##### Table of Contents



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 September 30, 2002

OR



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

For the transition period from ___________ to ___________

Commission file number: 000-31121

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

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

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

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

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

Yes   [X]               No   [   ]

At September 30, 2002, 25,285,433 shares of common stock of the Registrant were
outstanding.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                          |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                   
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS         
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS          
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               |                                                                                               | 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 and Reports on Form 8-K.                                                    
|SIGNATURES                    
|INDEX TO EXHIBITS             
|EXHIBIT 99.1                  



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##### Table of Contents



AVISTAR COMMUNICATIONS CORPORATION

INDEX

|           |  |                                                                                       |    |                                                          |    |          |    | 
|---------- |  | ------------------------------------------------------------------------------------- | -- | -------------------------------------------------------- | -- | -------- | -- | 
|           |  |                                                                                       |    |                                                          |    | PAGE NO.
|           |  |                                                                                       |    |                                                          |    |         
|PART I.    |  | FINANCIAL INFORMATION                                                                 |    |                                                          |    |         
|          
|Item 1.    |  | Financial Statements                                                                  |    |                                                          | 3  |         
|           |  |                                                                                       |    | Condensed Consolidated Balance Sheets                    |    |          | 3  | 
|           |  |                                                                                       |    | Condensed Consolidated Statements of Operations          |    |          | 4  | 
|           |  |                                                                                       |    | Condensed Consolidated Statement of Stockholders Equity |    |          | 5  | 
|           |  |                                                                                       |    | Condensed Consolidated Statements of Cash Flows          |    |          | 6  | 
|           |  |                                                                                       |    | Notes to Condensed Consolidated Financial Statements     |    |          | 7  | 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |                                                          | 14 |         
|           |  |                                                                                       |    | Factors Affecting Future Operating Results               |    |          | 21 | 
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |                                                          | 29 |         
|Item 4.    |  | Controls and Procedures                                                               |    |                                                          | 29 |         
|          
|PART II.   |  | OTHER INFORMATION                                                                     |    |                                                          |    |         
|          
|Item 1.    |  | Legal Proceedings                                                                     |    |                                                          | 30 |         
|Item 5.    |  | Other Information                                                                     |    |                                                          | 30 |         
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |    |                                                          | 30 |         
|          
|SIGNATURES |  |                                                                                       | 31 |                                                         

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1.Financial Statements




AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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

|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |         |        |        | 
|------------------------------------- | ------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------- | ------ | ------------ | ------- | ------ | ------ | 
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         | September 30, |        | December 31,
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         | 2002          |        | 2001        
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |             
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         | (unaudited)   |        |              |         |       
|Assets:                               |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      | Current assets:                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |         |       
|                                      |                                       | Cash and cash equivalents                                                                                                                                                                                         |                                            | $       | 5,456         |        |              | $       | 7,455  |       
|                                      |                                       | Short-term investments                                                                                                                                                                                            |                                            |         | 3,367         |        |              |         | 5,831  |       
|                                      |                                       | Accounts receivable, net of allowance for doubtful
accounts of $187 at September 30, 2002 and $232 at
December 31, 2001                                                                                           |                                            |         | 1,064         |        |              |         | 2,760  |       
|                                      |                                       | Inventories, including inventory shipped to customer sites, not
yet installed of $140 at September 30, 2002 and $262 at
December 31, 2001                                                                         |                                            |         | 1,055         |        |              |         | 1,096  |       
|                                      |                                       | Prepaid expenses and other current assets                                                                                                                                                                         |                                            |         | 805           |        |              |         | 1,121  |       
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      |                                       | Total current assets                                                                                                                                                                                              |                                            |         | 11,747        |        |              |         | 18,263 |       
|                                      | Property and equipment, net           |                                                                                                                                                                                                                   |                                            | 437     |               |        |              | 599     |       
|                                      | Other assets                          |                                                                                                                                                                                                                   |                                            | 411     |               |        |              | 403     |       
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      |                                       |                                                                                                                                                                                                                   | Total assets                               |         | $             | 12,595 |              |         | $      | 19,265 | 
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|Liabilities and Stockholders Equity: |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      | Current liabilities:                  |                                                                                                                                                                                                                   |                                            |         |               |        |              |         |       
|                                      |                                       | Bank overdraft                                                                                                                                                                                                    |                                            | $       |              |        |              | $       | 149    |       
|                                      |                                       | Accounts payable                                                                                                                                                                                                  |                                            |         | 285           |        |              |         | 633    |       
|                                      |                                       | Deferred revenue and customer deposits                                                                                                                                                                            |                                            |         | 1,060         |        |              |         | 1,205  |       
|                                      |                                       | Accrued liabilities and other                                                                                                                                                                                     |                                            |         | 1,315         |        |              |         | 2,237  |       
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      |                                       |                                                                                                                                                                                                                   | Total current liabilities                  |         |               | 2,660  |              |         |        | 4,224  | 
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      | Stockholders equity:                 |                                                                                                                                                                                                                   |                                            |         |               |        |              |         |       
|                                      |                                       | Common stock, $0.001 par value; 250,000,000 shares
authorized at September 30, 2002 and December 31, 2001;
25,285,433 and 25,196,478 shares outstanding at September 30, 2002
and December 31, 2001, respectively |                                            |         | 26            |        |              |         | 26     |       
|                                      |                                       | Treasury stock, 1,179,625 and 1,166,125 shares at September 30, 2002
and December 31, 2001, respectively                                                                                                          |                                            |         | (51           | )      |              |         | (40    | )     
|                                      | Additional paid-in-capital            |                                                                                                                                                                                                                   |                                            | 80,226  |               |        |              | 80,039  |       
|                                      | Deferred stock compensation           |                                                                                                                                                                                                                   |                                            | (200    | )             |        |              | (493    | )     
|                                      | Cumulative other comprehensive income |                                                                                                                                                                                                                   |                                            | 19      |               |        |              | 79      |       
|                                      | Accumulated deficit                   |                                                                                                                                                                                                                   |                                            | (70,085 | )             |        |              | (64,570 | )     
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      |                                       | Total stockholders equity                                                                                                                                                                                        |                                            |         | 9,935         |        |              |         | 15,041 |       
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        
|                                      |                                       |                                                                                                                                                                                                                   | Total liabilities and stockholders equity |         | $             | 12,595 |              |         | $      | 19,265 | 
|                                      |                                       |                                                                                                                                                                                                                   |                                            |         |               |        |              |        

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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

|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |       |        |     | 
|----------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------ | --------------------------------- | ----- | ------------------ | -- | ----------------- | ----- | ------------- | --- | ------------- | ----- | ------ | --- | ------ | ----- | ------ | --- | 
|                                                                                    |                                               |                          |                                   |       | Three Months Ended |    | Nine Months Ended
|                                                                                    |                                               |                          |                                   |       |                    |    |                  
|                                                                                    |                                               |                          |                                   |       | September 30,      |    | September 30,     |       | September 30, |     | September 30,
|                                                                                    |                                               |                          |                                   |       | 2002               |    | 2001              |       | 2002          |     | 2001         
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |              
|                                                                                    |                                               |                          |                                   |       | (unaudited)        |    | (unaudited)      
|Revenue:                                                                            |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    | Product                                       |                          | $                                 | 1,206 |                    |    | $                 | 1,719 |               |     | $             | 3,628 |        |     | $      | 8,854 |       
|                                                                                    | Services, maintenance and support             |                          |                                   | 1,136 |                    |    |                   | 1,310 |               |     |               | 3,415 |        |     |        | 3,800 |       
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    |                                               | Total revenue            |                                   |       | 2,342              |    |                   |       | 3,029         |     |               |       | 7,043  |     |        |       | 12,654 |    
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|Cost of revenue:                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    | Product                                       |                          |                                   | 503   |                    |    |                   | 857   |               |     |               | 1,751 |        |     |        | 3,745 |       
|                                                                                    | Services, maintenance and support             |                          |                                   | 567   |                    |    |                   | 578   |               |     |               | 1,809 |        |     |        | 2,113 |       
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    |                                               | Total cost of revenue    |                                   |       | 1,070              |    |                   |       | 1,435         |     |               |       | 3,560  |     |        |       | 5,858  |    
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    |                                               | Gross margin             |                                   |       | 1,272              |    |                   |       | 1,594         |     |               |       | 3,483  |     |        |       | 6,796  |    
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|Operating Expenses:                                                                 |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    | Research and development                      |                          |                                   | 894   |                    |    |                   | 1,146 |               |     |               | 2,984 |        |     |        | 4,073 |       
|                                                                                    | Sales and marketing                           |                          |                                   | 875   |                    |    |                   | 1,278 |               |     |               | 2,782 |        |     |        | 4,791 |       
|                                                                                    | General and administrative                    |                          |                                   | 1,179 |                    |    |                   | 1,105 |               |     |               | 3,376 |        |     |        | 4,069 |       
|                                                                                    | Amortization of deferred stock compensation * |                          |                                   | 74    |                    |    |                   | 155   |               |     |               | 293   |        |     |        | 706   |       
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    |                                               | Total operating expenses |                                   |       | 3,022              |    |                   |       | 3,684         |     |               |       | 9,435  |     |        |       | 13,639 |    
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    |                                               | Loss from operations     |                                   |       | (1,750             | )  |                   |       | (2,090        | )   |               |       | (5,952 | )   |        |       | (6,843 | )  
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|Other income (expense):                                                             |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    | Interest expense                              |                          |                                   |      |                    |    |                   |      |               |     |               |      |        |     |        | (2    | )     
|                                                                                    | Interest income                               |                          |                                   | 58    |                    |    |                   | 157   |               |     |               | 222   |        |     |        | 643   |       
|                                                                                    | Other, net                                    |                          |                                   | (5    | )                  |    |                   | (4    | )             |     |               | 215   |        |     |        | 23    |       
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    |                                               |                          | Total other income (expense), net |       |                    | 53 |                   |       |               | 153 |               |       |        | 437 |        |       |        | 664 | 
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|Net loss                                                                            |                                               | $                        | (1,697                            | )     |                    | $  | (1,937            | )     |               | $   | (5,515        | )     |        | $   | (6,179 | )    
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|Net loss per share  basic and diluted                                              |                                               | $                        | (0.07                             | )     |                    | $  | (0.08             | )     |               | $   | (0.22         | )     |        | $   | (0.25  | )    
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|Weighted average shares used in calculating
basic and diluted net loss per share    |                                               |                          | 25,273                            |       |                    |    | 25,145            |       |               |     | 25,252        |       |        |     | 25,159 |      
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|* Amortization of deferred stock compensation excluded
from the following expenses: |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    | Cost of revenue                               |                          | $                                 | 7     |                    |    | $                 | 18    |               |     | $             | 35    |        |     | $      | 98    |       
|                                                                                    | Research and development                      |                          |                                   | 6     |                    |    |                   | 14    |               |     |               | 26    |        |     |        | 83    |       
|                                                                                    | Sales and marketing                           |                          |                                   | 60    |                    |    |                   | 120   |               |     |               | 226   |        |     |        | 508   |       
|                                                                                    | General and administrative                    |                          |                                   | 1     |                    |    |                   | 3     |               |     |               | 6     |        |     |        | 17    |       
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      
|                                                                                    |                                               | $                        | 74                                |       |                    | $  | 155               |       |               | $   | 293           |       |        | $   | 706    |      
|                                                                                    |                                               |                          |                                   |       |                    |    |                   |       |               |     |               |       |        |     |        |      

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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

|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|------------------------------------------------------------------------------ |  | ------------ | ---------- | -------------- |  | ---------- | -- | ------ |  | ------------- | --------- | ------------ |  | ------------- | --- | ------- |  | ------ | ------ |  |  | - | ---- | - |  | - | --- | - |  | ---------- | ------- | - |  | - | ------ | -
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  | Cumulative |         |   |  |  
|                                                                               |  | Common Stock |            | Treasury Stock |  | Additional |    |        |  |               |           | Deferred     |  | Other         |     | Total  
|                                                                               |  |              |            |                |  | Paid-In    |    | Stock  |  | Comprehensive |           | Accumulated  |  | Stockholders'
|                                                                               |  | Shares       |            | Amount         |  | Shares     |    | Amount |  | Capital       |           | Compensation |  | Income        |     | Deficit |  | Equity
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |       
|Balances at December 31, 2001                                                  |  |              | 26,362,603 |                |  | $          | 26 |        |  |               | 1,166,125 |              |  | $             | (40 | )       |  | $      | 80,039 |  |  | $ | (493 | ) |  | $ | 79  |   |  | $          | (64,570 | ) |  | $ | 15,041 |  
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Issuance of common stock to employees
pursuant to employee stock purchase plan |  |              | 98,305     |                |  |            |   |        |  |               |          |              |  |               |    |         |  |        | 109    |  |  |   |     |   |  |   |    |   |  |            |        |   |  |   | 109    |  
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Issuance of common stock to employees
pursuant to exercise of options          |  |              | 4,150      |                |  |            |   |        |  |               |          |              |  |               |    |         |  |        | 4      |  |  |   |     |   |  |   |    |   |  |            |        |   |  |   | 4      |  
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Purchase of common stock pursuant
to stock repurchase program                  |  |              |           |                |  |            |   |        |  |               | 13,500    |              |  |               | (11 | )       |  |        |       |  |  |   |     |   |  |   |    |   |  |            |        |   |  |   | (11    | )
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Non-employee stock-based compensation                                          |  |              |           |                |  |            |   |        |  |               |          |              |  |               |    |         |  |        | 74     |  |  |   |     |   |  |   |    |   |  |            |        |   |  |   | 74     |  
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Amortization of deferred stock compensation                                    |  |              |           |                |  |            |   |        |  |               |          |              |  |               |    |         |  |        |       |  |  |   | 293  |   |  |   |    |   |  |            |        |   |  |   | 293    |  
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Unrealized loss on short-term investments                                      |  |              |           |                |  |            |   |        |  |               |          |              |  |               |    |         |  |        |       |  |  |   |     |   |  |   | (60 | ) |  |            |        |   |  |   | (60    | )
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Net loss                                                                       |  |              |           |                |  |            |   |        |  |               |          |              |  |               |    |         |  |        |       |  |  |   |     |   |  |   |    |   |  |            | (5,515  | ) |  |   | (5,515 | )
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  
|Balances at September 30, 2002                                                 |  |              | 26,465,058 |                |  | $          | 26 |        |  |               | 1,179,625 |              |  | $             | (51 | )       |  | $      | 80,226 |  |  | $ | (200 | ) |  | $ | 19  |   |  | $          | (70,085 | ) |  | $ | 9,935  |  
|                                                                               |  |              |            |                |  |            |    |        |  |               |           |              |  |               |     |         |  |        |        |  |  |   |      |   |  |   |     |   |  |            |         |   |  |   |        |  

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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

|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |               |        |     |      |  
|--------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------- | ------ | ----------------- | ------ | ------------- | ------ | --- | ---- | -
|                                                    |                                                     |                                                                             |                                            |                                           |        | Nine Months Ended
|                                                    |                                                     |                                                                             |                                            |                                           |        |                  
|                                                    |                                                     |                                                                             |                                            |                                           |        | September 30,     |        | September 30,
|                                                    |                                                     |                                                                             |                                            |                                           |        | 2002              |        | 2001         
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    |                                                     |                                                                             |                                            |                                           |        | (unaudited)      
|Cash Flows from Operating Activities:               |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    |                                                     | Net loss                                                                    |                                            | $                                         | (5,515 | )                 |        | $             | (6,179 | )  
|                                                    |                                                     | Adjustments to reconcile net loss to net cash used
in operating activities: |                                            |                                           |        |                   |        |               |        |    
|                                                    |                                                     |                                                                             | Depreciation                               |                                           |        | 261               |        |               |        | 130 |     
|                                                    |                                                     |                                                                             | Stock-based compensation                   |                                           |        | 367               |        |               |        | 706 |     
|                                                    |                                                     |                                                                             | Provision for doubtful accounts            |                                           |        | 140               |        |               |        | 50  |     
|                                                    |                                                     |                                                                             | Changes in current assets and liabilities: |                                           |        |                   |        |               |        |     |     
|                                                    |                                                     |                                                                             |                                            | Accounts receivable                       |        |                   | 1,556  |               |        |     | 688  |  
|                                                    |                                                     |                                                                             |                                            | Inventories                               |        |                   | 41     |               |        |     | 512  |  
|                                                    |                                                     |                                                                             |                                            | Prepaid expenses and other current assets |        |                   | 316    |               |        |     | 32   |  
|                                                    |                                                     |                                                                             |                                            | Other assets                              |        |                   | (8     | )             |        |     | (173 | )
|                                                    |                                                     |                                                                             |                                            | Accounts payable                          |        |                   | (348   | )             |        |     | (902 | )
|                                                    |                                                     |                                                                             |                                            | Deferred revenue and customer deposits    |        |                   | (145   | )             |        |     | (435 | )
|                                                    |                                                     |                                                                             |                                            | Accrued liabilities and other             |        |                   | (922   | )             |        |     | (400 | )
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    | Net cash used in operating activities               |                                                                             |                                            | (4,257                                    | )      |                   |        | (5,971        | )     
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|Cash Flows from Investing Activities:               |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    | Purchase of short-term investments                  |                                                                             |                                            |                                          |        |                   |        | (5,225        | )     
|                                                    | Sale of short-term investments                      |                                                                             |                                            | 2,404                                     |        |                   |        |              |       
|                                                    | Purchase of property and equipment                  |                                                                             |                                            | (99                                       | )      |                   |        | (507          | )     
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|Net cash provided by (used in) investing activities |                                                     |                                                                             | 2,305                                      |                                           |        |                   | (5,732 | )            
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|Cash Flows from Financing Activities:               |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    | Decrease in bank overdraft                          |                                                                             |                                            | (149                                      | )      |                   |        |              |       
|                                                    | Proceeds from issuance of common stock              |                                                                             |                                            | 113                                       |        |                   |        | 253           |       
|                                                    | Repurchases of common stock                         |                                                                             |                                            | (11                                       | )      |                   |        | (34           | )     
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    | Net cash provided by (used in) financing activities |                                                                             |                                            | (47                                       | )      |                   |        | 219           |       
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    | Net decrease in cash and cash equivalents           |                                                                             |                                            | (1,999                                    | )      |                   |        | (11,484       | )     
|                                                    | Cash and cash equivalents, beginning of period      |                                                                             |                                            | 7,455                                     |        |                   |        | 21,660        |       
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              
|                                                    | Cash and cash equivalents, end of period            |                                                                             | $                                          | 5,456                                     |        |                   | $      | 10,176        |       
|                                                    |                                                     |                                                                             |                                            |                                           |        |                   |        |              

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

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

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

Business

Avistar Communications Corporation (Avistar or the Company) provides
the Avistar vBusiness integrated suite of video-enabled applications, including
networked video communications software and hardware products and services.
Avistars products include applications for interactive video calling, content
creation and publishing, broadcast video and video-on-demand, as well as data
sharing, directory services and network management. Avistar designs, develops,
markets, sells, manufactures and/or assembles and installs and supports its
products. Avistars real-time and non-real-time products are based upon its
architecture and Video Operating System (AvistarVOS) platform, which
facilitate distribution over local and wide area networks using telephony or
internet services as appropriate. 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 September 30, 2002 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 $70.1
million as of September 30, 2002. The Companys operating results may
fluctuate significantly in the future as a result of a variety of factors,
including, but not limited to, the economic environment, the adoption of
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 without limitation, general economic conditions and
conditions in the financial services industry in particular, the level and
timing of revenue, the costs and timing of the Companys product development
efforts and the success of these development efforts, the costs and timing of
the Companys sales and marketing activities, the extent to which the Companys
existing and new products gain market acceptance, competing technological and
market developments, the costs involved in maintaining and enforcing patent
claims and other intellectual property rights, and other factors, all of which
impact the Companys ability to achieve and maintain profitability. The
Companys management estimates that it will need to establish access to
additional funding within the next four months in order to continue its efforts
to implement its business plan (refer to Footnote 8 for discussion of Loan and
Security Agreement letter of commitment dated October 10, 2002).

If the Company is unable to raise funds on acceptable terms when and as
required, the Company may not be able to develop or enhance its products, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated requirements, which could seriously harm its business, financial
condition, and results of operations. If additional funds are raised through
the issuance of equity securities, the Companys net tangible book value per
share is likely to decrease, the percentage ownership of then current

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stockholders will be diluted, and such equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

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

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

Use of Estimates

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

Cash and Cash Equivalents and Short Term Investments

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

Supplemental Cash Flow Information

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

Significant Concentrations

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

|           |  |                    |    |                   |  |      |    |      |  |  |    |   |  |  |    |  
|---------- |  | ------------------ | -- | ----------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|           |  | THREE MONTHS ENDED |    | NINE MONTHS ENDED
|           |  | SEPTEMBER 30,      |    | SEPTEMBER 30,    
|           |  |                    |    |                  
|           |  | 2002               |    | 2001              |  | 2002 |    | 2001
|           |  |                    |    |                   |  |      |    |     
|           |  | (UNAUDITED)        |    | (UNAUDITED)      
|Customer A |  |                    | 41 | %                 |  |      | 32 | %    |  |  | 55 | % |  |  | 33 | %
|Customer B |  |                    | *  |                   |  |      | 21 | %    |  |  | *  |   |  |  | 25 | %
|Customer C |  |                    | 20 | %                 |  |      | 15 | %    |  |  | 12 | % |  |  | *  |  



---

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

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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.

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 September 30, 2002, approximately 67% of accounts receivable was
concentrated with three customers who each represented greater than 10% of the
Companys total accounts receivable balance. As of December 31, 2001,
approximately 49% of accounts receivable was concentrated with two customers
who each represented greater than 10% of the Companys total accounts
receivable balance.

Inventories

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

|                                                       |  |               |       |              |  |   |       |  
|------------------------------------------------------ |  | ------------- | ----- | ------------ |  | - | ----- | -
|                                                       |  | SEPTEMBER 30, |       | DECEMBER 31,
|                                                       |  | 2002          |       | 2001        
|                                                       |  |               |       |             
|                                                       |  | (UNAUDITED)   |       |              |  |  
|Raw materials and subassemblies                        |  | $             | 110   |              |  | $ | 169   |  
|Finished goods                                         |  |               | 914   |              |  |   | 1,018 |  
|Inventory shipped to customer sites, not yet installed |  |               | 140   |              |  |   | 262   |  
|Less: Allowance for obsolescence                       |  |               | (109  | )            |  |   | (353  | )
|                                                       |  |               |       |              |  |   |       |  
|                                                       |  | $             | 1,055 |              |  | $ | 1,096 |  
|                                                       |  |               |       |              |  |   |       |  

Inventory shipped to customer sites, not yet installed, represents product
shipped to customer sites pending completion of the installation process by the
Company. As of September 30, 2002 and December 31, 2001, the Company had billed
approximately $0.3 million and $0.6 million, respectively, to customers related
to these shipments, but did not record the revenue, as the installations had
not been completed and confirmed by the customer. Although customers are
billed in accordance with customer agreements, these deferred revenue amounts
are netted against accounts receivable until the customer confirms
installation.

Revenue Recognition and Deferred Revenue

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

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

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

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services are offered independent of the purchase of product. The value of
these training courses is determined based on the price charged when such
services are sold separately, and training revenue is recognized upon
performance of the service.

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

Recent Accounting Pronouncements

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

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

3. Line of Credit

On February 27, 2002, the Company entered into a Loan and Security
Agreement with a financial institution to borrow up to $4.5 million as a
revolving line of credit and $0.5 million as an equipment term loan. The first
$1.0 million of the revolving line is available on a non-formula basis, and the
remainder is limited to 80% of the Companys eligible accounts receivable. The
equipment term loan is limited to 100% of the purchase price of eligible
equipment. As collateral under this Loan and Security Agreement, the Company
granted a first priority interest in all its assets to the lender, excluding
intellectual property. The revolving line of credit, which expires on February
26, 2003, and the equipment term loan, which expires on November 30, 2004,
require certain covenants to be met, including maintenance of a $3.0 million
cash balance at the financial institution. Interest on borrowed amounts is
payable at the banks prime rate plus 0.25%. As of September 30, 2002, the
Company did not have any outstanding borrowings under this line of credit
(refer to Footnote 8 for discussion of Loan and Security Agreement letter of
commitment dated October 10, 2002).

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 nine months
ended September 30, 2002 and 2001, payments of approximately $125,000 and
$224,000, respectively, were made to WSGR for legal services provided to the
Company.

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During the nine months ended September 30, 2002 and 2001, payments for
consulting fees of approximately $165,000 and $73,000, 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.

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.

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 outstanding stock options and shares subject to repurchase from
the calculation of diluted net loss per share for the three and nine months
ended September 30, 2002 and 2001, because all such securities are
antidilutive. Accordingly, diluted net loss per share is the same as basic net
loss per share for all periods presented.

The total number of common equivalent shares excluded from the
calculations of diluted net loss per share was 136,231 and 531,170 for the
three months ended September 30, 2002 and 2001, respectively, and 269,039 and
824,871 for the nine months ended September 30, 2002 and 2001, 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 in two operating segments: (1) the design, development,
manufacture, 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 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 (CEO), monitors the Companys
operations based upon the information reflected in the following table (in
thousands):

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|                                      |                          |  |         |         |     |  |       |      |   |  |   |         |  
|------------------------------------- | ------------------------ |  | ------- | ------- | --- |  | ----- | ---- | - |  | - | ------- | -
|                                      |                          |  | Avistar |         | CPI |  | Total
|                                      |                          |  |         |         |     |  |      
|Three Months Ended September 30, 2002 |                          |  |         |         |     |  |       |      |   |  |   |        
|                                      | Revenue                  |  | $       | 2,342   |     |  | $     |     |   |  | $ | 2,342   |  
|                                      | Gross margin             |  |         | 1,272   |     |  |       |     |   |  |   | 1,272   |  
|                                      | Depreciation expense     |  |         | (72     | )   |  |       | (1   | ) |  |   | (73     | )
|                                      | Total operating expenses |  |         | (2,640  | )   |  |       | (382 | ) |  |   | (3,022  | )
|                                      | Interest income          |  |         | 58      |     |  |       |     |   |  |   | 58      |  
|                                      | Interest expense         |  |         |        |     |  |       |     |   |  |   |        |  
|                                      | Net loss                 |  |         | (1,315  | )   |  |       | (382 | ) |  |   | (1,697  | )
|                                      | Assets                   |  |         | 12,532  |     |  |       | 63   |   |  |   | 12,595  |  
|Three Months Ended September 30, 2001 |                          |  |         |         |     |  |       |      |   |  |   |        
|                                      | Revenue                  |  | $       | 3,029   |     |  | $     |     |   |  | $ | 3,029   |  
|                                      | Gross margin             |  |         | 1,594   |     |  |       |     |   |  |   | 1,594   |  
|                                      | Depreciation expense     |  |         | (58     | )   |  |       | (4   | ) |  |   | (62     | )
|                                      | Total operating expenses |  |         | (3,402  | )   |  |       | (282 | ) |  |   | (3,684  | )
|                                      | Interest income          |  |         | 157     |     |  |       |     |   |  |   | 157     |  
|                                      | Interest expense         |  |         |        |     |  |       |     |   |  |   |        |  
|                                      | Net loss                 |  |         | (1,655  | )   |  |       | (282 | ) |  |   | (1,937  | )
|                                      | Assets                   |  |         | 21,302  |     |  |       | 11   |   |  |   | 21,313  |  
|Nine Months Ended September 30, 2002  |                          |  |         |         |     |  |       |      |   |  |   |        
|                                      | Revenue                  |  | $       | 7,043   |     |  | $     |     |   |  | $ | 7,043   |  
|                                      | Gross margin             |  |         | 3,483   |     |  |       |     |   |  |   | 3,483   |  
|                                      | Depreciation expense     |  |         | (257    | )   |  |       | (4   | ) |  |   | (261    | )
|                                      | Total operating expenses |  |         | (8,616  | )   |  |       | (819 | ) |  |   | (9,435  | )
|                                      | Interest income          |  |         | 222     |     |  |       |     |   |  |   | 222     |  
|                                      | Interest expense         |  |         |        |     |  |       |     |   |  |   |        |  
|                                      | Net loss                 |  |         | (4,696  | )   |  |       | (819 | ) |  |   | (5,515  | )
|Nine Months Ended September 30, 2001  |                          |  |         |         |     |  |       |      |   |  |   |        
|                                      | Revenue                  |  | $       | 12,654  |     |  | $     |     |   |  | $ | 12,654  |  
|                                      | Gross margin             |  |         | 6,796   |     |  |       |     |   |  |   | 6,796   |  
|                                      | Depreciation expense     |  |         | (121    | )   |  |       | (9   | ) |  |   | (130    | )
|                                      | Total operating expenses |  |         | (12,771 | )   |  |       | (868 | ) |  |   | (13,639 | )
|                                      | Interest income          |  |         | 643     |     |  |       |     |   |  |   | 643     |  
|                                      | Interest expense         |  |         | (2      | )   |  |       |     |   |  |   | (2      | )
|                                      | Net loss                 |  |         | (5,311  | )   |  |       | (868 | ) |  |   | (6,179  | )

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 57% and 48% of
total revenue for the three months ended September 30, 2002 and 2001,
respectively. International revenue comprised 52% and 47% of total revenue for
the nine months ended September 30, 2002 and 2001, respectively. For the three
months ended September 30, 2002 and 2001, international revenues to customers
in the United Kingdom accounted for 25% and 29%, respectively, of total
revenue. For the nine months ended September 30, 2002 and 2001, international
revenues to customers in the United Kingdom accounted for 27% of total revenue
in both periods. All of the Companys sales are currently billed in United
States dollars. The Company had no significant long-lived assets in any country
other than in the United States for any period presented.

8. Subsequent Event

On October 10, 2002, we entered into a commitment letter with the
financial institution party to the Loan and Security Agreement dated February
27, 2002. This commitment letter, which is subject to negotiation and signing
of definitive agreements by the parties, provides for the amendment of the Loan
and Security Agreement to increase the maximum funds available thereunder to
$6.0 million and extend the term of the agreement. Furthermore, the commitment
letter provides as a condition to the execution of the definitive

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agreement, that Gerald Burnett, Chairman and CEO of the Company,
personally guarantee payment of our obligations under the agreement.

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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,
2001, as filed with the Securities and Exchange Commission on March 21, 2002.

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

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

Overview

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

We operate in two segments. Avistar Communications Corporation engages in
the design, development, manufacturing, sale and marketing of networked video
communications products, and associated support services, and Collaboration
Properties, Inc., our wholly owned subsidiary, engages in the prosecution,
maintenance, support and licensing of the intellectual property that we have
developed, some of which is used in our products. As of September 30, 2002, CPI
had not entered into any such third party licensing agreements.

Critical Accounting Policies

The preparation of these 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 Condensed Consolidated Interim Financial Statements:



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

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These critical accounting policies are discussed below.

Revenue

We derive product revenue principally from the sale and licensing of our
video-enabled networked communications system, consisting of a suite of
Avistar-designed software and hardware products, including third party
components. In addition, we derive revenue from fees for installation,
maintenance, support, training services and software development. Product
revenue as a percentage of total revenue was 51% for the three-month period
ended September 30, 2002, and 57% for the three-month period ended September
30, 2001. Product revenue as a percentage of total revenue was 51% for the
nine-month period ended September 30, 2002 and 70% for the nine-month period
ended September 30, 2001.

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

To date, a significant portion of our revenue has resulted from sales to a
limited number of customers, particularly Deutsche Bank and JP Morgan Chase and
their affiliates. For the nine months ended September 30, 2002, we recorded
revenue of approximately $4.7 million, or 67% of total revenue, from these
customers, who each generated greater than 10% of our total revenue. For the
nine months ended September 30, 2001, we recorded revenue of approximately $7.3
million, or 58% of total revenue, from Deutsche Bank and UBS Warburg LLC and
their affiliates, who each generated greater than 10% of our total revenue. We
anticipate that our revenue, and therefore, our operating results for any given
period, will continue to depend to a significant extent on a limited number of
customers. As a result, the loss or a reduction in sales to any one of these
customers would have a significant adverse impact on our operations and
financial performance.

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 52% of total
revenue for the nine months ended September 30, 2002, and 47% for the nine
months ended September 30, 2001. For the nine months ended September 30, 2002
and 2001, international revenues to customers in the United Kingdom accounted
for 27% of total revenue.

Cost of Revenue

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

Operating Expenses

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

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

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

Amortization of deferred stock compensation relates to stock options
issued to employees, and represents the difference between the exercise price
of options granted to employees and the grant-date fair value of our common
stock. Based on the outstanding options at December 31, 2001, we anticipate
recording charges of approximately $358,000 in 2002 and $135,000 in 2003 to
record the remainder of the costs associated with these grants. Future
compensation expense may be decreased in a period of forfeiture for any accrued
but unvested compensation arising from the early termination of an option
holders services. In addition, we have granted options to acquire shares of
common stock to non-employees who have provided consulting services. For the
three months ended September 30, 2002, we recognized an expense of $7,000
related to these non-employee options. For the three months ended September 30,
2001, we did not recognize expense related to non-employee options. For the
nine months ended September 30, 2002, we recognized an expense of $74,000
related to these non-employee options, and for the nine months ended September
30, 2001, we recognized an expense of $31,000 related to these non-employee
options. Pursuant to the provisions of SFAS No. 123, the fair value of
non-employee options issued was determined based on the fair value of the
consideration received, where such amount was reliably measurable, or the fair
value of the equity instruments issued, in which case, the fair value was
estimated as services were provided using the Black-Scholes option pricing
model.

Valuation of Accounts Receivable

Estimates are used in determining our allowance for doubtful accounts and
are based on our historical collection experience, historical write-offs,
current trends and the credit quality of our customer base, and the make-up of
our accounts receivable by aging category. If the allowance for doubtful
accounts was understated, our operating income could be significantly reduced.
As of September 30, 2002, approximately 67% of accounts receivable were
concentrated with three customers, who each represented greater than 10% of our
total accounts receivable balance. As of December 31, 2001, approximately 49%
of accounts receivable were concentrated with two customers, who each
represented greater than 10% of our total accounts receivable.

Valuation of Inventories

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

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Results of Operations

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

|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |      |       | 
|----------------------- | ------------------------------------------- | ---------------------------- | ----- | --------------------------- | ----- | ----------------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- |  | ----- | ---- | ----- | 
|                        |                                             |                              |       | PERCENTAGE OF TOTAL REVENUE
|                        |                                             |                              |       |                            
|                        |                                             |                              |       | THREE MONTHS ENDED          |       | NINE MONTHS ENDED
|                        |                                             |                              |       | SEPTEMBER 30,               |       | SEPTEMBER 30,    
|                        |                                             |                              |       |                             |       |                  
|                        |                                             |                              |       | 2002                        |       | 2001              |       | 2002 |       | 2001
|                        |                                             |                              |       |                             |       |                   |       |      |       |     
|Revenue:                |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        | Product                                     |                              |       | 51.5                        | %     |                   |       | 56.8 | %     |      |       | 51.5 | %     |  |       | 70.0 | %    
|                        | Services, maintenance and support           |                              |       | 48.5                        |       |                   |       | 43.2 |       |      |       | 48.5 |       |  |       | 30.0 |      
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total revenue                |       |                             | 100.0 |                   |       |      | 100.0 |      |       |      | 100.0 |  |       |      | 100.0 | 
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|Cost of revenue:        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        | Product                                     |                              |       | 21.5                        |       |                   |       | 28.3 |       |      |       | 24.9 |       |  |       | 29.6 |      
|                        | Services, maintenance and support           |                              |       | 24.2                        |       |                   |       | 19.1 |       |      |       | 25.7 |       |  |       | 16.7 |      
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total cost of revenue        |       |                             | 45.7  |                   |       |      | 47.4  |      |       |      | 50.6  |  |       |      | 46.3  | 
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|Gross margin            |                                             |                              | 54.3  |                             |       |                   | 52.6  |      |       |      | 49.4  |      |       |  | 53.7  |     
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|Operating expenses:     |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        | Research and development                    |                              |       | 38.2                        |       |                   |       | 37.8 |       |      |       | 42.4 |       |  |       | 32.2 |      
|                        | Sales and marketing                         |                              |       | 37.4                        |       |                   |       | 42.2 |       |      |       | 39.5 |       |  |       | 37.9 |      
|                        | General and administrative                  |                              |       | 50.3                        |       |                   |       | 36.5 |       |      |       | 47.9 |       |  |       | 32.2 |      
|                        | Amortization of deferred stock compensation |                              |       | 3.2                         |       |                   |       | 5.1  |       |      |       | 4.1  |       |  |       | 5.6  |      
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total operating expenses     |       |                             | 129.1 |                   |       |      | 121.6 |      |       |      | 133.9 |  |       |      | 107.9 | 
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|Loss from operations    |                                             |                              | (74.8 | )                           |       |                   | (69.0 | )    |       |      | (84.5 | )    |       |  | (54.2 | )   
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|Other (expense) income: |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        | Interest expense                            |                              |       | (0.0                        | )     |                   |       | (0.0 | )     |      |       | (0.0 | )     |  |       | (0.0 | )    
|                        | Interest income                             |                              |       | 2.5                         |       |                   |       | 5.2  |       |      |       | 3.2  |       |  |       | 5.1  |      
|                        | Other                                       |                              |       | (0.2                        | )     |                   |       | (0.1 | )     |      |       | 3.1  |       |  |       | 0.2  |      
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|                        |                                             | Total other (expense) income |       |                             | 2.3   |                   |       |      | 5.1   |      |       |      | 6.3   |  |       |      | 5.3   | 
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     
|Net loss                |                                             |                              | (72.5 | )%                          |       |                   | (63.9 | )%   |       |      | (78.2 | )%   |       |  | (48.9 | )%  
|                        |                                             |                              |       |                             |       |                   |       |      |       |      |       |      |       |  |       |     

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Revenue

Total revenue decreased by 23% to $2.3 million for the three months ended
September 30, 2002 from $3.0 million for the three months ended September 30,
2001, and decreased by 44% to $7.0 million for the nine months ended September
30, 2002 from $12.7 million for the nine months ended September 30, 2001. The
decrease in the three and nine month periods ended September 30, 2002 relative
to the prior year were due primarily to lower product sales. Lower product
sales were due in large part to continued weakness in the United States and
global economies, 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 September 30, 2002, revenue from two customers
accounted for 61% of total revenue, each of whom accounted for greater than 10%
of our total revenue. For the three months ended September 30, 2001, revenue
from three customers accounted for 68% of our total revenue, each of whom
contributed greater than 10% of our total revenue. For the nine months ended
September 30, 2002, revenue from two customers accounted for 67% of total
revenues, each of whom accounted for greater than 10% of our total revenue.
For the nine months ended September 30, 2001, revenue from two customers
accounted for 58% of our total revenue, each of whom contributed greater than
10% of our total revenue. The level of sales to any customer may vary from
quarter to quarter. We expect that there will be significant customer
concentration in future quarters. The loss of any one of those customers would
have a material adverse impact on our financial condition or operating results.

Cost of Revenue

The cost of revenue declined by 25% to $1.1 million for the three months
ended September 30, 2002 from $1.4 million for the three months ended September
30, 2001, and decreased by 39% to $3.6 million for the nine months ended
September 30, 2002, from $5.9 million for the nine months ended September 30,
2001. Cost of revenue decreased during the three and nine-month periods ended
September 30, 2002 relative to the prior year due primarily to reductions in
product revenue and associated direct costs. Cost of

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product revenue declined by 41% to $0.5 million in the three-month period
ended September 30, 2002 compared to $0.9 million for the corresponding period
in 2001, and declined by 53% to $1.8 million in the nine-month period ended
September 30, 2002 compared to $3.7 million for the corresponding period in
2001. This decline in cost of product revenue in the three and nine-month
periods ended September 30, 2002 was due to the lower level of product sales
and associated direct costs, and a declining fixed component of the cost of
product revenue, resulting primarily from reduced personnel and personnel
related expenses. Cost of service revenue declined by 2% to $0.6 million for
the three months ended September 30, 2002 compared to $0.6 million for the
corresponding period in 2001, due to a decrease in service costs related to
software development revenue, offset by an increase in the costs of our
maintenance program. Cost of service revenue declined by 14% to $1.8 million
for the nine months ended September 30, 2002 compared to $2.1 million for the
corresponding period in 2001, due to the declining fixed component of the cost
of service revenue, resulting primarily from the reduction in personnel and
personnel related expenses.

Gross Margin

The gross margin as a percentage of revenue increased slightly to 54% for
the three months ended September 30, 2002 from 53% for the three months ended
September 30, 2001. The gross margin as a percentage of revenue decreased to
50% for the nine months ended September 30, 2002 from 54% for the nine months
ended September 30, 2001 due to a decrease in product gross margin, offset
partially by an increase in services gross margin. Product gross margin as a
percentage of total product revenue increased to 58% for the three-month period
ended September 30, 2002 from 50% for the three-month period ended September
30, 2001, as a result of a decrease in direct product costs as a percentage of
product revenue, as well as a slight decrease in the fixed component of the
cost of product revenue, primarily due to a reduction in personnel and
personnel related expenses. Product gross margin as a percentage of total
product revenue decreased to 52% for the nine-month period ended September 30,
2002, compared to 58% for the same period in 2001, as a result of reduced
product revenue, which provided more limited coverage of the fixed components
of the cost of product sales. Service gross margin as a percentage of total
service revenue decreased to 50% for the three months ended September 30, 2002
compared to 56% for the same period in 2001, due to an increase in the costs of
our maintenance program, offset partially by a decrease in service contract
costs related to software development revenue. Service gross margin as a
percentage of total service revenue increased to 47% for the nine months ended
September 30, 2002, compared to 44% for the same period in 2001, as a result of
a decline in the fixed components of the cost of service revenue, resulting
primarily from reduced personnel and personnel related expenses associated with
reduced staffing levels.

Operating expenses

Research and development.Research and development expenses decreased by
22% to $0.9 million in the three months ended September 30, 2002 from $1.1
million for the three months ended September 30, 2001, and decreased by 27% to
$3.0 million for the nine months ended September 30, 2002 from $4.1 million for
the nine months ended September 30, 2001. The decreases in the three and
nine-month periods ended September 30, 2002 relative to the prior year were due
to the reduction in personnel and personnel related expenses, as a result of a
9% reduction in staffing levels in research and development relative to
September 30, 2001, and a reduction in external consulting expenses.

Sales and marketing.Sales and marketing expenses decreased by 32% to $0.9
million in the three months ended September 30, 2002 from $1.3 million in the
three months ended September 30, 2001, and decreased by 42% to $2.8 million for
the nine months ended September 30, 2002 from $4.8 million for the nine months
ended September 30, 2001. The decreases in the three and nine-month periods
ended September 30, 2002 relative to the prior year were due to decreased
personnel and personnel related costs, decreased commission expense due to
lower product sales, and reductions in marketing program expenditures.

General and administrative.General and administrative expenses increased
by 7% to $1.2 million in the three months ended September 30, 2002 from $1.1
million for the three months ended September 30, 2001 due to an increase in
outside services, offset partially by a decrease in personnel and personnel
related expenses. General and administrative expenses decreased by 17% to $3.4
million for the nine months ended September 30, 2002 from $4.1 million for the
nine months ended September 30, 2000 due primarily to decreased personnel and
personnel related costs, resulting from the reduction in the average staffing
level relative to the nine months ended September 30, 2001.

Amortization of deferred stock compensation.Amortization of deferred
stock compensation decreased by 52% to $0.1 million in the three months ended
September 30, 2002 from $0.2 million in the three months ended September 30,
2001, and decreased by 59% to $0.3 million in the nine months ended September
30, 2002 from $0.7 million in the nine months ended September 30, 2001. The
decreases in the three and nine-month periods ended September 30, 2002 relative
to the prior year were due the cumulative effect of the completion of option
amortization, as well as forfeitures of stock options by employees no longer
with our company.

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Other Income (Expense)

Other income (expense), net decreased by 65% to an income of $0.1 million
in the three months ended September 30, 2002 from an income of $0.2 million in
the three months ended September 30, 2001 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. Other income (expense), net
decreased by 34% to an income of $0.4 million in the nine months ended
September 30, 2002 from an income of $0.7 million for the nine months ended
September 30, 2001 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, offset partially by $0.2 million in net grant proceeds
received during the nine months ended September 30, 2002 from the New York
disaster relief program associated with the events of September 11, 2001.

Liquidity and Capital Resources

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

We had cash and cash equivalents of $5.5 million and short-term
investments of $3.4 million as of September 30, 2002 and cash and cash
equivalents of $7.5 million and short-term investments of $5.8 million as of
December 31, 2001. For the nine months ended September 30, 2002 we had an
overall net cash outflow of $2.0 million, resulting primarily from net cash
used in operations of $4.3 million, offset partially by the net cash provided
by investing activities of $2.3 million. The net cash used in operating
activities of $4.3 million resulted from a net loss of $5.5 million, a decrease
in accounts payable of $0.4 million, a decrease in deferred revenue and
customer deposits of $0.1 million, and a decrease in accrued liabilities and
other of $0.9 million, partially offset by depreciation, stock-based
compensation and provision for doubtful accounts totaling $0.8 million, a
decrease in accounts receivable of $1.6 million, and a decrease in prepaid
expenses and other current assets of $0.3 million. The net cash provided by
investing activities resulted from the net sale of short-term investments of
$2.4 million, partially offset by the purchase of property and equipment of
$0.1 million.

At September 30, 2002, we had open purchase orders and other contractual
obligations of approximately $1.1 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 September 30, 2002:

|                             |  |        |       | 
|---------------------------- |  | ------ | ----- | 
|Year Ending December 31,     |  | Amount
|                             |  |       
|Fourth Quarter of 2002       |  | $      | 426   | 
|2003                         |  |        | 869   | 
|2004                         |  |        | 162   | 
|2005                         |  |        | 213   | 
|2006                         |  |        | 213   | 
|Thereafter                   |  |        | 921   | 
|                             |  |        |       | 
|Total minimum lease payments |  | $      | 2,804 | 
|                             |  |        |       | 

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

On September 23, 2002, we (through a wholly owned subsidiary) filed a
patent infringement lawsuit in the United States District Court for the
Northern District of California against Polycom, Inc. alleging that several
Polycom videoconferencing products infringe four patents of our wholly-owned
subsidiary, CPI. In this action, we have requested injunctive relief, damages
to compensate for past and present infringement, treble damages, costs
associated with the litigation and such further relief as the Court deems just
and proper. Litigation such as this suit can take years to resolve and can be
expensive to prosecute. Regardless of the outcome, the prosecution of our
claims may result in the use of significant financial resources and may require
us to obtain additional financing. Finally, judgment adverse to CPI could
require CPI, under certain circumstances, to compensate Polycom.

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

On October 10, 2002, we entered into a commitment letter with the
financial institution party to the Loan and Security Agreement dated February
27, 2002. Based on this commitment letter, which is subject to negotiation and
signing of definitive agreements by the parties, we expect that the Loan and
Security Agreement will be amended to increase the maximum funds available
thereunder to $6.0 million and extend the term of the agreement. The amended
Loan and Security Agreement is expected to expire 364 days after the definitive
amendment is signed. The agreement, as amended, is expected to retain a first
priority security interest in all our assets, excluding intellectual property.
Furthermore, Gerald Burnett, Chairman and CEO of the Company has committed to
personally guarantee payment of our obligations under the agreement and as a
consequence, a number of constraining covenants from the Loan and Security
agreement have been deleted in the commitment letter, allowing us greater
access to the full amount of the facility.

We intend to continue to invest in the development of new products and
enhancements to our existing products. We expect that we will need to arrange
for the availability of additional funding within the next four months, either
through the execution of the definitive amendment to the Loan and Security
Agreement as described in the preceding paragraph or through other means, in
order to meet our future business requirements for the following twelve months.
Our future liquidity and capital requirements will depend upon numerous
factors, including without limitation, general economic conditions and
conditions in the financial services industry in particular, the level and
timing of revenue, the costs and timing of our product development efforts and
the success of these development efforts, the costs and timing of our sales and
marketing activities, the extent to which our existing and new products gain
market acceptance, competing technological and market developments, the costs
involved in maintaining and enforcing patent claims and other intellectual
property rights including, without limitation, the costs and result of
litigation with Polycom, and other factors, all of which impact our ability to
achieve and maintain profitability.

If we are unable to obtain additional funding on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, financial condition, and
results of operations. There can be no assurance that such funding will be
available on terms attractive to us, or at all. Furthermore, any additional
equity financing may be dilutive to stockholders and such equity securities may
have rights, preferences or privileges senior to those of the holders of our
common stock, and debt financing, if available, may involve 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 April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections Business Combinations. The provisions of SFAS No. 145 relating to
the rescission of SFAS No. 4 are effective for financial statements issued for
fiscal years beginning after May 15, 2002, and the provisions relating to SFAS
No. 13 are effective for transactions occurring after May 15, 2002. SFAS No.
145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No.
44, Accounting for Intangible Assets of Motor Carriers, and amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. We do not
expect the adoption to have a significant impact on our financial position or
results of operations.

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




Factors Affecting Future Operating Results

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

Our ability to achieve profitability depends in large part on the
widespread adoption of networked video communications systems. If the market
for our system fails to grow or grows more slowly than we anticipate, we may
not be able to increase revenue or achieve profitability. The market for our
system is relatively new and evolving. We will have to devote substantial
resources to educating prospective customers about the uses and benefits of our
system. Our efforts to educate potential customers may not result in our
system achieving market acceptance. In addition, businesses that have invested
or may invest substantial resources in video products may be reluctant or slow
to adopt our system. Similarly, customers using existing information systems
in which they have made significant investments may refuse to adopt our system
if they perceive that our offerings will not complement their existing systems.
Consequently, the conversion from traditional methods of communication to the
extensive use of 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 $5.5 million for the nine months ended September
30, 2002, $7.9 million for the year 2001, and $4.7 million for the year 2000.
As of September 30, 2002, our accumulated deficit was $70.1 million. Our
revenue may not increase, or even remain at its current level. In addition,
our operating expenses may increase significantly as we continue to develop our
business in the future. As a result, to become profitable, we will need to
increase our revenue by increasing sales to existing customers and by
attracting additional customers. If our expenses increase more rapidly than
our revenue, or if revenue and expense levels remain the same, we may never
become profitable.

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

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

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

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

On September 23, 2002, we (through a wholly owned subsidiary) commenced a
patent infringement lawsuit against Polycom, Inc. alleging that several Polycom
videoconferencing products infringe four patents held by our wholly-owned
subsidiary, CPI. The suit was filed in the United States District Court for the
Northern District of California. The four patents involved are U.S. Patent
Nos. 5,867,654, 5,896,500, 6,212,547 and 6,343,314. These patents cover
technologies relating to video and data conferencing over unshielded twisted
pair (UTP) networks, distributed call-state management, separate monitors for
simultaneous computer-based data

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sharing and videoconferencing and remote participant hold and disconnect
functions in multi-party conferencing. The prosecution of this lawsuit may
require us to expend significant financial and managerial resources and may
have a material negative impact on our business. The duration and ultimate
outcome of this litigation are uncertain. Litigation such as this suit can
take years to resolve and can be expensive to prosecute. Regardless of the
outcome, the prosecution of our claims in this lawsuit may require us to obtain
additional financing. In addition, an adverse judgment, if entered against
CPI, could require CPI to pay substantial compensation to Polycom, which could
harm our business, financial position and results of operations and cause our
stock price to decline substantially.

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

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



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

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

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

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

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

Our customers typically place limited initial orders for our networked
video communications system, as they seek to evaluate its usefulness and value.
Our strategy is to pursue additional and larger follow-on orders after these
initial orders. Revenue generated from follow-on orders accounted for
approximately 98% of our revenue in the nine months ended September 30, 2002,
and 89% in the same period in 2001. Current economic conditions have led to
decreases in our clients capital spending, and we have experienced a decrease
in the size and number of follow-on orders. Our future financial performance
depends on successful initial installations of our system and successful
generation of follow-on orders as the Avistar network expands within a customer
organization. If our system does not meet the needs and expectations of
customers, we may not be able to generate follow-on orders.

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

We have historically derived the majority of our revenue from a limited
number of customers, particularly Deutsche Bank and JP Morgan Chase and their
affiliates. Collectively, these customers accounted for 67% of our revenue in
the nine months ended September 30, 2002. This contribution reflects the
acquisition by Deutsche Bank of other financial services firms that were
previously Avistar customers, as well as the purchase of Avistar technology by
Deutsche Bank for new accounts as part of Deutsche Banks client connectivity
program. For the nine months ended September 30, 2001, Deutsche Bank and UBS
Warburg LLC and their affiliates accounted for 58% of our revenue. We expect
to continue to depend upon a limited number of customers for a substantial
portion of our revenue. As of September 30, 2002, approximately 67% of our
accounts receivable were concentrated with three customers who each represented
greater than 10% of our total accounts receivable balance. As of December 31,
2001, approximately 49% of our accounts receivable were concentrated with two
customers who each represented greater than 10% of our total accounts
receivable balance.

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

We may not be able to modify 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;                                                                                   
|
| |  |  | frequent new stand-alone introductions;                                                                          
|
| |  |  | changes in the requirements of our customers and their communities of users;                                     
|
| |  |  | evolving industry standards; and                                                                                 
|
| |  |  | transition to internet protocol connectivity for video at the desktop, with increasing availability of bandwidth.

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

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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.

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

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

Competition could reduce our market share and decrease our revenue.

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

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

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

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

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

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

A third party could claim that our technology infringes upon its
proprietary rights. As the number of software systems in our target market
increases and the functionality of these systems overlap, we believe that the
number of infringement suits filed by software developers may increase.
Although we have no knowledge that our system infringes the proprietary rights
of any third parties, we could nevertheless be sued in the future for
infringement. Defending against any infringement claims, even those that are

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not meritorious, could result in the expenditure of significant financial
and managerial resources. In addition, if we are found liable for
infringement, we may have to pay damages or royalties to a third party, and may
not be able to continue offering that portion of our system that is found to be
infringing. Redesigning our system components to avoid any alleged or actual
infringement could result in the expenditure of significant financial and
managerial resources and diminish the value of our system, which could harm our
business, financial condition or results of operations.

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

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

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

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

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

The loss of any of our outside contract manufacturers or third party
equipment suppliers that produce key components of our system could
significantly disrupt our manufacturing 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 currently under development. Our reliance on these third parties
involves a number of risks, including:



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

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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, or result in additional
costs, or cancellation of orders by our customers.

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

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

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

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

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

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

Failure to achieve or manage growth effectively will harm our business,
financial condition and operating results. Furthermore, in order to remain
competitive or to expand our business, we may find it necessary or desirable 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 52% of total
revenue for the nine months ended September 30, 2002, and 47% for the same
period in 2001. Some of the risks we may encounter in conducting international
business activities include the following:



| |  |  | tariffs and other trade barriers;                              
| | - |  | ---------------------------------------------------------------
|
| |  |  | unexpected changes in foreign regulatory requirements and laws;
|
| |  |  | economic and political instability;                            
|
| |  |  | increased risk of infringement claims;                         
|
| |  |  | restrictions on the repatriation of funds;                     

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| |  |  | potentially adverse tax consequences;                                                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | timing, cost and potential difficulty of adapting our system to
the local language standards in those foreign countries that do not
use the English alphabet;
|
| |  |  | fluctuations in foreign currencies; and                                                                                                                      
|
| |  |  | limitations in communications infrastructures in some foreign countries.                                                                                     

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

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

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

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

On October 8, 2002, we applied for trading of our common stock on The
NASDAQ SmallCap Market. This application was approved by NASDAQ and our common
stock was transferred to The NASDAQ SmallCap Market on October 30, 2002 despite
the fact that the closing bid price of our common stock was below the minimum
closing bid price requirement of The NASDAQ SmallCap Market on that date.
NASDAQ allows companies that meet the listing requirements of the NASDAQ
SmallCap Market (other than the minimum closing bid price) an initial grace
period of 180 days to regain compliance by posting a minimum closing bid price
of $1.00 for at least ten consecutive trading days. With the acceptance of our
application to switch to The NASDAQ SmallCap Market, our 90-day grace period to
achieve the minimum bid requirements, which commenced July 24, 2002, was
extended to 180 days, or through January 21, 2003. Additionally, if we
demonstrate at the end of the grace period that we are in compliance with The
NASDAQ SmallCap Market core listing standards (that is, either $750,000 net
income, stockholders equity of $5 million or market capitalization of $50
million) then we may be allowed an additional 180-day grace period to meet the
$1.00 minimum closing bid price requirement, or until July 19, 2003. There can
be no assurance that we will meet the requirements for continued listing on any
NASDAQ market or that we will meet The NASDAQ SmallCap Market core listing
standards to qualify for an additional grace period to achieve compliance.

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

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

The securities markets have experienced significant price and volume
fluctuations, and the market prices of the securities of technology companies
have been especially volatile. This market volatility, as well as general
economic, market or political conditions have, and may continue to reduce the
market price of our common stock, regardless of our operating performance. In

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addition, our operating results could be below the expectations of public
market analysts and investors, and in response, the market price of our common
stock could decrease significantly.

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

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

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

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

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

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

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

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

We develop products primarily in the United States and sell those products
primarily in North America, Europe and Asia. International revenue, which
consists of sales to customers with operations principally in Western Europe
and Asia, comprised 57% of total revenue for the three months ended September
30, 2002, and 48% for the same period in 2001. International revenue comprised
52% of total revenue for the nine months ended September 30, 2002, and 47% for
the same period in 2001. As a result, our financial condition could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. As all of our sales are currently made
in United States dollars, a strengthening of the United States dollar could
make our products less competitive in foreign markets. We do not use
derivative financial instruments for speculative or trading purposes, nor do we
engage in any foreign currency hedging transactions.

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

Cash and Cash Equivalents and Short-Term Investments

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

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

|                                                      |                                  |         |                |               |  |  |                  |      |  
|----------------------------------------------------- | -------------------------------- | ------- | -------------- | ------------- |  |  | ---------------- | ---- | -
|                                                      |                                  |         |                |               |  |  | Weighted Average
|Description                                           |                                  | Amounts |                | Interest Rate
|                                                      |                                  |         |                |              
|                                                      |                                  |         | (in thousands) |               |  |  |                 
|Cash and cash equivalents and short-term investments: |                                  |         |                |               |  |  |                  |     
|                                                      | Cash                             |         | $              | 948           |  |  |                  |     |  
|                                                      | Commercial paper                 |         |                | 2,405         |  |  |                  | 1.82 | %
|                                                      | Market preferreds                |         |                | 2,100         |  |  |                  | 1.96 | %
|                                                      | Other cash equivalents           |         |                | 3             |  |  |                  | 1.80 | %
|                                                      | Short-term investments           |         |                | 3,367         |  |  |                  | 3.57 | %
|                                                      |                                  |         |                |               |  |  |                  |     
|                                                      | Fair Value at September 30, 2002 |         | $              | 8,823         |  |  |                  |      |  
|                                                      |                                  |         |                |               |  |  |                  |     




Item 4. Controls and Procedures



|(a) |  | Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-14(c) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act), within 90 days of
the filing date of this report. Based on their evaluation, our principal
executive officer and principal accounting officer concluded that
Avistars disclosure controls and procedures are effective.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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, we (through a wholly owned subsidiary) commenced a
patent infringement lawsuit against Polycom, Inc. alleging that several Polycom
videoconferencing products infringe four patents held by our wholly-owned
subsidiary, CPI. The suit was filed in the United States District Court for the
Northern District of California. The four patents involved are U.S. Patent
Nos. 5,867,654, 5,896,500, 6,212,547 and 6,343,314. These patents cover
technologies relating to video and data conferencing over unshielded twisted
pair (UTP) networks, distributed call-state management, separate monitors for
simultaneous computer-based data sharing and videoconferencing and remote
participant hold and disconnect functions in multi-party conferencing. These
technologies are core components of our AvistarVOS video operating system. In
this action, we have requested injunctive relief, damages to compensate for
past and present infringement, treble damages, costs associated with the
litigation and such further relief as the Court deems just and proper.

The prosecution of this lawsuit may require us to expend significant
financial and managerial resources and may have a material negative impact on
our business. The duration and ultimate outcome of this litigation are
uncertain. Litigation such as this suit can take years to resolve and can be
expensive to prosecute. Regardless of the outcome, the prosecution of our
claims in this lawsuit may require us to obtain additional financing. In
addition, an adverse judgment, if entered against CPI, could require CPI to pay
substantial compensation to Polycom, which could harm our business, financial
position and results of operations and cause our stock price to decline
substantially.




Item 5. Other Information.

On October 8, 2002, we applied for trading of our common stock on The
NASDAQ SmallCap Market. This application was approved by NASDAQ and our common
stock was transferred to The NASDAQ SmallCap Market as of the commencement of
trading on October 30, 2002 despite the fact that the closing bid price of our
common stock was below the minimum closing bid price requirement of The NASDAQ
SmallCap Market on that date. NASDAQ allows companies that meet the listing
requirements of the NASDAQ SmallCap Market (other than the minimum closing bid
price) an initial grace period of 180 days to regain compliance by posting a
minimum closing bid price of $1.00 for at least ten consecutive trading days.
With the acceptance of our application to switch to The NASDAQ SmallCap Market,
our 90-day grace period to achieve the minimum bid requirements, which
commenced July 24, 2002, was extended to 180 days, or through January 21, 2003.
Additionally, if we demonstrate at the end of the grace period that we are in
compliance with The NASDAQ SmallCap Market core listing standards (that is,
either $750,000 net income, stockholders equity of $5 million or market
capitalization of $50 million) then we may be allowed an additional 180-day
grace period to meet the $1.00 minimum closing bid price requirement, or until
July 19, 2003.




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

| |  |     |  |                     |  |                                                                                                                                                                                                                                                                                                                                                   
| |  | --- |  | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a) |  | Exhibits            |  |                                                                                                                                                                                                                                                                                                                                                   
| |  |     |  |                     |  |                                                                                                                                                                                                                                                                                                                                                   
| |  |     |  | 99.1                |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    
| |  |     |  |                     |  |                                                                                                                                                                                                                                                                                                                                                   
| |  | (b) |  | Reports on Form 8-K
|
| |  |     |  | (i)                 |  | The Company filed a report on Form 8-K on September 26,
2002 reporting that it had filed a patent infringement
action in the U.S. District Court in Northern California
against Polycom, Inc., through its wholly-owned
subsidiary, Collaboration Properties, Inc., alleging
that Polycoms conferencing products infringe on four of
its patents.

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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 7th day of November 2002.

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

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

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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: November 7, 2002

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

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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: November 7, 2002

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

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INDEX TO EXHIBITS

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