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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 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 March 31, 2002, 25,249,833 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 STATEMENTS OF CASH FLOWS         
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II  OTHER INFORMATION   
|                               | Item 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|INDEX TO EXHIBITS             
|EXHIBIT 3.3                   



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AVISTAR COMMUNICATIONS CORPORATION

INDEX

|           |  |                                                                                                                                 |  |         
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                                                                 |  | PAGE NO.
|           |  |                                                                                                                                 |  |         
|PART  I    |  | FINANCIAL INFORMATION                                                                                                           |  |         
|          
|Item 1.    |  | Financial Statements                                                                                                            |  | 3       
|           |  | Condensed Consolidated Balance Sheets                                                                                           |  | 3       
|           |  | Condensed Consolidated Statements of Operations                                                                                 |  | 4       
|           |  | Condensed Consolidated Statement of Stockholders Equity                                                                        |  | 5       
|           |  | Condensed Consolidated Statements of Cash Flows                                                                                 |  | 6       
|           |  | Notes to Condensed Consolidated Financial Statements                                                                            |  | 7       
|          
|          
|          
|          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and
Results of OperationsFactors Affecting Future Operating Results |  | 12
17   
|          
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                      |  | 24      
|          
|PART  II   |  | OTHER INFORMATION                                                                                                               |  |         
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                |  | 24      
|          
|SIGNATURES |  | 25                                                                                                                             

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 March 31, 2002 and December 31, 2001
(in thousands, except share data)

|                                      |                             |                                                                                                                                                                                                           |                           |         |             |        |              |         |        |        | 
|------------------------------------- | --------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------- | ----------- | ------ | ------------ | ------- | ------ | ------ | 
|                                      |                             |                                                                                                                                                                                                           |                           |         | March 31,   |        | December 31,
|                                      |                             |                                                                                                                                                                                                           |                           |         | 2002        |        | 2001        
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |        |             
|                                      |                             |                                                                                                                                                                                                           |                           |         | (unaudited) |        |              |         |       
|Assets:                               |                             |                                                                                                                                                                                                           |                           |         |             |        |              |        
|                                      | Current assets:             |                                                                                                                                                                                                           |                           |         |             |        |              |         |       
|                                      |                             | Cash and cash equivalents                                                                                                                                                                                 |                           | $       | 5,338       |        |              | $       | 7,455  |       
|                                      |                             | Short-term investments                                                                                                                                                                                    |                           |         | 5,599       |        |              |         | 5,831  |       
|                                      |                             | Accounts receivable, net of allowance for doubtful
accounts of $358 and $232, respectively                                                                                                                |                           |         | 2,558       |        |              |         | 2,760  |       
|                                      |                             | Inventories, including inventory shipped to customers sites, not
yet installed of $185 and $262, respectively                                                                                             |                           |         | 1,086       |        |              |         | 1,096  |       
|                                      |                             | Prepaid expenses and other current assets                                                                                                                                                                 |                           |         | 832         |        |              |         | 1,121  |       
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |       
|                                      |                             |                                                                                                                                                                                                           | Total current assets      |         |             | 15,413 |              |         |        | 18,263 | 
|                                      |                             | Property and equipment, net                                                                                                                                                                               |                           |         | 570         |        |              |         | 599    |       
|                                      |                             | Other assets                                                                                                                                                                                              |                           |         | 405         |        |              |         | 403    |       
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |       
|                                      |                             |                                                                                                                                                                                                           | Total assets              |         | $           | 16,388 |              |         | $      | 19,265 | 
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |       
|Liabilities and Stockholders Equity: |                             |                                                                                                                                                                                                           |                           |         |             |        |              |        
|                                      | Current liabilities:        |                                                                                                                                                                                                           |                           |         |             |        |              |         |       
|                                      |                             | Bank overdraft                                                                                                                                                                                            |                           | $       |            |        |              | $       | 149    |       
|                                      |                             | Accounts payable                                                                                                                                                                                          |                           |         | 707         |        |              |         | 633    |       
|                                      |                             | Deferred revenue and customer deposits                                                                                                                                                                    |                           |         | 807         |        |              |         | 1,205  |       
|                                      |                             | Accrued liabilities and other                                                                                                                                                                             |                           |         | 1,568       |        |              |         | 2,237  |       
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |       
|                                      |                             |                                                                                                                                                                                                           | Total current liabilities |         |             | 3,082  |              |         |        | 4,224  | 
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |       
|                                      | Stockholders equity:       |                                                                                                                                                                                                           |                           |         |             |        |              |         |       
|                                      |                             | Common stock, $0.001 par value; 250,000,000
shares authorized at March 31, 2002 and
December 31, 2001; 26,415,958 and 26,362,603 shares outstanding
at March 31, 2002 and December 31, 2001, respectively |                           |         | 26          |        |              |         | 26     |       
|                                      |                             | Treasury common stock, 1,166,125 shares outstanding at
March 31, 2002 and December 31, 2001                                                                                                               |                           |         | (1          | )      |              |         | (1     | )     
|                                      | Additional paid-in-capital  |                                                                                                                                                                                                           |                           | 80,075  |             |        |              | 80,000  |       
|                                      | Deferred stock compensation |                                                                                                                                                                                                           |                           | (367    | )           |        |              | (493    | )     
|                                      | Other comprehensive income  |                                                                                                                                                                                                           |                           | 51      |             |        |              | 79      |       
|                                      | Accumulated deficit         |                                                                                                                                                                                                           |                           | (66,478 | )           |        |              | (64,570 | )     
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |       
|                                      |                             | Total stockholders equity                                                                                                                                                                                |                           |         | 13,306      |        |              |         | 15,041 |       
|                                      |                             |                                                                                                                                                                                                           |                           |         |             |       
|                                      |                             | Total liabilities and stockholders equity                                                                                                                                                                |                           | $       | 16,388      |        |              | $       | 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 months ended March 31, 2002 and 2001
(in thousands, except per share data)

|                                                                                    |                                              |                                   |        |                    |        |           |        |       |        |  
|----------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------- | ------ | ------------------ | ------ | --------- | ------ | ----- | ------ | -
|                                                                                    |                                              |                                   |        | Three Months Ended
|                                                                                    |                                              |                                   |        |                   
|                                                                                    |                                              |                                   |        | March 31,          |        | March 31,
|                                                                                    |                                              |                                   |        | 2002               |        | 2001     
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              |                                   |        | (unaudited)       
|Revenue:                                                                            |                                              |                                   |        |                    |        |           |        |      
|                                                                                    | Product                                      |                                   | $      | 1,521              |        |           | $      | 4,682 |       
|                                                                                    | Services, maintenance and support            |                                   |        | 1,179              |        |           |        | 1,400 |       
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              | Total revenue                     |        |                    | 2,700  |           |        |       | 6,082  |  
|                                                                                    |                                              |                                   |        |                    |        |          
|Cost of revenue:                                                                    |                                              |                                   |        |                    |        |           |        |      
|                                                                                    | Product                                      |                                   |        | 724                |        |           |        | 1,838 |       
|                                                                                    | Services, maintenance and support            |                                   |        | 599                |        |           |        | 796   |       
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              | Total cost of revenue             |        |                    | 1,323  |           |        |       | 2,634  |  
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              | Gross margin                      |        |                    | 1,377  |           |        |       | 3,448  |  
|                                                                                    |                                              |                                   |        |                    |        |          
|Operating Expenses:                                                                 |                                              |                                   |        |                    |        |           |        |      
|                                                                                    | Research and development                     |                                   |        | 1,149              |        |           |        | 1,569 |       
|                                                                                    | Sales and marketing                          |                                   |        | 1,014              |        |           |        | 1,778 |       
|                                                                                    | General and administrative                   |                                   |        | 1,083              |        |           |        | 1,527 |       
|                                                                                    | Amortization of deferred stock compensation* |                                   |        | 126                |        |           |        | 285   |       
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              | Total operating expenses          |        |                    | 3,372  |           |        |       | 5,159  |  
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              | Loss from operations              |        |                    | (1,995 | )         |        |       | (1,711 | )
|                                                                                    |                                              |                                   |        |                    |        |          
|Other income (expense):                                                             |                                              |                                   |        |                    |        |           |        |      
|                                                                                    | Interest expense                             |                                   |        |                   |        |           |        | (2    | )     
|                                                                                    | Interest income                              |                                   |        | 91                 |        |           |        | 275   |       
|                                                                                    | Other, net                                   |                                   |        | (4                 | )      |           |        | 33    |       
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              | Total other income (expense), net |        |                    | 87     |           |        |       | 306    |  
|                                                                                    |                                              |                                   |        |                    |        |          
|Net loss                                                                            |                                              | $                                 | (1,908 | )                  |        | $         | (1,405 | )    
|                                                                                    |                                              |                                   |        |                    |        |          
|Net loss per share  basic and diluted                                              |                                              | $                                 | (0.08  | )                  |        | $         | (0.06  | )    
|                                                                                    |                                              |                                   |        |                    |        |          
|Weighted Average shares used in calculating
basic and diluted net loss per share    |                                              |                                   | 25,231 |                    |        |           | 25,150 |      
|                                                                                    |                                              |                                   |        |                    |        |          
|* Amortization of deferred stock compensation excluded from the following
expenses: |                                              |                                   |        |                    |        |           |        |      
|                                                                                    | Cost of revenue                              |                                   | $      | 16                 |        |           | $      | 42    |       
|                                                                                    | Research and development                     |                                   |        | 12                 |        |           |        | 35    |       
|                                                                                    | Sales and marketing                          |                                   |        | 95                 |        |           |        | 201   |       
|                                                                                    | General and administrative                   |                                   |        | 3                  |        |           |        | 7     |       
|                                                                                    |                                              |                                   |        |                    |        |          
|                                                                                    |                                              | $                                 | 126    |                    |        | $         | 285    |      
|                                                                                    |                                              |                                   |        |                    |        |          

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

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AVISTAR COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
for the three months ended March 31, 2002 (unaudited)
(in thousands, except share amounts)

|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |   |  |   |         |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------ | ---------- | -------------- |  | ---------- | -- | ------ |  | --------------- | --------- | ------------ |  | ------------------- | -- | ------- |  | ------ | ------ |  |  | - | ---- | - |  | - | --- | - |  | - | ------- | - |  | - | ------ | -
|                                                                  |  | Common Stock |            | Treasury Stock |  |            |    |        |  | Deferred        |           | Other        |  |                     |    |         |  |        |        | 
|                                                                  |  |              |            |                |  | Additional |    | Stock  |  | Comprehensive   |           | Accumulated  |  | Total Shareholders'
|                                                                  |  | Shares       |            | Amount         |  | Shares     |    | Amount |  | Paid-In Capital |           | Compensation |  | Income              |    | Deficit |  | Equity
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |       
|Balance at December 31, 2001                                      |  |              | 26,362,603 |                |  | $          | 26 |        |  |                 | 1,166,125 |              |  | $                   | (1 | )       |  | $      | 80,000 |  |  | $ | (493 | ) |  | $ | 79  |   |  | $ | (64,570 | ) |  | $ | 15,041 |  
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |  
|Issuance of common stock pursuant to employee
stock purchase plan |  |              | 49,605     |                |  |            |   |        |  |                 |          |              |  |                     |   |         |  |        | 71     |  |  |   |     |   |  |   |    |   |  |   |        |   |  |   | 71     |  
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |  
|Issuance of common stock pursuant to exercise
of options          |  |              | 3,750      |                |  |            |   |        |  |                 |          |              |  |                     |   |         |  |        | 4      |  |  |   |     |   |  |   |    |   |  |   |        |   |  |   | 4      |  
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |  
|Amortization of Deferred Stock Compensation                       |  |              |           |                |  |            |   |        |  |                 |          |              |  |                     |   |         |  |        |       |  |  |   | 126  |   |  |   |    |   |  |   |        |   |  |   | 126    |  
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |  
|Unrealized gain on short-term investments                         |  |              |           |                |  |            |   |        |  |                 |          |              |  |                     |   |         |  |        |       |  |  |   |     |   |  |   | (28 | ) |  |   |        |   |  |   | (28    | )
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |  
|Net loss                                                          |  |              |           |                |  |            |   |        |  |                 |          |              |  |                     |   |         |  |        |       |  |  |   |     |   |  |   |    |   |  |   | (1,908  | ) |  |   | (1,908 | )
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |  
|Balance at March 31, 2002                                         |  |              | 26,415,958 |                |  | $          | 26 |        |  |                 | 1,166,125 |              |  | $                   | (1 | )       |  | $      | 80,075 |  |  | $ | (367 | ) |  | $ | 51  |   |  | $ | (66,478 | ) |  | $ | 13,306 |  
|                                                                  |  |              |            |                |  |            |    |        |  |                 |           |              |  |                     |    |         |  |        |        |  |  |   |      |   |  |   |     |  

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

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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2002 and 2001
(in thousands)

|                                      |                                                     |                                                                             |                                            |                                           |        |                    |      |           |        |     |      |  
|------------------------------------- | --------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------- | ------ | ------------------ | ---- | --------- | ------ | --- | ---- | -
|                                      |                                                     |                                                                             |                                            |                                           |        | Three Months Ended
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|                                      |                                                     |                                                                             |                                            |                                           |        | March 31,          |      | March 31,
|                                      |                                                     |                                                                             |                                            |                                           |        | 2002               |      | 2001     
|                                      |                                                     |                                                                             |                                            |                                           |        |                    |      |          
|                                      |                                                     |                                                                             |                                            |                                           |        | (unaudited)       
|Cash Flows from Operating Activities: |                                                     |                                                                             |                                            |                                           |        |                    |      |          
|                                      |                                                     | Net loss                                                                    |                                            | $                                         | (1,908 | )                  |      | $         | (1,405 | )  
|                                      |                                                     | Adjustments to reconcile net loss to net cash
used in operating activities: |                                            |                                           |        |                    |      |           |        |    
|                                      |                                                     |                                                                             | Depreciation                               |                                           |        | 97                 |      |           |        | 17  |     
|                                      |                                                     |                                                                             | Amortization of stock compensation expense |                                           |        | 126                |      |           |        | 285 |     
|                                      |                                                     |                                                                             | Provision for doubtful accounts            |                                           |        | 126                |      |           |        | (35 | )   
|                                      |                                                     |                                                                             | Changes in current assets and liabilities: |                                           |        |                    |      |           |        |     |     
|                                      |                                                     |                                                                             |                                            | Accounts receivable                       |        |                    | 76   |           |        |     | 614  |  
|                                      |                                                     |                                                                             |                                            | Inventories                               |        |                    | 10   |           |        |     | 563  |  
|                                      |                                                     |                                                                             |                                            | Prepaid expenses and other current assets |        |                    | 290  |           |        |     | 74   |  
|                                      |                                                     |                                                                             |                                            | Other assets                              |        |                    | (2   | )         |        |     | (217 | )
|                                      |                                                     |                                                                             |                                            | Accounts payable                          |        |                    | 74   |           |        |     | (225 | )
|                                      |                                                     |                                                                             |                                            | Deferred revenue and customer deposits    |        |                    | (398 | )         |        |     | (153 | )
|                                      |                                                     |                                                                             |                                            | Accrued liabilities and other             |        |                    | (669 | )         |        |     | 8    |  
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|                                      |                                                     | Net cash used in operating activities                                       |                                            |                                           | (2,178 | )                  |      |           | (474   | )  
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|Cash Flows from Investing Activities: |                                                     |                                                                             |                                            |                                           |        |                    |      |          
|                                      | Purchase of short-term investments                  |                                                                             |                                            |                                          |        |                    |      | (7,796    | )     
|                                      | Sale of short-term investments                      |                                                                             |                                            | 204                                       |        |                    |      |          |       
|                                      | Purchase of property and equipment                  |                                                                             |                                            | (69                                       | )      |                    |      | (134      | )     
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|                                      | Net cash provided by (used in) investing activities |                                                                             |                                            | 135                                       |        |                    |      | (7,930    | )     
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|Cash Flows from Financing Activities: |                                                     |                                                                             |                                            |                                           |        |                    |      |          
|                                      |                                                     | Decrease in bank overdraft                                                  |                                            |                                           | (149   | )                  |      |           |       |    
|                                      |                                                     | Proceeds from issuance of common stock                                      |                                            |                                           | 75     |                    |      |           | 169    |    
|                                      |                                                     | Repurchases of common stock                                                 |                                            |                                           |       |                    |      |           | (23    | )  
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|                                      |                                                     | Net cash provided by (used in) financing activities                         |                                            |                                           | (74    | )                  |      |           | 146    |    
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|                                      |                                                     | Net decrease in cash and cash equivalents                                   |                                            |                                           | (2,117 | )                  |      |           | (8,258 | )  
|                                      |                                                     | Cash and cash equivalents, beginning of period                              |                                            |                                           | 7,455  |                    |      |           | 21,660 |    
|                                      |                                                     |                                                                             |                                            |                                           |        |                   
|                                      |                                                     | Cash and cash equivalents, end of period                                    |                                            | $                                         | 5,338  |                    |      | $         | 13,402 |    
|                                      |                                                     |                                                                             |                                            |                                           |        |                   

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
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, 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 platform, which facilitate distribution over local
and wide area networks using telephony or internet services as appropriate. In
addition, Avistar develops, prosecutes, maintains and supports intellectual
property used in the Companys products. Avistars services include software
development, consulting, implementation, training, maintenance and support.

Basis of Presentation

The unaudited balance sheet as of March 31, 2002 presents the consolidated
financial position of Avistar and its two wholly-owned operating subsidiaries,
Avistar Systems U.K. Limited (ASUK) and Collaboration Properties, Inc.
(CPI) 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.

Certain reclassifications were made to the prior year financial
information to conform to the current period presentation.

Risks and Uncertainties

The markets for the Companys products and services have only recently
begun to develop. 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 $66.5 million as of March 31,
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
current challenging economic environment, the use of differing distribution
channels, and the timing of the new product announcements by the Company or its
competitors.

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 any expansion 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 intellectual property rights and other factors. We may need to raise
additional funds, and additional financing may not be available on favorable
terms, if at all. If we cannot raise funds, if 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.

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2.  Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The financial statements furnished in this report have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles 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 generally accepted accounting
principles.

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

Cash and Cash Equivalents and Short Term Investments

The Company considers all investment instruments purchased with an
original maturity of three months or less to be cash equivalents. The Companys
cash equivalents at March 31, 2002 and December 31, 2001 consisted of money
market funds and short-term securities. The Company has classified all
investments 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.

Significant Concentrations

A relatively small number of customers accounted for a significant
percentage of the Companys net sales. Sales to these customers as a percentage
of sales were as follows for the three months ended March 31, 2002 and 2001:

|           |  |                    |    |      |  |  |    |  
|---------- |  | ------------------ | -- | ---- |  |  | -- | -
|           |  | THREE MONTHS ENDED
|           |  | MARCH 31,         
|           |  |                   
|           |  | 2002               |    | 2001
|           |  |                    |    |     
|           |  | (unaudited)       
|Customer A |  |                    | 59 | %    |  |  | 35 | %
|Customer B |  |                    | *  |      |  |  | 29 | %
|Customer C |  |                    | *  |      |  |  | 11 | %



---

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

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

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. The Company has cash and investment policies that limit
the amount of credit exposure to any one financial institution and restrict
placement of these investments to financial institutions evaluated as highly
credit worthy. Concentration of credit risk with respect to trade receivables
relate to those trade receivables from both United States and foreign entities.
As of March 31, 2002, approximately 76% of accounts receivable was
concentrated with three customers who represented

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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 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 and were comprised of the following (in thousands):

|                                                       |  |             |       |              |  |   |       |  
|------------------------------------------------------ |  | ----------- | ----- | ------------ |  | - | ----- | -
|                                                       |  | MARCH 31,   |       | DECEMBER 31,
|                                                       |  | 2002        |       | 2001        
|                                                       |  |             |       |             
|                                                       |  | (UNAUDITED) |       |              |  |  
|Raw materials and subassemblies                        |  | $           | 130   |              |  | $ | 169   |  
|Finished goods                                         |  |             | 1,134 |              |  |   | 1,018 |  
|Inventory shipped to customer sites, not yet installed |  |             | 185   |              |  |   | 262   |  
|Less: Allowance for obsolescence                       |  |             | (363  | )            |  |   | (353  | )
|                                                       |  |             |       |              |  |  
|                                                       |  | $           | 1,086 |              |  | $ | 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 March 31, 2002 and December 31, 2001, the Company had billed
approximately $0.5 million and $0.6 million, respectively, to customers related
to these shipments, but did not record the receivable or the revenue, as the
installations had not been completed. Although customers are billed in
accordance with customer agreements, these amounts are netted against accounts
receivable until installation is confirmed.

Research and Development

Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86 (SFAS
86), Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on the Companys product development process, technological feasibility
is established upon completion of a working model. After technological
feasibility is established, material software development costs are
capitalized. The capitalized cost is then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater.

Revenue Recognition and Deferred Revenue

The Companys revenue recognition policy is in compliance 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 installation and
customer acceptance is received, 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 based on specific payment
terms. Installation and professional services are due upon providing the
services. If payments for systems are made in advance of the completion of
installation, such amounts are deferred and recorded as deferred revenue in the
accompanying balance sheets until installation has occurred and the customer
has accepted the product.

The price charged for maintenance and/or support is stipulated in the
contract and is based on a percentage of product revenue as stipulated in the
customer agreement. Customers have the option to renew the maintenance and/or
support in subsequent periods. Revenue from maintenance and support services
is 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. Training services are
offered independent of the purchase of product. The value of these training
courses is determined based on the price charged when such services are sold
separately, and the related revenue is recognized upon performance of the
service.

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

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, 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 prime plus 0.25%. As of March 31, 2002, the Company did not have any
outstanding borrowings under this line of credit.

4.  Related Party Transactions

Certain directors with controlling interests in the Company are also the
majority owners of an entity that conducted business with the Company, Vicor
Inc. (Vicor). Descriptions of certain transactions between the Company and
Vicor and other related entities follow.

Rent Sublease

Beginning in September 1999, the Company sub-leased certain office space,
at cost, to Vicor, an affiliated entity through common ownership. The Company
received approximately $34,000 during the three months ended March 31, 2001
from Vicor under this sublease agreement. The sublease was terminated in July
2001. There were no outstanding receivables from Vicor as of March 31, 2002.

Fees to Related Parties

On February 6, 2001, Robert P. Latta, partner at the law firm Wilson
Sonsini Goodrich & Rosati, Professional Corporation (WSGR), was appointed to
the Companys Board of Directors. Mr. Latta and WSGR have represented the
Company and its predecessors as corporate counsel since 1997. During the three
months ended March 31, 2002 and 2001, payments of approximately $30,000 and
$83,000, respectively, were made to WSGR for legal services provided to the
Company by WSGR.

During the three months ended March 31, 2002, payments of approximately
$55,000 in consulting fees 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.  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. Pursuant to SEC Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock issued or granted for nominal
consideration prior to an initial public offering must be included in the
calculation of basic and diluted net loss per share as if such stock had been
outstanding during 1999. To date, the Company has had no issuances or grants
for nominal consideration.

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

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result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method. The Company has
excluded all convertible preferred stock, outstanding stock options and shares
subject to repurchase from the calculation of diluted net loss per share for
the three months ended March 31, 2002 and 2001, because all such securities are
antidilutive. Accordingly, diluted net loss per share approximates basic net
loss per share for all periods presented.

The total number of shares excluded from the calculations of diluted net
loss per share was 2,883,115 and 2,059,643 for the three months ended March 31,
2002 and 2001, respectively. Basic and diluted pro forma net loss per share
have been computed as described above and also give effect, under SEC guidance,
to the conversion of the convertible preferred stock (using the if-converted
method) from the original date of issuance and the effect of the beneficial
conversion related to the Series A convertible preferred stock.

6.  Segment Reporting

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

|                                  |                          |  |     |        |     |  |       |      |   |  |   |        |  
|--------------------------------- | ------------------------ |  | --- | ------ | --- |  | ----- | ---- | - |  | - | ------ | -
|                                  |                          |  | ACC |        | CPI |  | Total
|                                  |                          |  |     |        |     |  |      
|Three Months Ended March 31, 2002 |                          |  |     |        |     |  |       |      |   |  |   |       
|                                  | Revenue                  |  | $   | 2,700  |     |  | $     |     |   |  | $ | 2,700  |  
|                                  | Gross margin             |  |     | 1,377  |     |  |       |     |   |  |   | 1,377  |  
|                                  | Depreciation expense     |  |     | (96    | )   |  |       | (1   | ) |  |   | (97    | )
|                                  | Total operating expenses |  |     | (3,165 | )   |  |       | (207 | ) |  |   | (3,372 | )
|                                  | Interest income          |  |     | 91     |     |  |       |     |   |  |   | 91     |  
|                                  | Interest expense         |  |     |       |     |  |       |     |   |  |   |       |  
|                                  | Net loss                 |  |     | (1,701 | )   |  |       | (207 | ) |  |   | (1,908 | )
|                                  | Assets                   |  |     | 16,355 |     |  |       | 33   |   |  |   | 16,388 |  
|Three Months Ended March 31, 2001 |                          |  |     |        |     |  |       |      |   |  |   |       
|                                  | Revenue                  |  | $   | 6,082  |     |  | $     |     |   |  | $ | 6,082  |  
|                                  | Gross margin             |  |     | 3,448  |     |  |       |     |   |  |   | 3,448  |  
|                                  | Depreciation expense     |  |     | (14    | )   |  |       | (3   | ) |  |   | (17    | )
|                                  | Total operating expenses |  |     | (4,855 | )   |  |       | (304 | ) |  |   | (5,159 | )
|                                  | Interest income          |  |     | 275    |     |  |       |     |   |  |   | 275    |  
|                                  | Interest expense         |  |     | (2     | )   |  |       |     |   |  |   | (2     | )
|                                  | Net loss                 |  |     | (1,111 | )   |  |       | (294 | ) |  |   | (1,405 | )
|                                  | Assets                   |  |     | 26,923 |     |  |       | 36   |   |  |   | 26,959 |  

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 52% and 45% of
total revenue for the three months ended March 31, 2002 and 2001, respectively.
For the three months ended March 31, 2002 and 2001, international revenues to
customers in the United Kingdom accounted for 29% and 32%, respectively, of
total revenue. The Company had no significant long-lived assets in any country
other than in the United States for any period presented.

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

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

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

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

Overview

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

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

Revenue

We derive product revenue principally from the sale and licensing of our
video-enabled networked communications system, consisting of a suite of
Avistar-designed software and hardware products, including third party
components. In addition, we derive revenue from fees for software development,
installation, maintenance, support and training services. For the three month
periods ended March 31, 2002 and 2001, product revenue as a percentage of total
revenue was 56% and 77%, respectively.

We recognize revenue from product sales when all of the following
conditions are met: the product has been shipped, an arrangement exists with
the customer at a fixed price and we have the right to invoice the customer,
collection of the receivable is probable and we have fulfilled all of our
material contractual obligations to the customer. When we provide installation
services, the product and installation revenues are recognized upon completion
of installation, and when customer acceptance is received, subject to the
satisfaction of the revenue recognition criteria described above. The price
charged for maintenance and/or support services is stipulated in the customer
contract and is based on a percentage of product revenue. Customers have the
option to renew the maintenance and/or support services in subsequent periods.
Revenue from maintenance and support is recognized pro-rata over the
maintenance and/or support term, which is typically one year in length.
Training services are offered independently of the purchase of

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

To date, a significant portion of our revenue has resulted from sales to a
limited number of customers. For the three months ended March 31, 2002, we
recorded revenue of approximately $1.6 million, or 59% of total revenue, from
our largest customer and its affiliates, and no other customers individually
accounted for greater than 10% of our total revenue. For the three months
ended March 31, 2001, we recorded revenue of approximately $4.6 million, or 75%
of total revenue, from our three largest customers and their affiliates, who
each generated greater than 10% of our total revenue. We anticipate that our
revenue and, therefore, our operating results for any given period, will
continue to depend to a significant extent on a limited number of customers.
As a result, the loss or a reduction in sales to any one of these customers
would have a significant adverse impact on our operations and financial
performance.

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 52% and 45% of
total revenue for the three months ended March 31, 2002 and 2001, respectively.
For the three months ended March 31, 2002 and 2001, international revenues to
customers in the United Kingdom accounted for 29% and 32%, respectively, of
total revenue.

Cost of Revenue

Our cost of revenue consists primarily of the cost of software and
hardware, including compensation for distribution personnel and third party
components, the cost of compensation for installation, maintenance, support and
training personnel, and other costs related to facilities and office equipment
for professional services, technical support and training personnel. We
recognize product costs as revenue from 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. These
charges are amortized over the vesting period of the options, generally four
years. Our research and development expenses consist primarily of compensation
expenses for our personnel, patent and licensing costs and, to a minor extent,
independent contractors. We expense all patent and licensing costs as we incur
them. Our sales and marketing expenses consist primarily of compensation,
commissions and travel expenses, along with 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.

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 and depreciation/amortization expense for property
and equipment.

The non-cash deferred stock compensation charge relates to stock options
issued to employees, and represents the difference between the exercise price
of options granted to acquire our shares of common stock during the period, and
the deemed fair value for financial reporting purposes of our shares of common
stock on the measurement date, which is the same as the date of grant of those
options. Based on the outstanding options at December 31, 2001, we anticipate
recording charges of approximately $400,000 in 2002 and $100,000 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.

Valuation of Accounts Receivable

Estimates are used in determining our allowance for doubtful accounts and
are based on our historical collection experience, current trends and a
percentage of our accounts receivable by aging category. In determining these
percentages, we look at historical write-offs of our receivables. We also look
at current trends and the credit quality of our customer base. If the estimate
for bad debts was understated, our operating income could be significantly
reduced. As of March 31, 2002, approximately 76% of accounts receivable were
concentrated with three customers, who each represented greater than 10% of our
total accounts receivable. 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.

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Valuation of Inventories

We currently record a reserve 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, purchase
commitment reserves, and charges against earnings may be required.

Results of Operations

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

|                     |                                             |                          |       |                    |       |      |       |      |       | 
|-------------------- | ------------------------------------------- | ------------------------ | ----- | ------------------ | ----- | ---- | ----- | ---- | ----- | 
|                     |                                             |                          |       | Three months ended
|                     |                                             |                          |       |                   
|                     |                                             |                          |       | March 31,          |       |      |       |     
|                     |                                             |                          |       |                    |       |      |       |     
|                     |                                             |                          |       | 2002               |       | 2001
|                     |                                             |                          |       |                    |       |     
|Revenue:             |                                             |                          |       |                    |       |      |       |     
|                     | Product                                     |                          |       | 56.3               | %     |      |       | 77.0 | %    
|                     | Services, maintenance and support           |                          |       | 43.7               |       |      |       | 23.0 |      
|                     |                                             |                          |       |                    |       |      |       |     
|                     |                                             | Total revenue            |       |                    | 100.0 |      |       |      | 100.0 | 
|                     |                                             |                          |       |                    |       |      |       |     
|Cost of revenue:     |                                             |                          |       |                    |       |      |       |     
|                     | Product                                     |                          |       | 26.8               |       |      |       | 30.2 |      
|                     | Services, maintenance and support           |                          |       | 22.2               |       |      |       | 13.1 |      
|                     |                                             |                          |       |                    |       |      |       |     
|                     |                                             | Total cost of revenue    |       |                    | 49.0  |      |       |      | 43.3  | 
|                     |                                             |                          |       |                    |       |      |       |     
|Gross margin         |                                             |                          | 51.0  |                    |       |      | 56.7  |     
|                     |                                             |                          |       |                    |       |      |       |     
|Operating expenses:  |                                             |                          |       |                    |       |      |       |     
|                     | Research and development                    |                          |       | 42.6               |       |      |       | 25.8 |      
|                     | Sales and marketing                         |                          |       | 37.6               |       |      |       | 29.2 |      
|                     | General and administrative                  |                          |       | 40.1               |       |      |       | 25.1 |      
|                     | Amortization of deferred stock compensation |                          |       | 4.7                |       |      |       | 4.7  |      
|                     |                                             |                          |       |                    |       |      |       |     
|                     |                                             | Total operating expenses |       |                    | 125.0 |      |       |      | 84.8  | 
|                     |                                             |                          |       |                    |       |      |       |     
|Loss from operations |                                             |                          | (74.0 | )                  |       |      | (28.1 | )   
|                     |                                             |                          |       |                    |       |      |       |     
|Other income:        |                                             |                          |       |                    |       |      |       |     
|                     | Interest income                             |                          |       | 3.4                |       |      |       | 4.5  |      
|                     | Other, net                                  |                          |       | (0.1               | )     |      |       | 0.5  |      
|                     |                                             |                          |       |                    |       |      |       |     
|                     |                                             | Total other income       |       |                    | 3.3   |      |       |      | 5.0   | 
|                     |                                             |                          |       |                    |       |      |       |     
|Net loss             |                                             |                          | (70.7 | )%                 |       |      | (23.1 | )%  
|                     |                                             |                          |       |                    |       |      |       |     

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

Revenue

Total revenue decreased by 56% from $6.1 million for the three months
ended March 31, 2001 to $2.7 million for the three months ended March 31, 2002.
The decrease was due primarily to lower product sales and associated
installation service revenue. Product sales decreased by 68% from $4.7 million
for the three months ended March 31, 2001 to $1.5 million for the three months
ended March 31, 2002. This reduction was primarily due to the continued
slowdown in the economy and continued weakness in the financial services sector
particularly, which has resulted in constrained budgets and delayed procurement
decisions by both existing and potential customers. Our service revenue
decreased by 16% from $1.4 million for the three months ended March 31, 2001 to
$1.2 million for the three months ended March 31, 2002, primarily due to
reduced installation service revenue associated with lower product sales.

For the three months ended March 31, 2002, revenue from one customer and
its affiliates accounted for 59% of total revenue. This one firm was the only
customer who generated greater than 10% of our total revenue. The comparable
concentration figure for the same period in 2001 was 75% for the top three
customers, each generating over 10% of our total revenue. We anticipate that
our revenue will continue to depend on a limited number of major customers for
the foreseeable future, although the companies

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considered to be major customers and the percentage of revenue represented
by each major customer may vary from period to period. The loss of or
reduction in sales to any one of those customers would have a material adverse
impact on our financial condition and operating results.

Cost of Revenue

Cost of revenue declined by 50% from $2.6 million in the three months
ended March 31, 2001 to $1.3 million in the three months ended March 31, 2002.
Cost of revenue decreased primarily due to lower product revenue. Cost of
product revenue decreased by 61%, from $1.8 million for the three months ended
March 31, 2001 to $0.7 million for the three months ended March 31, 2002. Cost
of services, maintenance and support decreased by 25% from $0.8 million for the
three months ended March 31, 2001 to $0.6 million for the three months ended
March 31, 2002. This decrease was due primarily to lower personnel and
personnel related expenses.

Gross Margin

Gross margin as a percentage of revenue decreased from 57% for the three
months ended March 31, 2001 to 51% in the three months ended March 31, 2002.
The decrease was due primarily to the lower overall revenue base, which
provided more limited coverage of the fixed components of the cost of sales.
The decrease in gross margin as a percentage of revenue was also due to higher
service revenue as a percentage of total revenue for the three months ended
March 31, 2002, which generally carries a lower margin than product revenue.

Operating Expenses

Research and development.Research and development expenses decreased by
27% from $1.6 million for the three months ended March 31, 2001 to $1.1 million
for the three months ended March 31, 2002. The decrease was due primarily to
lower personnel and personnel related costs.

Sales and marketing.Sales and marketing expenses decreased by 43% from
$1.8 million for the three months ended March 31, 2001 to $1.0 million for the
three months ended March 31, 2002. This decrease was due predominantly to
reduced personnel and personnel related costs, significantly lower sales
commission expenses and lower marketing program costs, all reflecting the lower
level of sales and staffing levels during the three month period ended March
31, 2002 relative to the same period in 2001.

General and administrative.General and administrative expenses decreased
by 29% from $1.5 million for the three months ended March 31, 2001 to $1.1
million for the three months ended March 31, 2002. This decrease was due
primarily to reduced personnel and personnel related costs, reflecting a lower
staffing level during the three month period ended March 31, 2002 relative to
the same period in 2001.

Amortization of deferred stock compensation.Amortization of deferred
stock compensation decreased by 56% from $0.3 million for the three months
ended March 31, 2001 to $0.1 million for the three months ended March 31, 2002.
The decrease was due to the timing on vesting of options, as well as
forfeitures of stock options by employees no longer with our company.

Other Income (Expense), Net

Other income (expense), net decreased from income of $0.3 million during
the three months ended March 31, 2001 to income of $0.1 million during the
three months ended March 31, 2002. The decrease is due primarily to reduced
interest revenue from our declining base of cash and cash equivalents and
short-term investment balances.

Liquidity and Capital Resources

We had cash and cash equivalents of $5.3 million as of March 31, 2002 and
$7.5 million as of December 31, 2001. For the three months ended March 31,
2002 we had an overall net cash outflow of $2.1 million, resulting
predominantly from net cash used in operations of $2.2 million and purchases of
property and equipment of $0.1 million, offset partially by the net sale of
short-term investments of $0.2 million. The net cash used in operating
activities of $2.2 million resulted primarily from a net loss of $1.9 million.

For the three months ended March 31, 2001 we had an overall net cash
outflow of $8.3 million resulting predominantly from the purchase of short-term
investments of $7.8 million and net cash used in operations of $0.5 million.
The net cash used in operations

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included a net loss of $1.4 million, a decrease in accounts receivable of
$0.6 million, a decrease in inventories of $0.6 million, amortization of stock
compensation expense of $0.3 million, all partially offset by an increase in
other assets of $0.2 million, a decrease in accounts payable of $0.2 million,
and a decrease in deferred revenue and customer deposits of $0.2 million.

Expenditures for property and equipment in each of the three months ended
March 31, 2002 and 2001 were $0.1 million. As of March 31, 2002, we did not
have any material commitments for future capital expenditures. We anticipate
spending approximately $0.5 million in capital expenditures in the next 12
months.

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, 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 balance at the financial institution. Interest
on borrowed amounts is payable at prime plus 0.25%. As of the date we filed
this report with the Securities and Exchange Commission, we did not have any
outstanding borrowings under this line of credit, although we estimate that we
were eligible to borrow up to $2.5 million under the line of credit and the
equipment term loan. 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 at
any given time.

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

If we fail to achieve our plan of generating positive cash flow from
operations over the next 12 months, we may be required to raise additional
funds, and additional financing may not be available on favorable terms, if at
all. If we cannot raise funds, if 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. If additional funds are raised through the issuance of
equity securities, our net tangible book value per share may decrease, the
percentage ownership of then current stockholders may be diluted, and such
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock.

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

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

We incurred net losses of $1.9 million for the three months ended March
31, 2002, $7.9 million for the year 2001, and $4.7 million for the year 2000.
As of March 31, 2002, our accumulated deficit was $66.5 million. Our revenue
may not increase, or even remain at its current level. In addition, our
operating expenses may increase significantly as we 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, we may
never become profitable. Furthermore, we will record additional amortization
of deferred stock compensation in connection with options that we granted in
1999 and 2000. This amortization, although declining, will further decrease
our ability to 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 fall.

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 three 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
end-user customers, tightening of customers operating budgets, retrenchment in
the capital markets and other general economic factors all could have a
material adverse effect on our revenue, capital resources, financial condition
and results of operations.

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
potential 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 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 99% and 94% of our revenue in the three months ended March 31,
2002 and 2001, respectively. Current economic conditions have led to
decreases in our clients capital spending, and we have experienced a decrease
in the size of follow-on orders. Our future financial performance depends on
successful initial installations of our system and successful generation of
follow-on orders. If our system does not meet the needs and expectations of
customers, we may not be able to generate follow-on orders.

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

We have historically derived the majority of our revenue from a limited
number of customers, particularly Deutsche Bank and its affiliates. This
customer accounted for 59% of our revenue in the three months ended March 31,
2002 and, together with UBS Warburg LLC and Goldman, Sachs & Co., accounted for
75% of our revenue in the three months ended March 31, 2001. We expect to
continue to depend upon a limited number of customers for a substantial portion
of our revenue. As of March 31, 2002, approximately 76% of our accounts
receivable were concentrated among 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 our products in a timely and cost effective
manner to respond to technological change.

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



| |  |  | rapid technological change;                                                     
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | significant development costs;                                                  
|
| |  |  | frequent new stand-alone introductions;                                         
|
| |  |  | changes in the requirements of our customers and their communities of users; and
|
| |  |  | evolving industry standards.                                                    

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

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

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

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

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

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

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

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

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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 demand
for our system, or give rise to claims against us.

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

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

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



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

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

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

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

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

If we are unable to expand our direct sales force and 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 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 and there is intense competition for sales personnel in the
communications marketplace. 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 future success depends in part on our ability to enhance our existing
products and achieve market acceptance of existing and future products and
technologies. Our products and technologies are complex and to successfully
implement our business strategy and manage our business, an in depth
understanding of video communication and collaboration technologies and their
potential uses is required. We depend on the continued services of our
executive officers and other key personnel. We do not have long-term
employment agreements with our executive officers or other key personnel and we
do not carry any key man life insurance. The loss of the services of any of
our executive officers or key personnel could harm our business, financial
condition and results of operations.

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

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

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

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

International revenue, which consists of sales to customers with
operations principally in Western Europe and Asia, comprised 52% and 45% of
total revenue for the three months ended March 31, 2002 and 2001, respectively.
Some of the risks we may encounter in conducting international business
activities include the following:



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

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

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

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 in spite of our operating performance. In
addition, our operating results could be below the expectations of public
market analysts and investors, and in response the market price of our common
stock could decrease significantly. The market price of our common stock on
the NASDAQ National Market ranged from a low close value of $1.26 to a high of
$2.99 during the period from April 1, 2001 to March 31, 2002. If the closing
bid price for our stock declines below $1.00 per share and remains below such
level for 30 consecutive trading days, we may become the subject of delisting
proceedings under the NASDAQ National Marketplace Rules. A delisting may
negatively impact the value of our stock, as stocks trading on the
over-the-counter market are typically less liquid and trade with larger
variations between the bid and ask price.

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. 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.

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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 78% of our common stock as of
March 31, 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 52% of total revenue for the three months ended March 31,
2002 and 45% of total revenue for the three months ended March 31, 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. We do not 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. However,
due to the nature of our short-term investments, we have concluded that we do
not have material market risk exposure. 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 original 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 affected to any significant
degree by the effect of a sudden change in market interest rates on our
investment portfolio.

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

|                                                      |                              |  |                |        |               |  |                  |      |  
|----------------------------------------------------- | ---------------------------- |  | -------------- | ------ | ------------- |  | ---------------- | ---- | -
|                                                      |                              |  |                |        |               |  | Weighted Average
|                                                      |                              |  | Amounts        |        | Interest Rate
|                                                      |                              |  |                |        |              
|                                                      |                              |  | (in thousands) |        |               |  |                 
|Description                                           |                              |  |                |        |               |  |                  |     
|Cash and cash equivalents and short-term investments: |                              |  |                |        |               |  |                  |     
|                                                      | Cash                         |  | $              | 695    |               |  |                  |      |  
|                                                      | Commercial paper             |  |                | 4,621  |               |  |                  | 1.79 | %
|                                                      | Other cash equivalents       |  |                | 22     |               |  |                  | 1.88 | %
|                                                      | Short-term investments       |  |                | 5,599  |               |  |                  | 4.14 | %
|                                                      |                              |  |                |        |               |  |                 
|                                                      | Fair Value at March 31, 2002 |  | $              | 10,937 |               |  |                  |      |  
|                                                      |                              |  |                |        |               |  |                 




PART II  OTHER INFORMATION




Item 6:Exhibits and Reports on Form 8-K

|    |                                                                                                |                     |  |                                             
|--- | ---------------------------------------------------------------------------------------------- | ------------------- |  | --------------------------------------------
|(a) |                                                                                                | Exhibits            | 
|   
|    |                                                                                                | 3.3                 |  | Bylaws of Avistar Communications Corporation
|   
|(b) |                                                                                                | Reports on Form 8-K
|   
|    | The Company did not file any reports on Form 8-K during the three months
ended March 31, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 30th day of April 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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INDEX TO EXHIBITS

|         |  |                                             
|-------- |  | --------------------------------------------
|Exhibits |  | Description                                 
|         |  |                                             
|3.3      |  | Bylaws of Avistar Communications Corporation

26