensation excluded from the following
expenses: |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |  
|                                                                                    |  | Cost of revenue                              |                                   | $ | 12                 |        |                  | $ | 38       |        |          | $ | 28    |        |        | $ | 80    |       
|                                                                                    |  | Research and development                     |                                   |   | 8                  |        |                  |   | 34       |        |          |   | 20    |        |        |   | 69    |       
|                                                                                    |  | Sales and marketing                          |                                   |   | 71                 |        |                  |   | 187      |        |          |   | 166   |        |        |   | 388   |       
|                                                                                    |  | General and administrative                   |                                   |   | 2                  |        |                  |   | 7        |        |          |   | 5     |        |        |   | 14    |       
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       
|                                                                                    |  | $                                            | 93                                |   |                    | $      | 266              |   |          | $      | 219      |   |       | $      | 551    |  
|                                                                                    |  |                                              |                                   |   |                    |        |                  |   |          |        |          |   |       |        |        |   |       |       

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

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AVISTAR COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
for the six months ended June 30, 2002
(unaudited)
(in thousands, except share amounts)

|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------- |  | ------------ | ---------- | -------------- |  | ---------- | -- | ------ |  | --------------- | --------- | ---------------- |  | ------------- | --- | ------- |  | ------ | ------ |  |  | - | ---- | - |  | - | --- | - |  | - | ------- | - |  | - | ------ | -
|                                                                          |  | Common Stock |            | Treasury Stock |  |            |    |        |  | Deferred        |           | Cumulative Other |  |               |     |         |  | Total 
|                                                                          |  |              |            |                |  | Additional |    | Stock  |  | Comprehensive   |           | Accumulated      |  | Stockholders'
|                                                                          |  | Shares       |            | Amount         |  | Shares     |    | Amount |  | Paid-In Capital |           | Compensation     |  | Income        |     | Deficit |  | Equity
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |       
|Balances at December 31,                                                  |  |              | 26,362,603 |                |  | $          | 26 |        |  |                 | 1,166,125 |                  |  | $             | (40 | )       |  | $      | 80,039 |  |  | $ | (493 | ) |  | $ | 79  |   |  | $ | (64,570 | ) |  | $ | 15,041 |  
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|Issuance of common stock to employees
pursuant to employee stock purchase |  |              | 49,605     |                |  |            |   |        |  |                 |          |                  |  |               |    |         |  |        | 71     |  |  |   |     |   |  |   |    |   |  |   |        |   |  |   | 71     |  
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|Issuance of common stock to employees
pursuant to exercise of options     |  |              | 4,150      |                |  |            |   |        |  |                 |          |                  |  |               |    |         |  |        | 4      |  |  |   |     |   |  |   |    |   |  |   |        |   |  |   | 4      |  
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|Non-employee stock-based compensation                                     |  |              |           |                |  |            |   |        |  |                 |          |                  |  |               |    |         |  |        | 67     |  |  |   |     |   |  |   |    |   |  |   |        |   |  |   | 67     |  
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|Amortization
of deferred stock compensation                               |  |              |           |                |  |            |   |        |  |                 |          |                  |  |               |    |         |  |        |       |  |  |   | 219  |   |  |   |    |   |  |   |        |   |  |   | 219    |  
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|Unrealized loss on short-term investments                                 |  |              |           |                |  |            |   |        |  |                 |          |                  |  |               |    |         |  |        |       |  |  |   |     |   |  |   | (46 | ) |  |   |        |   |  |   | (46    | )
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|Net loss                                                                  |  |              |           |                |  |            |   |        |  |                 |          |                  |  |               |    |         |  |        |       |  |  |   |     |   |  |   |    |   |  |   | (3,817  | ) |  |   | (3,817 | )
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|Balances at June 30, 2002                                                 |  |              | 26,416,358 |                |  | $          | 26 |        |  |                 | 1,166,125 |                  |  | $             | (40 | )       |  | $      | 80,181 |  |  | $ | (274 | ) |  | $ | 33  |   |  | $ | (68,387 | ) |  | $ | 11,539 |  
|                                                                          |  |              |            |                |  |            |    |        |  |                 |           |                  |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the six months ended June 30, 2002 and 2001
(in thousands)

|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |     |       |  
|------------------------------------- |  | --------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------- | ------ | ---------------- | ----- | -------- | ------ | --- | ----- | -
|                                      |  |                                                                             |                                            |                                           |        | Six Months Ended
|                                      |  |                                                                             |                                            |                                           |        |                 
|                                      |  |                                                                             |                                            |                                           |        | June 30,         |       | June 30,
|                                      |  |                                                                             |                                            |                                           |        | 2002             |       | 2001    
|                                      |  |                                                                             |                                            |                                           |        |                  |       |         
|                                      |  |                                                                             |                                            |                                           |        | (unaudited)     
|Cash Flows from Operating Activities: |  |                                                                             |                                            |                                           |        |                  |       |         
|                                      |  | Net loss                                                                    |                                            | $                                         | (3,817 | )                |       | $        | (4,242 | )  
|                                      |  | Adjustments to reconcile net loss to net cash used
in operating activities: |                                            |                                           |        |                  |       |          |        |    
|                                      |  |                                                                             | Depreciation                               |                                           |        | 188              |       |          |        | 68  |      
|                                      |  |                                                                             | Stock-based compensation                   |                                           |        | 286              |       |          |        | 581 |      
|                                      |  |                                                                             | Provision for doubtful accounts            |                                           |        | 151              |       |          |        | 23  |      
|                                      |  |                                                                             | Changes in current assets and liabilities: |                                           |        |                  |       |          |        |     |      
|                                      |  |                                                                             |                                            | Accounts receivable                       |        |                  | 1,199 |          |        |     | 1,687 |  
|                                      |  |                                                                             |                                            | Inventories                               |        |                  | 20    |          |        |     | 437   |  
|                                      |  |                                                                             |                                            | Prepaid expenses and other current assets |        |                  | 606   |          |        |     | 57    |  
|                                      |  |                                                                             |                                            | Other assets                              |        |                  | (8    | )        |        |     | (207  | )
|                                      |  |                                                                             |                                            | Accounts payable                          |        |                  | (364  | )        |        |     | (187  | )
|                                      |  |                                                                             |                                            | Deferred revenue and customer deposits    |        |                  | (697  | )        |        |     | (846  | )
|                                      |  |                                                                             |                                            | Accrued liabilities and other             |        |                  | (935  | )        |        |     | (310  | )
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |    
|                                      |  | Net cash used in operating activities                                       |                                            |                                           | (3,371 | )                |       |          | (2,939 | )  
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |    
|Cash Flows from Investing Activities: |  |                                                                             |                                            |                                           |        |                  |       |         
|                                      |  | Purchase of short-term investments                                          |                                            |                                           |       |                  |       |          | (3,833 | )  
|                                      |  | Sale of short-term investments                                              |                                            |                                           | 2,407  |                  |       |          |       |    
|                                      |  | Purchase of property and equipment                                          |                                            |                                           | (79    | )                |       |          | (377   | )  
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |    
|                                      |  | Net cash provided by (used in) investing activities                         |                                            |                                           | 2,328  |                  |       |          | (4,210 | )  
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |    
|Cash Flows from Financing Activities: |  |                                                                             |                                            |                                           |        |                  |       |         
|                                      |  | Decrease in bank overdraft                                                  |                                            |                                           | (149   | )                |       |          |       |    
|                                      |  | Proceeds from issuance of common stock                                      |                                            |                                           | 75     |                  |       |          | 153    |    
|                                      |  | Repurchases of common stock                                                 |                                            |                                           |       |                  |       |          | (34    | )  
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |    
|                                      |  | Net cash provided by (used in) financing activities                         |                                            |                                           | (74    | )                |       |          | 119    |    
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |    
|                                      |  | Net decrease in cash and cash equivalents                                   |                                            |                                           | (1,117 | )                |       |          | (7,030 | )  
|                                      |  | Cash and cash equivalents, beginning of period                              |                                            |                                           | 7,455  |                  |       |          | 21,660 |    
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |       
|                                      |  | Cash and cash equivalents, end of period                                    |                                            | $                                         | 6,338  |                  |       | $        | 14,630 |    
|                                      |  |                                                                             |                                            |                                           |        |                  |       |          |        |    

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Business, Basis of Presentation, and Risks and Uncertainties

Business

Avistar Communications Corporation (Avistar or the Company) provides
the Avistar vBusiness integrated suite of video-enabled applications,
including networked video communications software and hardware products and
services. Avistars products include applications for interactive video
calling, content creation and publishing, broadcast video and video-on-demand,
as well as data sharing, directory services and network management. Avistar
designs, develops, markets, sells, manufactures and/or assembles and installs
and supports its products. Avistars real-time and non-real-time products are
based upon its architecture and Video Operating System (AvistarVOS) platform,
which facilitate distribution over local and wide area networks using telephony
or internet services as appropriate. In addition, Avistar develops, maintains
and supports intellectual property used in the Companys products. Avistars
services include software development, consulting, implementation, training,
maintenance and support.

Basis of Presentation

The unaudited balance sheet as of June 30, 2002 presents the consolidated
financial position of Avistar and its two wholly-owned operating subsidiaries,
Avistar Systems U.K. Limited (ASUK) and Collaboration Properties, Inc.
(CPI), a Nevada corporation, after elimination of all intercompany accounts
and transactions. The consolidated results are referred to, collectively, as
those of Avistar or the Company in these notes.

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

The Companys fiscal year coincides with the calendar year ending on
December 31. Certain reclassifications were made to the prior year presentation
to conform to the current period presentation.

Risks and Uncertainties

The markets for the Companys products and services are in the early
stages of development. Some of the Companys products utilize changing and
emerging technologies. As is typical in industries of this nature, demand and
market acceptance are subject to a high level of uncertainty, particularly when
there are adverse conditions in the economy. Acceptance of the Companys
products, over time, is critical to the Companys success. The Companys
prospects must be evaluated in light of difficulties encountered by it and its
competitors in further developing this evolving marketplace. The Company has
generated losses since inception and had an accumulated deficit of $68.4
million as of June 30, 2002. The Companys operating results may fluctuate
significantly in the future as a result of a variety of factors, including, but
not limited to, the economic environment, the adoption of differing
distribution channels, and the timing of new product announcements by the
Company or its competitors.

The Companys future liquidity and capital requirements will depend upon
numerous factors, including without limitation, general economic conditions and
conditions in the financial services industry in particular, the level and
timing of revenue, the costs and timing of the Companys product development
efforts and the success of these development efforts, the costs and timing of
the Companys sales and marketing activities, the extent to which the Companys
existing and new products gain market acceptance, competing technological and
market developments, the costs involved in maintaining and enforcing patent
claims and other intellectual property rights, and other factors, all of which
impact the Companys ability to achieve and maintain profitability. The
Companys management estimates that it will need to obtain additional funding
over the next six months in order to continue its efforts to implement its
business plan.

If the Company is unable to raise funds on acceptable terms, the Company
may not be able to develop or enhance its products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could seriously harm its business, financial condition, and
results of operations. If additional funds are raised through the issuance of
equity securities, the Companys net tangible book value per share is likely to
decrease, the percentage ownership of then current stockholders will be
diluted, and such equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock.

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2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The financial statements furnished in this report have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
December 31, 2001 Condensed Consolidated Balance Sheet was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America.

In the opinion of management, the unaudited financial statements furnished
in this report reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
the interim periods covered and of the Companys financial position as of the
interim balance sheet date. The results of operations for the interim periods
are not necessarily indicative of the results for the entire year. These
financial statements should be read in conjunction with the Companys audited
consolidated financial statements and the accompanying notes for the year ended
December 31, 2001 included in the Companys annual report on Form 10-K filed
with the Securities and Exchange Commission on March 21, 2002.

Use of Estimates

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

Cash and Cash Equivalents and Short Term Investments

The Company considers all investment instruments purchased with a
remaining maturity of three months or less to be cash equivalents. The
Companys cash equivalents at June 30, 2002 and December 31, 2001 consisted of
money market funds and short-term securities. The Company has classified all
investments not classified as cash equivalents as short term since it has the
intent and ability to redeem them within one year. The Company classifies its
short-term investments as available for sale with unrealized gains or losses
reported as a separate component of stockholders equity. The fair value of
the Companys investments was determined based on quoted market prices at the
reporting date for those instruments.

Supplemental Cash Flow Information

During the six months ended June 30, 2002 and 2001, no cash was paid for
income taxes or interest.

Significant Concentrations

A relatively small number of customers accounted for a significant
percentage of the Companys net sales. Sales to these customers as a percentage
of sales were as follows for the three and six months ended June 30, 2002 and
2001:

|           |  |                    |    |                  |  |      |    |      |  |  |    |   |  |  |    |  
|---------- |  | ------------------ | -- | ---------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|           |  | THREE MONTHS ENDED |    | SIX MONTHS ENDED
|           |  | JUNE 30,           |    | JUNE 30,        
|           |  |                    |    |                 
|           |  | 2002               |    | 2001             |  | 2002 |    | 2001
|           |  |                    |    |                  |  |      |    |     
|           |  | (UNAUDITED)        |    | (UNAUDITED)     
|Customer A |  |                    | 66 | %                |  |      | 31 | %    |  |  | 62 | % |  |  | 33 | %
|Customer B |  |                    | *  |                  |  |      | 21 | %    |  |  | *  |   |  |  | 26 | %
|Customer C |  |                    | *  |                  |  |      | 12 | %    |  |  | *  |   |  |  | *  |  



---

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

Any change in the relationship with these customers could have a
potentially adverse effect on the Companys financial position and/or results
of operations.

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Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. The Company has cash and investment policies that limit
the amount of credit exposure to any one financial institution and restrict
placement of these investments to financial institutions evaluated as highly
credit worthy. Concentration of credit risk with respect to trade receivables
relate to those trade receivables from both United States and foreign entities.
As of June 30, 2002, approximately 74% of accounts receivable was concentrated
with one customer who represented greater than 10% of the Companys total
accounts receivable balance. As of December 31, 2001, approximately 49% of
accounts receivable was concentrated with two customers who each represented
greater than 10% of the Companys total accounts receivable balance.

Inventories

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

|                                                       |  |             |       |              |  |   |       |  
|------------------------------------------------------ |  | ----------- | ----- | ------------ |  | - | ----- | -
|                                                       |  | JUNE 30,    |       | DECEMBER 31,
|                                                       |  | 2002        |       | 2001        
|                                                       |  |             |       |             
|                                                       |  | (UNAUDITED) |       |              |  |  
|Raw materials and subassemblies                        |  | $           | 128   |              |  | $ | 169   |  
|Finished goods                                         |  |             | 1,026 |              |  |   | 1,018 |  
|Inventory shipped to customer sites, not yet installed |  |             | 121   |              |  |   | 262   |  
|Less: Allowance for obsolescence                       |  |             | (199  | )            |  |   | (353  | )
|                                                       |  |             |       |              |  |   |       |  
|                                                       |  | $           | 1,076 |              |  | $ | 1,096 |  
|                                                       |  |             |       |              |  |   |       |  

Inventory shipped to customer sites, not yet installed, represents product
shipped to customer sites pending completion of the installation process by the
Company. As of June 30, 2002 and December 31, 2001, the Company had billed
approximately $0.2 million and $0.6 million, respectively, to customers related
to these shipments, but did not record the revenue, as the installations had
not been completed. Although customers are billed in accordance with customer
agreements, these deferred revenue amounts are netted against accounts
receivable until the customer confirms installation.

Revenue Recognition and Deferred Revenue

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

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

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

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

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections Business Combinations. The provisions of SFAS No. 145 relating to
the rescission of SFAS No. 4 are effective for financial statements issued for
fiscal years beginning after May 15, 2002, and the provisions relating to SFAS
No. 13 are effective for transactions occurring after May 15, 2002. SFAS No.
145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No.
44, Accounting for Intangible Assets of Motor Carriers, and amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
does not expect the adoption to have a significant impact on the Companys
financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 revises the
accounting for specified employee and contract terminations that are part of
restructuring activities. Companies will be able to record a liability for a
cost associated with an exit or disposal activity only when the liability is
incurred and can be measured at fair value. Commitment to an exit plan or a
plan of disposal expresses only managements intended future actions and
therefore, does not meet the requirement for recognizing a liability and
related expense. This Statement only applies to termination benefits offered
for a specific termination event or a specified period. It will not affect
accounting for the costs to terminate a capital lease. The Company is required
to adopt this statement for exit or disposal activities initiated after
December 31, 2002. The Company does not expect the adoption to have a
significant impact on the Companys financial position or results of
operations.

3. Line of Credit

On February 27, 2002, the Company entered into a Loan and Security
Agreement with a financial institution to borrow up to $4.5 million as a
revolving line of credit and $0.5 million as an equipment term loan. The first
$1.0 million of the revolving line is available on a non-formula basis, and the
remainder is limited to 80% of the Companys eligible accounts receivable. The
equipment term loan is limited to 100% of the purchase price of eligible
equipment. As collateral under this Loan and Security Agreement, the Company
granted a first priority interest in all its assets to the lender, excluding
intellectual property. The revolving line of credit, which expires on February
26, 2003, and the equipment term loan, which expires on November 30, 2004,
require certain covenants to be met, including maintenance of a $3.0 million
cash balance at the financial institution. Interest on borrowed
amounts is payable at the banks prime rate plus 0.25%. As of June 30, 2002, the Company did not have any
outstanding borrowings under this line of credit.

4. Related Party Transactions

On February 6, 2001, Robert P. Latta, partner at the law firm Wilson
Sonsini Goodrich & Rosati, Professional Corporation (WSGR), was appointed to
the Companys Board of Directors. Mr. Latta and WSGR have represented the
Company and its predecessors as corporate counsel since 1997. During the six
months ended June 30, 2002 and 2001, payments of approximately $80,000 and
$197,000, respectively, were made to WSGR for legal services provided to the
Company.

During the six months ended June 30, 2002 and 2001, payments for
consulting fees of approximately $110,000 and $18,000, respectively, were made
to R. Stephen Heinrichs, a former officer of the Company, who is also a member
of the Board of Directors, pursuant to a Separation Agreement between Mr.
Heinrichs and the Company dated April 26, 2001.

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5. Net Loss Per Share

Basic and diluted net loss per share of common stock is presented in
conformity with SFAS No. 128 (SFAS 128), Earnings Per Share, for all
periods presented.

In accordance with SFAS 128, basic net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Diluted net loss per share is
computed on the basis of the weighted average number of shares and common
equivalent shares outstanding during the period. Common equivalent shares
result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method. The Company has
excluded all outstanding stock options and shares subject to repurchase from
the calculation of diluted net loss per share for the three and six months
ended June 30, 2002 and 2001, because all such securities are antidilutive.
Accordingly, diluted net loss per share is the same as basic net loss per share
for all periods presented.

The total number of common equivalent shares excluded from the
calculations of diluted net loss per share were 4,731,784 and 2,602,136 for the
three months ended June 30, 2002 and 2001, respectively, and 4,122,949 and
2,495,482 for the six months ended June 30, 2002 and 2001, respectively.

6. Segment Reporting

Disclosure of segments is presented in accordance with SFAS No. 131 (SFAS
131), Disclosures About Segments of an Enterprise and Related Information.
SFAS 131 establishes standards for disclosures regarding operating segments,
products and services, geographic areas and major customers. The Company is
organized and operates in two operating segments: (1) the design, development,
manufacture, sale and marketing of networked video communications products
(Avistar) and (2) the development, maintenance and support of the intellectual
property used in the Companys products (CPI). Service revenue relates mainly
to the maintenance, support, training and installation of products and is
included in Avistar for purposes of reporting and decision-making. Avistar
also engages in the corporate functions and provides financing and services to
the subsidiaries. The Companys chief operating decision maker, its Chief
Executive Officer, monitors the Companys operations based upon the information
reflected in the following table (in thousands):

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|                                 |                          |  |         |        |     |  |       |      |   |  |   |        |  
|-------------------------------- | ------------------------ |  | ------- | ------ | --- |  | ----- | ---- | - |  | - | ------ | -
|                                 |                          |  | Avistar |        | CPI |  | Total
|                                 |                          |  |         |        |     |  |      
|Three Months Ended June 30, 2002 |                          |  |         |        |     |  |       |      |   |  |   |       
|                                 | Revenue                  |  | $       | 2,002  |     |  | $     |     |   |  | $ | 2,002  |  
|                                 | Gross margin             |  |         | 836    |     |  |       |     |   |  |   | 836    |  
|                                 | Depreciation expense     |  |         | (90    | )   |  |       | (1   | ) |  |   | (91    | )
|                                 | Total operating expenses |  |         | (2,812 | )   |  |       | (230 | ) |  |   | (3,042 | )
|                                 | Interest income          |  |         | 73     |     |  |       |     |   |  |   | 73     |  
|                                 | Interest expense         |  |         |       |     |  |       |     |   |  |   |       |  
|                                 | Net loss                 |  |         | (1,679 | )   |  |       | (230 | ) |  |   | (1,909 | )
|                                 | Assets                   |  |         | 13,451 |     |  |       | 167  |   |  |   | 13,618 |  
|Three Months Ended June 30, 2001 |                          |  |         |        |     |  |       |      |   |  |   |       
|                                 | Revenue                  |  | $       | 3,543  |     |  | $     |     |   |  | $ | 3,543  |  
|                                 | Gross margin             |  |         | 1,754  |     |  |       |     |   |  |   | 1,754  |  
|                                 | Depreciation expense     |  |         | (48    | )   |  |       | (3   | ) |  |   | (51    | )
|                                 | Total operating expenses |  |         | (4,534 | )   |  |       | (262 | ) |  |   | (4,796 | )
|                                 | Interest income          |  |         | 211    |     |  |       |     |   |  |   | 211    |  
|                                 | Interest expense         |  |         |       |     |  |       |     |   |  |   |       |  
|                                 | Net loss                 |  |         | (2,580 | )   |  |       | (256 | ) |  |   | (2,836 | )
|                                 | Assets                   |  |         | 23,384 |     |  |       | 34   |   |  |   | 23,418 |  
|Six Months Ended June 30, 2002   |                          |  |         |        |     |  |       |      |   |  |   |       
|                                 | Revenue                  |  | $       | 4,702  |     |  | $     |     |   |  | $ | 4,702  |  
|                                 | Gross margin             |  |         | 2,213  |     |  |       |     |   |  |   | 2,213  |  
|                                 | Depreciation expense     |  |         | (186   | )   |  |       | (2   | ) |  |   | (188   | )
|                                 | Total operating expenses |  |         | (5,977 | )   |  |       | (437 | ) |  |   | (6,414 | )
|                                 | Interest income          |  |         | 164    |     |  |       |     |   |  |   | 164    |  
|                                 | Interest expense         |  |         |       |     |  |       |     |   |  |   |       |  
|                                 | Net loss                 |  |         | (3,380 | )   |  |       | (437 | ) |  |   | (3,817 | )
|Six Months Ended June 30, 2001   |                          |  |         |        |     |  |       |      |   |  |   |       
|                                 | Revenue                  |  | $       | 9,625  |     |  | $     |     |   |  | $ | 9,625  |  
|                                 | Gross margin             |  |         | 5,201  |     |  |       |     |   |  |   | 5,201  |  
|                                 | Depreciation expense     |  |         | (62    | )   |  |       | (6   | ) |  |   | (68    | )
|                                 | Total operating expenses |  |         | (9,389 | )   |  |       | (566 | ) |  |   | (9,955 | )
|                                 | Interest income          |  |         | 486    |     |  |       |     |   |  |   | 486    |  
|                                 | Interest expense         |  |         | (2     | )   |  |       |     |   |  |   | (2     | )
|                                 | Net loss                 |  |         | (3,692 | )   |  |       | (550 | ) |  |   | (4,242 | )

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 45% and 48% of
total revenue for the three months ended June 30, 2002 and 2001, respectively.
International revenue comprised 49% and 46% of total revenue for the six months
ended June 30, 2002 and 2001, respectively. For the three months ended June
30, 2002 and 2001, international revenues to customers in the United Kingdom
accounted for 28% and 16%, respectively, of total revenue. For the six months
ended June 30, 2002 and 2001, international revenues to customers in the United
Kingdom accounted for 29% and 26%, respectively, of total revenue. All of the
Companys sales are currently billed in United States dollars. The Company had
no significant long-lived assets in any country other than in the United States
for any period presented.

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Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Interim Financial Statements and the Notes thereto
included elsewhere herein, and the audited consolidated financial statements
contained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission on
March 21, 2002.

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

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

Overview

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

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

Critical Accounting Policies

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

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

     Revenue recognition;

     Valuation of accounts receivable; and

     Valuation of inventories.

These critical accounting policies are discussed below.

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Revenue

We derive product revenue principally from the sale and licensing of our
video-enabled networked communications system, consisting of a suite of
Avistar-designed software and hardware products, including third party
components. In addition, we derive revenue from fees for software development,
installation, maintenance, support and training services. For the three-month
periods ended June 30, 2002 and 2001, product revenue as a percentage of total
revenue was 45% and 69%, respectively. For the six-month periods ended June
30, 2002 and 2001, product revenue as a percentage of total revenue was 51% and
74%, respectively.

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

To date, a significant portion of our revenue has resulted from sales to a
limited number of customers. For the six months ended June 30, 2002, we
recorded revenue of approximately $2.9 million, or 62% of total revenue, from
Deutsche Bank and its affiliates. No other customers individually accounted for
greater than 10% of our total revenue for the six months ended June 30, 2002.
For the six months ended June 30, 2001, we recorded revenue of approximately
$5.7 million, or 59% of total revenue, from our two largest customers and their
affiliates, who each generated greater than 10% of our total revenue. We
anticipate that our revenue, and therefore, our operating results for any given
period, will continue to depend to a significant extent on a limited number of
customers. As a result, the loss or a reduction in sales to any one of these
customers would have a significant adverse impact on our operations and
financial performance.

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 49% and 46% of
total revenue for the six months ended June 30, 2002 and 2001, respectively.
For the six months ended June 30, 2002 and 2001, international revenues to
customers in the United Kingdom accounted for 29% and 26%, respectively, of
total revenue.

Cost of Revenue

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

Operating Expenses

We generally recognize our operating expenses as we incur them in three
operational categories: research and development, sales and marketing, and
general and administrative. Our operating expenses also include amortization
of our deferred stock compensation charges related to stock options granted
prior to our initial public offering. These charges are amortized on a
straight-line basis over the vesting period of the options, generally four
years. Our research and development expenses consist primarily of compensation
expenses for our personnel, patent and licensing costs and, to a lesser extent,
independent contractors. Due to uncertainties about the estimated future
economic benefits and lives of our patents and patent applications, all related
patent costs are expensed as incurred. Our sales and marketing expenses consist
primarily of compensation, commissions and travel expenses, and other internal
and outside

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marketing expenses. Our general and administrative expenses consist
primarily of compensation for our administrative and financial personnel, and a
number of non-allocable costs, including insurance, professional fees, legal
fees, accounting fees and provision for doubtful accounts receivable.

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

Amortization of deferred stock compensation relates to stock options
issued to employees, and represents the difference between the exercise price
of options granted to employees and the grant-date fair value of our common
stock. Based on the outstanding options at December 31, 2001, we anticipate
recording charges of approximately $358,000 in 2002 and $135,000 in 2003 to
record the remainder of the costs associated with these grants. Future
compensation expense may be decreased in a period of forfeiture for any accrued
but unvested compensation arising from the early termination of an option
holders services. In addition, we have granted options to acquire shares of
common stock to non-employees who have provided consulting services. For the
three months ended June 30, 2002 and 2001, we recognized an expense of $61,000
and $3,000, respectively, related to these non-employee options, and for the
six months ended June 30, 2002 and 2001, we recognized an expense of $67,000
and $6,000, respectively. Pursuant to the provisions of SFAS No. 123, the fair
value of options issued was determined based on the fair value of the
consideration received, where such amount was reliably measurable, or the fair
value of the equity instruments issued, in which case, the fair value was
estimated as services were provided using the Black-Scholes option pricing
model.

Since June of 2001, we have carried out a number of initiatives intended
to control costs and reduce operating expenses, including a net reduction in
staffing of 29% as of June 30, 2002 relative to staffing levels as of June 30,
2001.

Valuation of Accounts Receivable

Estimates are used in determining our allowance for doubtful accounts and
are based on our historical collection experience, historical write-offs,
current trends and the credit quality of our customer base, and the make-up of
our accounts receivable by aging category. If the allowance for doubtful
accounts was understated, our operating income could be significantly reduced.
As of June 30, 2002, approximately 74% of accounts receivable were concentrated
with one customer, the only customer who represented greater than 10% of our
total accounts receivable balance. As of December 31, 2001, approximately 49%
of accounts receivable were concentrated with two customers, who each
represented greater than 10% of our total accounts receivable.

Valuation of Inventories

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

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Results of Operations

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

|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |      |       | 
|----------------------- | ------------------------------------------- | ---------------------------- | ------ | --------------------------- | ----- | ---------------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- |  | ----- | ---- | ----- | 
|                        |                                             |                              |        | PERCENTAGE OF TOTAL REVENUE
|                        |                                             |                              |        |                            
|                        |                                             |                              |        | THREE MONTHS ENDED          |       | SIX MONTHS ENDED
|                        |                                             |                              |        | JUNE 30,                    |       | JUNE 30,        
|                        |                                             |                              |        |                             |       |                 
|                        |                                             |                              |        | 2002                        |       | 2001             |       | 2002 |       | 2001
|                        |                                             |                              |        |                             |       |                  |       |      |       |     
|Revenue:                |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        | Product                                     |                              |        | 45.0                        | %     |                  |       | 69.2 | %     |      |       | 51.4 | %     |  |       | 74.1 | %    
|                        | Services, maintenance and support           |                              |        | 55.0                        |       |                  |       | 30.8 |       |      |       | 48.6 |       |  |       | 25.9 |      
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total revenue                |        |                             | 100.0 |                  |       |      | 100.0 |      |       |      | 100.0 |  |       |      | 100.0 | 
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|Cost of revenue:        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        | Product                                     |                              |        | 26.1                        |       |                  |       | 29.6 |       |      |       | 26.8 |       |  |       | 30.0 |      
|                        | Services, maintenance and support           |                              |        | 32.1                        |       |                  |       | 20.9 |       |      |       | 26.1 |       |  |       | 16.0 |      
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total cost of revenue        |        |                             | 58.2  |                  |       |      | 50.5  |      |       |      | 52.9  |  |       |      | 46.0  | 
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|Gross margin            |                                             |                              | 41.8   |                             |       |                  | 49.5  |      |       |      | 47.1  |      |       |  | 54.0  |     
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|Operating expenses:     |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        | Research and development                    |                              |        | 47.0                        |       |                  |       | 38.3 |       |      |       | 44.4 |       |  |       | 30.4 |      
|                        | Sales and marketing                         |                              |        | 44.7                        |       |                  |       | 49.0 |       |      |       | 40.6 |       |  |       | 36.5 |      
|                        | General and administrative                  |                              |        | 55.6                        |       |                  |       | 40.6 |       |      |       | 46.7 |       |  |       | 30.8 |      
|                        | Amortization of deferred stock compensation |                              |        | 4.6                         |       |                  |       | 7.5  |       |      |       | 4.7  |       |  |       | 5.7  |      
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total operating expenses     |        |                             | 151.9 |                  |       |      | 135.4 |      |       |      | 136.4 |  |       |      | 103.4 | 
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|Loss from operations    |                                             |                              | (110.1 | )                           |       |                  | (85.9 | )    |       |      | (89.3 | )    |       |  | (49.4 | )   
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|Other (expense) income: |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        | Interest expense                            |                              |        | (0.0                        | )     |                  |       | (0.0 | )     |      |       | (0.0 | )     |  |       | (0.0 | )    
|                        | Interest income                             |                              |        | 3.6                         |       |                  |       | 6.0  |       |      |       | 3.5  |       |  |       | 5.0  |      
|                        | Other                                       |                              |        | 11.2                        |       |                  |       | (0.1 | )     |      |       | 4.7  |       |  |       | 0.3  |      
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total other (expense) income |        |                             | 14.8  |                  |       |      | 5.9   |      |       |      | 8.2   |  |       |      | 5.3   | 
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     
|Net loss                |                                             |                              | (95.3  | )%                          |       |                  | (80.0 | )%   |       |      | (81.1 | )%   |       |  | (44.1 | )%  
|                        |                                             |                              |        |                             |       |                  |       |      |       |      |       |      |       |  |       |     

COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Revenue

Total revenue decreased by 43% to $2.0 million for the three months ended
June 30, 2002 from $3.5 million for the three months ended June 30, 2001, and
decreased by 51% to $4.7 million for the six months ended June 30, 2002 from
$9.6 million for the six months ended June 30, 2001. The decrease in the three
and six month periods ended June 30, 2002 relative to the prior year were due
primarily to lower product sales. Lower product sales were due in large part
to continued weakness in the United States and global economies and in the
financial services sector in particular, which has resulted in delayed
procurement decisions and constrained technology spending among our existing
and potential customers. For the three months ended June 30, 2002, revenue from
one customer accounted for 66% of total revenues, and no other customers
individually accounted for greater than 10% of our total revenue. For the
three months ended June 30, 2001 revenue from three customers accounted for 64%
of our total revenue, each of whom contributed greater than 10% of our total
revenue. For the six months ended June 30, 2002, revenue from one customer
accounted for 62% of total revenues, and no other customers individually
accounted for greater than 10% of our total revenue. For the six months ended
June 30, 2001, revenue from two customers accounted for 59% of our total
revenue, each of whom contributed greater than 10% of our total revenue. The
level of sales to any customer may vary from quarter to quarter. We expect
that there will be significant customer concentration in future quarters. The
loss of any one of those customers would have a material adverse impact on our
financial condition or operating results.

Cost of Revenue

The cost of revenue declined by 35% to $1.2 million for the three months
ended June 30, 2002 from $1.8 million for the three months ended June 30, 2001,
and decreased by 44% to $2.5 million for the six months ended June 30, 2002
from $4.4 million for the six months ended June 30, 2001. Cost of revenue
decreased during the three and six-month periods ended June 30, 2002 relative
to the prior year due to reductions in product revenue and associated direct
costs. Cost of product revenue declined by 50% and 56% in the three and
six-month periods ended June 30, 2002 and 2001, respectively, due to the lower
level of product sales and associated direct

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costs, and a declining fixed component of the cost of product revenue,
resulting primarily from reduced personnel and personnel related expenses. Cost
of service revenue declined by 13% and 20% in the three and six-month periods
ended June 30, 2002 and 2001, respectively, due to the declining fixed
component of the cost of service revenue, resulting primarily from the
reduction in personnel and personnel related expenses.

Gross Margin

The gross margin as a percentage of revenue decreased to 42% for the three
months ended June 30, 2002 from 50% for the three months ended June 30, 2001,
and decreased to 47% for the six months ended June 30, 2002 from 54% for the
six months ended June 30, 2001. The decreases in the three and six-month
periods ended June 30, 2002 relative to the prior year were primarily due to
the lower overall revenue base, which provided more limited coverage of the
fixed components of the cost of sales. Product gross margin as a percentage of
total product revenue decreased to 42% for the three-month period ended June
30, 2002 from 57% for the three-month period ended June 30, 2001, and decreased
to 48% from 60% for the six-month periods ended June 30, 2002 and 2001,
respectively, as a result of reduced product revenue, which provided more
limited coverage of the fixed components of the cost of product sales. Service
gross margin as a percentage of total service revenue increased to 42% from 32%
for the three-month periods ended June 30, 2002 and 2001, and to 46% from 38%
for the six-month periods ended June 30, 2002 and 2001, respectively, as a
result of similar total service revenue levels, over a declining level of the
fixed components of the cost of service revenue resulting primarily from
reduced personnel and personnel related expenses.

Operating expenses

Research and development.Research and development expenses decreased by
31% to $0.9 million in the three months ended June 30, 2002 from $1.4 million
for the three months ended June 30, 2001, and decreased by 29% to $2.1 million
for the six months ended June 30, 2002 from $2.9 million for the six months
ended June 30, 2001. The decreases in the three and six-month periods ended
June 30, 2002 relative to the prior year were due to the reduction in personnel
and personnel related expenses, as a result of a 19% reduction in staffing
levels in research and development relative to June 30, 2001, and a reduction
in external consulting expenses.

Sales and marketing.Sales and marketing expenses decreased by 48% to $0.9
million in the three months ended June 30, 2002 from $1.7 million in the three
months ended June 30, 2001, and decreased by 46% to $1.9 million for the six
months ended June 30, 2002 from $3.5 million for the six months ended June 30,
2001. The decreases in the three and six-month periods ended June 30, 2002
relative to the prior year were due to decreased personnel and personnel
related costs, as a result of a 34% reduction in sales and marketing staffing
relative to June 30, 2001, decreased commission expense due to lower business
volume, and reductions in marketing program expenditures.

General and administrative.General and administrative expenses decreased
by 22% to $1.1 million in the three months ended June 30, 2002 from $1.4
million for the three months ended June 30, 2001, and decreased by 26% to $2.2
million in the six months ended June 30, 2002 from $3.0 million for the six
months ended June 30, 2001. The decreases in the three and six-month periods
ended June 30, 2002 relative to the prior year were due to decreased personnel
and personnel related costs as a result of a 26% reduction in the
administrative staffing level relative to June 30, 2001, and decreased outside
professional services costs.

Amortization of deferred stock compensation.Amortization of deferred
stock compensation decreased by 65% to $0.1 million in the three months ended
June 30, 2002 from $0.3 million in the three months ended June 30, 2001, and
decreased by 60% to $0.2 million in the six months ended June 30, 2002 from
$0.6 million in the six months ended June 30, 2001. The decreases in the three
and six-month periods ended June 30, 2002 relative to the prior year were due
to a decline in options vesting in 2002 relative to 2001, as well as
forfeitures of stock options by employees no longer with our company.

Other Income (Expense)

Other income (expense), net increased by 44% to an income of $0.3 million in
the three months ended June 30, 2002 from an income of $0.2 million in the
three months ended June 30, 2001. Other income (expense), net decreased by 25%
to an income of $0.4 million in the six months ended June 30, 2002 from an
income of $0.5 million for the six months ended June 30, 2001. The increase in
the three-month period ended June 30, 2002 relative to the prior year was due
to net grant proceeds received from the New York disaster relief program
associated with the events of September 11, 2001, partially offset by lower
interest income due to a declining balance of cash and cash equivalents, and
short-term investments with lower rates of return on such investments. The
decrease in the six-month period ended June 30, 2002 relative to the prior year
was due to lower interest income resulting from a declining balance of

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cash and cash equivalents, and short-term investments, and lower rates of
return on such investments, partially offset by the net grant proceeds received
from the New York disaster relief program during the six months ended June 30,
2002.

Liquidity and Capital Resources

We have funded our operations since inception primarily from product and services revenue, the net proceeds of $31.4 million from our
August 2000 initial public offering of Common Stock, lines of credit with
related parties and financial institutions, and, to a lesser extent, the
proceeds of approximately $6.4 million from the sale of Series B Preferred
Stock in December 1999.

We had cash and cash equivalents of $6.3 million as of June 30, 2002 and
$7.5 million as of December 31, 2001. For the six months ended June 30, 2002
we had an overall net cash outflow of $1.1 million, resulting primarily from
net cash used in operations of $3.4 million, offset partially by the net cash
provided by investing activities of $2.3 million. The net cash used in
operating activities of $3.4 million resulted from a net loss of $3.8 million,
a decrease in accounts payable of $0.4 million, a decrease in deferred revenue
and customer deposits of $0.7 million, and a decrease in accrued liabilities
and other of $0.9 million, partially offset by depreciation, amortization and
provision for doubtful accounts totaling $0.6 million, a decrease in accounts
receivable of $1.2 million, and a decrease in prepaid expenses and other
current assets of $0.6 million. The net cash provided by investing activities
resulted from the net sale of short-term investments of $2.4 million, partially
offset by the purchase of property and equipment of $0.1 million.

On February 27, 2002, we entered into a Loan and Security Agreement with a
financial institution to borrow up to $4.5 million as a revolving line of
credit and $0.5 million as an equipment term loan. The first $1.0 million of
the revolving line is available on a non-formula basis, and the remainder is
limited to 80% of our eligible accounts receivable. The equipment term loan is
limited to 100% of the purchase price of eligible equipment. As collateral
under this Loan and Security Agreement, we granted a first priority interest in
all our assets to the lender, excluding intellectual property. The revolving
line of credit, which expires on February 26, 2003, and the equipment term
loan, which expires on November 30, 2004, require certain covenants be met,
including maintenance of a $3.0 million balance at the financial institution.
Interest on borrowed amounts is payable at the banks prime rate plus 0.25%.
As of June 30, 2002, we did not have any outstanding borrowings under this line
of credit, although we estimate that we were eligible to borrow up to $1.0
million under the line of credit and $0.5 million under the equipment term loan
at that time. Because our accounts receivable fluctuate from time to time as
we invoice customers and customers pay their invoices, the available borrowings
under this line of credit will fluctuate. We cannot assure you that we will
have sufficient accounts receivable to satisfy our borrowing needs from this
line of credit at any given time.

At June 30, 2002, we had open purchase orders and other contractual
obligations of approximately $0.9 million, primarily related to inventory
purchases. We also have commitments that consist of obligations under our
operating leases in our normal course of business. These commitments and
obligations are reflected in our financial statements once goods or services
have been received or payments related to the obligations become due.

We intend to continue to invest in the development of new products and
enhancements to our existing products. We expect that we will need to obtain
additional funding in the next six months in order to meet our future business
requirements for the next twelve months. Our future liquidity and capital
requirements will depend upon numerous factors, including without limitation,
general economic conditions and conditions in the financial services industry
in particular, the level and timing of revenue, the costs and timing of our
product development efforts and the success of these development efforts, the
costs and timing of our sales and marketing activities, the extent to which our
existing and new products gain market acceptance, competing technological and
market developments, the costs involved in maintaining and enforcing patent
claims and other intellectual property rights, and other factors, all of which
impact our ability to achieve and maintain profitability.

If we are unable to obtain additional funding on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, financial condition, and
results of operations. There can be no assurance that such funding will be
available on terms attractive to us, or at all. Furthermore, any additional
equity financing may be dilutive to stockholders and such equity securities may
have rights, preferences or privileges senior to those of the holders of our
common stock, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require us to relinquish our rights to certain of our technologies or products.

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Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections Business Combinations. The provisions of SFAS No. 145 relating to
the rescission of SFAS No. 4 are effective for financial statements issued for
fiscal years beginning after May 15, 2002, and the provisions relating to SFAS
No. 13 are effective for transactions occurring after May 15, 2002. SFAS No.
145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No.
44, Accounting for Intangible Assets of Motor Carriers, and amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. We do not
expect the adoption to have a significant impact on our financial position or
results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 revises the
accounting for specified employee and contract terminations that are part of
restructuring activities. Companies will be able to record a liability for a
cost associated with an exit or disposal activity only when the liability is
incurred and can be measured at fair value. Commitment to an exit plan or a
plan of disposal expresses only managements intended future actions and
therefore, does not meet the requirement for recognizing a liability and
related expense. This Statement only applies to termination benefits offered
for a specific termination event or a specified period. It will not affect
accounting for the costs to terminate a capital lease. The Company is required
to adopt this statement for exit or disposal activities initiated after
December 31, 2002. We do not expect the adoption to have a significant impact
on our financial position or results of operations.

Factors Affecting Future Operating Results

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

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

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

We incurred net losses of $3.8 million for the six months ended June 30,
2002, $7.9 million for the year 2001, and $4.7 million for the year 2000. As
of June 30, 2002, our accumulated deficit was $68.4 million. Our revenue may
not increase, or even remain at its current level. In addition, our operating
expenses may increase significantly as we continue to develop our business in
the future. As a result, to become profitable, we will need to increase our
revenue by increasing sales to existing customers and by attracting additional
customers. If our expenses increase more rapidly than our revenue, or if
revenue and expense levels remain the same, we may never become profitable.

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

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

Economic growth in the United States has slowed to the point where
industries are delaying or reducing technology purchases. These conditions
have negatively affected our business in 2001 and the first six months of 2002,
and will in the future if these conditions persist. If our customers and
potential customers continue to delay ordering our products, we will fall short
of our revenue

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expectations for the remainder of 2002 and beyond. The outlook for the
video communications industry is uncertain and it is very difficult to predict
how long the current slowdown will last. Slower growth among our end-user
customers, tightening of customers operating budgets, retrenchment in the
capital markets and other general economic factors all have and could continue
to have a materially adverse effect on our revenue, capital resources,
financial condition and results of operations.

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

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



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

We expect that we will need to obtain additional funding in the next six
months in order to meet our future business requirements for the next twelve
months. However, due to the uncertainty of the factors set forth above and
others, we may require additional funding earlier than expected. If we are
unable to obtain additional funding when needed on acceptable terms, we may not
be able to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, financial condition, and
results of operations. There can be no assurance that such funding will be
available on terms attractive to us, or at all. Furthermore, any additional
equity financing may be dilutive to stockholders and such equity securities may
have rights, preferences or privileges senior to those of the holders of our
common stock, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require us to relinquish our rights to certain of our technologies or products.

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

We have generally experienced a product sales cycle of four to nine months
for new customers or large follow-on orders due to the time needed to educate
customers about the uses and benefits of our system, and the significant
investment decisions that our prospective customers must make when they decide
to buy our system. Many of our prospective customers have neither budgeted
expenses for networked video communications systems, or for personnel
specifically dedicated to the procurement, installation or support of these
systems. As a result, our customers spend a substantial amount of time before
purchasing our system in performing internal reviews and obtaining capital
expenditure approvals. Current economic conditions have contributed to
additional deliberation, and a significant associated delay in the sales cycle.

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

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

Our customers typically place limited initial orders for our networked
video communications system, as they seek to evaluate its usefulness and value.
Our strategy is to pursue additional and larger follow-on orders after these
initial orders. Revenue generated from follow-on orders accounted for
approximately 98% and 88% of our revenue in the six months ended June 30, 2002
and 2001, respectively. Current economic conditions have led to decreases in
our clients capital spending, and we have experienced a decrease in the size
of follow-on orders. Our future financial performance depends on successful
initial installations of our system and successful generation of follow-on
orders as the Avistar network expands within a customer organization. If our
system does not meet the needs and expectations of customers, we may not be
able to generate follow-on orders.

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

We have historically derived the majority of our revenue from a limited
number of customers, particularly Deutsche Bank and its affiliates. This
customer accounted for 62% of our revenue in the six months ended June 30, 2002
and, together with one other customer, accounted for 59% of our revenue in the
six months ended June 30, 2001. This contribution reflects the
acquisition, by Deutsche Bank, of other financial services firms that
were previously Avistar customers, and well as the purchase of
Avistar technology by Deutsche Bank, for new accounts as part of
Deutsche Banks client connectivity program. We expect to continue to depend upon a limited
number of customers for a substantial portion of our revenue. As of June 30,
2002, approximately 74% of our accounts receivable were concentrated with one
customer who represented greater than 10% of our total accounts receivable
balance. As of December 31, 2001, approximately 49% of our accounts receivable
were concentrated with two customers who each represented greater than 10% of
our total accounts receivable balance.

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

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

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



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

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

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

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

Competition could reduce our market share and decrease our revenue.

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

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

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

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

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

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

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

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in the expenditure of significant financial and managerial resources and
diminish the value of our system, which could harm our business, financial
condition or results of operations.

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

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

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

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

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

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

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



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

If these manufacturers or suppliers cease to provide us with the assistance or
the components necessary for the operation of our business, we may not be able
to identify alternate sources in a timely fashion. Any transition to alternate
manufacturers or suppliers would likely result in operational problems and
increased expenses, and could cause delays in the shipment of, or otherwise
limit our

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

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

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

If we are unable to expand our direct sales force and/or add distribution
channels, our business will suffer.

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

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

Our products and technologies are complex and to successfully implement
our business strategy and manage our business, an in-depth understanding of
video communication and collaboration technologies and their potential uses is
required. We depend on the continued services of our executive officers and
other key personnel. We do not have long-term employment agreements with our
executive officers or other key personnel and we do not carry any key man life
insurance. The loss of the services of any of our executive officers or key
personnel could harm our business, financial condition and results of
operations.

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

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

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

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

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 49% and 46% of
total revenue for the six months ended June 30, 2002 and 2001, respectively.
Some of the risks we may encounter in conducting international business
activities include the following:



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

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

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

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

Continued listing on the NASDAQ National Market requires that the minimum
closing bid price of our common stock not fall below $1.00 for 30 consecutive
trading days. On July 24, 2002, we received notification from the NASDAQ
Stock Market that we are out of compliance with the minimum closing bid price
requirement of $1.00 per share set forth in Marketplace Rule 4450(a)(5).
Therefore, our common stock may be delisted from trading on the
NASDAQ National Market on or about October
22, 2002 if the minimum closing bid price of our common stock does not equal or exceed
$1.00 for a minimum of ten consecutive trading days. If our stock does not
satisfy listing requirements before then, we may attempt to seek review of the
NASDAQ Stock Markets decision to delist its stock, or may apply for quotation
of our common stock on any other organized market on which the shares may be
eligible for trading. There can be no assurance that our common stock will
satisfy the requirements for continued listing on the NASDAQ National
Market. Additionally, we currently do not meet the $1.00 per share minimum bid
price requirement to maintain a listing on the NASDAQ
SmallCap Market.

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

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

The securities markets have experienced significant price and volume
fluctuations, and the market prices of the securities of technology companies
have been especially volatile. This market volatility, as well as general
economic, market or political conditions have, and may continue to reduce the
market price of our common stock, regardless of our operating performance. In
addition, our operating results could be below the expectations of public
market analysts and investors, and in response, the market price of our common
stock could decrease significantly.

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

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

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

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

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

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

Our executive officers, directors and entities affiliated with them, in
the aggregate, beneficially own approximately 79% of our common stock as of
June 30, 2002. If they were to act together, these stockholders would be able
to exercise control over most matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. These actions may be taken even if they are opposed by other
investors. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our company, which could cause
our stock price to decline.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

We develop products primarily in the United States and sell those products
primarily in North America, Europe and Asia. International revenue,
which consists of sales to customers with operations principally in
Western Europe and Asia, comprised 45% and 48% of total revenue for
the three months ended June 30, 2002 and 2001, respectively.
International revenue comprised 49% and 46% of total revenue for the
six months ended June 30, 2002 and 2001, respectively. As a result, our financial condition could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all of our sales are currently made in
United States dollars, a strengthening of the United States dollar could make
our products less competitive in foreign markets. We do not use derivative
financial instruments for speculative or trading purposes, nor do we engage in
any foreign currency hedging transactions.

Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are
in short-term instruments. We expect that our interest income will be
negatively affected by recent declines in short-term interest rates. There has
not been a material change in our exposure to interest rate and foreign
currency risk since the date of our annual report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission on
March 21, 2002.

Cash and Cash Equivalents and Short-Term Investments

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

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

|                                                      |                             |  |                |       |               |  |                  |      |  
|----------------------------------------------------- | --------------------------- |  | -------------- | ----- | ------------- |  | ---------------- | ---- | -
|                                                      |                             |  |                |       |               |  | Weighted Average
|                                                      |                             |  | Amounts        |       | Interest Rate
|                                                      |                             |  |                |       |              
|                                                      |                             |  | (in thousands) |       |               |  |                 
|Description                                           |                             |  |                |       |               |  |                  |     
|Cash and cash equivalents and short-term investments: |                             |  |                |       |               |  |                  |     
|                                                      | Cash                        |  | $              | 904   |               |  |                  |     |  
|                                                      | Commercial paper            |  |                | 5,425 |               |  |                  | 1.83 | %
|                                                      | Other cash equivalents      |  |                | 9     |               |  |                  | 1.83 | %
|                                                      | Short-term investments      |  |                | 3,378 |               |  |                  | 3.58 | %
|                                                      |                             |  |                |       |               |  |                  |     
|                                                      | Fair Value at June 30, 2002 |  | $              | 9,716 |               |  |                  |      |  
|                                                      |                             |  |                |       |               |  |                  |     

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PART II  OTHER INFORMATION




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

At the Annual Meeting of Stockholders held June 12, 2002, the stockholders
of the Company approved the following matters:

1. A proposal to elect seven (7) directors of the Company to serve for
the ensuing year and until their successors are elected or until such
directors earlier resignation or removal.

|                     |  |             |             |             |  |  |        | 
|-------------------- |  | ----------- | ----------- | ----------- |  |  | ------ | 
|Nominee              |  | In Favor(1) |             | Withheld(1)
|                     |  |             |             |            
|Gerald J. Burnett    |  |             | 121,350,453 |             |  |  | 25,269 | 
|William L. Campbell  |  |             | 121,130,653 |             |  |  | 56,669 | 
|William R. Brody     |  |             | 121,130,653 |             |  |  | 56,669 | 
|R. Stephen Heinrichs |  |             | 156,294,992 |             |  |  | 65,544 | 
|Robert P. Latta      |  |             | 121,130,653 |             |  |  | 56,669 | 
|Robert M. Metcalfe   |  |             | 121,350,453 |             |  |  | 25,269 | 
|David M. Solo        |  |             | 121,350,453 |             |  |  | 25,269 | 



---

| |  |  | (1) | Using cumulative voting in accordance with Company bylaws.
| |  |  | --- | ----------------------------------------------------------



| |  | William R. Brody subsequently resigned from the board of directors on July
3, 2002.
| |  | -----------------------------------------------------------------------------------




Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits



| | 99.1 |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)  Reports on Form 8-K



| | (i) |  | The Company filed a report on Form 8-K on May 8, 2002
relating to the dismissal of Arthur Andersen LLP (AA)
as the Companys independent public accountants, and the
selection of KPMG LLP to replace AA in this role.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 14th day of August 2002.

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

| |     |                                                                                     
| | --- | ------------------------------------------------------------------------------------
| | By: | /s/ ROBERT J. HABIG                                                                 
| |     |                                                                                     
| |     | Robert J. Habig
Chief Financial Officer
(Principal Financial and Accounting
Officer)

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EXHIBIT INDEX



|        |  |                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                   
|        |  |                                                                                                                                                                               
|99.1    |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.