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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 March 31, 2003

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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes [  ] No [X]

At March 31, 2003, 25,330,821 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 STATEMENTS OF CASH FLOWS     
|                                                |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Factors Affecting Future Operating Results                                                   
|                                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                | Item 4. Controls and Procedures                                                              
|PART II - OTHER INFORMATION                    
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 5. Other Information                                                                    
|                                                | Item 6. Exhibits                                                                             
|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 Statements of Cash Flows                                       |  | 5       
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12      
|           |  | Factors Affecting Future Operating Results                                            |  | 17      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 26      
|Item 4.    |  | Controls and Procedures                                                               |  | 26      
|PART II.   |  | OTHER INFORMATION                                                                     |  |         
|Item 1.    |  | Legal Proceedings                                                                     |  | 27      
|Item 5.    |  | Other Information                                                                     |  | 27      
|Item 6.    |  | Exhibits                                                                              |  | 27      
|SIGNATURES |  |                                                                                       |  | 28      

2



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PART I - FINANCIAL INFORMATION




Item 1.Financial Statements

AVISTAR COMMUNICATIONS
CORPORATION AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

as of March 31, 2003 and
December 31, 2002
(in thousands, except share and per share data)


|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |        | 
|------------------------------------- | --------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----------- | ----- | ------------ | - | ------- | ------ | 
|                                      |                       |                                                                                                                                                                                                      |                                            |   | March 31,   |       | December 31,
|                                      |                       |                                                                                                                                                                                                      |                                            |   | 2003        |       | 2002        
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |             
|                                      |                       |                                                                                                                                                                                                      |                                            |   | (unaudited) |       |              |   |        
|Assets:                               |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |  
|                                      | Current assets:       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |        
|                                      |                       | Cash
and cash equivalents                                                                                                                                                                            |                                            | $ | 5,086       |       |              | $ | 4,783   |       
|                                      |                       | Short-term investments                                                                                                                                                                               |                                            |   | 500         |       |              |   | 2,402   |       
|                                      |                       | Accounts receivable, net of allowance for doubtful
accounts of $68 at March 31, 2002 and $69 at December 31, 2002                                                                                    |                                            |   | 978         |       |              |   | 740     |       
|                                      |                       | Inventories, including inventory shipped to customers sites, not
yet installed of $75 at March 31, 2003 and $71 at December 31, 2002                                                                 |                                            |   | 1,107       |       |              |   | 1,148   |       
|                                      |                       | Prepaid expenses and other current assets                                                                                                                                                            |                                            |   | 415         |       |              |   | 629     |       
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |       
|                                      |                       |                                                                                                                                                                                                      | Total current assets                       |   |             | 8,086 |              |   |         | 9,702  | 
|                                      |                       | Property and equipment, net                                                                                                                                                                          |                                            |   | 344         |       |              |   | 378     |       
|                                      |                       | Other assets                                                                                                                                                                                         |                                            |   | 320         |       |              |   | 320     |       
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |       
|                                      |                       |                                                                                                                                                                                                      | Total assets                               |   | $           | 8,750 |              |   | $       | 10,400 | 
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |  
|Liabilities and Stockholders Equity: |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |  
|                                      | Current liabilities:  |                                                                                                                                                                                                      |                                            |   |             |       |              |   |        
|                                      |                       | Accounts payable                                                                                                                                                                                     |                                            | $ | 1,127       |       |              | $ | 558     |       
|                                      |                       | Deferred revenue and customer deposits                                                                                                                                                               |                                            |   | 1,555       |       |              |   | 996     |       
|                                      |                       | Accrued liabilities and other                                                                                                                                                                        |                                            |   | 723         |       |              |   | 898     |       
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |       
|                                      |                       |                                                                                                                                                                                                      | Total current liabilities                  |   |             | 3,405 |              |   |         | 2,452  | 
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |       
|                                      | Stockholders equity: |                                                                                                                                                                                                      |                                            |   |             |       |              |   |        
|                                      |                       | Common stock, $0.001 par value; 250,000,000 shares authorized at March 31,
2003 and December 31, 2002; 26,510,446 and 26,465,058 shares
issued at March 31, 2003 and December 31, 2002, respectively |                                            |   | 26          |       |              |   | 26      |       
|                                      |                       | Less: treasury common stock, 1,179,625 shares at March 31, 2003
and December 31, 2002, at cost                                                                                                       |                                            |   | (51         | )     |              |   | (51     | )     
|                                      |                       | Additional paid-in-capital                                                                                                                                                                           |                                            |   | 80,298      |       |              |   | 80,254  |       
|                                      |                       | Deferred stock compensation                                                                                                                                                                          |                                            |   | (90         | )     |              |   | (135    | )     
|                                      |                       | Other comprehensive income                                                                                                                                                                           |                                            |   |            |       |              |   | 2       |       
|                                      |                       | Accumulated defict                                                                                                                                                                                   |                                            |   | (74,838     | )     |              |   | (72,148 | )     
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |       
|                                      |                       |                                                                                                                                                                                                      | Total stockholders equity                 |   |             | 5,345 |              |   |         | 7,948  | 
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |       
|                                      |                       |                                                                                                                                                                                                      | Total liabilities and stockholders equity |   | $           | 8,750 |              |   | $       | 10,400 | 
|                                      |                       |                                                                                                                                                                                                      |                                            |   |             |       |              |   |         |       

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 months ended March 31, 2003 and 2002
(in thousands, except per share data)


|                                                                                    |                                               |                            |        |       |                    |   |           |       |        |   | 
|----------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------- | ------ | ----- | ------------------ | - | --------- | ----- | ------ | - | 
|                                                                                    |                                               |                            |        |       | Three Months Ended
|                                                                                    |                                               |                            |        |       |                   
|                                                                                    |                                               |                            |        |       | March 31,          |   | March 31,
|                                                                                    |                                               |                            |        |       | 2003               |   | 2002     
|                                                                                    |                                               |                            |        |       |                    |   |          
|                                                                                    |                                               |                            |        |       | (unaudited)       
|Revenue:                                                                            |                                               |                            |        |       |                    |   |           |      
|                                                                                    | Product                                       |                            | $      | 801   |                    |   | $         | 1,521 |       
|                                                                                    | Services, maintenance and support             |                            |        | 862   |                    |   |           | 1,179 |       
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|                                                                                    |                                               | Total revenue              |        |       | 1,663              |   |           |       | 2,700  |  
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|Cost of revenue:                                                                    |                                               |                            |        |       |                    |   |           |      
|                                                                                    | Product                                       |                            |        | 386   |                    |   |           | 724   |       
|                                                                                    | Services, maintenance and support             |                            |        | 567   |                    |   |           | 599   |       
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|                                                                                    |                                               | Total cost of revenue      |        |       | 953                |   |           |       | 1,323  |  
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|                                                                                    |                                               | Gross margin               |        |       | 709                |   |           |       | 1,377  |  
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|Operating Expenses:                                                                 |                                               |                            |        |       |                    |   |           |      
|                                                                                    | Research and development                      |                            |        | 696   |                    |   |           | 1,149 |       
|                                                                                    | Sales and marketing                           |                            |        | 971   |                    |   |           | 1,014 |       
|                                                                                    | General and administrative                    |                            |        | 1,702 |                    |   |           | 1,083 |       
|                                                                                    | Amortization of deferred stock compensation * |                            |        | 45    |                    |   |           | 126   |       
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|                                                                                    |                                               | Total operating expenses   |        |       | 3,414              |   |           |       | 3,372  |  
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|                                                                                    |                                               | Loss from operations       |        |       | (2,705             | ) |           |       | (1,995 | )
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|Other income (expense):                                                             |                                               |                            |        |       |                    |   |           |      
|                                                                                    | Interest income                               |                            |        | 19    |                    |   |           | 91    |       
|                                                                                    | Other, net                                    |                            |        | (5    | )                  |   |           | (4    | )     
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|                                                                                    |                                               | Total other income, net    |        |       | 14                 |   |           |       | 87     |  
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|Net loss                                                                            |                                               | $                          | (2,690 | )     |                    | $ | (1,908    | )    
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|Net loss per share - basic and diluted                                              |                                               | $                          | (0.11  | )     |                    | $ | (0.08     | )    
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|Weighted average shares used in calculating
basic and diluted net loss per share    |                                               |                            | 25,321 |       |                    |   | 25,231    |      
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       
|* Amortization of deferred stock compensation excluded
from the following expenses: |                                               |                            |        |       |                    |   |           |      
|                                                                                    |                                               | Cost of revenue            |        | $     | 5                  |   |           | $     | 16     |  
|                                                                                    |                                               | Research and development   |        |       | 4                  |   |           |       | 12     |  
|                                                                                    |                                               | Sales and marketing        |        |       | 35                 |   |           |       | 95     |  
|                                                                                    |                                               | General and administrative |        |       | 1                  |   |           |       | 3      |  
|                                                                                    |                                               |                            |        |       |                    |   |           |       |        |  
|                                                                                    |                                               | $                          | 45     |       |                    | $ | 126       |      
|                                                                                    |                                               |                            |        |       |                    |   |           |       |       

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWSfor the three months ended March 31, 2003 and 2002
(in thousands)

|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |     |      |  
|------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | ------ | ------------------ | ---- | --------- | ------ | --- | ---- | -
|                                      |                                                                             |                                               |                                           |        | Three Months Ended
|                                      |                                                                             |                                               |                                           |        |                   
|                                      |                                                                             |                                               |                                           |        | March 31,          |      | March 31,
|                                      |                                                                             |                                               |                                           |        | 2003               |      | 2002     
|                                      |                                                                             |                                               |                                           |        |                    |      |          
|                                      |                                                                             |                                               |                                           |        | (unaudited)       
|Cash Flows from Operating Activities: |                                                                             |                                               |                                           |        |                    |      |           |       
|                                      | Net loss                                                                    |                                               | $                                         | (2,690 | )                  |      | $         | (1,908 | )  
|                                      | Adjustments to reconcile net loss to net cash used in operating activities: |                                               |                                           |        |                    |      |           |        |    
|                                      |                                                                             | Depreciation                                  |                                           |        | 51                 |      |           |        | 97  |     
|                                      |                                                                             | Stock-based compensation                      |                                           |        | 45                 |      |           |        | 126 |     
|                                      |                                                                             | Compensation on options issued to consultants |                                           |        | 9                  |      |           |        |    |     
|                                      |                                                                             | Provision for doubtful accounts               |                                           |        | 15                 |      |           |        | 126 |     
|                                      |                                                                             | Changes in current assets and liabilities:    |                                           |        |                    |      |           |        |     |     
|                                      |                                                                             |                                               | Accounts receivable                       |        |                    | (253 | )         |        |     | 76   |  
|                                      |                                                                             |                                               | Inventories                               |        |                    | 41   |           |        |     | 10   |  
|                                      |                                                                             |                                               | Prepaid expenses and other current assets |        |                    | 214  |           |        |     | 290  |  
|                                      |                                                                             |                                               | Other assets                              |        |                    |     |           |        |     | (2   | )
|                                      |                                                                             |                                               | Accounts payable                          |        |                    | 569  |           |        |     | 74   |  
|                                      |                                                                             |                                               | Deferred revenue and customer deposits    |        |                    | 559  |           |        |     | (398 | )
|                                      |                                                                             |                                               | Accrued liabilities and other             |        |                    | (175 | )         |        |     | (669 | )
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    
|                                      | Net cash used in operating activities                                       |                                               |                                           | (1,615 | )                  |      |           | (2,178 | )  
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    
|Cash Flows from Investing Activities: |                                                                             |                                               |                                           |        |                    |      |           |       
|                                      | Sale of short-term investments                                              |                                               |                                           | 1,900  |                    |      |           | 204    |    
|                                      | Purchase of property and equipment                                          |                                               |                                           | (17    | )                  |      |           | (69    | )  
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    
|                                      | Net cash provided by investing activities                                   |                                               |                                           | 1,883  |                    |      |           | 135    |    
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    
|Cash Flows from Financing Activities: |                                                                             |                                               |                                           |        |                    |      |           |       
|                                      | Decrease in bank overdraft                                                  |                                               |                                           |       |                    |      |           | (149   | )  
|                                      | Proceeds from issuance of common stock                                      |                                               |                                           | 35     |                    |      |           | 75     |    
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    
|                                      | Net cash provided by (used in) financing activities                         |                                               |                                           | 35     |                    |      |           | (74    | )  
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    
|                                      | Net increase (decrease) in cash and cash equivalents                        |                                               |                                           | 303    |                    |      |           | (2,117 | )  
|                                      | Cash and cash equivalents, beginning of period                              |                                               |                                           | 4,783  |                    |      |           | 7,455  |    
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    
|                                      | Cash and cash equivalents, end of period                                    |                                               | $                                         | 5,086  |                    |      | $         | 5,338  |    
|                                      |                                                                             |                                               |                                           |        |                    |      |           |        |    

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
facilitates distribution over local and wide area networks using telephony or
Internet services as appropriate. Avistars services include software
development, consulting, implementation, training, maintenance and support. In
addition, Avistar seeks to prosecute, maintain, support and license the
intellectual property developed by the Company through its wholly-owned
subsidiary, Collaboration Properties, Inc., a Nevada corporation (CPI).

Basis of Presentation

The unaudited balance sheet as of March 31, 2003 presents the consolidated
financial position of Avistar and its two wholly-owned operating subsidiaries,
Avistar Systems U.K. Limited (ASUK) and CPI after elimination of all
intercompany accounts and transactions. The consolidated results are referred
to, collectively, as those of Avistar or the Company in these notes.

The functional currency of ASUK is the United States dollar. Accordingly,
all gains and losses resulting from those transactions denominated in
currencies other than the United States dollar are included in the statements
of operations. 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 $74.8
million as of March 31, 2003. The Companys operating results may fluctuate
significantly in the future as a result of a variety of factors, including, but
not limited to, the economic environment, the adoption of different
distribution channels, and the timing of new product announcements by the
Company or its competitors.

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

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2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The financial statements filed 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,
2002 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, 2002 included in the Companys annual report on Form 10-K filed
with the Securities and Exchange Commission on March 25, 2003.

Use of Estimates

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

Cash and Cash Equivalents and Short Term Investments

The Company considers all investment instruments purchased with a
remaining maturity of three months or less to be cash equivalents. The
Companys cash equivalents at March 31, 2003 and December 31, 2002 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. As of March 31, 2003, there was no
difference between the cost and fair value of the Companys investments.

Supplemental Cash Flow Information

During the three months ended March 31, 2003 and 2002, 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 months ended March 31, 2003 and 2002:

|           |  |                    |    |      |  |  |    |  
|---------- |  | ------------------ | -- | ---- |  |  | -- | -
|           |  | THREE MONTHS ENDED
|           |  | MARCH 31,         
|           |  |                   
|           |  | 2003               |    | 2002
|           |  |                    |    |     
|           |  | (UNAUDITED)       
|Customer A |  |                    | 58 | %    |  |  | 59 | %
|Customer B |  |                    | 10 | %    |  |  | *  |  



---

|* |  | 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 March 31, 2003, approximately 68% of accounts receivable were
concentrated with two customers, each of whom represented more than 10% of the
Companys total accounts receivable balance. As of December 31, 2002,
approximately 65% of accounts receivable were concentrated with one customer.

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):

|                                                       |  |             |       |              |  |   |       | 
|------------------------------------------------------ |  | ----------- | ----- | ------------ |  | - | ----- | 
|                                                       |  | MARCH 31,   |       | DECEMBER 31,
|                                                       |  | 2003        |       | 2002        
|                                                       |  |             |       |             
|                                                       |  | (UNAUDITED) |       |              |  |  
|Raw materials and subassemblies                        |  | $           | 64    |              |  | $ | 70    | 
|Finished goods                                         |  |             | 968   |              |  |   | 1,007 | 
|Inventory shipped to customer sites, not yet installed |  |             | 75    |              |  |   | 71    | 
|                                                       |  |             |       |              |  |   |       | 
|                                                       |  | $           | 1,107 |              |  | $ | 1,148 | 
|                                                       |  |             |       |              |  |   |       | 

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 March 31, 2003 and December 31, 2002, the Company had billed
approximately $0.1 million to customers related to these shipments, but did not
record the revenue, as the installations had not been completed and confirmed
by the customer. Although customers are billed in accordance with customer
agreements, these deferred revenue amounts are netted against accounts
receivable until the customer confirms installation.

Revenue Recognition and Deferred
Revenue

The
Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition
(SOP 97-3), and SOP 98-9, Modification of
SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. The
Company  recognizes revenue from product sales when all of the
following conditions are met: the product has been shipped, an
arrangement exists with the customer at a fixed price and the Company
has the right to invoice the customer, collection of the receivable
is probable, and the Company has fulfilled all of its material
contractual obligations to the customers.

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

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

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

Stock-Based Compensation

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

|                                                                                                                            |             |   |                              |       |      |   |        |       |  
|--------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ---------------------------- | ----- | ---- | - | ------ | ----- | -
|                                                                                                                            |             |   | Three Months Ended March 31,
|                                                                                                                            |             |   |                             
|                                                                                                                            |             |   | 2003                         |       | 2002
|                                                                                                                            |             |   |                              |       |     
|Net loss, as reported                                                                                                       |             | $ | (2,690                       | )     |      | $ | (1,908 | )    
|Add stock  based employee compensation expense
included in reported net income, net of
tax                                 |             |   | 45                           |       |      |   | 126    |      
|Deduct total stock-based employee compensation
expense determined
under fair-value-based method for all
rewards, net of tax |             |   | (1,000                       | )     |      |   | (938   | )    
|                                                                                                                            |             |   |                              |       |      |   |        |      
|Pro forma net loss                                                                                                          |             | $ | (3,645                       | )     |      | $ | (2,720 | )    
|Basic and diluted loss per share                                                                                            |             |   |                              |       |      |   |        |      
|                                                                                                                            | As reported |   | $                            | (0.11 | )    |   | $      | (0.08 | )
|                                                                                                                            | Pro forma   |   | $                            | (0.14 | )    |   | $      | (0.11 | )

The fair value of options granted for the three months ended March 31,
2003 and 2002 is estimated on the date of grant using the following
assumptions:

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|                                |  |      |     |      |  |  |     |  
|------------------------------- |  | ---- | --- | ---- |  |  | --- | -
|                                |  | 2003 |     | 2002
|                                |  |      |     |     
|Expected
dividend               |  |      | 0   | %    |  |  | 0   | %
|Average risk-free interest
rate |  |      | 2.8 | %    |  |  | 4.5 | %
|Expected
volatility             |  |      | 187 | %    |  |  | 185 | %
|Expected term (in
years)        |  |      | 4   |      |  |  | 4   |  

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or 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 adoption of SFAS 146 did not have a significant impact
on the Companys financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Summary of Statement No. 148
Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment
of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has adopted the disclosure requirements of SFAS 148.

3. Line of Credit

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

4. Related Party Transactions

Robert P. Latta, a member of the law firm Wilson Sonsini Goodrich &
Rosati, Professional Corporation (WSGR), has served as a director of the
Company since February 2001. Mr. Latta and WSGR have represented the Company
and its predecessors as corporate counsel since 1997. During the three months
ended March 31, 2003 and 2002, payments of approximately $89,000 and $30,000,
respectively, were made to WSGR for legal services provided to the Company.

During the three months ended March 31, 2003 and 2002, payments for
consulting fees of approximately $74,000 and $55,000, 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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Gerald Burnett, Chairman and Chief Executive Officer of the Company has
provided a collateralized guarantee, assuring payment of the Companys
obligations under a Loan and Security Agreement with a financial institution
dated February 27, 2002, as amended. In addition, Gerald Burnett has provided
to the Company a commitment to provide funds up to $6.0 million (inclusive of
any funds drawn by the Company and subject to his collateralized guarantee of
the Companys obligations under the Loan and Security Agreement) through
February 27, 2004, in the event that the $6.0 million committed under the
amended Loan and Security Agreement is not fully available to the Company for
any reason.

5. Legal Proceedings

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

6. 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 convertible preferred stock, outstanding stock options and shares
subject to repurchase from the calculation of diluted net loss per share for
the three months ended March 31, 2003 and 2002, because all such securities are
antidilutive. Accordingly, diluted net loss per share approximates basic net
loss per share for all periods presented.

The total number of shares excluded from the calculations of diluted net
loss per share was 254,426 and 2,883,115 for the three months ended March 31,
2003 and 2002, respectively.

7. Segment Reporting

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

|                                  |                          |  |         |        |     |  |       |      |   |  |   |        |  
|--------------------------------- | ------------------------ |  | ------- | ------ | --- |  | ----- | ---- | - |  | - | ------ | -
|                                  |                          |  | Avistar |        | CPI |  | Total
|                                  |                          |  |         |        |     |  |      
|Three Months Ended March 31, 2003 |                          |  |         |        |     |  |       |      |   |  |   |       
|                                  | Revenue                  |  | $       | 1,663  |     |  | $     |     |   |  | $ | 1,663  |  
|                                  | Gross margin             |  |         | 709    |     |  |       |     |   |  |   | 709    |  
|                                  | Depreciation expense     |  |         | (50    | )   |  |       | (1   | ) |  |   | (51    | )
|                                  | Total operating expenses |  |         | (2,757 | )   |  |       | (657 | ) |  |   | (3,414 | )

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|                                  |                          |  |         |        |     |  |       |      |   |  |   |        |  
|--------------------------------- | ------------------------ |  | ------- | ------ | --- |  | ----- | ---- | - |  | - | ------ | -
|                                  |                          |  | Avistar |        | CPI |  | Total
|                                  |                          |  |         |        |     |  |      
|                                  | Interest income          |  |         | 19     |     |  |       |     |   |  |   | 19     |  
|                                  | Net loss                 |  |         | (2,033 | )   |  |       | (657 | ) |  |   | (2,690 | )
|                                  | Assets                   |  |         | 8,691  |     |  |       | 59   |   |  |   | 8,750  |  
|Three Months Ended March 31, 2002 |                          |  |         |        |     |  |       |      |   |  |   |       
|                                  | Revenue                  |  | $       | 2,700  |     |  | $     |     |   |  | $ | 2,700  |  
|                                  | Gross margin             |  |         | 1,377  |     |  |       |     |   |  |   | 1,377  |  
|                                  | Depreciation expense     |  |         | (96    | )   |  |       | (1   | ) |  |   | (97    | )
|                                  | Total operating expenses |  |         | (3,165 | )   |  |       | (207 | ) |  |   | (3,372 | )
|                                  | Interest income          |  |         | 91     |     |  |       |     |   |  |   | 91     |  
|                                  | Net loss                 |  |         | (1,701 | )   |  |       | (207 | ) |  |   | (1,908 | )
|                                  | Assets                   |  |         | 16,355 |     |  |       | 33   |   |  |   | 16,388 |  

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 50% and 52% of
total revenue for the three months ended March 31, 2003 and 2002, respectively.
For the three months ended March 31, 2003 and 2002, international revenues to
customers in the United Kingdom accounted for 34% and 29%, respectively, of
total revenue. All of the Companys sales are currently billed in United States
dollars. The Company had no significant net sales or long-lived assets in any
country other than in the United States for any period presented.

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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 our Annual Report on Form 10-K for the year ended December 31,
2002, as filed with the Securities and Exchange Commission on March 25, 2003.

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

Although we believe that the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this Annual Report on Form
10-Q to conform our prior statements to actual results.

Overview

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

We operate in two segments. We engage in the design, development,
manufacturing, sale and marketing of networked video communications products,
and associated support services and Collaboration Properties, Inc., or CPI, our
wholly-owned subsidiary, engages in the prosecution, maintenance, support and
licensing of the intellectual property that we have developed, some of which is
used in our products. As of March 31, 2003, CPI had not entered into any such
third party licensing agreements.

Critical Accounting Policies

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

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



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

Revenue Recognition

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We derive product revenue principally from the sale and licensing of our
video-enabled networked communications system, consisting of a suite of
Avistar-designed software and hardware products, including third party
components. In addition, we derive revenue from fees for installation,
maintenance, support, training services and software development. Product
revenue as a percentage of total revenue was 48% for the three-month period
ended March 31, 2003 and 56% for the three-month period ended March 31, 2002.

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

To date, a significant portion of our revenue has resulted from sales to a
limited number of customers. For the three months ended March 31, 2003, we
recorded revenue of approximately $1.1 million, or 68% of total revenue, from
Deutsche Bank AG and UBS Warburg LLC and their affiliates, each of whom
generated more than 10% of our total revenue. For the three months ended March
31, 2002, we recorded revenue of approximately $1.6 million, or 59% of total
revenue, from Deutsche Bank AG and its affiliates. No other customers
individually accounted for greater than 10% of our total revenue for the three
months ended March 31, 2002. We anticipate that our revenue, and therefore,
our operating results for any given period, will continue to depend to a
significant extent on a limited number of customers. As a result, the loss of
or a reduction in sales to any one of these customers would have a significant
adverse impact on our operations and financial performance.

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 50% of total
revenue for the three months ended March 31, 2003, and 52% for the three months
ended March 31, 2002.

Valuation of Accounts Receivable

Estimates are used in determining our allowance for doubtful accounts and
are based on our historical collection experience, historical write-offs,
current trends and the credit quality of our customer base and the
characteristics of our accounts receivable by aging category. If the allowance
for doubtful accounts was understated, our operating income could be
significantly reduced. The impact of any such change or deviation may be
increased by our reliance on a relatively small number of customers for a large
portion of our total revenue. As of March 31, 2003, approximately 68% of our
accounts receivable balance was concentrated with two customers, each of whom
represented more than 10% of our total accounts receivable. As of December 31,
2002, approximately 65% of our accounts receivable were concentrated with one
customer.

Valuation of Inventories

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

13



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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         
|                        |                                             |                          |        | MARCH 31,                  
|                        |                                             |                          |        |                            
|                        |                                             |                          |        | 2003                        |       | 2002
|                        |                                             |                          |        |                             |       |     
|Revenue:                |                                             |                          |        |                             |       |      |       |     
|                        | Product                                     |                          |        | 48.2                        | %     |      |       | 56.3 | %    
|                        | Services, maintenance and support           |                          |        | 51.8                        |       |      |       | 43.7 |      
|                        |                                             |                          |        |                             |       |      |       |      |      
|                        |                                             | Total revenue            |        |                             | 100.0 |      |       |      | 100.0 | 
|                        |                                             |                          |        |                             |       |      |       |      |      
|Cost of revenue:        |                                             |                          |        |                             |       |      |       |     
|                        | Product                                     |                          |        | 23.2                        |       |      |       | 26.8 |      
|                        | Services, maintenance and support           |                          |        | 34.1                        |       |      |       | 22.2 |      
|                        |                                             |                          |        |                             |       |      |       |      |      
|                        |                                             | Total cost of revenue    |        |                             | 57.3  |      |       |      | 49.0  | 
|                        |                                             |                          |        |                             |       |      |       |      |      
|Gross margin            |                                             |                          | 42.7   |                             |       |      | 51.0  |     
|                        |                                             |                          |        |                             |       |      |       |      |      
|Operating expenses:     |                                             |                          |        |                             |       |      |       |     
|                        | Research and development                    |                          |        | 41.9                        |       |      |       | 42.6 |      
|                        | Sales and marketing                         |                          |        | 58.4                        |       |      |       | 37.6 |      
|                        | General and administrative                  |                          |        | 102.3                       |       |      |       | 40.1 |      
|                        | Amortization of deferred stock compensation |                          |        | 2.7                         |       |      |       | 4.7  |      
|                        |                                             |                          |        |                             |       |      |       |      |      
|                        |                                             | Total operating expenses |        |                             | 205.3 |      |       |      | 125.0 | 
|                        |                                             |                          |        |                             |       |      |       |      |      
|Loss from operations    |                                             |                          | (162.7 | )                           |       |      | (74.0 | )   
|                        |                                             |                          |        |                             |       |      |       |      |      
|Other (expense) income: |                                             |                          |        |                             |       |      |       |     
|                        | Interest income                             |                          |        | 1.2                         |       |      |       | 3.4  |      
|                        | Other                                       |                          |        | (0.3                        | )     |      |       | (0.1 | )    
|                        |                                             |                          |        |                             |       |      |       |      |      
|                        |                                             | Total other income       |        |                             | 0.9   |      |       |      | 3.3   | 
|                        |                                             |                          |        |                             |       |      |       |      |      
|Net loss                |                                             |                          | (161.8 | )%                          |       |      | (70.7 | )%  
|                        |                                             |                          |        |                             |       |      |       |      |      

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

Revenue

Total revenue decreased by 38.4% to $1.7 million for the three months
ended March 31, 2003 from $2.7 million for the three months ended March 31,
2002. The decrease was due primarily to lower product sales, reflecting
continued weakness in the United States and global economies, particularly in
the financial services sector. This weakness has led to delayed procurement
decisions and increasingly constrained technology spending among our existing
and potential customers.

For the three months ended March 31, 2003, revenue from two customers
accounted for 68% of total revenue, each of whom accounted for greater than 10%
of our total revenue. For the three months ended March 31, 2002, revenue from
one customer accounted for 59% of our total revenue. No other customers
individually accounted for greater than 10% of our total revenue for the three
months ended March 31, 2002. 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 and operating
results.

Cost of Revenue

The cost of revenue declined by 28.0% to $1.0 million for the three months
ended March 31, 2003 from $1.3 million for the three months ended March 31,
2002. Cost of product revenue declined by 46.5% to $0.4 million for the
three-months ended March 31, 2003 compared to $0.7 million for the three months
ended March 31, 2002. This decline in cost of product revenue was directly due
to the lower level of product sales. Cost of service revenue declined by 5.3%
to $0.6 million for the three months ended March 31, 2003 compared to $0.6
million for the three months ended March 31, 2002, due to a decrease in
software development contracts, partially offset by a slight increase in the
costs of our maintenance program.

14



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Gross Margin

Gross margin as a percentage of revenue decreased to 42.6% for the three
months ended March 31, 2003 from 51% for the three months ended March 31, 2002.
The decrease is due mainly to a decrease in services gross margin. Product
gross margin as a percentage of total product revenue was 51.7% for the
three-month period ended March 31, 2003 compared to 52.4% for the three-month
period ended March 31, 2002. Services gross margin as a percentage of total
service revenue decreased to 34.2% for the three months ended March 31, 2003
compared to 49.2% for the three months ended March 31, 2002, due primarily to a
decrease in services revenue, which provided more limited coverage of the fixed
components of the cost of our maintenance services, and relatively stable costs
of other services.

Operating expenses

Research and development.Research and development expenses decreased by
39.4% to $0.7 million for the three months ended March 31, 2003 from $1.1
million for the three months ended March 31, 2002. The decrease was due to the
reduction in personnel and personnel related expenses, as a result of a 21%
reduction in staffing levels in research and development relative to March 31,
2002, and a reduction in outside services and external consulting expenses.

Sales and marketing.Sales and marketing expenses decreased by 4.2% to
$1.0 million for the three months ended March 31, 2003 from $1.0 million for
the three months ended March 31, 2002. The slight decrease was due to decreased
travel related costs.

General and administrative.General and administrative expenses increased
by 57.2% to $1.7 million for the three months ended March 31, 2003 from $1.1
million for the three months ended March 31, 2002. The increase is due
primarily to an increase in legal fees and other outside services costs.

Amortization of deferred stock compensation.Amortization of deferred
stock compensation decreased by 64.3% to $45,000 for the three months ended
March 31, 2003 from $126,000 for the three months ended March 31, 2002. The
decrease was due the cumulative effect of the completion of option
amortization, as well as forfeitures of stock options by employees no longer
with our company.

Other Income (Expense)

Other income, net decreased by 83.9% to $14,000 for the three months ended
March 31, 2003 from $87,000 for the three months ended March 31, 2002 due to a
declining balance of cash, cash equivalents and short-term investments with
lower rates of return on cash, cash equivalents and short-term investments.

Liquidity and Capital Resources

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

We had cash and cash equivalents of $5.1 million and short-term
investments of $0.5 million as of March 31, 2003 compared to cash and cash
equivalents of $4.8 million and short-term investments of $2.4 million as of
December 31, 2002. For the three months ended March 31, 2003 we had an overall
net cash inflow of $0.3 million, resulting primarily from net cash provided by
investing activities of $1.9 million, offset partially by the net cash used in
operations of $1.6 million. The net cash used in operating activities of $1.6
million resulted from a net loss of $2.7 million, an increase in accounts
receivable of $0.3 million and a decrease in accrued liabilities of $0.2
million, offset by an increase in accounts payable of 0.6 million, an increase
in deferred revenue and customer deposits of $0.6 million and a decrease in
prepaid expenses and other current assets of $0.2 million. The net cash
provided by investing activities resulted from the net sale of short-term
investments of $1.9 million.

At March 31, 2003, we had open purchase orders and other contractual
obligations of approximately $0.7 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.

The following table represents our future commitments under minimum annual
lease payments as of March 31, 2003:

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|                                         |  |        |       | 
|---------------------------------------- |  | ------ | ----- | 
|Year Ending December 31,                 |  | Amount
|                                         |  |       
|Second, third and fourth Quarter of 2003 |  | $      | 505   | 
|2004                                     |  |        | 175   | 
|2005                                     |  |        | 230   | 
|2006                                     |  |        | 230   | 
|2007                                     |  |        | 230   | 
|Thereafter                               |  |        | 768   | 
|                                         |  |        |       | 
|Total minimum lease payments             |  | $      | 2,138 | 
|                                         |  |        |       | 

We rent our current office facility in Redwood Shores, California under a
non-cancelable operating lease that expires in 2003.

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

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

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

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or 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

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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. We are
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.

In December 2002, the FASB issued SFAS 148, Summary of Statement No. 148
Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment
of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We have
adopted the disclosure requirements of SFAS 148.




Factors Affecting Future Operating Results

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

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

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

We incurred net losses of $2.7 million for the three months ended March
31, 2003, $7.6 million for the year 2002, and $7.9 million for the year 2001.
As of March 31, 2003, our accumulated deficit was $74.8 million. Our revenue
may not increase, or even remain at its current level. In addition, our
operating expenses may increase as we continue to develop our business in the
future. As a result, to become profitable, we will need to increase our
revenue by increasing sales to existing customers and by attracting additional
customers. If our expenses increase more rapidly than our revenue, or if
revenue and expense levels remain the same, we may never become profitable. If
we fail to achieve our plan of generating positive cash flow from operations
over the next 12 months, we may be required to raise additional funds, and
additional financing may not be available on favorable terms, if at all.
Although our Chairman and Chief Executive Officer has guaranteed our Loan and
Security Agreement, we cannot be certain that he will continue to do so.

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

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

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

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

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On September 23, 2002, CPI, our wholly-owned subsidiary, commenced a
patent infringement lawsuit against Polycom, Inc. alleging that several Polycom
videoconferencing products infringe four patents held by CPI. The suit was
filed in the United States District Court for the Northern District of
California. The four patents involved are U.S. Patent Nos. 5,867,654,
5,896,500, 6,212,547 and 6,343,314. These patents cover technologies relating
to video and data conferencing over unshielded twisted pair (UTP) networks,
distributed call-state management, separate monitors for simultaneous
computer-based data sharing and videoconferencing and remote participant hold
and disconnect functions in multi-party conferencing. Polycom responded to
CPIs claims on November 14, 2002, at which time it both answered the complaint
and asserted counterclaims against CPI for non-infringement, invalidity and
unenforceability. On January 31, 2003 Polycom filed a motion with the court
requesting permission to amend its counterclaims to incorporate claims of
alleged infringements by Avistar Communications of four PictureTel patents that
Polycom has told us it has had assigned to it. A hearing was held on March 7,
2003, at which time the judge granted Polycoms motion to amend its
counterclaims. A trial date for CPIs claims against Polycom and Polycoms
counterclaims has not yet been set. The prosecution of this lawsuit and the
defense of the Polycom counterclaim may require us to expend significant
financial and managerial resources and therefore may have a material negative
impact on our business. The duration and ultimate outcome of this litigation
are uncertain. In addition, an adverse judgment, if entered against CPI or
Avistar, could require CPI or Avistar to pay substantial compensation and/or
damages to Polycom, which could harm our business, financial position and
results of operations and cause our stock price to decline substantially. Three
of the four counterclaims for patent infringement relate to equipment provided
to Avistar by a third-party and Avistars agreement with that third-party
supplier provides for indemnification of Avistar by that third party.
Nevertheless, litigation such as this suit can take years to resolve and can be
expensive to prosecute and defend. Regardless of the outcome, the prosecution
of CPIs claims and defense of the counterclaims in this lawsuit may require us
to obtain additional financing.

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

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



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

Although we have renewed our Loan and Security Agreement, which provides a
credit line of $6.0 million, we may need to arrange for the availability of
additional funding in order to meet our future business requirements. If we
are unable to obtain additional funding when needed on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities, respond to competitive pressures or unanticipated requirements,
or finance our litigation with Polycom, which could seriously harm our
business, financial condition, results of operations and ability to continue
operations. There can be no assurance that such funding will be available on
terms attractive to us, or at all. Our Chairman and Chief Executive Officer
has personally guaranteed the Loan and Security Agreement through February 27,
2004. We cannot be sure that he will be willing to continue to guarantee our
borrowings based on the available terms beyond February 27, 2004, if at all.
Furthermore, any additional equity financing may be dilutive to stockholders
and such equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require us to relinquish our rights to certain of our
technologies or products.

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

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

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

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

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

Our customers typically place limited initial orders for our networked
video communications system, as they seek to evaluate its usefulness and value.
Our strategy is to pursue additional and larger follow-on orders after these
initial orders. Revenue generated from follow-on orders accounted for
approximately 99% of our revenue for the three months ended March 31, 2003 and
2002. Current economic conditions have led to decreases in our clients
capital spending, and we have experienced a decrease in the size and number of
follow-on orders. Our future financial performance depends on successful
initial installations of our system and successful generation of follow-on
orders as the Avistar network expands within a customer organization. If our
system does not meet the needs and expectations of customers, we may not be
able to generate follow-on orders.

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

We have historically derived the majority of our revenue from a limited
number of customers, particularly Deutsche Bank AG and UBS Warburg LLC and
their affiliates. Collectively, these customers accounted for 68% of our
revenue for the three months ended March 31, 2003. For the three months ended
March 31, 2002, Deutsche Bank AG and its affiliates accounted for 59% of our
revenue. No other customers individually contributed greater than 10% of our
total revenue for the three months ended March 31, 2002. We expect to continue
to depend upon a limited number of customers for a substantial portion of our
revenue. As of March 31, 2003, approximately 68% of our accounts receivable
were concentrated with two customers. As of December 31, 2002, approximately
65% of our accounts receivable were concentrated with one customer.

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

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

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



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

Our system is designed to work with a variety of hardware and software
configurations and data networking infrastructures used by our customers.
However, our software may not operate correctly on all hardware and software
platforms or with all 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 installation requires significant amounts of our
professional services support, our revenue recognition could be delayed, our
costs could increase and our margins could suffer.

Competition could reduce our market share and decrease our revenue.

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

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

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

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

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

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. At a
hearing held on March 7, 2003, the judge in the existing lawsuit in which CPI
is claiming that

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Polycom infringes four CPI patents granted Polycoms motion to amend its
counterclaims to include claims of alleged infringements by Avistar
Communications of four PictureTel patents that Polycom has told us it has had
assigned to it. A trial date for CPIs claims against Polycom and Polycoms
proposed counterclaims has not yet been set. Three of the four counterclaims
for patent infringement relate to equipment provided to Avistar by a
third-party and Avistars agreement with that third-party supplier provides
for indemnification of Avistar by that third party. Nevertheless, prosecuting
and defending against any infringement claims, even those that are not
meritorious, could result in the expenditure of significant financial and
managerial resources, could take years to resolve and may require us to obtain
additional financing. In addition, if we are found liable for infringement, it
could require CPI or Avistar to pay substantial compensation and/or damages to
Polycom and we may not be able to continue offering that portion of our system
that is found to be infringing. Redesigning our system components to avoid
alleged or actual infringement could result in the expenditure of significant
and managerial resources and diminish the value of our system, which could harm
our business, financial position and results of operations and cause our stock
price to decline substantially.

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

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

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

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

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

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

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

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| |  |  | the likelihood that, if particular components were not available, we
would suffer an interruption in the manufacture and shipment of our
systems until these components or alternatives become available;                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | reduced control by us over the quality and cost of our system and
over our ability to respond to unanticipated changes and increases in
customer orders, and conversely, price changes from suppliers if
committed volumes are not met; and
|
| |  |  | the possible unavailability of, or interruption in, access to some
technologies due to infringement claims, production/supply issues or
other hindrances.                                                                                  

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

If the communications networks utilized by our customers experience
difficulties or become incompatible with our products, our customers
perceptions of our system may suffer and our business may be adversely
affected.

Our system is designed to work with a variety of hardware and software
configurations and data networking infrastructures used by our customers.
However, our products may not operate correctly on other networking structures
adopted by our customers. Our systems require the existence and maintenance of
network infrastructures by our customers or third party network providers. If
these network providers fail to properly maintain such networks, experience
network failures or make changes to their networks that are incompatible with
our products, our products may not operate correctly. If such network-related
problems were to occur, our customers may perceive our systems as the source of
the problem and our relationships with such customers may be adversely affected
causing our business to suffer.

We are utilizing a private provider of virtual private networks, or VPNs,
for our internal network, and we have introduced this provider to several of
our customers for their video network needs. Some of our customers have
retained this provider. Although the resulting contractual relationship is
between our customer and this provider, in the event that this provider fails
to meet the performance expectations of our customers, our customers
dissatisfaction with this provider could impact their perception of our
products and/or adversely impact our relationship with them.

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

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

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

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

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

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

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

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 50% of total
revenue for the three months ended March 31, 2003 and 52% for the three months
ended March 31, 2002. Some of the risks we may encounter in conducting
international business activities include the following:



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

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

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

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

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

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

Continued listing on The NASDAQ SmallCap Market requires that the minimum
closing bid price of our common stock not fall below $1.00 for 30 consecutive
trading days. On April 29, 2003, we received notification from The NASDAQ Stock
Market that we

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are out of compliance with the minimum closing bid price requirement of
$1.00 per share set forth in Marketplace Rule 4310(c)(4). Therefore, our common
stock may be delisted from trading on The NASDAQ SmallCap Market on or about
October 27, 2003 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.
Additionally, if we demonstrate at the end of this grace period that we are in
compliance with The NASDAQ SmallCap Market core listing standards (that is,
either $750,000 net income for the most recently completed fiscal year,
stockholders equity of $5 million or market capitalization of $50 million), we
may be allowed an additional 180-day grace period to meet the $1.00 minimum
closing bid price requirement, or until April 24, 2004. If our stock does not
satisfy the continued listing requirements before then, we may attempt to seek
review of The NASDAQ Stock Markets decision to delist our 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
SmallCap Market.

If we are unable to maintain the listing of our common stock for trading
on The NASDAQ SmallCap Market, there may be adverse impact on the market price
and liquidity of our common stock, and our stock may be subject to the penny
stock rules contained in Section 15(g) of the Securities Exchange Act of 1934,
as amended, and the rules promulgated there under. Delisting of our common
stock from The NASDAQ SmallCap Market could also materially adversely affect
our business, including, among other things: our ability to raise additional
financing to fund our operations; our ability to attract and retain customers;
and our ability to attract and retain personnel, including management
personnel. In addition, if we were unable to list our common stock for trading
on The NASDAQ SmallCap 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.

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

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



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

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

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

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

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

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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 owned approximately 78% of our common stock as of
March 31, 2003. If they were to act together, these stockholders would be able
to exercise control over most matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. These actions may be taken even if they are opposed by other
investors. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our company, which could cause
the market price of our common stock to decline.

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##### Table of Contents






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 50% of total revenue for the three months ended March 31,
2003 and 52% for the three months ended March 31, 2002. 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, 2002 filed with the Securities and Exchange Commission on
March 25, 2003.

Cash and Cash Equivalents and Short-Term Investments

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

The following table provides information about our investment portfolio.
For investment securities, the table presents cash and cash equivalents and
short-term investments and related weighted average interest rates by category
at March 31, 2003.

|                                                      |                              |         |                |               |  |  |                  |      |  
|----------------------------------------------------- | ---------------------------- | ------- | -------------- | ------------- |  |  | ---------------- | ---- | -
|                                                      |                              |         |                |               |  |  | Weighted Average
|Description                                           |                              | Amounts |                | Interest Rate
|                                                      |                              |         |                |              
|                                                      |                              |         | (in thousands) |               |  |  |                 
|Cash and cash equivalents and short-term investments: |                              |         |                |               |  |  |                  |     
|                                                      | Cash                         |         | $              | 1,399         |  |  |                  |     |  
|                                                      | Market preferreds            |         |                | 1,500         |  |  |                  |     |  
|                                                      | Other cash equivalents       |         |                | 2,187         |  |  |                  | 1.12 | %
|                                                      | Short-term investments       |         |                | 500           |  |  |                  | 1.60 | %
|                                                      |                              |         |                |               |  |  |                  |      |  
|                                                      | Fair Value at March 31, 2003 |         | $              | 5,586         |  |  |                  |      |  
|                                                      |                              |         |                |               |  |  |                  |      |  




Item 4. Controls and Procedures



| | (a) |  | Based on our evaluation as of a date within 90 days of the filing
date of this Quarterly Report on Form 10-Q, our principal executive
officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act))
are effective to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. It should be noted
that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our
internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation referenced in
paragraph (a) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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PART
II - OTHER INFORMATION




Item 1. Legal Proceedings.

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

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




Item 5. Other Information.

Continued listing on The NASDAQ SmallCap Market requires that the minimum
closing bid price of our common stock not fall below $1.00 for 30 consecutive
trading days. On April 29, 2003, 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 4310(c)(4).
Therefore, our common stock may be delisted from trading on The NASDAQ SmallCap
Market on or about October 27, 2003 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. Additionally, if we demonstrate at the end of this grace period
that we are in compliance with The NASDAQ SmallCap Market core listing
standards (that is, either $750,000 net income for the most recently completed
fiscal year, stockholders equity of $5 million or market capitalization of $50
million), we may be allowed an additional 180-day grace period to meet the
$1.00 minimum closing bid price requirement, or until April 24, 2004. If our
stock does not satisfy the continued listing requirements before then, we may
attempt to seek review of The NASDAQ Stock Markets decision to delist our
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 SmallCap Market.




Item 6. Exhibits.



| | (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.

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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 May 2003.

| |  |                                    |  |                                                                                                
| |  | ---------------------------------- |  | -----------------------------------------------------------------------------------------------
| |  | 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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Certification under Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Gerald J. Burnett, certify that:

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

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

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

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

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

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

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

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

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

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

6.      The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

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

29



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##### Table of Contents



Certification under Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Robert J. Habig, certify that:

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

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

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

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

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

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

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

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

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

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

6.      The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

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

30



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##### Table of Contents






EXHIBIT INDEX



| | (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.