<PAGE>
 
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB
   (Mark One)

[X]  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934 for the quarterly period ended October 3, 1997

[_]  Transition report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934 for the transition period from _________ to ___________


                        Commission File Number: 000-21415

                            WHITE PINE SOFTWARE, INC.
           (Name of Small Business Issuer as Specified in Its Charter)

            Delaware                                          04-3151064
  (State or Other Jurisdiction of                          (I.R.S. Employer
   Incorporation or Organization)                         Identification No.)

                 542 Amherst Street, Nashua, New Hampshire 03063
                    (Address of Principal Executive Offices)

                                 (603) 886-9050
                (Issuer's Telephone Number, Including Area Code)



Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such 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 
                       ---       ---

The number of shares outstanding of the Registrant's common stock as of November
10, 1997 was 9,250,987.

Transitional Small Business Disclosure Format (check one):
                    Yes       No  X
                        ---      --- 
<PAGE>
 
                                TABLE OF CONTENTS

                          PART I. FINANCIAL INFORMATION
<TABLE> 
<S>                                                                                                <C> 
Item 1.  Financial Statements (Unaudited):

         Condensed Consolidated Balance Sheets as of October 3, 1997 and December 31,1996.........  3

         Condensed Consolidated Statements of Operations for the three and nine months ended
         October 3, 1997 and September 30, 1996...................................................  4

         Condensed Consolidated Statements of Cash Flows for the nine months ended
         October 3, 1997 and September 30, 1996...................................................  5

         Notes to Condensed Consolidated Financial Statements.....................................  6

Item 1a. Risk Factors.............................................................................  8

Item 2.  Management's Discussion and Analysis or Plan of Operation................................  9

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings........................................................................  13

Item 6.  Exhibits and Reports on Form 8-K.........................................................  14
</TABLE> 

                                       2
<PAGE>
PART 1.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

                   White Pine Software, Inc. and Subsidiary
               Condensed Consolidated Balance Sheets (Unaudited)
                                (in thousands)


<TABLE> 
<CAPTION> 
                                                                  October 3,                December 31,
                                                                     1997                      1996
                                                             ----------------------    ----------------------
<S>                                                          <C>                       <C> 
Assets
       Current assets:
           Cash and cash equivalents                         $              16,019     $              23,298
           Accounts receivable, net                                          1,958                     2,553
           Inventories                                                          87                       113
           Prepaid expenses and other current assets                         1,904                       450
                                                             ----------------------    ----------------------
                       Total current assets                                 19,968                    26,414

       Property and equipment, net                                           1,302                     1,063
       Third party licenses, net                                               754                       702
       Goodwill, net                                                           736                       915
       Other long term assets                                                  218                       310
                                                             ----------------------    ----------------------
Total assets                                                 $              22,978     $              29,404
                                                             ======================    ======================

Liabilities and stockholders' equity 
   Current liabilities:
           Accounts payable and accrued expenses             $               2,756     $               2,905
           Deferred revenue                                                    273                       827
           Current portion of long-term debt                                    55                       112
                                                             ----------------------    ----------------------
                       Total current liabilities                             3,084                     3,844

       Long term debt, net of current portion                                   35                       113
       Long term portion of accrued third-party licenses                       110                       211
Total stockholders' equity                                                  19,749                    25,236
                                                             ----------------------    ----------------------
Total liabilities and stockholders' equity                   $              22,978     $              29,404
                                                             ======================    ======================

</TABLE> 

See Notes to Condensed Consolidated Financial Statements

                                                                 3
<PAGE>

                   White Pine Software, Inc. and Subsidiary
          Condensed Consolidated Statements of Operations (Unaudited)
                     (in thousands, except per share data)

<TABLE> 
<CAPTION> 
                                                                 Three Months Ended               
                                                       October 3, 1997      September 30, 1996    
                                                     --------------------  ---------------------- 
 <S>                                                 <C>                   <C> 
 Revenue:
        Software license fees                        $             2,534   $               2,810  
        Services and other                                           338                     279  
                                                     --------------------  ---------------------- 
                 Total revenue                                     2,872                   3,089  

 Cost of revenue                                                     343                     597  
                                                     --------------------  ---------------------- 
 Gross profit                                                      2,529                   2,492  

 Operating expenses:
        Sales and marketing                                        1,810                   1,672  
        Research and development                                   1,298                   1,007  
        General and administrative                                   519                     778  
        Restructuring                                                  -                       -  
                                                     --------------------  ---------------------- 
                 Total operating expenses                          3,627                   3,457  
                                                     --------------------  ---------------------- 

 Loss from operations                                             (1,098)                   (965) 

 Other income, net                                                   230                      15  
                                                     --------------------  ---------------------- 

 Loss before provision for income taxes                             (868)                   (950) 
 Provision for income taxes                                            7                      20  
                                                     --------------------  ---------------------- 
 Net loss                                            $              (875)  $                (970) 
                                                     ====================  ====================== 

 Net loss per common and common
        equivalent share                             $             (0.10)  $               (0.16) 
                                                     ====================  ====================== 

 Weighted average number of common and common
        equivalent shares outstanding                          9,168,921               6,005,227  
                                                     ====================  ====================== 
<CAPTION> 
                                                                  Nine Months Ended
                                                        October 3, 1997      September 30, 1996
                                                     --------------------  ----------------------
 <S>                                                 <C>                   <C> 
 Revenue:
        Software license fees                        $             7,108   $               7,114
        Services and other                                           989                     835
                                                     --------------------------------------------
                 Total revenue                                     8,097                   7,949

 Cost of revenue                                                   1,363                   1,518
                                                       ------------------------------------------
 Gross profit                                                      6,734                   6,431

 Operating expenses:
        Sales and marketing                                        5,895                   4,482
        Research and development                                   4,545                   2,707
        General and administrative                                 2,073                   2,062
        Restructuring                                                661                       -
                                                       ------------------ -----------------------
                 Total operating expenses                         13,174                   9,251
                                                       ------------------ -----------------------

 Loss from operations                                             (6,440)                 (2,820)

 Other income, net                                                   743                      38
                                                       ------------------------------------------

 Loss before provision for income taxes                           (5,697)                 (2,782)
 Provision for income taxes                                            7                      76
                                                       ------------------------------------------
 Net loss                                              $          (5,704)      $          (2,858)
                                                       ==========================================

 Net loss per common and common                                                                 
        equivalent share                               $           (0.63)      $           (0.48)
                                                       =========================================

 Weighted average number of common and common
        equivalent shares outstanding                          9,107,338               5,935,776
                                                       =========================================
</TABLE> 

 See Notes to Condensed Consolidated Financial Statements

                                       4
<PAGE>


                   White Pine Software, Inc. and Subsidiary
          Condensed Consolidated Statements of Cash Flows (Unaudited)
                                (in thousands)
<TABLE> 
<CAPTION> 
                                                                                      Nine Months          Nine Months
                                                                                         Ended                Ended
                                                                                       October 3           September 30
                                                                                         1997                 1996
                                                                                    ----------------    ------------------
<S>                                                                                 <C>                    <C> 
Operating activities
Net loss                                                                             $       (5,704)       $       (2,858)
Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation                                                                            334                   306
        Amortization of goodwill and third-party licenses                                       511                   581
        Provision for bad debts                                                                 (45)                   85
        Changes in operating assets and liabilities:
               Accounts receivable                                                              610                (1,027)
               Inventories                                                                       22                    61
               Prepaid expenses                                                              (1,328)                 (734)
               Other assets                                                                     (55)                  (58)
               Accounts payable and accrued expenses                                            (81)                  837
               Deferred revenue                                                                (541)                  369
                                                                                    ----------------    ------------------
Net cash used in operating activities                                                        (6,277)               (2,438)

Investing activities
Purchase of property and equipment, net                                                        (595)                 (642)
Purchase of third-party licenses, net                                                          (384)                 (170)
                                                                                    ----------------    ------------------
Net cash used in investing activities                                                          (979)                 (812)

Financing activities
Proceeds from long-term debt                                                                      -                     -
Principal payments on long-term debt                                                           (216)                 (106)
Proceeds from common stock issued at $5.83 par value stock 
  redeemable as $.01 par value stock                                                              -                 2,259
Proceeds from common stock issued upon exercise of stock options                                217                     -
                                                                                    ----------------    ------------------
Net cash provided by  financing activities                                                        1                 2,153

Currency translation effect on cash and cash equivalents                                        (24)                  (35)
                                                                                    ----------------    ------------------
Net decrease in cash and cash equivalents                                                    (7,279)               (1,132)
Cash and cash equivalents at beginning of period                                             23,298                 1,774
                                                                                    ----------------    ------------------
Cash and cash equivalents at end of period                                           $       16,019        $          642
                                                                                    ================    ==================
</TABLE> 

See Notes to Condensed Consolidated Financial Statements

                                       5
<PAGE>
 
                    WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
                                 October 3, 1997

1.   Basis of Presentation

The unaudited condensed consolidated financial statements included herein have
been prepared by White Pine Software, Inc. (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that the disclosures made are adequate to make the
information not misleading. It is suggested that these financial statements be
read in conjunction with the condensed consolidated financial statements and
notes thereto, together with the related information set forth under
"Management's Discussion and Analysis or Plan of Operation," contained in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996 filed with the Commission.

Description of Business

The Company develops, markets and supports multiplatform desktop multimedia
software that facilitates worldwide video and audio communication and data
collaboration across the Internet, intranets and other networks that use the
Internet Protocol ("IP"). The Company's desktop videoconferencing software
products allow users to participate in real-time, multipoint videoconferences
over the Internet and intranets. The Company recently introduced MeetingPoint,
the industry's first H.323 multimedia conferencing server software. MeetingPoint
represents the first conferencing server software to implement the International
Telecommunications Union (ITU) H.323 standard for conferencing over packet
networks. This enables any standards-based client to participate in full
multipoint group conferences. MeetingPoint began shipping in November 1997. The
Company also offers desktop X Windows and terminal emulation software. The
Company's customers include businesses, government organizations, educational
institutions and individual consumers. The Company markets and sells its
products in the United States, Europe, and the Pacific Rim through distributors,
a combination of strategic partners and OEMs, and its direct sales organization,
as well as over the Internet. The Company, formerly known as Visual
International, Inc., was incorporated in April 1992.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned foreign subsidiary, About Software Corporation S.A. (ASC), and
ASC's wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.

The condensed consolidated financial statements at and for the periods ended
October 3, 1997 and September 30, 1996 are unaudited and include all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim periods. The
results of operations for the nine months ended October 3, 1997 are not
necessarily indicative of results for the entire year.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Fiscal Year

Effective January 1, 1997, the Company changed its interim fiscal reporting
periods from calendar quarters to quarters consisting of thirteen weeks.

                                       6
<PAGE>
 
Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and investments in high grade
commercial paper having maturities of three months or less when purchased.
Commercial paper qualifying as cash equivalents totaled $15,249,000 and
$22,440,000 at October 3, 1997 and December 31, 1996, respectively. These
investments have been categorized as held to maturity under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Accordingly, the balances are stated
at amortized cost, which approximates fair value, because of the short maturity
of these instruments.

Revenue Recognition

The Company's revenue is derived from software license fees and fees for
services related to its software products, primarily software maintenance fees.
The Company recognizes revenue in accordance with the provisions of AICPA
Statement of Position No. 91-1, Software Revenue Recognition.

Software license revenue is recognized upon receipt of a firm customer order and
shipment of the software, net of allowances for estimated future returns,
provided that no significant obligations remain on the part of the Company and
collection of the related receivable is deemed probable. Revenue under certain
license agreements is recognized upon execution of a signed contract and
fulfillment of the contractual obligations, provided that no significant
obligations remain on the part of the Company and collection is deemed probable.

Software maintenance fees, which are generally payable in advance and are
non-refundable, are recognized ratably over the period of the maintenance
contract, typically twelve months. Revenue from training and consulting services
is recognized as services are provided.

Software license fees, consulting fees, and training fees that have been prepaid
or invoiced but that do not yet qualify for recognition as revenue under the
Company's policy, and prepaid maintenance fees not yet recognized as revenue,
are reflected as deferred revenue.

Loss Per Common and Common Equivalent Share

Net loss per common and common equivalent share is computed using the weighted
average number of shares of common stock and dilutive common equivalent shares
outstanding during the period. All shares, options, and warrants issued during
the 12-month period prior to the Company's initial public offering consummated
on October 17, 1996 have been included in the calculation as if they were
outstanding for the fiscal quarter ended June 30, 1996, using the treasury stock
method. Common equivalent shares consist of the incremental common shares
issuable upon the exercise of stock options and warrants using the treasury
stock method.

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 addresses the simplification of calculating
earnings per share (EPS) and makes it comparable to international EPS standards.
It is effective for financial statements for periods ended after December 15,
1997. Early adoption is not permitted; however, prior period EPS amounts will be
required to be restated to conform to the provisions of the Statement. The
Company's adoption of SFAS No. 128 is not expected to have a material impact on
earnings per share reported in its financial statements.

Item 1A.  Risk Factors

Recent Operating Losses

The Company incurred losses from operations of $5,704,000 in the nine months
ended October 3, 1997, $3,637,000 in the year ended December 31, 1996, and
$3,526,000 in the year ended December 31, 1995. At October 3, 1997, the Company
had an accumulated deficit of approximately $19,316,000. In the fiscal years
ended December 31, 1996 and 1995, the Company made significant expenditures for
product development and sales and marketing in support of the product launch of
Enhanced CU-SeeMe, which became commercially available in March 1996. The
Company expects to invest heavily in the product launch of its MeetingPoint
server. These initial product rollout

                                       7
<PAGE>
 
expenditures may negatively impact the Company's results of operations in the
future, particularly if sales of new products fall below expectations.

Sales of the Company's connectivity products comprised 37% of total revenue for
the nine months ended October 3, 1997, and 56% and 100% in the years ended
December 31, 1996 and 1995, respectively. Should sales of legacy connectivity
products continue to decline faster than the video-conferencing product sales
escalate, the Company's revenue volume could continue to fluctuate.

New Products

The Company's MeetingPoint server was released in November 1997. This product
represents the first publicly-available Internet server that incorporates H.323
industry standards, effectively allowing interoperability among various
video-conferencing clients. Inability for MeetingPoint to achieve anticipated
revenue volumes, operational difficulties with the product, and accelerated
market competition could all have a negative impact on the Company's future
results of operations.

Customers

Sales to a primary distributor represented 13.0%, 14.0%, and 15.6% of the
Company's total revenue in the nine months ended October 3, 1997, and the fiscal
years ended December 31, 1996, and 1995, respectively. Sales to a second primary
distributor represented 10.6% and 6.2% in the nine months ended October 3, 1997,
and the fiscal year ended December 31, 1996, respectively. The loss of, or a
significant curtailment of, purchases by either distributor, including a loss or
curtailment due to factors outside of the Company's control, would have a
material adverse effect on the Company's business, financial condition, and
results of operations.

Competition

The market for videoconferencing products and services is extremely competitive,
and the Company expects that competition will continue to intensify in the
future. The Company believes that its ability to compete successfully will
depend on a number of factors both within and outside its control, including the
adoption and evolution of industry standards, the pricing policies of its
competitors and suppliers, the timing of the introduction of new software
products and services by the Company and others, the Company's ability to hire
and retain employees, and industry and general economic trends. In addition,
because the barriers to entry in the software market are relatively low and the
potential market is large, the Company anticipates continued growth in the
industry and the entrance of new competitors in the future. CU-SeeMe and
MeetingPoint also compete with videoconferencing software that is available on
the Internet and can be downloaded by users for either no charge or extended
evaluation. The Cornell Research Foundation makes Freeware CU-SeeMe and a
related server freely available over the Internet.

Ability to Manage Change

The Company's success depends to a significant extent on the ability of its
officers and key employees to manage changing business conditions and to
continue to improve its operational and financial control and reporting systems.

As a result of the foregoing factors, the Company may incur further losses in
the future. There can be no assurance that the Company will achieve profitable
operations in any future period.

                                       8
<PAGE>
 
Item 2.   Management's Discussion and Analysis or Plan of Operation

This Quarterly Report on Form 10-QSB of White Pine Software, Inc. (the
"Company") contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING CHANGES IN THE COMPANY'S MANAGEMENT DURING THE LAST YEAR, THE
COMPANY'S DEPENDENCE ON ONE OR MORE CUSTOMERS FOR A SIGNIFICANT PORTION OF ITS
REVENUES, AND SIGNIFICANT AND INCREASING COMPETITION IN THE MARKETS FOR CERTAIN
OF THE COMPANY'S PRODUCTS AND SERVICES. CERTAIN OF THESE FACTORS ARE DESCRIBED
UNDER "ITEM 1A. Risk Factors" IN THIS FORM 10-QSB.

EXODUS, MEETINGPOINT, WEBTERM, WHITE PINE and 5PM TERM are trademarks of the
Company. CU-SEEME is a registered trademark of Cornell Research Foundation, Inc.
All other trademarks referred to in this Quarterly Report are the property of
their respective owners.

Overview. The Company develops, markets and supports multiplatform desktop
--------  
multimedia software that facilitates worldwide video and audio communication and
data collaboration across the Internet, intranets and other networks that use
the Internet Protocol ("IP"). The Company's desktop videoconferencing software
products, CU-SeeMe, White Pine Reflector, and MeetingPoint create a
client-server solution that allows users to participate in real-time, multipoint
videoconferences over the Internet and intranets. The Company recently
introduced MeetingPoint, the industry's first H.323 multimedia conferencing
server software. MeetingPoint represents the first conferencing server software
to implement the International Telecommunications Union (ITU) H.323 standard for
conferencing over packet networks. This enables any standards-based client to
participate in full multipoint group conferences. MeetingPoint began shipping in
November 1997. The Company also offers its eXodus line of desktop X Windows
software, which enables seamless interoperability between local and remote
environments, and its 5PM line of terminal emulation software, which provides
desktop access to data and applications residing on enterprise legacy systems.

In June 1995, as a part of its continuing plan to focus on software connectivity
products, the Company entered into the License Agreement with the Cornell
Research Foundation, Inc. (the "Foundation"), which granted to the Company the
exclusive worldwide right to develop, modify, market, distribute and sublicense
commercial versions of Freeware CU-SeeMe and its related software-only
multipoint conferencing server. The Company commenced shipments of the initial
commercial versions of its Enhanced CU-SeeMe and the White Pine Reflector in
March 1996 and May 1996, respectively. The Company anticipates that its revenue
growth, if any, will depend on increased sales of CU-SeeMe and the White Pine
Reflector and on sales of its next generation CU-SeeMe client and MeetingPoint
multimedia server for the Internet and intranets. Accordingly, the Company
intends to devote a substantial portion of its research and development and
sales and marketing resources to technologies related to videoconferencing.

Effective January 1, 1997, the Company changed its interim fiscal reporting
periods from calendar quarters to quarters consisting of thirteen weeks.

On May 22, 1997, the Company renegotiated the terms of its License Agreement
with the Foundation. The principle changes to the agreement were a $1,000,000
prepayment of royalties by the Company to the Foundation, and a decrease in the
level of royalties based on revenue. The renegotiated terms are retroactive to
January 1, 1997. The Company is still subject to certain minimum royalty
payments.

On June 4, 1997, the Company announced the resignation of Howard R. Berke, as
Chairman, President, and Chief Executive Officer. On August 5, 1997, the
Company's Board of Directors approved the appointment of Killko A. Caballero to
the position of President. Mr. Caballero was named acting President in June 1997
and was previously Senior Vice President of Research and Development and Chief
Technology Officer. The Board also approved the appointment of Christine J. Cox
to the position of Vice President of Finance. Ms. Cox was previously the
company's Corporate Controller, and filled the post vacated by Richard M.
Darer on March 21, 1997.

                                       9
<PAGE>
 
Results of Operations. The following table sets forth line items from the
---------------------
Company's statement of operations as percentages of total revenue for the three
and nine months ended October 3, 1997 and September 30, 1996.


<TABLE>
<CAPTION>

                                                     Three months ended                   Nine months ended
                                             ----------------------------------     --------------------------------
                                                October 3,      September 30,         October 3,     September 30,
                                                   1997             1996                1997            1996
                                             ----------------------------------     --------------------------------
<S>                                             <C>             <C>                   <C>            <C> 
Revenue:
     Software license fees                         88.2%             91.0%              87.8%           89.5%
     Services and other                            11.8               9.0               12.2            10.5
                                             ----------------------------------     --------------------------------

         Total revenue                            100.0             100.0              100.0            100.0

Cost of revenue                                    12.0              19.3               16.8             19.1
                                             ----------------------------------     --------------------------------
Gross profit                                       88.0              80.7               83.2             80.9

Operating expenses:
     Sales and marketing                           63.0              54.1               72.8             56.4
     Research and development                      45.2              32.6               56.1             34.1
     General and administrative                    18.1              25.2               25.6             25.9
       Restructuring                                 --                --                8.2               --
                                             ----------------------------------     --------------------------------
         Total operating expenses                 126.3             111.9              162.7            116.4

Loss from operations                              (38.3)            (31.2)             (79.5)           (35.5)
Interest income and other, net                      8.0               0.5                9.2               .5
Provision for income taxes                          0.2               0.6                0.1              1.0
                                             ----------------------------------     --------------------------------

Net loss                                          (30.5)%           (31.3)%            (70.4)%          (36.0)%
                                                  =======           =======            =======          =======
</TABLE> 

Revenue. Total revenue decreased by 7% to $2,872,000 in the quarter ended
-------
October 3, 1997 from $3,089,000 in the quarter ended September 30, 1996.
Quarter-over-quarter revenue increased by 9% from $2,625,000 in the previous
quarter of the same fiscal year. Total revenue increased by 2% to $8,097,000 in
the nine months ended October 3, 1997 from $7,949,000 in the nine months ended
September 30, 1996. Revenues generated from product sold over the Company's
website increased 77% to $340,000 for the quarter over the same period last
year, and 33% over the preceding quarter in the same year. Conferencing revenue
for the quarter increased by 16% to $1,631,000 over the same period prior year,
offset sharply by a decrease in connectivity revenue of 45% to $894,000. The
Company anticipates further decreases in connectivity product revenue as it
continues to emphasis it's focus on it's conferencing products.

Revenue from sales outside the United States comprised 28% and 30% of total
revenue for the quarters ended October 3, 1997 and September 30, 1996,
respectively. Revenue from sales outside the United States comprised 29% and 31%
of total revenue for the nine month periods ended October 3, 1997 and September
30, 1996, respectively.

Cost of Revenue. Cost of revenue consists principally of royalties and
---------------
associated amortization of paid license fees relating to third-party software
included in the Company's products, and costs of product media, manuals,
packaging materials, product localization for international markets, duplication
and shipping.

Cost of revenue as a percentage of total revenue decreased to 12% for the
quarter ended October 3, 1997 from 19% for the quarter ended September 30, 1996.
The percentage decrease resulted primarily from the reduced royalty payments
under the revised License Agreement with the Cornell Research Foundation, Inc.
and, to a lesser extent, termination of certain third-party license agreements
with technology no longer utilized in the Company's products.

                                       10
<PAGE>
 
Sales and Marketing. Sales and marketing expense consists primarily of costs
-------------------
associated with sales and marketing personnel, sales commissions, trade shows,
advertising and promotional materials. Sales and marketing expense increased by
8% to $1,810,000 in the quarter ended October 3, 1997 and by 32% to $5,895,000
in the nine months ended October 3, 1997, as compared to the respective periods
in the prior year. Sales and marketing expense for the quarter decreased by 13%
from the prior quarter, as a result of i) reduced marketing program activity in
the quarter ended October 3, 1997, and ii) cost-reduction measures taken in the
second quarter. Sales and marketing expense is expected to increase in the
fourth quarter of fiscal 1997, due to the MeetingPoint advertising campaign.
Sales and marketing expense increased as a percentage of total revenue to 63% in
the quarter ended October 3, 1997 from 54% in the quarter ended September 30,
1996. Total sales and marketing expense increased as a percentage of total
revenue to 73% in the nine months ended October 3, 1997 from 56% in the
comparable period for the prior year.

Research and Development. Research and development expense consists primarily of
------------------------
costs of personnel and equipment. Research and development expense increased by
29% to $1,298,000 in the quarter ended October 3, 1997 from $1,007,000 in the
quarter ended September 30, 1996. Research and development expense increased 68%
to $4,545,000 in the nine-month period ended October 3, 1997 from $2,707,000 in
the same period in the prior year. Research and development expense for the
quarter decreased by 18% from the prior quarter in the same year. This was the
result of headcount reductions at the end of the second fiscal quarter, as well
as the write-off of certain capitalized research and development expenses in the
Company's French subsidiary. Total research and development expense represented
45% and 33% of total revenue for the quarters ended October 3, 1997 and
September 30, 1996, respectively, and represented 56% and 34% of total revenue
for the nine months ended October 3,1997 and September 30, 1996, respectively.

General and Administrative. General and administrative expense consists of
--------------------------
administrative, financial and general management activities, including legal,
accounting and other professional fees. General and administrative expense
decreased by 33% and 1% in the three and nine months ended October 3, 1997,
respectively, from $778,000 and $2,062,000 in the three and nine months ended
September 30, 1996, respectively. General and administrative expense decreased
as a percentage of total revenue to 18% in the quarter ended October 3, 1997
from 25% in the same quarter in the prior year. General and administrative
expense as a percentage of total revenue remained flat at 26% in the nine-month
periods ended October 3, 1997 and September 30, 1996, respectively.

The dollar and percentage decreases in general and administrative expenses for
the quarter ended October 3, 1997 were attributable primarily to higher
headcount and legal, audit, and investor relations expenses in the quarter ended
September 30, 1996, incurred prior to the Company's public offering in October
1996.

Restructuring Charge. In the previous quarter ended July 4, 1997, the Company
--------------------
reorganized its operations and recorded a restructuring charge in the amount of
$661,000 as a result of a change in senior management and a reduction in its
workforce. This amount consisted primarily of severance payments, outplacement
expenses, and related fees for 26 employees who were laid off at the quarter
end. The Company incurred a cash outlay of approximately $308,000 in the quarter
ending October 3, 1997, associated with the charge. It anticipates an additional
outlay of approximately $200,000 in the following three quarters associated with
the charge. These amounts were recorded as a liability in the quarter ended July
4, 1997.

Provision for Income Taxes. The Company's provision for income taxes consists of
--------------------------
federal alternative minimum taxes and state and foreign income taxes. The
Company expects that its effective tax rate for the foreseeable future will be
lower than the combined federal and state statutory rate primarily as a result
of the realization of net operating loss carryforwards.

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<PAGE>
 
                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is a defendant in 8 lawsuits pending in New York federal and state
courts (the "RSI Suits") in which the plaintiffs claim to suffer from carpal
tunnel syndrome, or "repetitive stress injuries," as a result of having used
computer keyboards (the "Keyboards") that are alleged to have been defectively
designed. The Keyboards were supplied, and possibly designed and manufactured,
by Ontel Corporation. The assets of Ontel Corporation were purchased in 1982 by
Visual Technology, Inc. ("Visual"), a predecessor of Visual T.I., Inc. ("VTI"),
which in turn is a predecessor of the Company. The RSI Suits, which seek money
damages, were brought from February 1992 to June 1996 by employees of New York
Telephone, which purchased the Keyboards from Lockheed Electronics Corporation.
One or more of Visual, Ontel Corporation, Lockheed Electronics Corporation and
Key Tronics Corporation, a subcontractor for certain of the Keyboards, are named
as co-defendants in certain of the RSI Suits. New York Telephone employees have
also commenced 38 suits that name as defendants only Visual and/or Ontel
Corporation. The Company could be named as a defendant in these cases. None of
the RSI Suits has reached trial and additional information detrimental to the
Company could be developed in the course of discovery.

In May 1993, VTI's product liability coverage terminated. Certain of the RSI
Suits appear to be based on claims that allegedly arose after May 1993, and
therefore may be uninsured. The insurers for VTI, the Company and others (the
"Insurers") are defending the RSI Suits under a reservation of rights. To date,
the Company's proportionate share of the defense costs of the RSI Suits has not
been material. There can be no assurance, however, that the Company will not
incur material legal expenses defending the RSI Suits. The Company has a reserve
of approximately $291,000 in connection with the RSI Suits, based upon the
Company's belief that (i) certain of the RSI Suits are covered by product
liability insurance, (ii) the Company is contractually indemnified by Lockheed
Electronics Corporation and/or Key Tronics Corporation against all or a portion
of the damages to which the Company may be subject and (iii) the Company has
defenses to substantially all of the claims under the RSI Suits. Although the
Company believes that its reserve for the RSI Suits is adequate, there can be no
assurance that the Company's liabilities under the RSI Suits will not
substantially exceed that reserve. New York Telephone and others may continue to
use certain of the Keyboards and, accordingly, there can be no assurance that
additional product liability claims will not be asserted against the Company in
the future.

From time to time, the Company has received and may receive in the future notice
of claims of infringement of other parties' proprietary rights. Although the
Company believes that its products and technology do not infringe the
proprietary rights of others, there can be no assurance that additional third
parties will not assert infringement and other claims against the Company or
that any infringement claims will not be successful.

From time to time, the Company may be exposed to litigation arising out of its
products, services and operations. As of the date of filing of this Quarterly
Report on Form 10-QSB, the Company is not engaged in any legal proceedings of a
material nature, other than the RSI Suits.

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<PAGE>
 
Item 6.  Exhibits and Reports on Form 8-K

         (a)   Exhibits

               Exhibit No.  Description
               -----------  -----------
 
               11.1         Statement re computation of per share earnings

               27.1         Financial Data Schedule for fiscal quarter ended
                            October 3, 1997


         (b)   Reports on Form 8-K

               None.

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