##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|  |  |                                                                                                     
|- |  | ----------------------------------------------------------------------------------------------------
|o |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934        
| 
|  |  | For the Fiscal Year Ended December 31,
    2002                                                     
| 
|þ |  | 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 000-23305



---

First Virtual Communications, Inc.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0357037                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    identification No.)
|3393 Octavius Drive, Santa Clara, CA                               |  | 95054                                   
|(Address of principal executive
    offices)                       |  | (Zip code)                              

(408) 567-7200

(Registrants Telephone Number, including
area code)


Securities Registered Pursuant To Section
12(b) of the Act:

None


Securities Registered Pursuant To
Section 12(g) of the Act:

Common Stock, $0.001 par value




---

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 Exchange Act of 1934
during the preceding 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 þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendments to this
Form 10-K.     o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 121(b)2 of the
Securities Exchange Act of
1934)days.     Yes o          No þ

As of June 30, 2002 there were 40,116,179
shares of the registrants Common Stock outstanding, and
the aggregate market value of such shares held by non-affiliates
of the registrant (based upon the closing sale price of $.45 for
such shares on The Nasdaq National Market on June 28, 2002)
was approximately $18.1 million. Shares of the
registrants Common Stock held by each executive officer,
director and holder of five percent or more of the
registrants Common Stock outstanding as of June 30,
2002 have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of shares of Common Stock outstanding
as of April 14, 2003 was 40,483,594.



---

DOCUMENTS INCORPORATED BY REFERENCE

Designated portions of the registrants
definitive proxy statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this Form 10-K.



---






---



##### 



PART I

Item
1.     Business

In addition to the historical information
contained in this report, this report contains forward-looking
statements within the meaning of Section 27(a) of the
Securities Act of 1933, as amended (the Securities
Act) and Section 21(e) of the Securities Exchange Act
of 1934, as amended (the Exchange Act) that involve
risks and uncertainties. These forward-looking statements
include, without limitation, statements containing the words
believes, anticipates,
expects, and words of similar import. Such
forward-looking statements will have known and unknown risks,
uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry
results, to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others,
the risk factors set forth below, under Overview,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this Form 10-K. The Company assumes no
obligation to update any forward-looking statements contained
herein.

Overview

Founded in 1993, First Virtual Communications,
Inc., a Delaware corporation, started as a manufacturer of video
networking equipment and has developed into a premier provider
of next generation web conferencing and collaboration solutions.
The Company delivers award winning integrated communications
solutions that address the needs of companies remotely
located personnel, who need to work together to collaborate,
train, demonstrate or sell. The Company has helped to define
IP-based communications by pushing the boundaries of
conferencing for a better user experience, easier enterprise
deployment and a potentially greater return on investment. The
Companys products provide business quality communication
by supporting a wide range of industry standards. The
Companys solutions integrate seamlessly with existing
tools and methodologies, such as email and web browsing, while
extending the advantages of instant messaging and collaboration
environments, such as MSN Messenger. The Companys
innovative solutions are deployed in over 1,200 customer sites
worldwide, including Fortune 500 companies, government agencies
and service providers.

On June 19, 2001, the Company and CUseeMe
Networks completed a merger, pursuant to which CUseeMe Networks
became a wholly owned subsidiary of the Company. CUseeMe
Networks historically provided innovative software-based
solutions to enable voice, video, and data collaboration over
IP-based networks. CUseeMe Networks specialized in delivering a
solution that was both centrally managed and centrally deployed,
enabling large-scale deployments of rich media collaboration to
enterprise desktops. The Company has benefited greatly from the
technologies gained through its merger with CUseeMe Networks.
Following the merger, the Company began to transition its
hardware based product line to being a completely software-based
solution. First Virtual Communications now provides a broad
range of integrated rich media web conferencing solutions that
run seamlessly across multiple network types to enterprise
customers and service providers worldwide.

The Company is leveraging its real-time audio and
video technology as well as web-based collaboration to
capitalize on the rapidly emerging opportunity to provide rich
media web conferencing solutions to enterprise markets, either
as systems sold through channels or services delivered through
service providers. First Virtual Communications web-based
Click To MeetTM is the Companys flagship
product family. It provides a framework for rich media web
conferencing that is simple to use, fully integrated and
effectively manages all of the components of an end to end
solution while hiding traditional complexities from the end user.

Our Click to Meet product line has been well
received by the market and is gaining recognition as a robust
and versatile web conferencing solution. Click to Meet Express
received positive coverage in publications including,
Internet Telephony Magazine, Network World, Learning &
Leading with Technology, Home Office Magazine, and Vision
and Packet Magazine. Click to Meet also won the
Editors Choice award and an overall A-grade rating from
Internet Telephony Magazine, while Click to Meet Express
was named Product of the Year by that publication. Click to Meet
rich media conferencing solution was also named Best

1



---



##### 



Innovative Use of Technology at the Cisco
Systems Innovation Through Convergence Exposition, held in
Dallas, Texas in April of 2002.


First Virtual Communications distributes its
products through its direct sales force, as well as through
resellers, integrators and collaboration partners, which include
AT&T, British Telecommunications plc, Cisco Systems, Inc.,
China Telecom, SBC Communications Inc., Net One Systems, NEC
System Technologies, Ltd., Tomen Cyber-Business Solutions, Inc.,
Verizon Communications and other leading companies
worldwide.

The Company markets its systems to enterprise
customers, including business customers, government users,
education and healthcare providers, primarily through indirect
sales channels. The Company also sells its products to service
providers, including expanded customer relationships with
AT&T, Electronic Data Systems, China Telecom and Chunghwa
Telecom, all of which are deploying broadband web conferencing
services using the Companys products and solutions. Our
rich media communications solutions enable telecommunications
carriers to deliver a comprehensive set of rich media
applications over the carriers existing broadband networks
into conference rooms, as well as to the users desktops.

For the year ended December 31, 2002, 80% of
the Companys revenue was from enterprise customers and 20%
was from service providers, while for the year ended
December 31, 2001, 71% of the Companys revenue was
from enterprise customers and 29% was from service providers.

The Company maintains a network of distributors
in Europe and Asia to distribute its products under the FVC.COM
and First Virtual Communications names. Approximately 32% and
21% of the Companys revenues were generated from customers
outside of North America during the years ended
December 31, 2002 and 2001, respectively. In an effort to
further develop our presence in the Asian market, in January of
2002, we acquired our exclusive distributor in Hong Kong. In
July 2002, the Company also acquired the remaining 48% interest
of FVC.COM (UK) Ltd., which distributes the Companys
products in the United Kingdom. The Company expects that direct
sales from shipments to customers outside of North America will
continue to represent a significant portion of our future
revenues. In addition, the Company believes that a small portion
of our sales through some of our distribution partners is sold
to international end-users. In 2002, sale of our products
AT&T Corporation represented more than 10% of total revenue.

Revenues from the Companys international
operations are subject to various risks, including seasonality,
longer payment cycles, changes in regulatory requirements and
tariffs, reduced protection of intellectual property rights,
political and economic restraints, and currency risks, among
others.

The Companys revenue is derived from
primarily three sources (i) sales of software licenses
(ii) sales of hardware and (iii) services and support
revenue, which includes software license maintenance, training,
installation and consulting revenue. The Company licenses its
software products under perpetual licenses. The Company sells
its products and services via its direct sales force and through
domestic and foreign distributors. The Company may out-source
certain functions to independent service providers.

The Company applies the provisions of Statement
of Position 97-2, Software Revenue Recognition to all
transactions involving the sale of software products and
hardware transactions where the software is not incidental. For
hardware transactions where software is incidental, the Company
applies the provisions of Staff Accounting Bulletin 101.

Product revenue from the license of the
Companys software products and sale of hardware products
where the software is and is not incidental is recognized when
persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed or determinable, and collection
of the resulting receivable is reasonably assured, and, if
applicable, upon acceptance when acceptance criteria are
specified or upon expiration of the acceptance period.
Maintenance and support revenue for providing product updates
and customer support is deferred and recognized ratably over the
service period. Training, installation and consulting revenue is
recognized as services are performed and billable according to
the terms of the service arrangement.

2



---



##### 



The Company has experienced, and is likely to
experience in the future, fluctuations in revenues, gross
margins and operating results. Various factors contribute to the
fluctuations in revenues, gross margins and operating results,
including the Companys success in developing and marketing
its rich media web conferencing business and in developing,
introducing and shipping new products and product enhancements,
the Companys success in accurately forecasting demand for
new orders, which may have short lead-times before required
shipment, product mix, percentage of revenues derived from
original equipment manufacturers, or OEMs, versus distributors
or resellers, new product introductions and price reductions by
competitors, the efforts of OEMs, distributors, resellers, and
other third parties on behalf of the Company, the Companys
ability to attract, retain and motivate qualified personnel, the
timing and amount of research and development efforts and
success, and selling, general and administrative expenditures.
Further, a significant portion of the Companys expenses is
fixed. The Company expects that operating expenses will decrease
in the future with the implementation of cost reduction
measures. To the extent these decreased expenses are not
accompanied by an increase in revenues or gross margin, the
Companys business, financial condition and results of
operations would be materially adversely affected. Due to all
the foregoing factors, it is likely that in some future quarter,
as at times in past quarters, the Companys results of
operations will be below the expectations of public market
analysts and investors.

Industry Background

Ineffective meetings impose a huge cost on an
organization. They waste time, reduce productivity, slow-down
decision making and have a negative impact on morale. In the
past, the most effective meetings were conducted face to face,
with participants physically having to travel to the meeting
place. This is becoming increasingly impractical in todays
environment due to a more distributed work force, reduced travel
budgets, faster decision making requirements and the need to
communicate efficiently with a broader group of
constituents  co-workers, suppliers, partners and
customers.

This widespread need for an alternative to
meetings in which participants are physically in the same room
was first addressed by audio conferencing and later by video
conferencing solutions. Audio conferencing did not allow meeting
participants to see each other and neither solution offered
easy, real-time access to the data of the participants. Video
conferencing is notorious for its high costs and the
complexities of the technology, often requiring a dedicated
administrator to set-up a video conferencing session.

With continued improvements in the public
Internet, early web conferencing solutions appeared
in the last few years from companies like Webex and Placeware.
Typically offered as a service, these products enable multiple
users to participate in on-line meetings, sharing audio, data
and text chat. These early offerings focused on the sharing of
data over the Internet, with audio collaboration added by means
of a separate voice conference call. None of these solutions is
fully integrated and none offers interactive video as well as
the sharing of voice and data. Each of these technologies
addresses some of the issues but none of them present a
comprehensive solution to provide an effective alternative to
face-to-face meetings.

Customer Requirements

To achieve effective workgroup meetings,
customers require:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The ability to present and/or share information
    easily and in real time.                                                                         
|
| |  | The ability to see and hear all of the meeting
    participants.                                                                                     
|
| |  | The ability for each meeting participant to have
    all of their data directly available to them and easily sharable
    with the rest of the group.
|
| |  | A simple non-intimidating conferencing
    environment.                                                                                              
|
| |  | The ability to leverage the participants PC
    applications and tools in use today and the ability to share
    information directly from them.    

3



---



##### 





| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | A solution that leverages the participants
    existing IT infrastructure investments in PCs and networks.                         
|
| |  | A cost effective alternative to face-to-face
    meetings, without requiring participants to be physically in the
    same location.

First Virtual Communications
Strategy

Web conferencing is gaining momentum. Wainhouse
Research projects the market for group videoconferencing to grow
from $400 million in 2001 to $1.2 billion in 2006,
yielding a compound annual growth rate of 24.4%. However,
Wainhouse Research projects web conferencing will grow at a much
faster 47% annual rate from $290 million to
$2.0 billion in the same time period.

To address the fast-growing rich media web
conferencing market, We have developed an innovative suite of
next-generation web conferencing products that enable highly
effective face-to-face meetings without the need for travel. By
integrating voice, data and interactive video in a single
software application, we believe that our products will fulfill
all the requirements for an effective meeting at a much lower
cost than other alternatives.

Our Click-to-Meet product family has been
designed to address a broad spectrum of enterprises 
from those with only a few people to organizations with
thousands of employees. Ease of use has been a cornerstone in
the design of our products, all of which function in a familiar,
non-intimidating environment  the PC browser.

Click-to-Meet software runs on industry-standard
hardware platforms and standard network operating systems,
including Windows and Linux. Our products leverage the existing
infrastructure of an enterprise by inter-operating with its
existing video conferencing platforms.

We offer a fully integrated software application
to our enterprise customers at a cost substantially lower than
the service offerings of other companies. A licensed software
application will appeal to the Chief Information Officers of
large enterprises which are concerned with the security issues
that exist when sensitive corporate data is shared on a website
outside the enterprise firewall, as is the case with the Webex
model. Additionally, Click to Meet applications are easy to
integrate with other communications solutions used by an
enterprise, such as calendars and scheduling, directory
services, instant messaging and email.

By delivering products that enable users to work
within a familiar environment and by enabling the web
conferencing application to be fully integrated with the other
communication tools and services of an enterprise, we believe
that we are setting the stage for wide scale adoption of this
web collaboration technology.

Leverage Strong Technology
Foundation

Our products are built on a strong and proven
technology base. This includes our award-winning Click to Meet
Conference Server, and our Click to Meet Conference
Client  strategic ingredients in our industry-leading
Click to Meet product line.

Our Click to Meet Conference Server is the engine
and foundation of the Click to Meet architecture. The Conference
Server provides a distributed architecture for web conferencing,
audio conferencing, video conferencing, text chat, and T.120
data collaboration services. The Conference Server allows Click
to Meet to operate in a distributed model which is both
client-server and peer-to-peer in nature. Multiple Conference
Servers can communicate among each other using sophisticated
Intelligent Linking, allowing Click to Meet conferences to scale
significantly to meet customer requirements. This Intelligent
Linking also allows the Conference Server to be deployed at the
edges of a network where the end users are located, or in a
central location, depending on the application requirements,
thereby maximizing the benefits of a typical distributed IP
networking environment.

4



---



##### 



Our Products and Technology

First Virtual Communications provides solutions
that enable groups of people to meet online and effectively
imitate actual face-to-face meetings. Our products leverage
increased PC performance, multimedia capability, broadband
internet, instant messaging and email infrastructure to provide
an easy-to-use next generation web conferencing solution.

Products



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click to Meet Conference Serveris our web conferencing foundation, a
    software engine that powers the entire Click to Meet family of
    products. Conference Server is not only a powerful, affordable,
    and widely deployed H.323 Multipoint Control Unit for
    traditional conferencing applications, but also a robust
    collaboration server for audio, video, and data collaboration
    over IP. Our software solution provides a flexible platform
    choice, deployment options, fast upgrades, and low-cost
    processing power.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Conference Server is engineered from the
    ground-up as an IP-based solution and was the first to support:
    Continuous Presence, mixed speed endpoints in multipoint
    conferences, Unicast and Multicast linking, Microsoft Outlook
    scheduling integration, and Session Initiation Protocol (SIP)
    for connectivity. It is a browser-based plug-in for web
    conferencing and collaboration that includes advanced audio
    technology, such as wideband audio, echo cancellation, automatic
    voice detection and gain control. Its video features include,
    full screen video, advanced compression algorithms including
    H.263+, video noise reduction and automatic bandwidth detection.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click to Meet Expressenables dispersed groups to meet
    online and conduct more effective collaborative meetings. Click
    to Meet Express delivers ad-hoc web conferencing capabilities to
    virtually anyone with an Internet connection and a PC. With
    Click to Meet Express, users can maintain the expressive and
    interactive communications of a traditional face-to-face
    meeting, through integrated audio, multipoint video, and
    document collaboration tools.



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click to Meet Express delivers an on-demand rich
    media web conferencing environment where users can create
    conferences on-the-fly and invite participants by email, instant
    messaging, or clicking on a link in a web page. Click to Meet
    Express is designed to be as simple to install as a typical web
    server.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click to Meet Premierprovides the same web conferencing
    experience as Click to Meet Express and adds an online
    directory, calendar and scheduling functionality, billing,
    administrative, and control tools, providing a turnkey,
    end-to-end rich media web conferencing and communications
    solution. Click to Meet Premier also integrates with existing
    video conferencing equipment and infrastructure, allowing those
    users of a traditional conferencing application to effectively
    participate in web conferences.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click to Meet Premier enables organizations to
    leverage their converged broadband networks for face- to-face
    collaboration. Using Click to Meet Premier, organizations can
    enhance existing processes with two-way video and web
    collaboration, thereby reducing travel costs, improving
    productivity, and preserving long distance business
    relationships. Click to Meet Premier gives users point-and-click
    access to ad-hoc and scheduled video calls, conferences and data
    collaboration across many types of networks, including IP and
    ISDN, through a web-based interface.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click to Meet Selectoffers control and management of an
    ISDN, ATM, and IP conferencing network. Click to Meet Select
    enables conference creation, scheduling and resource allocation
    such as controlling MCUs and gateways, in a simple browser-based
    environment. Click to Meet Select hides the complexity of
    dialing and conference setup from the end user, facilitating
    greater utilization of conferencing investments.



| |                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click to Meet Select brings web-based data
    collaboration to an existing video conferencing application or
    system. Click to Meet Select also simplifies the use of a Cisco
    IP/VC designed network, hiding the complexity of network zone,
    gateway and MCU call setup and management. Click to Meet Select
    also

5



---



##### 



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | extends the Cisco Voice Over IP application,
    allowing users to set up video conferences directly from their
    Cisco IP telephones.

Advantages of Our Innovative
Approach

The Companys innovative approach results in
solutions with the following attributes sought after by our
customers:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fully Integrated First Virtual Communications
    provides a Next Generation Web Conferencing solution that allows
    multiple users to participate in an on-line meeting with audio,
    video, data and text chat all integrated into a single
    application and single-window environment.                                                                                                                                                      
|
| |  | Anyone, Anywhere First Virtual Communications
    believes in a true ad hoc meeting environment. Anyone, anywhere
    should be able to easily establish, participate or be invited
    into a web conference without requiring any administrative
    support or having to be pre-registered in a directory.                                                                                                                                         
|
| |  | Reach First Virtual Communications
    client server approach provides unlimited free clients through a
    simple download and meeting invitations that can be sent by
    email or instant messaging, thus making virtually anyone with a
    personal computer and an internet connection a potential
    participant in a meeting.                                                                                                               
|
| |  | Return On Investment and
    Security First Virtual
    Communications installed enterprise software application
    model allows organizations to realize a faster return on
    investment and maximizes security. Customers can install the
    First Virtual Communications conferencing application on their
    own network with unlimited usage, versus an ASP-hosted service
    that operates on an open network and charges on usage basis.
|
| |  | View Everyone First Virtual Communications
    believes that for video to have real value in an on-line meeting
    all participants must be able to see everyone elses
    expressions to effectively gauge all reactions, in contrast to
    other solutions that only allow for a view of the active speaker.                                                                                                                                     
|
| |  | Choice and Control First Virtual Communications
    believes individuals should have more choice and control of
    their conferencing experience at the desktop. Each participant
    should have the flexibility to select how they display the data,
    video and text.                                                                                                                                                                           
|
| |  | Leverage Existing Workflow First Virtual Communications
    believes that an effective on-line conferencing solution should
    be easy to use by integrating into, not recreating, the
    applications solutions that organizations are currently using
    today, such as calendaring, scheduling, directory services,
    instant messaging and email.                                                                                            
|
| |  | Industry Standard Platforms First Virtual Communications
    approach leverages an organizations existing IT
    infrastructure investments while minimizing incremental capital
    costs, by running on industry standard hardware, software and
    network infrastructure.                                                                                                                                                                      
|
| |  | Investment Leverage First Virtual Communications
    approach is compatible with traditional videoconferencing
    equipment, allowing those devices to be included in an on-line
    meeting. This allows conference room videoconferencing devices
    to participate in the audio and video portions of the meeting,
    thereby leveraging customers investments in those devices.                                                              

The Benefits of Our Products

Implementing a First Virtual Communications rich
media web conferencing solution that integrates audio, video and
data allows organizations to hold more effective meetings, save
money, enhance productivity and improve the quality of decisions
resulting in:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | Better communications between co-workers,
    suppliers, partners and customers.
|
| |  | Faster decision making; faster time to market.                                  
|
| |  | Reduced downtime  people can join
    meetings right from their desks.         

6



---



##### 





| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Improved access to data.                                                                                                          
|
| |  | Flexible, multi windowed video environment that
    allows each user to choose exactly who they want to see in the
    conference.

In addition, the Companys solutions:



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage existing investments in PCs, servers,
    applications and network infrastructure.                                                                                                                              
|
| |  | Extend investments in existing videoconferencing
    infrastructure to web conferencing.                                                                                                                                 
|
| |  | Provide unlimited use of concurrent ports,
    resulting in lower total cost of ownership than ASP hosted
    solutions, which charge per-minute, per-participant fees and
    require external audio conferencing costs.
|
| |  | Provide free client software, extending web
    conferencing to more potential participants.                                                                                                                             
|
| |  | Deliver increased security, allowing an
    organization to keep sensitive data inside its firewall.                                                                                                                     

Product Categories

For the years ended December 31, 2002, 2001
and 2000, the Company recorded revenues in the amount of $24.4,
$27.7 and $40.0 million respectively. The Companys
revenue is of three types: Software, Product and Support
Services. Software revenue primarily consists of revenue from
the sale of the Click to Meet family of software products, which
include CTM Express, CTM Select, CTM Premier and CTM Conference
Server. Product revenue consists of revenue from the sale of ATM
legacy hardware products, including hardware products sourced
from third parties and sold by the Company. Support service
revenue consists of software license subscriptions, hardware
maintenance, training, installation and consulting revenue. For
the years ended December 31, 2002, 2001 and 2000 Software
revenue totaled $11.4, $4.2 and $1.0 million, respectively.
For the years ended December 31, 2002, 2001 and 2000,
Product revenue equaled $8.5, $18.0 and $37.2 million,
respectively. For the years ended December 31, 2002, 2001
and 2000, Support Services revenue equaled $4.6, $5.5 and
$1.9 million, respectively.

Customer Services

Always on the leading edge of advanced Internet
technologies, First Virtual Communications applies the highest
possible level of professionalism to project design,
implementation and support. Our Customer Service and Technical
Support Organizations play a critical role, offering project
coordination, implementation design and engineering, quality
control and training groups.

Marketing, Sales and Customer
Support

We believe that the three significant growth
areas for our rich media web conferencing products are
enterprises, service providers and the government sector.

We market our products through our internal sales
force and indirect sales channels, including: OEMs, value-added
resellers, service providers and integrators. We may increase
our use of OEM channels in the future. Our internal sales force
uses the Companys web conferencing technology to directly
qualify and stimulate end-user demand, as well as to manage our
relationships with our customers.

First Virtual Communications has international
offices in the United Kingdom, France, Germany, Italy, Japan,
Korea and China. For the years ended December 31, 2002,
2001, and 2000, approximately 32%, 21%, and 12%,
respectively, of our revenue was generated from customers
outside of the United States.

Research and Development

We recognize that a strong technical base is
essential to our long-term success and we have made a
substantial investment in research and development. We intend to
continue to make substantial investments in product development
and to participate in the development of industry standards. The
Company monitors changing customer needs and works closely with
its OEM partners, end-user customers and market research

7



---



##### 



organizations to track changes in the
marketplace, including emerging industry standards. The Company
intends to maintain its product development focus on software
products for the rich media web conferencing market.


The Companys research and development
expenditures totaled $9.9 million, $12.6 million, and
$12.5 million for the years ended December 31, 2002,
2001, and 2000, respectively. The Company performs its principal
research and product development activities at its headquarters
in Santa Clara, California, its facility in Nashua, New
Hampshire, and its facility in La Gaude, France.

Competition

The market for rich media web conferencing and
MCU products is very competitive. Since the barriers to entry in
this market space are relatively low and the potential market is
large, First Virtual Communications expects continued growth in
the industry and the entrance of new competitors in the future.
Although there is no one competitor currently offering all
aspects of rich media web conferencing in a single integrated
platform, the Company believes that competitors are developing
such products.

In offering rich media web conferencing products,
the Company currently competes, or expects to compete, directly
or indirectly with the following categories of providers:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | H.323 MCU vendors, such as Polycom, Ezenia!, and
    RADVISION;                                                              
|
| |  | Videoconferencing client vendors, such as
    Microsoft (NetMeeting), Polycom, and VCON;                                     
|
| |  | Collaborative web conferencing product vendors,
    such as Lotus (Sametime), Interwise, and Ezenia!
    (InfoWorkSpace); and
|
| |  | Application service providers, such as Raindance,
    Placeware, and WebEx.                                                  

The method of delivery for web conferencing
solutions varies among our competitors. Some offer strictly
hosted solutions, some offer a product (software, and in some
cases hardware) which must be installed at the customers
site. These differences create competitive advantages in some
markets and disadvantages in others.

Many of the Companys current and potential
competitors, particularly Microsoft, Polycom and WebEx, have
longer operating histories and significantly greater managerial,
financial, marketing, technical and other competitive resources,
as well as greater name recognition, than does the Company. As a
result, these companies may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements
and may be able to devote greater resources to the promotion and
sale of their conferencing products and services.

To remain competitive, we must continue to invest
in research and development and sales and marketing. The Company
may not have sufficient resources to make those investments or
may not succeed in making the technological advances necessary
to be competitive. In addition, current and potential
competitors have established or may in the future establish
collaborative relationships among themselves or with third
parties, including third parties with which First Virtual
Communications has a relationship, to increase the visibility
and utility of their products and services. Accordingly, it is
possible that new competitors or alliances may emerge and
rapidly acquire a significant market share, which could have a
material adverse effect on First Virtual Communications
business, financial condition and results of operations.

Manufacturing

The Company has completed a two-year transition
from being a supplier of advanced hardware products to being a
leading supplier of rich media web conferencing software
products. The Company currently produces these products at its
facility in California by transferring images of the software to
CD-ROM discs and shipping them directly to its customers. As
revenues increase, it is likely that the Company will also use
third parties to perform some, or all, of these activities.
Although the Companys products are software applications,
the Company can be impacted by industry wide events such as
shortages of CD ROMs or other materials. The Companys
supply chain, including buffer stock of critical materials, may
not be sufficient to

8



---



##### 



meet increases in demand occurring simultaneously
with delayed deliveries from suppliers. The Company may not be
able to negotiate acceptable arrangements with its existing or
future suppliers, or negotiate arrangements that will be on
terms favorable to the Company.


Employees

As of March 28, 2003, the Company employed
173 individuals full-time. In addition, the Company employs a
number of temporary, contract employees. The Companys
employees are not represented by a collective bargaining
agreement and the Company believes its relationships with its
employees are good.

Risk Factors

In addition to the other information provided in
this report, the following risk factors should be considered in
evaluating the Company and its business.

The
Company has a history of operating losses and will incur losses
in the future. The Company may never generate sufficient revenue
to achieve profitability.

The Company has incurred operating losses in each
quarter since it commenced operations in 1993. The Company
expects to continue to devote substantial resources to its
research and development and sales and marketing activities. As
a result, the Company expects that it will continue to incur
operating losses for the foreseeable future. The Companys
revenue decreased from $27.7 million for the year ended
December 31, 2001, to $24.4 million for the year ended
December 31, 2002, while its net loss decreased from
$31.6 million for the year ended December 31, 2001 to
$24.3 million for the year ended December 31, 2002. At
December 31, 2002, the Company had an accumulated deficit
of $111.6 million.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys quarterly financial results
    are expected to fluctuate and may cause the price of the
    Companys common stock to fall.

The Company has experienced in the past, and is
likely to experience in the future, fluctuations in revenue,
gross margin and operating results. Various factors could
contribute to the fluctuations in revenue, gross margin and
operating results in the future, including the Companys:



| |   |                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | success in developing our rich media Web
    conferencing business and in developing, introducing and
    shipping new products and product enhancements, particularly for
    Click to MeetTM and the Multi Conferencing Unit, or
    MCU;                  
|
| |  | success in accurately forecasting demand for new
    orders that may have short lead-times before required shipment,
    product mix, percentage of revenue derived from original
    equipment manufacturers, or OEMs, versus distributors or
    resellers;
|
| |  | new product introductions and price reductions by
    competitors;                                                                                                                                                                                           
|
| |  | results from strategic collaborations;                                                                                                                                                                                                                       
|
| |  | use of OEMs, distributors, resellers, and other
    third parties;                                                                                                                                                                                           
|
| |  | ability to attract, retain and motivate qualified
    personnel;                                                                                                                                                                                             
|
| |  | research and development efforts and success; and                                                                                                                                                                                                            
|
| |  | selling, general and administrative expenditures.                                                                                                                                                                                                            

Additionally, the Companys operating
results may vary significantly depending on a number of factors
that are outside of its control. Further, a significant portion
of the Companys expenses are fixed. The Company has made
significant progress in reducing its operating expenses in the
last year and expects that operating expenses will decrease in
the future due to continued expense reduction measures. However,
to the extent that operating expenses are not reduced and to the
extent that revenue or gross margin cannot be increased, the
Companys business, financial condition and results of
operations would be materially adversely

9



---



##### 



affected. Due to all the foregoing factors, it is
likely that in some future quarter, as at times in past
quarters, the Companys results of operations will be below
the expectations of public market analysts and investors,
resulting in a negative impact on the Companys common
stock price.




| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the carrying value of the Companys
    long lived assets is not recoverable, an impairment loss must be
    recognized which could adversely affect the Companys
    financial results.

Certain events or changes in circumstances would
require the Company to assess the recoverability of the carrying
amount of long-lived assets. In the year ended December 31,
2002, the Company recorded impairment charges of
$3.3 million relating to technology acquired in a prior
acquisition and $6.6 million relating to goodwill. In
addition, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards, or
SFAS No. 142, in July 2001, whereby goodwill must be
evaluated annually and whenever events or circumstances occur
which indicate goodwill might be impaired. The Company adopted
SFAS No. 142 on January 1, 2002. The Company will
continue to evaluate the recoverability of the carrying amount
of our long-lived assets, and may incur substantial impairment
charges that could adversely affect the Companys financial
results in the future.



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys success depends on the
    markets acceptance of rich media Web conferencing services
    and the Companys products, including Click to Meet and the
    Multi Conferencing Unit.

The Companys success depends in part on the
markets acceptance of rich media Web conferencing services
and the Companys products, including Click to Meet and the
MCU. Potential end-users must accept video applications as a
viable alternative to face-to-face meetings and conventional
classroom-based learning. New applications, such as the use of
video conferencing in marketing, selling and manufacturing, are
still in the development stage. The Companys contracts
with telecommunications service providers to provide video and
Web conferencing solutions are in the early stage and only
recently has the Company received significant revenue from this
market segment. If rich media, Web conferencing and broadband
video services fail to achieve broad commercial acceptance or if
such acceptance is delayed, the Companys business,
financial condition and results of operations will be materially
adversely affected. The Company anticipates that significant
revenue and growth in the foreseeable future will come from the
sale of its Click to Meet and MCU products and services. Broad
market acceptance of these products and services is therefore
critical to the Companys operating success.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company faces potential delisting from The
    Nasdaq SmallCap Market. If delisting occurs, the market price
    and market liquidity of the Companys common stock would be
    materially affected.

The Companys common stock currently is
listed on The Nasdaq SmallCap Market. Pursuant to its rules, The
Nasdaq National Market delisted the Companys shares from
the Nasdaq National Market based on the shares trading below
$1.00 per share on The Nasdaq National Market for a period of
30 consecutive trading days. On September 9, 2002, the
Companys shares began trading on The Nasdaq SmallCap
Market. In October 2002, the Company received a letter from
Nasdaq advising it that the Companys common stock must
have a closing bid price of at least $1.00 per share for a
minimum of ten consecutive trading days by March 26, 2003
in order to continue trading on the Nasdaq SmallCap Market,
subject to appeal by the Company. On March 26, 2003, the
last sale reported on The Nasdaq SmallCap Market for the
Companys stock was at $.32. On April 1, 2003,
the Company received an additional letter from Nasdaq advising
that, based on recent Nasdaq modifications to the bid price
rules, it would be granted an additional 90 calendar day period
within which to remedy the bid price deficiency. To demonstrate
compliance with the minimum bid price requirement, the Company
is required to demonstrate a closing bid price of at least $1.00
per share on or before June 30, 2003, and immediately
thereafter, a closing bid price of at least $1.00 per share for
a minimum of ten consecutive trading days.

If delisting occurs the trading of the
Companys common stock is likely to be conducted on the
Over-the-Counter Bulletin Board, which will have a materially
adverse affect on the market price of the Companys common
stock and on the ability of stockholders and investors to buy
and sell the common stock. If delisting occurs, you may lose
some or all of your investment.

10



---



##### 



The
Companys software products may contain undetected
defects.

Software developed by the Company or developed by
others and incorporated by the Company into its products may
contain significant undetected errors, especially when first
released or as new versions are released. Although the
Companys software products are tested before commercial
release, errors in the products may be found after customers
begin to use the software. Any defects in the Companys
current or future products may result in significant decreases
in revenue or increases in expenses because of adverse
publicity, reduced orders, product returns, uncollectible
accounts receivable, delays in collecting accounts receivable,
and additional and unexpected costs of further product
development to correct the defects.

The
Companys common stock price is volatile.

The market price of the Companys common
stock has been extremely volatile in the past and, like that of
other technology companies, is likely to be volatile in the
future, depending upon many factors, including:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | fluctuations in the Companys financial
    results;                                                        
|
| |  | technological innovations or new commercial
    products developed by the Company or its competitors;       
|
| |  | establishment of and success of corporate
    partnerships or licensing arrangements;                       
|
| |  | announcements by the Company or others regarding
    the acquisition of technologies, products or companies;
|
| |  | regulatory changes and developments that affect
    the Companys business;                                 
|
| |  | developments or disputes concerning patent and
    proprietary rights and other legal matters;              
|
| |  | an adverse outcome from pending or any future
    legal matters;                                            
|
| |  | issuance of new or changed stock market analyst
    reports and/or recommendations; and                     
|
| |  | economic and other external factors.                                                                        

One or more of these factors could significantly
harm the Companys business and decrease the price of our
common stock in the public market. Severe price fluctuations in
a companys stock, including the Companys stock, have
frequently been followed by securities litigation. Litigation
can result in substantial costs and a diversion of
managements attention and resources and therefore could
have a material adverse effect on the Companys business,
financial condition and results of operations. Past financial
performance of the Company should not be considered a reliable
indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future
periods.



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | The Companys inability to secure
    additional funding could adversely effect its
    business.

We believe the Company has adequate cash and
access to cash to meet its anticipated working capital and
capital expenditure requirements. However, the Company may need
to raise additional funds through debt sources and/or the
issuance of equity securities in the future. If additional funds
are raised through the issuance of equity securities, the
percentage ownership of existing stockholders of the Company
will be reduced, stockholders may experience additional
dilution, and the new equity securities may have rights,
preferences or privileges senior to those of the holders of the
Companys common stock. Additional financing may not be
available when needed or on terms favorable to the Company, or
at all. If adequate funds are not available or are not available
on acceptable terms, it could have a material adverse effect on
the Companys business, financial condition and operating
results. The Company may be required to delay, scale back or
eliminate some or all of its development programs for its
products and may be unable to take advantage of future
opportunities or respond to competitive pressures.



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | The Company has a history of generating a
    large percentage of its revenue at the end of each quarterly
    accounting period.

Due to the way that many customers in the
Companys target markets allocate and spend their budgeted
funds for acquisition of the Companys products and other
products, a large percentage of the Companys business is
booked at the end of each quarterly accounting period. Because
of this, the Company may not be

11



---



##### 



able to reliably predict order volumes or prepare
orders for shipment on time. If the Company is unable to ship
its customer orders on time, there could be a material adverse
effect on the Companys results of operations.




| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | The Companys success depends on the
    performance of participants in the Companys distribution
    channels.

The Company currently sells its products through
OEMs, distributors and resellers. The Companys future
performance will depend in large part on sales of its products
through these distribution relationships, such as those with Net
One, NEC, AT&T and other key partners. Agreements with
distribution partners generally provide for discounts based on
the Companys list prices, and do not require minimum
purchases or restrict development or distribution of competitive
products. Therefore, entities that distribute the Companys
products may compete with the Company. In addition, OEMs,
distributors and resellers may not dedicate sufficient resources
or give sufficient priority to selling the Companys
products. The Company additionally depends on its distribution
relationships for most customer support, and expends significant
resources to train its OEMs, distributors and resellers to
support these customers. These entities can generally terminate
the distribution relationship upon 30 days notice. The loss
of a distribution relationship or a decline in the efforts of a
material distributor, or loss in business or cancellation of
orders from, significant changes in scheduled deliveries to, or
decreases in the prices of products sold to, any of these
distribution relationships could have a material adverse effect
on the Companys results of operations.



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company expects to rely on a limited
    number of large customer projects for its revenue in the future.
    Losing one or more of these customers may adversely affect the
    Companys future revenue.

The Company depends on a limited number of large
end-user projects for a majority of its revenue which has
resulted in, and may in the future result in, significant
fluctuations in quarterly revenue. The Company expects that
revenue from the sale of products to large resellers and
telecommunications service providers will continue to account
for a significant percentage of its revenue in any particular
quarter for the foreseeable future. Additionally, a significant
portion of the Companys sales of video conferencing
products has historically been to government agencies, such as
military and educational institutions, or to third parties using
the Companys products on behalf of government agencies.
Government customers are often subject to budgetary pressures
and may from time to time reduce their expenditures and/or
cancel orders. The loss of any major customer, or any reduction
or delay in orders by a customer, or the failure of the Company
or its distribution partners to market the Companys
products successfully to new customers could have a material
adverse effect on the Companys business, financial
condition and results of operations.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because sales of some of the Companys
    products require a lengthy sales effort and implementation
    cycle, revenue may be unpredictable, and the Companys
    business may be harmed.

Sales of some of the Companys products have
required and will continue to require an extended sales effort.
For some projects, the period from an initial sales call to an
end-user agreement can range from six to twelve months and can
be longer. Therefore, the timing of revenue booking and
recognition, as well as related cash flows, may be
unpredictable. A lengthy delay in booking orders, obtaining
payment and recognizing revenue could have a material adverse
effect on the Companys business, financial condition and
results of operations.



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rapid technological change and evolving
    industry standards and regulations may impair the Companys
    ability to develop and market its products and
    services.

Rapid technological change and evolving industry
standards characterize the market for the Companys
products and services. The Companys success depends, in
part, on its ability to maintain technological leadership and
enhance and expand its existing product and services offerings.
The Companys success also depends in part upon its ability
and the ability of its strategic partners to comply with
evolving industry standards. The Companys products must
meet a significant number of domestic and international video,
voice and data communications regulations and standards, some of
which are evolving as new technologies are deployed. The
Companys products are currently in compliance with
applicable regulatory requirements. However, as standards
evolve, the Company will be required to modify its products, or
develop and support

12



---



##### 



new versions of its products. In addition,
telecommunications service providers require that equipment
connected to their networks comply with their own environment
and standards, which may vary from industry standards.


The Companys ability to compete
successfully is also dependent upon the continued compatibility
and interoperability of its products with products and
architectures offered by other vendors. The Companys
business, financial condition and results of operations would be
materially adversely affected if it were unable in a timely
manner to comply with evolving industry standards or to address
compatibility issues. In addition, from time to time, the
Company may announce new products, capabilities or technologies
that have the potential to replace or shorten the life cycle of
the Companys existing product offerings. The announcement
of product enhancements or new product or service offerings
could cause customers to defer purchasing the Companys
products. In addition, the Company has experienced delays in the
introduction of new products in the past and may experience
additional delays in the introduction of products currently
under development or products developed in the future. The
failure of the Company to successfully introduce new products,
product enhancements or services on schedule or in time to meet
market opportunities, or customer delays in purchasing products
in anticipation of new product introductions or because of
changes in industry standards, could have a material adverse
effect on the Companys business, financial condition and
results of operations.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | The Company faces intense competition from
    other industry participants and may not be able to compete
    effectively.

The market for Web conferencing and networking
products and services is extremely competitive. Because the
barriers to entry in the market are relatively low and the
potential market is large, the Company expects continued growth
in existing competitors and the entrance of new competitors in
the future. Many of the Companys current and potential
competitors have significantly longer operating histories and
significantly greater managerial, financial, marketing,
technical and other competitive resources, as well as greater
name recognition, than that of the Company. As a result, these
companies may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements and may be
able to devote greater resources to the promotion and sale of
their competing products and services. As a result, the Company
may not be able to compete successfully with existing or new
competitors in the rich media Web conferencing and collaboration
solutions market. The Company believes that its ability to
compete successfully in this market depends on a number of
factors both within and outside its control, including:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | the timing of the introduction of new products,
    product upgrades and services by the Company and its competitors;
|
| |  | the pricing policies of the Companys
    competitors and suppliers;                                                 
|
| |  | the Companys ability to hire and retain
    highly qualified employees;                                             
|
| |  | continued investment in research and development;                                                                    
|
| |  | continued investment in sales and marketing; and                                                                     
|
| |  | the adoption and evolution of industry standards.                                                                    



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | The Companys business may be harmed if
    it is unable to protect its proprietary rights.

The Companys success and ability to compete
in the rich media Web conferencing and collaboration solutions
market depends, in part, upon its ability to protect its
proprietary technology. The Company may be unable to deter
misappropriation of its proprietary technology, detect
unauthorized use, and take appropriate steps to enforce its
intellectual property rights.

The Company does not rely on patent protection
for its products, and does not hold any patents, although it has
filed a patent application relating to the initiation and
support of video conferencing using instant messaging. This
patent application may not be approved, however, and even if
issued by the United States Patent and Trademark Office, it may
not give the Company an advantage over competitors. The
Companys adherence to industry-wide technical standards
and specifications may limit its opportunities to provide

13



---



##### 



proprietary product features. The Company
currently licenses certain technology from third parties and
plans to continue to do so in the future. The commercial success
of the Company will depend, in part, on its ability to continue
to obtain licenses to use third-party technology in its products.


The Company relies upon a combination of trade
secret, copyright and trademark laws and contractual
restrictions to establish and protect proprietary rights in its
technology. The Company also enters into confidentiality and
invention assignment agreements with its employees and enters
into non-disclosure agreements with its consultants, suppliers,
distributors and customers to limit access to and disclosure of
its proprietary information. However, these statutory and
contractual arrangements may not be sufficient to deter
misappropriation of the Companys proprietary technologies.
In addition, independent third parties may develop similar or
superior technologies to those of the Company. Furthermore, the
laws of some foreign countries do not provide the same degree of
protection of the Companys proprietary information as do
the laws of the United States.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Claims by third parties that the Company
    infringes their proprietary technology could prevent the Company
    from offering its products or otherwise materially harm the
    Companys business.

The commercial success of the Company also will
depend, in part, on the Company not breaching third-party
intellectual property rights. The Company licenses certain
third-party technology for use in its products, but is subject
to claims and the risk of litigation alleging infringement of
other third-party intellectual property rights. A number of
companies have developed technologies or received patents on
technologies that may be related to or be competitive with the
Companys technologies. The Company has not conducted a
patent search relating to the technology used in its products.
In addition, since patent applications in the United States are
not publicly disclosed until the patent issues, applications may
have been filed, which, if issued as patents, would relate to
the Companys products. The Companys lack of patents
may inhibit the Companys ability to negotiate or obtain
licenses from or oppose patents of third parties, if necessary.

The Company may incur substantial costs in
defending itself and its customers against intellectual property
litigation, including pending and potential future litigation,
regardless of the merits of such claims. The Company may also be
required by contract or by statutory implied warranties to
indemnify its distribution partners and end-users against
third-party infringement claims. Parties making infringement
claims against the Company may be able to obtain injunctive or
other equitable relief which could effectively block the
Companys ability to sell its products in the United States
and abroad, and could result in an award of substantial damages.
In the event of a successful claim of infringement against the
Company, the Company, its customers and end-users may be
required to obtain one or more licenses from third parties. The
Company, or its customers, may not be able to obtain necessary
licenses from third parties at a reasonable cost, or at all. The
defense of any lawsuit could result in time-consuming and
expensive litigation, damages, license fees, royalty payments
and restrictions on the Companys ability to sell its
products, any of which could have a material adverse effect on
the Companys business, financial condition, and results of
operations.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | The Companys reliance on third party
    manufacturers and suppliers could adversely affect the
    Companys business.

The Company currently outsources the
manufacturing of some of its products and purchases critical
components for some of its products from single suppliers. The
Company relies on several vendors to manufacture certain of its
products. If one or more of these manufacturers experiences
quality control or other problems, product shipments by the
Company may be delayed. The Company does not have long-term
agreements with suppliers, and its current suppliers are not
obligated to provide components to the Company for any specific
period, in any specific quantity or at any specific price,
except as may be provided in a particular purchase order.
Qualifying additional suppliers is a time consuming and
expensive process, and there is a greater likelihood of problems
arising during a transition period to a new supplier. If the
Company is required to find replacements for its manufacturers
or suppliers, this could result in short-term cost increases and
delays in delivery, which could have a material adverse effect
on the Companys business, financial condition and results
of operations. The Company may not be able to continue to
negotiate arrangements with its existing, or any future,
manufacturers or suppliers on terms favorable to the Company.

14



---



##### 





| |                                                                          
| | -------------------------------------------------------------------------
| | The Company faces additional risks from its
    international operations.

The Companys international business
involves a number of risks that could adversely affect its
operating results or contribute to fluctuations in those
results. The Companys revenue from international sales
represented 32%, 21% and 12%, respectively, of its total revenue
in the fiscal years ended December 31, 2002, 2001 and 2000,
respectively. The Company intends to seek opportunities to
expand its product and service offerings into additional
international markets, although the Company may not succeed in
developing localized versions of its products for new
international markets or in marketing or distributing products
and services in those markets.

The majority of the Companys international
sales are currently denominated in United States dollars.
However, it is possible that a significantly higher level of
future sales of the Companys products may be denominated
in foreign currencies. To the extent that the Companys
sales are denominated in currencies other than United States
dollars, fluctuations in exchange rates may result in foreign
exchange losses. The Company does not have experience in
implementing hedging techniques that might minimize the
Companys risks from exchange rate fluctuations.

The Companys international business also
involves a number of other difficulties and risks, including
risks associated with:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | changing economic conditions and political
    instability in foreign countries;                                             
|
| |  | export restrictions and export controls relating
    to the Companys technology;                                            
|
| |  | compliance with existing and changing regulatory
    requirements;                                                           
|
| |  | tariffs and other trade barriers;                                                                                            
|
| |  | difficulties in staffing and managing
    international operations;                                                          
|
| |  | longer payment cycles and problems in collecting
    accounts receivable;                                                    
|
| |  | software piracy;                                                                                                             
|
| |  | seasonal reductions in business activity in
    Europe and certain other parts of the world during the summer
    months; and
|
| |  | potentially adverse tax consequences.                                                                                        



| |                    
| | -------------------
| | Control by Insiders

As of March 28, 2003, the Companys
executive officers, directors and their affiliates beneficially
owned approximately 5.8 million shares, or approximately
13%, of the outstanding shares of the Companys common
stock, on an as-converted to common stock basis. As a result,
these persons may have the ability to effectively control the
Company and direct its affairs and business, including the
election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the
effect of delaying, deferring or preventing a change in control
of the Company, and making certain transactions more difficult
or impossible absent the support of these stockholders,
including proxy contests, mergers involving the Company, tender
offers, open-market purchase programs or other purchases of
common stock that could give stockholders of the Company the
opportunity to realize a premium over the then prevailing market
price for shares of common stock.

Item
2.     Properties

The Company is headquartered in Santa Clara,
California, where it leases approximately 48,000 square feet of
space that houses administrative, sales and marketing, customer
service, operations and product development activities. The
space is occupied pursuant to an operating lease that expires in
2009. On April 11, 2003, the Company signed an agreement
with its landlord to terminate its lease in its Santa Clara,
California headquarters facility and executed a new lease for
approximately 19,700 square feet of space in Redwood City,
California, which expires in 2013. The Company estimates the
annual occupancy cost of the new space will be

15



---



##### 



approximately $900,000 less than the cost of the
prior facility. The Company also leases approximately
27,225 square feet of space that houses product development
in Nashua, New Hampshire. The space is occupied pursuant to an
operating lease that expires in July of 2003. Additionally, the
Company has rental agreements for small sales offices in the
United States, Europe and Asia. Aggregate rental expense under
these facility leases for the year ended December 31, 2002
was approximately $1.7 million. The Company believes that
its existing facilities are adequate to meet current needs.


Item 3.     Legal
Proceedings

On or about April 9, 1999, several purported
class action suits were filed in the United States District
Court for the Northern District of California alleging
violations of the federal securities laws against the Company
and certain of its officers and directors in connection with the
Companys reporting of its financial results for the period
ended December 31, 1998. The court dismissed these actions
without leave to amend on February 14, 2000 and the
plaintiffs appealed the dismissal to the U.S. Court of Appeals
for the Ninth Circuit. The appeal was taken under submission by
the court of Appeals following the filing of briefs by the
parties and the presentation of oral argument on July 11,
2001. On March 15, 2002, the Court of Appeals affirmed the
district courts judgment. On March 28, 2002 the
plaintiffs filed a Petition for Rehearing in the Ninth Circuit.
On April 5, 2002, the Ninth Circuit denied the
plaintiffs Petition for a Rehearing. On December 12,
2002, the plaintiffs filed in the Ninth Circuit a Motion to
Recall the Mandate. On January 7, 2003, the Ninth Circuit
denied the motion.

On April 23, 2001, the Company received
notice of a stockholders derivative action filed in
California Superior Court in the County of Santa Clara, alleging
that, among other things, certain directors and officers of the
Company sold shares of the Companys common stock between
January 21, 1999 and April 6, 1999, while in
possession of material non-public information pertaining to the
Company. The Company and the individual defendants demurred to
the complaint, and moved to dismiss the action, or in the
alternative to stay the action pending the outcome of the appeal
in the related federal court class action or, if necessary, the
investigation of the claims by the Company. The court granted
the demurrer in part and denied it in part, granting plaintiff
leave to file an amended complaint, and stayed the action
pending the outcome of the appeal in the federal court class
action. The court also ordered that certain limited discovery of
documents could take place with respect to the filing of the
amended complaint. In December 2001, the plaintiff moved for
leave to take certain third-party discovery. The motion was
denied by the court. Plaintiff filed an amended complaint on
February 22, 2002. A hearing on the defendants
demurrer to the amended complaint was scheduled to take place on
May 21, 2002. The parties agreed to a continuance of the
hearing in order to permit them to engage in settlement
discussions with a third-party mediator. On July 25, 2002,
the parties reached a tentative settlement of the derivative
action, subject to a number of conditions, including approval of
the settlement by a special committee of independent directors
appointed by the Companys Board of Directors and empowered
to act on behalf of the Company with respect to the action.
Under the terms of the tentative settlement, the Company would
not pay any money to any party in connection with the
settlement, nor would it pay any money as indemnification to
present or former officers and directors in the event of a
settlement of the SEC enforcement action described in the
following paragraph. On December 19, 2002, the court
approved the settlement and dismissed the complaint with
prejudice.

On April 25, 2002, the Company was informed
by the staff of the SEC that the staff intends to recommend that
the SEC commence an enforcement action against the Company,
Ralph Ungermann and two former officers of the Company in
connection with the Companys January 1999 announcement of
unaudited financial results for the quarter and year ended
December 31, 1998, which were revised by the Company prior
to the release of the Companys Form 10-K in April
1999. The staff indicated that the basis for such an action
would be allegations that the January 1999 announcement was
misleading and/or the result of inadequate financial controls.
The staff did not state what remedies it would seek in such an
action, but noted that the remedies it might seek could include
an injunction against future violations, disgorgement, civil
penalties and an officer and director bar against the
individuals. The Company and each of the individuals
subsequently concluded separate settlements with the SEC. The
Company agreed that the SEC could file an administrative
proceeding against the Company, and that the Company would
settle the proceeding without admitting or

16



---



##### 



denying the allegations thereof. Pursuant to the
Companys agreement, on or about November 26, 2002,
the SEC commenced an administrative proceeding and entered
therein an order making findings and requiring the Company to
cease and desist from any violations of specified provisions of
the federal securities laws. The individuals agreed that the SEC
could file a civil injunctive action against them, and that they
would settle the action without admitting or denying the
allegations thereof. Pursuant to the individuals
agreements, on or about November 26, 2002, the SEC filed a
complaint in the United States District Court for the Northern
District of California entitled SEC v. Ralph K. Ungermann, et
al., Civil Action No. C 02 05613 RS, in
which the SEC alleged that the individuals had violated various
provisions of the federal securities laws, and, upon the consent
of each of the individuals, the court contemporaneously entered
final judgments that each of the individuals be permanently
enjoined from violations of certain provisions of the federal
securities laws and pay certain sums representing disgorgement,
penalties and pre-judgment interest. All such sums were
subsequently paid.


On May 1, 2002, the Company received notice
that Clover Technologies, Inc. (Clover) submitted a
claim to the American Arbitration Association initiating an
arbitration proceeding claiming that Clover is entitled to
compensation from the Company for allegedly defective video
access nodes (VANS) supplied by the Company to
Clover. The Company filed an answer to Clovers demand for
arbitration, denying all material allegations and claims, on
May 30, 2002. Since filing a demand for arbitration against
the Company, Clover has specified that its claim is for damages
totaling in excess of $2.7 million, based on claims that
certain of the VANS which Clover purchased for resale to its
customers were defective. The purchase arises out of a written
agreement between the Company and Clover, dated June  22,
1998. Clover seeks damages based on claims for alleged breach of
express and implied warranties, in the amount purportedly paid
for replacement products, plus unspecified incidental and
consequential damages. The Companys insurer has retained
counsel to defend the Company in this matter. The Company has
responded to the arbitration demand by denying all material
allegations, and it intends to vigorously defend itself. An
arbitration hearing before the American Arbitration Association
was scheduled for April 7, 2003 through April 14, 2003
in Santa Clara, California. Prior to that date, the parties held
a mediation session on April 16, 2003 and agreed to a
settlement of this matter.

On August 28, 2002, the Company was served
with a Complaint filed by Eric Hamilton (Hamilton)
in the United States District Court for the District of Maryland
alleging that in connection with the Companys use of its
CUseeME and Click-to-Meet products the Company infringes the
United States Patent No. 5,176,520 (the
520 Patent), issued on January 5, 1993 and
relating to Computer Assisted Instructional Delivery
System and Method, seeking unspecified damages for
infringement and willful infringement, in addition to seeking
injunctive relief. On November 1, 2002, the Company filed
its Answer to the Complaint in which it denied all material
allegations made against it. The Company also filed a
Counterclaim seeking a judicial declaration that (i) its
products do not infringe any valid claim of the
520 Patent and (ii) the 520 Patent is
invalid and unenforceable on the grounds of obviousness, lack of
enablement and failure to meet the written description
requirements under the patent laws. On or about January 5,
2003, the Company and Hamilton reached a tentative agreement on
material terms to settle the litigation. The Company agreed to
pay to Hamilton the total sum of $35,000 and dismiss its
counterclaim in exchange for a fully paid up, worldwide,
nonexclusive license to practice under the 520 patent
and a dismissal of Hamiltons claims. The parties exchanged
a mutual general release of all claims. The parties executed a
formal settlement agreement on January 28, 2003.

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

None.

17



---



##### 



PART II

Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

The Companys Common Stock is traded on The
Nasdaq SmallCap Market under the symbol FVCX. The
following table sets forth, for the periods indicated, the high
and low sale price per share of the Common Stock as reported on
the Nasdaq National Market through September 8, 2002 and on
The Nasdaq SmallCap Market commencing September 9, 2002.

|     |                |      |   |      |  |  |   |     | 
|---- | -------------- | ---- | - | ---- |  |  | - | --- | 
|     |                | High |   | Low 
|     |                |      |   |     
|2001 |                |      |   |      |  |  |   |    
|     | First Quarter  |      | $ | 2.41 |  |  | $ | .88 | 
|     | Second Quarter |      | $ | 1.55 |  |  | $ | .72 | 
|     | Third Quarter  |      | $ | 1.16 |  |  | $ | .70 | 
|     | Fourth Quarter |      | $ | 1.29 |  |  | $ | .59 | 
|2002 |                |      |   |      |  |  |   |    
|     | First Quarter  |      | $ | 1.43 |  |  | $ | .73 | 
|     | Second Quarter |      | $ | .83  |  |  | $ | .43 | 
|     | Third Quarter  |      | $ | .70  |  |  | $ | .33 | 
|     | Fourth Quarter |      | $ | .43  |  |  | $ | .25 | 

As of March 28, 2003, there were
approximately 399 holders of record of the Companys Common
Stock. On March 28, 2003, the last sale price reported on
The Nasdaq SmallCap Market for the Companys Common Stock
was $.33 per share.

The Company has never declared or paid any cash
dividends on its capital stock. The Company intends to retain
any future earnings to support operations and to finance the
growth and development of the Companys business and does
not anticipate paying cash dividends for the foreseeable future.

18



---



##### 





Item
6.     Selected Financial
Data


The following table presents summary selected
historical data of the Company as of and for each of the five
years in the period ended December 31, 2002.

|                                                  |                      |                                                 |          |       |   |      |         |       |   |      |         |       |   |   |         |       |   |   |         |       |  
|------------------------------------------------- | -------------------- | ----------------------------------------------- | -------- | ----- | - | ---- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                  |                      |                                                
|                                                  |                      | Year Ended December 31                         
|                                                  |                      |                                                
|                                                  |                      | 2002                                            |          | 2001  |   | 2000 |         | 1999  |   | 1998
|                                                  |                      |                                                 |          |       |   |      |         |       |   |     
|                                                  |                      |                                                
|                                                  |                      | (In thousands, except share and per share data)
|Statement of operations data                      |                      |                                                 |          |       |   |      |         |       |   |      |         |       |   |   |         |       |   |   |         |      
|Revenues                                          |                      | $                                               | 24,414   |       |   | $    | 27,661  |       |   | $    | 40,011  |       |   | $ | 45,700  |       |   | $ | 37,251  |      
|Total operating expenses(1)                       |                      |                                                 | 40,472   |       |   |      | 39,651  |       |   |      | 37,024  |       |   |   | 31,803  |       |   |   | 26,005  |      
|Operating loss                                    |                      |                                                 | (24,437  | )     |   |      | (32,540 | )     |   |      | (19,844 | )     |   |   | (14,954 | )     |   |   | (7,974  | )    
|Net loss                                          |                      | $                                               | (24,322  | )     |   | $    | (31,601 | )     |   | $    | (18,787 | )     |   | $ | (14,328 | )     |   | $ | (8,016  | )    
|Net loss per share:                               |                      |                                                 |          |       |   |      |         |       |   |      |         |       |   |   |         |       |   |   |         |      
|                                                  | Basic and diluted(2) |                                                 | $        | (0.64 | ) |      | $       | (1.26 | ) |      | $       | (1.09 | ) |   | $       | (0.87 | ) |   | $       | (0.69 | )
|Balance sheet data                                |                      |                                                 |          |       |   |      |         |       |   |      |         |       |   |   |         |       |   |   |         |      
|Cash, cash equivalents and short-term investments |                      | $                                               | 8,435    |       |   | $    | 9,384   |       |   | $    | 23,928  |       |   | $ | 8,821   |       |   | $ | 26,748  |      
|Working capital                                   |                      |                                                 | 735      |       |   |      | 8,363   |       |   |      | 31,729  |       |   |   | 21,878  |       |   |   | 32,939  |      
|Total assets                                      |                      |                                                 | 19,760   |       |   |      | 38,158  |       |   |      | 46,941  |       |   |   | 40,199  |       |   |   | 51,165  |      
|Total debt                                        |                      |                                                 |         |       |   |      | 36      |       |   |      | 119     |       |   |   | 228     |       |   |   | 1,665   |      
|Accumulated deficit                               |                      |                                                 | (111,588 | )     |   |      | (87,266 | )     |   |      | (55,665 | )     |   |   | (36,878 | )     |   |   | (22,550 | )    
|Total stockholders equity                        |                      | $                                               | 6,773    |       |   | $    | 26,357  |       |   | $    | 36,730  |       |   | $ | 27,812  |       |   | $ | 38,613  |      



---



|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating expenses included non-cash employee
    stock compensation charges of $26,000, $114,000, $267,000,
    $493,000, and $1.2 million, for the years ended
    December 31, 2002, 2001, 2000, 1999 and 1998, respectively.
|   
|(2) | See Note 1 to the consolidated financial
    statements for an explanation of the computation of net loss per
    share.                                                                                                        

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

The following discussion of the financial
condition and results of operations of the company should be
read in conjunction with the financial statements and the notes
thereto included in Item 8 of this Form 10-K. In
addition to the historical information contained in this item,
this item contains forward looking statements within the meaning
of Section 27(a) of the Securities Act and
Section 21(e) of the Exchange Act that involve risks and
uncertainties. These forward looking statements include, without
limitation, statements containing the words believe,
anticipates, expects, and words of
similar import. Such forward looking statements will have known
and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievement of the
Company, or industry results to be materially different from any
future results, performance or achievements expressed or implied
by such forward looking statements. Such factors include, among
others, the risk factors set forth above in Business/
Overview, Business/ Risk Factors, the risk
factors set forth in this item and elsewhere in this
Form 10-K. The Company assumes no obligation to update any
forward looking statements contained herein.

Overview

The Company delivers integrated, software
technologies for rich media Web conferencing and collaboration
solutions. The Company combines its expertise in networking
systems, real-time audio and video technology, and Web-based
collaboration to provide integrated voice, video, data, text and
streaming media solutions for a wide range of rich media
enterprise applications, including Web conferences, broadcasts,
video-

19



---



##### 



on-demand, videoconferences and video calls over
converged multi-service networks. The Company was incorporated
in California in October 1993 and reincorporated in Delaware in
December 1997. The Company first shipped its products in 1995.


On June 19, 2001, the Company and CUseeMe
Networks completed a merger, pursuant to which CUseeMe Networks
became a wholly owned subsidiary of the Company. CUseeMe
Networks provided innovative software-based solutions to enable
voice, video, and data collaboration over IP-based networks.
CUseeMe Networks specialized in delivering a solution that was
both centrally managed and centrally deployed, enabling
large-scale deployments of rich media collaboration to
enterprise desktops. As a result of the merger, the Company is
able to provide a broad range of integrated rich media Web
conferencing solutions that run seamlessly across multiple
network types to enterprise customers and service providers
worldwide.

In fiscal 2002, the Company recorded
$24.4 million in revenue, a decrease of 12% compared to the
previous year. The Company derived its revenue in 2002 from the
sale of video networking software, systems and services to
enterprise customers, which include business customers,
government agencies, educational institutions and healthcare
providers, primarily through indirect sales channels and to
telecommunications service providers.

The following table summarizes the percentage of
total revenue by enterprise customers and service providers:

|                     |  |                         |     |      |  |      |     |   |  |  |     |  
|-------------------- |  | ----------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                     |  |                        
|                     |  | Year Ended December 31,
|                     |  |                        
|                     |  | 2002                    |     | 2001 |  | 2000
|                     |  |                         |     |      |  |     
|Enterprise customers |  |                         | 80  | %    |  |      | 71  | % |  |  | 78  | %
|Service providers    |  |                         | 20  | %    |  |      | 29  | % |  |  | 22  | %
|                     |  |                         |     |      |  |      |     |   |  |  |     |  
|Total                |  |                         | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                     |  |                         |     |      |  |      |     |   |  |  |     |  

The Companys internal sales force qualifies
and stimulates end-user demand, and manages the Companys
strategic relationships with its distribution partners,
including OEMs, VARs and systems integrators. At
December 31, 2002 and 2001, CEWinc.com and AT&T
Corporation accounted for 20% and 15%, respectively, of total
accounts receivable.

The Company maintains sales offices in the United
Kingdom, France, Germany, Italy, China and Japan, and
distributes its products in both Europe and Asia through
resellers and distributors in more than 25 countries. For
the years ended December 31, 2002, 2001 and 2000,
approximately 32%, 21% and 12%, respectively, of the
Companys sales were generated from customers outside of
the United States. The Company expects that revenue from
shipments to customers outside of the United States will
continue to represent a significant portion of its future
revenue. In addition, the Company believes that a small portion
of its sales through OEMs, resellers and integrators are
ultimately sold to international end-users. Revenue from the
Companys international operations are subject to various
risks, including seasonality, longer payment cycles, changes in
regulatory requirements and tariffs, reduced protection of
intellectual property rights, political and economic restraints,
and currency risks, among others. To date, the Company has not
engaged in any foreign currency hedging activity.

Critical Accounting Policies and
Estimates

We have identified the policies below as critical
to our business operations and the understanding of our results
of operations. The impact and any associated risks related to
these policies on our business operations is discussed
throughout Managements Discussion and Analysis of
Financial Condition and Results of Operations where such
policies affect our reported and expected financial results. For
a detailed discussion of the application of these and other
accounting policies, see Note 1 in the Notes to the
Consolidated Financial Statements in Item 15 of this Annual
Report on Form 10-K, beginning on page F-6. Note that
our preparation of this Annual Report on Form 10-K requires
us to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our financial

20



---



##### 



statements, and the reported amounts of revenue
and expenses during the reporting period. There can be no
assurance that actual results will not differ from those
estimates.


Revenue recognition.We derive our revenue from primarily
three sources (i) sales of software licenses,
(ii) sales of hardware, and (iii) services and support
revenue which includes software license maintenance, training,
installation and consulting revenue. As described below,
significant management judgments and estimates must be made and
used in connection with the revenue recognized in any accounting
period. Material differences may result in the amount and timing
of our revenue for any period if our management made different
judgments or utilized different estimates.

The Company licenses its software products under
perpetual licenses. The Company sells its products and services
via its direct sales force, through domestic and foreign
distributors and via the Internet.

The Company applies the provisions of Statement
of Position 97-2, Software Revenue Recognition,
to all transactions involving the sale of software products and
hardware transactions where the software is not incidental. For
hardware transactions where software is incidental, the Company
applies the provisions of SEC Staff Accounting
Bulletin 101, Revenue Recognition.

Revenue from the license of the Companys
software products and sale of hardware products is recognized
when persuasive evidence of an arrangement exists, the product
has been delivered and title has transferred, the fee is fixed
or determinable, and collection of the resulting receivable is
reasonably assured, and, if applicable, upon acceptance when
acceptance criteria are specified or upon expiration of the
acceptance period. Maintenance and support revenue for providing
product updates and customer support is deferred and recognized
ratably over the service period. Training and consulting revenue
is recognized as services are performed and billable according
to the terms of the service arrangement.

For all sales, except those completed via the
Internet, the Company uses either a binding purchase order or
other signed agreement as evidence of an arrangement. For sales
over the Internet, the Company uses a credit card authorization
as evidence of an arrangement. Sales through distributors are
evidenced by a master agreement governing the relationship with
or without binding purchase orders on a transaction by
transaction basis.

Fees due under an arrangement are generally
deemed not to be fixed and determinable if a significant portion
of the fee is due beyond the Companys normal payment terms
which are 30 to 90 days from the date of invoice. In these
cases, revenue is not recognized until the fees become due. The
Company assesses collectibility based on a number of factors,
including past transaction history with the customer and the
credit-worthiness of the customer. The Company does not request
collateral from its customers. If the Company determines that
collection of a fee is not reasonably assured, the fee is
deferred and revenue recognized at the time collection becomes
reasonably assured, which is generally upon receipt of cash.

For arrangements with multiple obligations
(e.g., undelivered maintenance and support bundled with
perpetual licenses), the Company allocates revenue to delivered
elements of the arrangements using the residual value method
based on evidence of the fair value of the undelivered elements,
which is specific to the Company. The vendor specific objective
evidence of fair values for the ongoing maintenance and support
obligations are based upon the prices paid for the separate
renewal of these services by the customer or upon substantive
renewal rates stated in the contractual arrangements. Vendor
specific objective evidence of the fair value of other services,
primarily consulting and training services, is based upon
separate sales of these services.

Revenue from sales to certain of the
Companys resellers are subject to agreements allowing
rights of return and price protection. In such cases, the
Company provides reserves for estimated future returns and
credits for price protection upon revenue recognition. Such
reserves are estimated based on historical rates of return and
allowances, reseller inventory levels, the Companys
estimates of expected sell through by resellers and other
related factors. Actual results could differ from these
estimates. In the event of inability to estimate returns from
any reseller, the Company defers revenue recognition until the
reseller has sold through the products. Advance payments
received from customers and gross margin deferred with respect
to sales for which revenues have not been recorded are recorded
as deferred revenue.

21



---



##### 



A provision is made upon revenue recognition for
the estimated cost to repair or replace products under warranty
arrangements (see Note 10).

Sales returns and other allowances, allowance
for doubtful accounts and litigation.The preparation of financial
statements requires our management to make estimates and
assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expense during the period. Specifically, management must make
estimates of potential future product returns related to current
period product revenue. Management analyzes historical returns,
current economic trends, and changes in customer demand and
acceptance of our products when evaluating the adequacy of the
sales return and other allowances. Significant management
judgments and estimates must be made and used in connection with
establishing the sales return and other allowances in any
accounting period. Material differences may result in the amount
and timing of our revenue for any period if management made
different judgments or utilized different estimates. The
provision for sales returns and other allowances amounted to
$547,000 at December 31, 2002, compared to $869,000 at
December 31, 2001. Similarly, management must make
estimates of the uncollectability of our accounts receivable.
Management specifically analyzes accounts receivable, including
historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. As of December 31, 2002,
our accounts receivable balance was $4.1 million, net of
allowance for doubtful accounts of $1.0 million. At
December 31, 2001, our accounts receivable balance was
$6.4 million, net of allowance for doubtful accounts of
$1.6 million.

Managements current estimated range of the
liability related to pending litigation is based on claims for
which the amount and range of loss can be estimated. We have
recorded the minimum estimated liability related to those claims
where there is a range of loss. Because of the uncertainties
related to both the amount and range of loss on the remaining
pending litigation, management is unable to make a reasonable
estimate of the liability that could result from an unfavorable
outcome. As additional information becomes available, we will
assess the potential liability related to our pending litigation
and revise our estimates. Any revisions in our estimates of the
potential liability could materially impact our results of
operation and financial position.

Valuation of Inventories.The Company writes down its inventory
for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and
market conditions. If actual future demand or market conditions
are less favorable than those projected by management,
additional inventory write-downs may be required. During the
years ended December 31, 2002, 2001 and 2000, the Company
recorded inventory related charges of $1.4 million,
$7.3 million and $2.3 million respectively, to reduce
the value of inventories for certain excess and obsolete
products.

Valuation of long-lived and intangible assets
and goodwill.We assess the impairment
of identifiable intangibles, long-lived assets and goodwill
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider
important that could trigger an impairment review include the
following:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | significant underperformance relative to expected
    historical or projected future operating results;          
|
| |  | significant changes in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | significant negative industry or economic trends;                                                                
|
| |  | significant decline in our stock price for a
    sustained period; and                                           
|
| |  | our market capitalization relative to net book
    value.                                                        

When we determine that the carrying value of
intangibles and long-lived assets may not be recoverable based
upon the existence of one or more of the above indicators of
impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model. We determine that the carrying value of
goodwill may not be recoverable when the fair value of the
Company is less than the book value of the

22



---



##### 



Company. We measure any impairment by the excess
of the implied fair value of the Companys goodwill with
the carrying amount of the Companys goodwill. Net
intangible assets, long-lived assets, and goodwill amounted to
$6.2 million and $18.0 million as of December 31,
2002 and 2001, respectively. During the years ended
December 31, 2002 and 2001, the Company recorded
$9.9 million and $1.1 million, respectively, of
impairment losses related to goodwill and other intangible
assets.


On January 1, 2002, Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets became
effective and as a result, we reclassified workforce related
intangibles of $1.4 million to goodwill and ceased to
amortize approximately $6.9 million of goodwill and
$1.4 million related to the assembled workforce, in
connection with the CUseeMe acquisition. We recorded
approximately $1.6 million of amortization on intangible
assets related to acquired technology in connection with the
CuseeMe acquisition and licenses during 2002. We performed an
initial impairment review of our property and equipment,
goodwill and intangible assets in 2002 and an annual impairment
review. We recorded $6.6 million of impairment charges
related to goodwill during the year ended December 31, 2002
in connection with our annual impairment review, based on an
impairment analysis prepared by management using valuations
completed by an outside appraiser.

On January 1, 2002, the Company adopted
Statement of Financial Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 supercedes Statement
of Financial Accounting Standard No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS 121). SFAS 144
applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board
Opinion No. 30. SFAS 144 develops one accounting model
for long-lived assets that are to be disposed of by sale.
SFAS 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS 144
expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a
disposal transaction. The Company recorded $3.3 million of
impairment charges related to intangible assets in 2002, which
is included in the $9.9 million impairment charge noted
above.

Accounting for income taxes.As part of the process of preparing
our consolidated financial statements we are required to
estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual
current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we
believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of
operations.

Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We have recorded a
valuation allowance of $56.5 million as of
December 31, 2002, due to uncertainties related to our
ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating losses carried forward and
foreign tax credits, before they expire. The valuation allowance
is based on our estimates of taxable income by jurisdiction in
which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results
differ from these estimates or we adjust these estimates in
future periods, we may need to establish an additional valuation
allowance which could materially impact our financial position
and results of operations.

23



---



##### 



Results of Operations

The following table sets forth certain items from
the Companys Consolidated Statements of Operations as a
percentage of total revenue for the periods indicated. The data
set forth below should be read in conjunction with the
Companys Consolidated Financial Statements and Notes
thereto.

|                            |                                             |                          |        |      |       |      |        |      |       |   |       |      |      |  
|--------------------------- | ------------------------------------------- | ------------------------ | ------ | ---- | ----- | ---- | ------ | ---- | ----- | - | ----- | ---- | ---- | -
|                            |                                             |                         
|                            |                                             | Year Ended December 31, 
|                            |                                             |                         
|                            |                                             | 2002                     |        | 2001 |       | 2000
|                            |                                             |                          |        |      |       |     
|Revenues                    |                                             |                          | 100.0  | %    |       |      | 100.0  | %    |       |   | 100.0 | %   
|Cost of revenues            |                                             |                          | 34.3   | %    |       |      | 74.3   | %    |       |   | 57.1  | %   
|                            |                                             |                          |        |      |       |      |        |      |       |   |       |     
|                            | Gross profit                                |                          |        | 65.7 | %     |      |        | 25.7 | %     |   |       | 42.9 | %   
|                            |                                             |                          |        |      |       |      |        |      |       |   |       |     
|Operating expenses:         |                                             |                          |        |      |       |      |        |      |       |   |       |     
|                            | Research and development                    |                          |        | 40.7 | %     |      |        | 45.4 | %     |   |       | 31.3 | %   
|                            | Sales and marketing                         |                          |        | 39.3 | %     |      |        | 41.8 | %     |   |       | 31.3 | %   
|                            | General and administrative                  |                          |        | 45.2 | %     |      |        | 47.2 | %     |   |       | 29.9 | %   
|                            | Acquisition and other non-recurring charges |                          |        | 40.5 | %     |      |        | 8.9  | %     |   |       | 0.0  | %   
|                            |                                             |                          |        |      |       |      |        |      |       |   |       |     
|                            |                                             | Total operating expenses |        |      | 165.8 | %    |        |      | 143.3 | % |       |      | 92.5 | %
|                            |                                             |                          |        |      |       |      |        |      |       |   |       |     
|Operating loss              |                                             |                          | (100.1 | )%   |       |      | (117.6 | )%   |       |   | (49.6 | )%  
|Other income (expense), net |                                             |                          | 0.5    | %    |       |      | 3.4    | %    |       |   | 2.6   | %   
|                            |                                             |                          |        |      |       |      |        |      |       |   |       |     
|Net loss                    |                                             |                          | (99.6  | )%   |       |      | (114.2 | )%   |       |   | (47.0 | )%  
|                            |                                             |                          |        |      |       |      |        |      |       |   |       |     

Revenue.Revenue
decreased $3.2 million to $24.4 million in 2002, a
decline of 12% from $27.7 million in 2001 and 31% from
$40.0 million in 2000.

The following table summarized the total revenue
by software, products and support service (in thousands):

|              |                 |                         |        |       |  |      |        |        |  |   |        |        | 
|------------- | --------------- | ----------------------- | ------ | ----- |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|              |                 |                        
|              |                 | Year Ended December 31,
|              |                 |                        
|              |                 | 2002                    |        | 2001  |  | 2000
|              |                 |                         |        |       |  |     
|Software      |                 | $                       | 11,367 |       |  | $    | 4,192  |        |  | $ | 951    |       
|              | Product         |                         |        | 8,469 |  |      |        | 17,967 |  |   |        | 37,194 | 
|              | Support service |                         |        | 4,578 |  |      |        | 5,502  |  |   |        | 1,866  | 
|              |                 |                         |        |       |  |      |        |        |  |   |        |       
|Total revenue |                 | $                       | 24,414 |       |  | $    | 27,661 |        |  | $ | 40,011 |       
|              |                 |                         |        |       |  |      |        |        |  |   |        |       

Software revenue primarily consists of revenue
from the sale of the Click to Meet (CTM) family of
software products which include CTM Express, CTM Select, CTM
Premier and CTM Conference Server. Software revenue increased
$7.2 million to $11.3 million in 2002, an increase of
171% from $4.2 million in 2001. This increases reflected
the impact of new product introductions and the fact that 2002
was the first full calendar year following the merger with
CUseeMe in June 2001. Software revenue increased
$3.2 million to $4.2 million in 2001, an increase of
341% from $951,000 in 2000. The increase was primarily due to
our strong efforts to sell software and the beginning of our
transition from selling hardware-based products to
software-based products after the merger with CUseeMe.

Product revenue consists of revenue from the sale
of ATM legacy hardware products including hardware products
sourced from third parties and sold by the Company. Product
revenue decreased $9.5 million to $8.5 million, a
decrease of 53% from $18.0 million in 2001. Product revenue
decreased $19.2 million to $18.0 million, a decrease
of 52% from $37.2 million in 2000. The decreases in both
years were primarily a result of the lower demand and lower
average selling prices for hardware-based ATM legacy products.
Additionally, the Company provided only limited marketing and
promotional support to these products in 2002 and 2001. The
Company has not introduced any new or enhanced products in this
category during the past two years. The Company is not expecting
any significant revenue from sales of hardware products in 2003.

24



---



##### 



Support service revenue consists of software
license subscriptions, hardware maintenance, training,
installation and consulting revenue. Support service revenue
decreased 17% in 2002, compared to 2001, primarily due to a
decline in hardware maintenance revenue related to the decline
in Product revenue. Support service revenue increased 195% in
2001, compared to 2000. The increase was largely by our expanded
effort to sell services following the merger with CUseeMe.

Gross Profit.Gross
profit consists of revenue less the cost of revenue, which
includes the costs associated with the purchase of components
from outside manufacturers or the manufacture of the
Companys products by outside manufacturers and related
costs of freight, charges related to inventory obsolescence,
royalty, warranty and customer support costs, which were
expensed in the period incurred.

For the year ended December 31, 2002, gross
profit increased by $8.9 million to $16.0 million, or
66% of net revenue, compared to $7.1 million, or 26% of net
revenue in the year ended December 31, 2001. The increase
was primarily attributed to an increase in sales of
software-based products with an average gross margin of 90%, and
reduced charges for excess and obsolete inventory of
$5.9 million. For the year ended December 31, 2001,
gross profit decreased by $10.1 million to
$7.1 million, or 26% of revenue, compared to
$17.2 million, or 43% of revenue, in the previous year. The
decrease was primarily attributed to a decrease in revenue and
the effect of a $7.3 million charge associated with
inventory valuation adjustments for legacy products.

Research and development.Research and development expense
consisted primarily of personnel costs, cost of contractors and
outside consultants, supplies and material expenses, equipment
depreciation and overhead costs. Research and development
expenses decreased $2.6 million to $9.9 million in
2002, a reduction of 21% from the $12.6 million recorded in
2001. The reduction was comprised of a $1.6 million
decrease in personnel-related expenses, a $408,000 decrease in
professional service expense, a $225,000 decrease in travel and
entertainment expense, a $181,000 decrease in equipment and
maintenance expense, and a $186,000 decrease in other expenses.
These reductions occurred after the Company implemented cost
cutting measures throughout the organization. Research and
development expense increased slightly to $12.6 million in
2001, from the $12.5 million recorded in 2000. As a
percentage of total revenue, research and development expense
was 41% in 2002, compared to 45% in 2001 and 31% in 2000. The
decrease in research and development expense as a percentage of
revenue in 2002 compared to 2001 was due to a lower spending,
while the increase in research and development expense as a
percentage of revenue in 2001 compared to 2000 was due to
relatively lower sales in 2001 compared to fixed research and
development expense.

Sales and marketing.Sales and marketing expense includes
personnel and related overhead costs for sales and marketing,
costs of outside contractors, advertising, trade shows and other
marketing and promotional expenses. Sales and marketing expenses
decreased by $2.0 million to $9.6 million in 2002, a
decrease of 17% from $11.6 million in 2001. The decrease in
absolute dollars was principally due to a $1.0 million
reduction in trade show and marketing activities, a $184,000
decrease in expense associated with demonstration equipment and
supplies, a $130,000 decrease in personnel-related expenses, and
a $327,000 decrease in other expenses. These reductions occurred
after the Company implemented cost cutting measures throughout
the organization. Additionally, the Company recorded a $359,000
benefit from the recovery of a customer receivable which had
previously been deemed uncollectable. Sales and marketing
expense decreased 8% in 2001, to $11.6 million, from
$12.5 million in 2000. The decrease in 2001 over 2000 was
due to the reduction in advertising, tradeshow and other
marketing and promotional expenses in 2001.

As a percentage of total revenue, sales and
marketing expense was 39% in 2002, 42% in 2001 and 31% in 2000.
The decrease in sales and marketing expense as a percentage of
revenue in 2002 compared to 2001 was due to lower spending in
2002, while the increase in sales and marketing expense as a
percentage of revenue in 2001 compared to 2000 was due to the
decrease in revenue in 2001.

General and administrative.General and administrative expense
includes personnel and related overhead costs for finance, human
resources, information technology, product operations and
general management. General and administrative expenses
decreased by $2.0 million or 15% in 2002, to
$11.0 million, from $13.0 million in 2001. The
decrease was mainly due to a decrease of $942,000 in
personal-related expenses, a $257,000 decrease in equipment and
maintenance expense and a $206,000 decrease in other

25



---



##### 



expenses after the Company implemented cost
cutting measures throughout the organization. A further
reduction of $595,000 in amortization expense was realized after
the Company ceased to amortize goodwill. General and
administrative expense increased 9% in 2001, to
$13.0 million, from $12.0 million in 2000. The
increase was primarily due to $0.9 million of bad debt
expense. As a percentage of total revenue, general and
administrative expense was 45% in 2002, 47% in 2001 and 30% in
2000. The decrease in general and administrative expense as a
percentage of revenue in 2002 compared to 2001 was due to lower
spending in 2002, while the increase in general and
administrative expense as a percentage of revenue in 2001
compared to 2000 reflected the expense increases while revenue
deteriorated in 2001.


Acquisition and other non-recurring costs,
net.The $9.9 million of one time
charges in 2002 include a $6.6 million impairment charge
related to goodwill and a $3.3 million impairment charge
related to intangible assets associated with the acquisition of
CuSeeMe in 2001. The $2.5 million of one-time charges in
2001 included $276,000 of in-process research and development
costs as a result of the acquisition of CUseeMe Networks,
$1.1 million of impairment of goodwill associated with the
Companys 1998 acquisition of ICAST Corporation and
$1.1 million of costs associated with the reductions in
workforce during the year ended December 31, 2001.

Other income (expense), net.Other income (expense), net consists
primarily of interest expense relating to the Companys
credit facilities and long-term debt, offset in part by interest
income earned on short term investments and cash balances. Other
income, net totaled $115,000 in 2002, $665,000 in 2001,
$1.2 million in 2000. The decrease in other income, net in
2002 from 2001 and 2000 was primarily the result of lower
interest rates and a lower average cash balance in 2002 compared
to 2001 and 2000.

Minority Interest in Consolidated Subsidiary.Minority interest reflects the
interest of minority stockholders in the operating results of
the Companys consolidated subsidiary in the United
Kingdom. The Company acquired a controlling interest in this
entity in May 1999 and acquired the remaining 48% interest on
July 31, 2002 for $437,000. In 2001 and 2000, the amount
primarily reflects the portion of losses in this subsidiary that
were attributable to minority stockholders.

Income taxes.As of
December 31, 2002, the Company had net operating loss
carryforwards of approximately $139 million and
$31 million for federal and state tax purposes,
respectively, available to reduce future taxable income. These
carry-forwards, if not utilized to offset future taxable income,
will expire at various dates beginning in 2013. In addition,
under the Tax Reform Act of 1986, the amount of the benefit from
net operating losses that can be carried forward may be limited
in certain circumstances, including, but not limited to, a
cumulative stock ownership change of more than 50% over a three
year period, as defined. No benefit has been recorded for income
taxes for any of the periods presented as the Company believes
that, based on the history of such losses and other factors, the
weight of available evidence indicates that it will not be able
to realize the benefit of these net operating losses. Thus, a
full valuation reserve has been recorded. Please see Note 8
of notes to consolidated financial statements.

Liquidity and Capital Resources

Since inception, the Company has financed its
operations primarily through private and public placements of
equity securities, revenue from sales of the Companys
products and services and to a lesser extent through certain
credit facilities. As of December 31, 2002, the Company had
cash, cash equivalents and short-term investments of
$8.4 million and working capital of $735,000.

On April 12, 2002, the Company issued
6,686,000 shares of common stock at $0.72 per share and warrants
to purchase 3,343,000 shares of common stock at an exercise
price of $1.01 per share, for proceeds of approximately
$4.8 million. The warrants are exercisable for five years,
commencing October 11, 2002. The investors in the financing
included Special Situations Fund, including Special Situations
Technology Funds, L.P., of which Adam Stettner, a member of the
Companys Board of Directors, serves as Managing Director,
Mr. Ungermann and Dr. Gaut, each of whom are members
of the Companys Board of Directors, and other purchasers.

26



---



##### 



Since inception, the Company has experienced
significant net operating losses, including net losses in 2002
of $24.3 million with $4.9 million of cash used in
operating activities in 2002. In 2001, the Company incurred net
losses of $31.6 million and used $20.7 million of cash
in operating activities. Management currently expects that
operating losses and negative cash flows will continue in the
year 2003, albeit at lower levels than historically experienced.

In order to improve liquidity and reduce costs,
the Company took a number of actions in April 2003. The Company
reached agreement with Silicon Valley Bank for a $3 million
credit facility that may be used by the Company at any time
prior to December 31, 2003. The interest rate is equal to
the banks prime rate plus 2.25% with a floor at 6.5%. The
Company paid a $22,500 commitment fee at the closing and is
subject to a commitment fee of 0.25% per annum on any unused
borrowings, with this fee paid quarterly. The term loan is
secured by all of the Companys assets, including
intellectual property rights, and contains certain financial
covenants, including the maintenance of cash deposits at the
bank of not less than $2.9 million and a liquidity
covenant. The liquidity covenant requires that the sum of
(i) the amount of the Companys unrestricted cash on
deposit in the bank, plus (ii) the Companys eligible
accounts receivable, divided by (iii) the amount
outstanding under the loan agreement be at all times equal to
2.0 or higher. The liquidity covenant is only applicable if the
loan is drawn down. Funds drawn under the facility will be
recorded as a secured term loan, fully amortized and repaid over
a three-year period. The Company also entered into a private
equity line financing agreement with Ralph Ungermann, Executive
Chairman of the Companys Board of Directors, under which
the Company may require Mr. Ungermann to purchase up to
$1 million of our common stock at a purchase price of
$0.31 per share during the period from April 14, 2003
through April 13, 2004. The Company may draw down funds
under the private equity line financing agreement up to four
times during the 12 month term of the agreement, with each draw
for a minimum of $250,000.

In addition, in April 2003 the Company reached
agreement with its landlord to terminate its existing lease for
its California headquarters and execute a new lease that will
reduce annual rental expense by approximately $900,000 for each
of the next five years. Other actions were also taken in the
first quarter to reduce both personnel and facilities cost. In
the previous two years, the Company reduced its workforce, by 7%
and 26% in 2002 and 2001, respectively, and also instituted
measures to control discretionary spending.

Management believes that the Companys
existing cash and investments, together with the funds provided
pursuant to its credit facility with its bank and the financing
agreement with Ralph Ungermann are adequate to fund the
Companys operations through the first quarter of 2004.
However, the Companys cash requirements depend on several
factors, including the rate of market acceptance of its products
and services, the ability to expand and retain its customer base
and other factors. If the Company fails to achieve its planned
revenue or expense targets, management believes that it has the
plans, intent and ability to curtail capital and operating
spending to ensure that cash and investments will be sufficient
to meet the Companys cash requirements through
March 31, 2004.

During 2002, net cash and cash equivalents
increased by $1.4 million but decreased by $131,000 in 2001.

Cash used in operating activities totaled
$4.9 million in 2002, consisted primarily of
$24.3 million from a net loss and a decrease of
$2.1 million in accounts payable, partially offset by
non-cash charges totaling $14.7 million, an increase of
$3.7 million in deferred revenue, a decrease of
$2.1 million in accounts receivable, and a reduction of
$1.1 million in inventory. Cash used in operating
activities in 2001 totaled $20.7 million, reflecting a
$31.6 million net loss, an increase of $3.6 million in
inventory, a decrease of $1.9 million in accounts payable,
and a reduction of $3.2 million in accrued liabilities,
partially offset by non-cash charges of $13.6 million, a
decrease of $3.6 million in accounts receivable, an
increase of $1.8 million in deferred revenue and a
reduction of $639,000 in other current assets.

Cash provided in investment activities totaled
$1.3 million in 2002, primarily from sales of short-term
investments, totaling $2.3 million, offset by capital
expenditures of $566,000 and cash paid to acquire FVC.Com UK of
$437,000. Cash provided by investment activities in 2001 totaled
$19.5 million, primarily due to $14.4 million of net
sales of short-term investments and $6.6 million of cash
acquired in the acquisition of CUseeMe Networks, Inc., partially
offset by $1.4 million of cash used in the acquisition of
property and equipment. Capital expenditures were $566,000 in
2002 and $1.4 million each in 2000 and 2001. Capital

27



---



##### 



expenditures in all years consisted primarily of
purchases of computers and related equipment, furniture and
fixtures.


Cash provided by financing activities was
$5.0 million in 2002, primarily from the proceeds from the
sale of common stock through a private placement and the
issuance of common stock under the Companys stock option
plans and the Employee Stock Purchase Plan. Cash provided by
financing activities was $988,000 in 2001, primarily from
proceeds from the issuance of common stock.

The Companys future contractual obligations
and other commitments are as follows (in thousands):

|                                   |  |                        |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | --------- |  | ----- | ----- | ----- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |        | Less than |  | 1-3   |       | 4-5   |  | After 5
|Contractual Obligations            |  | Total                  |        | 1 year    |  | years |       | years |  | years  
|                                   |  |                        |        |           |  |       |       |       |  |        
|Operating Leases                   |  | $                      | 10,700 |           |  | $     | 1,649 |       |  | $       | 3,123 |  |  | $ | 3,302 |  |  | $ | 2,626 | 
|License Payable                    |  |                        | 338    |           |  |       | 150   |       |  |         | 188   |  |  |   |      |  |  |   |      | 
|                                   |  |                        |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 
|Total Contractual Cash Obligations |  | $                      | 11,038 |           |  | $     | 1,799 |       |  | $       | 3,311 |  |  | $ | 3,302 |  |  | $ | 2,626 | 
|                                   |  |                        |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 

As of December 31, 2002, we had recorded
accrued liabilities of $5.1 million, including
$1.6 million of personnel related expenses, $315,000 of
trade show and other marketing related expenses, $599,000 of
legal and professional related expenses, $428,000 of warranty
reserve, $277,000 of severance related to the departure of
certain former employees and $1.9 million of other
expenses. We also recorded $1.2 million of accounts
payable, as of December 31, 2002.

In order to aggressively pursue business
opportunities, the Company may be required to seek equity
investments from existing or potential strategic partners in the
future. Should the Company sell additional equity, the sale may
result in dilution to the Companys current stockholders.
Should the Company be unsuccessful in its efforts to raise
equity from strategic partners, it may seek additional capital
from the public and/or private equity markets that will likely
result in dilution of the Companys current stockholders.
There can be no assurance that any financing will be available
at acceptable terms or at all.



|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    about Market Risk

As of December 31, 2002, the Company held a
total of $8.4 million of cash, cash equivalents and
short-term investments. Of the $8.4 million, only $83,000
represents short-term investments. These securities, which
consist primarily of corporate medium term notes and other
corporate debt, are subject to interest rate risk and will
decline in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by ten
percent from levels as of December 31, 2002, the decline in
fair value of the portfolio would not be material.

The Company transacts substantially all of its
operations in United States dollars and therefore is not subject
to fluctuations in foreign exchange rates. Accordingly, the
Company currently does not use derivative financial instruments.
The Company has no fixed rate obligations. To the extent that
the Company utilizes its line of credit from the bank or other
sources, it will be exposed to short term interest rate risk.
However, as of March 28, 2003, the Company has no short
term debt and is not currently subject to an adverse material
impact from changes in interest rates.



|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The Companys Consolidated Financial
Statements and Notes thereto appear beginning at page F-1 of
this report.



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

There has been no change in or disagreement with
the Companys independent accountants during the three most
recent fiscal years.

28



---



##### 



PART III

Certain information required in Part III of
this Report is incorporated by reference to the Companys
proxy statement (the Proxy Statement) for the
Companys 2003 Annual Meeting of Stockholders. The Proxy
Statement will be filed with the SEC in accordance with
Regulation 14A under the Exchange Act no later than
April 30, 2003.



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

(a) Identification of Directors: The
information concerning the Companys directors and nominees
is incorporated by reference from the section entitled
Proposal I: Election of Directors in the Proxy
Statement.

(b) Identification of Executive Officers:
The information concerning the Companys Executive Officers
is incorporated by reference from the section entitled
Management in the Proxy Statement.

(c) Compliance with Section 16(a) of
the Exchange Act: The information required by this item is
incorporated by reference from the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference from the sections entitled
Executive Compensation in the Proxy Statement.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this item is
incorporated by reference from the section entitled
Security Ownership of Certain Beneficial Owners and
Management in the Proxy Statement.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is
incorporated by reference from the section entitled
Certain Relationships and Related Transactions in
the Proxy Statement.



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) An evaluation was performed under the
supervision and with the participation of the Companys
management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of the
Companys disclosure controls and procedures within
90 days before the filing date of this annual report. Based
on that evaluation, the Companys management, including the
CEO and CFO, concluded that the Companys disclosure
controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) promulgated under the Exchange Act) were effective.

(b) There have been no significant changes
in the Companys internal controls or in other factors that
could significantly affect internal controls subsequent to their
evaluation, nor were there any significant deficiencies or
material weaknesses in the Companys internal controls.

Limitations on the Effectiveness of Controls.The Companys management,
including the CEO and CFO, does not expect that its disclosure
controls will prevent all error or potential fraud. A control
system, no matter how well conceived and operated, can provide
only reasonable not absolute, assurance that the objectives of
the control system are met. Further, the design of a control
system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their cost. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons or by
collusion of two or more people. The design of any system of
controls also is based in part

29



---



##### 



upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance
with policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.


PART IV



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are filed as
part of this report.



|   |                     
|-- | --------------------
|1. | Financial Statements

(a) The consolidated financial statements
required by this item are submitted in a separate section
beginning on page F-1 of this report.

|                                                                                                                          |  |  |      | 
|------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|FINANCIAL STATEMENTS:                                                                                                     |  |  |      | 
|Report of Independent Accountants                                                                                         |  |  | F-1  | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                                             |  |  | F-2  | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2002               |  |  | F-3  | 
|Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    December 31, 2002 |  |  | F-4  | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002.              |  |  | F-5  | 
|Notes to Consolidated Financial Statements                                                                                |  |  | F-6  | 
|Quarterly Summary (unaudited)                                                                                             |  |  | F-30 | 



|   |                              
|-- | -----------------------------
|2. | Financial Statement Schedules

|                                                    |  |  |     | 
|--------------------------------------------------- |  |  | --- | 
|Report of Independent Accountants                   |  |  | S-1 | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | S-2 | 

Schedules other than the one listed above have
been omitted because the information required to be set forth
therein is not applicable or is included in the financial
statements or notes thereto, or the amounts are immaterial.

30



---



##### 





|   |         
|-- | --------
|3. | Exhibits

|        |    |                         |  |                                                                                                                                                                                              
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 2  | .1                      |  | Agreement and Plan of Merger and Reorganization,
    dated as of March 22, 2001, by and among First Virtual
    Communications, Inc., FVC Acquisition Corp. and CUseeMe
    Networks, Inc.(1)
|        | 3  | .1                      |  | Amended and Restated Certificate of Incorporation
    of the Company(2)                                                                                                                      
|        | 3  | .2                      |  | Certificate of Ownership and Merger, effective
    August 3, 1998(3)                                                                                                                         
|        | 3  | .3                      |  | Certificate of Designation of Series A
    Convertible Preferred Stock(5)                                                                                                                    
|        | 3  | .4                      |  | Amended Bylaws of the Registrant(2)                                                                                                                                                          
|        | 3  | .5                      |  | Certificate of Ownership and Merger, effective
    February 5, 2001(8)                                                                                                                       
|        | 3  | .6                      |  | Certificate of Amendment of Restated Certificate
    of Incorporation filed on June 19, 2001(8)                                                                                              
|        | 4  | .1                      |  | Specimen Common Stock Certificate(3)                                                                                                                                                         
|        | 4  | .2                      |  | Specimen Series A Convertible Preferred
    Stock Certificate(5)                                                                                                                             
|        | 4  | .3                      |  | Warrant to purchase 2,614,377 shares of the
    Companys Common Stock, dated May 7, 2001, issued by
    the Company to PictureTel Corporation(9)                                            
|        | 4  | .4                      |  | Warrant to purchase 850,000 shares, subject to
    adjustment, of the Companys Common Stock, dated
    June 8, 2000 issued by the Company to Vulcan Ventures
    Incorporated(5)            
|        | 4  | .5                      |  | Warrant to purchase 18,750 shares of the
    Companys Common Stock, dated April 30, 1997 issued by
    the Company to Silicon Valley Bank(1)                                                
|        | 4  | .6                      |  | Warrant to purchase the Companys Common
    Stock, dated April 12, 2002, issued by the Company to the
    purchasers and in the amounts as set forth on Schedule A
    attached thereto(12) 
|        | 4  | .7                      |  | Registration Rights Agreement, dated
    April 12, 2002, by and among the Company and each of the
    purchasers listed therein(12)                                                          
|        | 10 | .1*                     |  | 1997 Equity Incentive Plan(6)                                                                                                                                                                
|        | 10 | .4*                     |  | 1997 Employee Stock Purchase Plan(2)                                                                                                                                                         
|        | 10 | .5*                     |  | Form of 1997 Employee Stock Purchase Plan
    Offering(2)                                                                                                                                    
|        | 10 | .6*                     |  | 1997 Non-Employee Directors Stock Option
    Plan(6)                                                                                                                                        
|        | 10 | .8*                     |  | Executive Officers Change of Control Plan(4)                                                                                                                                                
|        | 10 | .9*                     |  | Non-Employee Directors Change of Control
    Plan(4)                                                                                                                                        
|        | 10 | .10*                    |  | 1999 Equity Incentive Plan(6)                                                                                                                                                                
|        | 10 | .12*                    |  | Form of Indemnification Agreement between the
    Registrant and its directors and executive officers(2)                                                                                     
|        | 10 | .14                     |  | Lease Agreement between the Company and John
    Arrillaga, or his successor Trustee, UTA 7/20/77, dated July 19,
    1995 (the Lease Agreement)(2)                                        
|        | 10 | .15                     |  | Amendment No. 1 to the Lease Agreement,
    dated November 7, 1997(2)                                                                                                                        
|        | 10 | .16                     |  | Amendment No. 4 to the Lease Agreement,
    dated February 4, 1999(4)                                                                                                                        
|        | 10 | .17                     |  | Master Lease Agreement between the Company and
    Comdisco, Inc. (Comdisco), dated April 30,
    1997(2)                                                                                  
|        | 10 | .18                     |  | Subordinated Loan and Security Agreement between
    the Company and Comdisco, dated April 30, 1997(2)                                                                                       
|        | 10 | .19                     |  | Development and License Agreement between the
    Company and Advanced Telecommunications Modules Limited, dated
    February 25, 1994, as amended(2)                                        
|        | 10 | .20                     |  | Technology Licensing Agreement between IBM
    Corporation and the Company, dated October 16, 1997(2)                                                                                        
|        | 10 | .22                     |  | Subordinated Loan and Security Agreement between
    the Company and Comdisco, dated October 23, 1997(2)                                                                                     
|        | 10 | .23                     |  | Lease Agreement between the Company and John
    Arrillaga, or his successor Trustee, UTA 7/20/77, dated
    November 7, 1997(2)                                                             

31



---



##### 



|        |    |                         |  |                                                                                                                                                                                   
|------- | -- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 10 | .24                     |  | Letter Agreement between IBM Corporation and the
    Company, dated February 8, 1998(2)                                                                                           
|        | 10 | .27                     |  | Stock Purchase Agreement, dated June 8,
    2000, between the Company and Vulcan Ventures Incorporated(5)                                                                         
|        | 10 | .28                     |  | Registration Rights Agreement, dated June 8,
    2000, between the Company and Vulcan Ventures Incorporated(5)                                                                    
|        | 10 | .30*                    |  | Employment and Non-Competition Agreement, dated
    March 22, 2001, between the Company and Killko Caballero(10)                                                                  
|        | 10 | .31*                    |  | Offer Letter, dated January 7, 2002, between
    the Company and Timothy Rogers(11)                                                                                               
|        | 10 | .32*                    |  | Letter Agreement, dated January 7, 2002,
    between the Company and Randy Acres(11)                                                                                              
|        | 10 | .33*                    |  | Letter Agreement, dated January 7, 2002,
    between the Company and Raymond Cavanaugh(11)                                                                                        
|        | 10 | .34*                    |  | Release and Waiver, dated March 12, 2002,
    between the Company and James Griffin(11)                                                                                           
|        | 10 | .35*                    |  | Letter Agreement, dated March 20, 2002,
    between the Company and Robert Scott(11)                                                                                              
|        | 10 | .36                     |  | Purchase Agreement, dated as of March 29,
    2002, by and among the Company and each of the purchasers listed
    therein(12)                                                    
|        | 10 | .37*                    |  | Amended and Restated Promissory Note and restated
    Security Agreement executed on May 14, 2002 by Killko
    Caballero in favor of the Company(11)                             
|        | 10 | .38**                   |  | First Virtual Communications Partner Agreement,
    dated April 1, 2002, between Net One Systems and the
    Company(13)                                                          
|        | 10 | .39*                    |  | Retention Agreement, dated October 3, 2002,
    between the Company and Ralph Ungermann                                                                                           
|        | 10 | .40*                    |  | Settlement and Release Agreement, dated
    October 29, 2002, between the Company and Killko Caballero                                                                            
|        | 10 | .41*                    |  | Settlement and Release Agreement, dated
    December 12, 2002 between the Company and Timothy Rogers                                                                              
|        | 10 | .42*                    |  | Offer Letter, dated October 29, 2002,
    between the Company and Jonathan Morgan                                                                                                 
|        | 10 | .43*                    |  | Offer Letter, dated December 12, 2002
    between the Company and Frank Kaplan                                                                                                    
|        | 10 | .44*                    |  | Offer Letter, dated December 12, 2002
    between the Company and Truman Cole                                                                                                     
|        | 10 | .45*                    |  | Settlement and Release Agreement, dated
    January 10, 2003, between the Company and Jeffery Krampf                                                                              
|        | 23 | .1                      |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                             
|        | 24 | .1                      |  | Power of Attorney (included on signature page)                                                                                                                                    
|        | 99 | .1                      |  | Certification, dated April 15, 2003,
    required by Section 906 of the Public Company Accounting
    Reform and Investor Protection Act of 2002 (18 U.S.C.
    §1350, as adopted)



---

Notes to Exhibits



|    |  |                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Management contract or compensatory plan or
    arrangement.                                                                                                                                  
|   
|**  |  | Confidential Treatment has been granted with
    respect to certain portions of this Exhibit. Omitted portions
    have been filed separately with the Securities and Exchange
    Commission.
|   
|(1) |  | Filed as an exhibit to the Companys Current
    Report on Form 8-K dated April 4, 2001 (File
    No. 000-23305).                                                                             
|   
|(2) |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-1, as amended (File
    No. 333-38755).                                                                             
|   
|(3) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on June 10, 1998
    (File No. 000-23305).                                                                       
|   
|(4) |  | Filed as an exhibit to the Companys Annual
    Report on Form 10-K filed on April 15, 1999 (File
    No. 333-72533).                                                                         
|   
|(5) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 14, 2000
    (File No. 000-23305).                                                                     

32



---



##### 





|     |  |                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------
|(6)  |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-8 filed on July 17,
    2000 (File No. 333-4159).      
|    
|(7)  |  | Filed as an exhibit to the Companys Annual
    Report on Form 10-K filed on March 30, 2000 (File
    No. 333-72533).            
|    
|(8)  |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 15, 2001
    (File No. 000-23305).        
|    
|(9)  |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on November 14,
    2001 (File No. 000- 23305).     
|    
|(10) |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-4 (File
    No. 333-59480), as filed on April 25, 2001.
|    
|(11) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on May 15, 2002.                                    
|    
|(12) |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-3 (File
    No. 333-88058), as filed on May 10, 2002.  
|    
|(13) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 14, 2002.                                 

(b) Reports on Form 8-K.

No reports on Form 8-K were filed in the fourth
quarter of 2002.

33



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 15th day of April 2003.



| |                                    
| | -----------------------------------
| | FIRST VIRTUAL COMMUNICATIONS, INC.,



| |     |                    
| | --- | -------------------
| | By: | /s/ JONATHAN MORGAN

| |                                          
| | -----------------------------------------
| |                                          
| | Jonathan Morgan                          
| | President and Chief Executive
    Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Jonathan Morgan and Truman Cole, his attorneys-in-fact and
agents, with full power of substitution and resubstitution, for
him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission granting unto such attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming that all such attorneys-in-fact and agents, or any of
them or their or his substitute or substituted, may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                   |  |                                                                                             |  |                |  | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                   |  |                                                                                             |  |               
|Signature                          |  | Title                                                                                       |  | Date          
|                                   |  |                                                                                             |  |               
|                                  
|/s/ JONATHAN MORGANJonathan Morgan |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)           |  | April 15, 2003
|                                  
|                                  
|/s/ RALPH UNGERMANNRalph Ungermann |  | Executive Chairman of the
    Board of Directors,                                           |  | April 15, 2003
|                                  
|                                  
|/s/ TRUMAN COLETruman Cole         |  | Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | April 15, 2003
|                                  
|                                  
|/s/ NORMAN GAUTNorman Gaut         |  | Director                                                                                    |  | April 15, 2003
|                                  
|                                  
|/s/ EDWARD HARRISEdward Harris     |  | Director                                                                                    |  | April 15, 2003
|                                  
|                                  
|/s/ ADAM STETTNERAdam Stettner     |  | Director                                                                                    |  | April 15, 2003

34



---



##### 



CERTIFICATIONS

I, Jonathan Morgan, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of First Virtual
    Communications, Inc.;                                                                                                                                                                                                                                                  
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



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

Dated: April 15, 2003



| |                        
| | -----------------------
| | /s/ JONATHAN MORGAN    
| |                        
| | Jonathan Morgan        
| | Chief Executive Officer

35



---



##### 



I, Truman Cole, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of First Virtual
    Communications, Inc.;                                                                                                                                                                                                                                                  
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



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

Dated: April 15, 2003



| |                        
| | -----------------------
| | /s/ TRUMAN COLE        
| |                        
| | Truman Cole            
| | Chief Financial Officer

36



---



##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of First Virtual Communications, Inc.


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) on page 30, present fairly, in all
material respects, the financial position of First Virtual
Communications, Inc., and its subsidiaries at December 31,
2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 1 to the consolidated
financial statements, effective January 1, 2002, the
Company changed its method of accounting for goodwill and other
intangible assets in accordance with the guidance provided in
Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets.

PricewaterhouseCoopers LLP

San Jose, California

February 5, 2003,

except for Note 14, which is


as of April 14, 2003.


F-1



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |         |        | 
|-------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ------ | - | ------ | ------- | ------ | 
|                                                   |                                                                                                                                                       | December 31,               |        | December 31,
|                                                   |                                                                                                                                                       | 2002                       |        | 2001        
|                                                   |                                                                                                                                                       |                            |        |             
|                                                   |                                                                                                                                                       |                           
|                                                   |                                                                                                                                                       | (In thousands,            
|                                                   |                                                                                                                                                       | except share data)        
|ASSETS                                            
|Current assets:                                    |                                                                                                                                                       |                            |        |              |        |   |        |        
|                                                   | Cash and cash equivalents                                                                                                                             |                            | $      | 8,352        |        |   | $      | 6,946   |       
|                                                   | Short-term investments                                                                                                                                |                            |        | 83           |        |   |        | 2,438   |       
|                                                   | Accounts receivable, net of allowances of $1,018
    and $1,641                                                                                       |                            |        | 4,080        |        |   |        | 6,365   |       
|                                                   | Inventory                                                                                                                                             |                            |        | 613          |        |   |        | 3,188   |       
|                                                   | Prepaids and other current assets                                                                                                                     |                            |        | 406          |        |   |        | 1,227   |       
|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |        
|                                                   |                                                                                                                                                       | Total current assets       |        |              | 13,534 |   |        |         | 20,164 | 
|Property and equipment, net                        |                                                                                                                                                       |                            | 2,197  |              |        |   | 3,183  |        
|Other assets                                       |                                                                                                                                                       |                            | 293    |              |        |   | 322    |        
|Intangible assets, net                             |                                                                                                                                                       |                            | 3,736  |              |        |   | 14,489 |        
|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |        
|Total Assets                                       |                                                                                                                                                       | $                          | 19,760 |              |        | $ | 38,158 |        
|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY          
|Current liabilities:                               |                                                                                                                                                       |                            |        |              |        |   |        |        
|                                                   | Current portion of long-term debt                                                                                                                     |                            | $      |             |        |   | $      | 36      |       
|                                                   | Accounts payable                                                                                                                                      |                            |        | 1,192        |        |   |        | 3,268   |       
|                                                   | Accrued liabilities                                                                                                                                   |                            |        | 5,139        |        |   |        | 5,561   |       
|                                                   | Deferred revenue                                                                                                                                      |                            |        | 6,656        |        |   |        | 2,936   |       
|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |        
|                                                   |                                                                                                                                                       | Total current liabilities  |        |              | 12,987 |   |        |         | 11,801 | 
|Commitments and contingencies (See Notes 9 and 13) |                                                                                                                                                       |                            |        |              |        |   |        |        
|Minority interest in consolidated subsidiaries     |                                                                                                                                                       |                            |       |              |        |   |       |        
|Stockholders equity:                              |                                                                                                                                                       |                            |        |              |        |   |        |        
|                                                   | Convertible preferred stock, $.001 par value;
    5,000,000 shares authorized; 27,437 shares issued and
    outstanding at December 31, 2002 and 2001 |                            |        |             |        |   |        |        |       
|                                                   | Common stock, $.001 par value;
    100,000,000 shares authorized; 40,388,456 and
    33,327,995 shares issued and outstanding, respectively           |                            |        | 40           |        |   |        | 33      |       
|                                                   | Additional paid-in capital                                                                                                                            |                            |        | 118,531      |        |   |        | 113,437 |       
|                                                   | Accumulated other comprehensive (loss) income                                                                                                         |                            |        | (210         | )      |   |        | 153     |       
|                                                   | Accumulated deficit                                                                                                                                   |                            |        | (111,588     | )      |   |        | (87,266 | )     
|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |        
|                                                   |                                                                                                                                                       | Total stockholders equity |        |              | 6,773  |   |        |         | 26,357 | 
|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |        
|                                                   |                                                                                                                                                       | $                          | 19,760 |              |        | $ | 38,158 |        
|                                                   |                                                                                                                                                       |                            |        |              |        |   |        |        

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

F-2



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |        |        | 
|--------------------------------------------------------------- | ------------------------------------------- | --------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                |                                             |                                  
|                                                                |                                             | Year Ended December 31,          
|                                                                |                                             |                                  
|                                                                |                                             | 2002                              |         | 2001   |        | 2000
|                                                                |                                             |                                   |         |        |        |     
|                                                                |                                             |                                  
|                                                                |                                             | (In thousands, except share data)
|Revenue:                                                        |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|                                                                | Software                                    |                                   | $       | 11,367 |        |      | $       | 4,192  |        |   | $       | 951    |       
|                                                                | Product                                     |                                   |         | 8,469  |        |      |         | 17,967 |        |   |         | 37,194 |       
|                                                                | Support service                             |                                   |         | 4,578  |        |      |         | 5,502  |        |   |         | 1,866  |       
|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|                                                                |                                             | Total revenue                     |         |        | 24,414 |      |         |        | 27,661 |   |         |        | 40,011 | 
|Cost of revenues                                                |                                             |                                   | 8,379   |        |        |      | 20,550  |        |        |   | 22,831  |       
|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|                                                                | Gross profit                                |                                   |         | 16,035 |        |      |         | 7,111  |        |   |         | 17,180 |       
|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|Operating expenses:                                             |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|                                                                | Research and development                    |                                   |         | 9,945  |        |      |         | 12,573 |        |   |         | 12,517 |       
|                                                                | Sales and marketing                         |                                   |         | 9,588  |        |      |         | 11,565 |        |   |         | 12,533 |       
|                                                                | General and administrative                  |                                   |         | 11,045 |        |      |         | 13,045 |        |   |         | 11,974 |       
|                                                                | Acquisition and other non-recurring charges |                                   |         | 9,894  |        |      |         | 2,468  |        |   |         |       |       
|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|                                                                |                                             | Total operating expenses          |         |        | 40,472 |      |         |        | 39,651 |   |         |        | 37,024 | 
|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|Operating loss                                                  |                                             |                                   | (24,437 | )      |        |      | (32,540 | )      |        |   | (19,844 | )     
|Other income (expense), net                                     |                                             |                                   | 115     |        |        |      | 665     |        |        |   | 1,187   |       
|Minority interest in consolidated subsidiaries                  |                                             |                                   |        |        |        |      | 274     |        |        |   | (130    | )     
|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|Net loss                                                        |                                             | $                                 | (24,322 | )      |        | $    | (31,601 | )      |        | $ | (18,787 | )     
|                                                                |                                             |                                   |         |        |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share                            |                                             | $                                 | (0.64   | )      |        | $    | (1.26   | )      |        | $ | (1.09   | )     
|Shares used to compute basic and diluted net loss
    per share |                                             |                                   | 38,153  |        |        |      | 25,156  |        |        |   | 17,205  |       

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

F-3



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                       |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        |         |   |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | ------------ |  | ---------- | - | ---------- |  | ------------- | ---------- | ------------ |  | ------------- | -- | ------- |  | ------ | ------- | - |  | - | ---- | - |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                                       |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |        
|                                                                                       |  | Convertible                       |        |              |  |            |   | Notes      |  | Accumulated   |            |              |  |              
|                                                                                       |  | Preferred Stock                   |        | Common Stock |  | Additional |   | Receivable |  | Other         |            |              |  | Total        
|                                                                                       |  |                                   |        |              |  | Paid-in    |   | from       |  | Comprehensive |            | Accumulated  |  | Stockholders
|                                                                                       |  | Shares                            |        | Amount       |  | Shares     |   | Amount     |  | Capital       |            | Stockholders |  | Income        |    | Deficit |  | Equity
|                                                                                       |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |       
|                                                                                       |  |                                  
|                                                                                       |  | (In thousands, except share data)
|Balance at December 31, 1999                                                           |  |                                   |       |              |  |            |  |            |  |               | 16,832,522 |              |  | $             | 17 |         |  | $      | 65,015  |   |  | $ | (321 | ) |  | $ | (21  | ) |  | $ | (36,878  | ) |  | $ | 27,812  |  
|Issuance of Series A Preferred Stock                                                   |  |                                   | 27,437 |              |  |            |  |            |  |               |           |              |  |               |   |         |  |        | 24,282  |   |  |   |      |   |  |   |      |   |  |   |          |   |  |   | 24,282  |  
|Issuance of common stock under stock option plans
    and related benefits             |  |                                   |       |              |  |            |  |            |  |               | 564,143    |              |  |               |   |         |  |        | 2,952   |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 2,952   |  
|Issuance (repurchase) of common stock, net                                             |  |                                   |       |              |  |            |   |            |  |               | (62,476    | )            |  |               |   |         |  |        | (145    | ) |  |   | 118  |   |  |   |     |   |  |   |         |   |  |   | (27     | )
|Repayment of notes by stockholders                                                     |  |                                   |        |              |  |            |   |            |  |               |           |              |  |               |   |         |  |        | (203    | ) |  |   | 203  |   |  |   |      |   |  |   |          |   |  |   |        |  
|Stock compensation charges                                                             |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        | 267     |   |  |   |      |   |  |   |      |   |  |   |          |   |  |   | 267     |  
|Cumulative translation adjustment                                                      |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        |         |   |  |   |      |   |  |   | 231  |   |  |   |          |   |  |   | 231     |  
|Net loss                                                                               |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        |         |   |  |   |      |   |  |   |      |   |  |   | (18,787  | ) |  |   | (18,787 | )
|                                                                                       |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        |         |   |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2000                                                           |  |                                   | 27,437 |              |  |            |  |            |  |               | 17,334,189 |              |  |               | 17 |         |  |        | 92,168  |   |  |   |     |   |  |   | 210  |   |  |   | (55,665  | ) |  |   | 36,730  |  
|Common shares issued in conjunction with the
    acquisition of CUseeMe Networks, Inc. |  |                                   |       |              |  |            |  |            |  |               | 15,599,390 |              |  |               | 16 |         |  |        | 20,175  |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 20,191  |  
|Issuance of common stock under stock purchase
    plans                                |  |                                   |       |              |  |            |  |            |  |               | 386,696    |              |  |               |   |         |  |        | 1,024   |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 1,024   |  
|Exercise of common stock options                                                       |  |                                   |       |              |  |            |  |            |  |               | 7,720      |              |  |               |   |         |  |        | 47      |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 47      |  
|Charges for stock compensation                                                         |  |                                   |       |              |  |            |  |            |  |               |           |              |  |               |   |         |  |        | 23      |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 23      |  
|Accumulated other income (loss)                                                        |  |                                   |       |              |  |            |  |            |  |               |           |              |  |               |   |         |  |        |        |   |  |   |     |   |  |   | (57  | ) |  |   |         |   |  |   | (57     | )
|Net loss                                                                               |  |                                   |       |              |  |            |  |            |  |               |           |              |  |               |   |         |  |        |        |   |  |   |     |   |  |   |     |   |  |   | (31,601  | ) |  |   | (31,601 | )
|                                                                                       |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        |         |   |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2001                                                           |  |                                   | 27,437 |              |  |            |  |            |  |               | 33,327,995 |              |  |               | 33 |         |  |        | 113,437 |   |  |   |     |   |  |   | 153  |   |  |   | (87,266  | ) |  |   | 26,357  |  
|Issuance of common stock under private placement                                       |  |                                   |       |              |  |            |  |            |  |               | 6,686,000  |              |  |               | 7  |         |  |        | 4,923   |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 4,930   |  
|Issuance of common stock under stock purchase
    plans                                |  |                                   |       |              |  |            |  |            |  |               | 367,415    |              |  |               |   |         |  |        | 137     |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 137     |  
|Exercise of common stock options                                                       |  |                                   |       |              |  |            |  |            |  |               | 7,046      |              |  |               |   |         |  |        | 8       |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 8       |  
|Charges for stock compensation                                                         |  |                                   |       |              |  |            |  |            |  |               |           |              |  |               |   |         |  |        | 26      |   |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 26      |  
|Accumulated other income (loss)                                                        |  |                                   |       |              |  |            |  |            |  |               |           |              |  |               |   |         |  |        |        |   |  |   |     |   |  |   | (363 | ) |  |   |         |   |  |   | (363    | )
|Net loss                                                                               |  |                                   |       |              |  |            |  |            |  |               |           |              |  |               |   |         |  |        |        |   |  |   |     |   |  |   |     |   |  |   | (24,322  | ) |  |   | (24,322 | )
|                                                                                       |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        |         |   |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2002                                                           |  |                                   | 27,437 |              |  |            |  |            |  |               | 40,388,456 |              |  | $             | 40 |         |  | $      | 118,531 |   |  | $ |     |   |  | $ | (210 | ) |  | $ | (111,588 | ) |  | $ | 6,773   |  
|                                                                                       |  |                                   |        |              |  |            |   |            |  |               |            |              |  |               |    |         |  |        |         |   |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |  

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

F-4



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |         |       |        |         |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                         |                                                                                                    |                                                                                         
|                                                         |                                                                                                    | Year Ended December 31,                                                                 
|                                                         |                                                                                                    |                                                                                         
|                                                         |                                                                                                    | 2002                                                                                     |                                   | 2001                                                    |       | 2000  
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |       
|                                                         |                                                                                                    |                                                                                         
|                                                         |                                                                                                    | (In thousands)                                                                          
|Cash flows from operating activities:                    |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|                                                         | Net loss                                                                                           |                                                                                          | $                                 | (24,322                                                 | )     |        | $      | (31,601 | )     |        | $       | (18,787 | )    
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities:                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |         |      
|                                                         |                                                                                                    | Depreciation and amortization                                                            |                                   |                                                         | 3,172 |        |        |         | 3,890 |        |         |         | 2,156 |       
|                                                         |                                                                                                    | Impairment of goodwill and intangibles                                                   |                                   |                                                         | 9,894 |        |        |         | 1,083 |        |         |         |      |       
|                                                         |                                                                                                    | Write-off of notes receivable                                                            |                                   |                                                         | 227   |        |        |         |      |        |         |         |      |       
|                                                         |                                                                                                    | Provision for doubtful accounts                                                          |                                   |                                                         | 177   |        |        |         | 912   |        |         |         | 524   |       
|                                                         |                                                                                                    | Stock compensation                                                                       |                                   |                                                         | 26    |        |        |         | 115   |        |         |         | 267   |       
|                                                         |                                                                                                    | Acquired in-process research and development                                             |                                   |                                                         |      |        |        |         | 276   |        |         |         |      |       
|                                                         |                                                                                                    | Provision for inventory                                                                  |                                   |                                                         | 1,438 |        |        |         | 7,347 |        |         |         |      |       
|                                                         |                                                                                                    | Loss on disposal of fixed assets                                                         |                                   |                                                         |      |        |        |         | 217   |        |         |         |      |       
|                                                         |                                                                                                    | Other                                                                                    |                                   |                                                         | (263  | )      |        |         | (259  | )      |         |         | 161   |       
|                                                         |                                                                                                    | Changes in assets and liabilities net of effects
    of acquisitions Accounts receivable |                                   |                                                         | 2,108 |        |        |         | 3,642 |        |         |         | 3,605 |       
|                                                         |                                                                                                    |                                                                                          | Inventory                         |                                                         |       | 1,137  |        |         |       | (3,570 | )       |         |       | 1,192  |        
|                                                         |                                                                                                    |                                                                                          | Prepaid expenses and other assets |                                                         |       | 114    |        |         |       | 639    |         |         |       | 2,259  |        
|                                                         |                                                                                                    |                                                                                          | Accounts payable                  |                                                         |       | (2,076 | )      |         |       | (1,924 | )       |         |       | (1,846 | )      
|                                                         |                                                                                                    |                                                                                          | Accrued liabilities               |                                                         |       | (237   | )      |         |       | (3,226 | )       |         |       | 451    |        
|                                                         |                                                                                                    |                                                                                          | Deferred revenue                  |                                                         |       | 3,720  |        |         |       | 1,793  |         |         |       | (602   | )      
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|                                                         |                                                                                                    |                                                                                          |                                   | Net cash used in operating activities                   |       |        | (4,885 | )       |       |        | (20,666 | )       |       |        | (10,620 | )
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|Cash flows from investing activities:                    |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|                                                         | Acquisition of businesses, net of cash received                                                    |                                                                                          |                                   | (437                                                    | )     |        |        |        |       |        |         |        |      
|                                                         | Acquisition of property and equipment                                                              |                                                                                          |                                   | (566                                                    | )     |        |        | (1,416  | )     |        |         | (1,371  | )    
|                                                         | Purchase of short-term investments, net                                                            |                                                                                          |                                   | 2,255                                                   |       |        |        | 14,362  |       |        |         | (9,027  | )    
|                                                         | Repayment of shareholder notes receivable                                                          |                                                                                          |                                   |                                                        |       |        |        |        |       |        |         | 321     |      
|                                                         | Cash acquired in acquisition of CUseeMe Networks,
    Inc.                                         |                                                                                          |                                   |                                                        |       |        |        | 6,601   |       |        |         |        |      
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|                                                         |                                                                                                    |                                                                                          |                                   | Net cash provided by (used in) investing
    activities |       |        | 1,252  |         |       |        | 19,547  |         |       |        | (10,077 | )
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|Cash flows from financing activities:                    |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|                                                         | Proceeds from issuance of stock, net                                                               |                                                                                          |                                   | 5,075                                                   |       |        |        | 1,071   |       |        |         | 26,886  |      
|                                                         | Repayment of capital lease obligations                                                             |                                                                                          |                                   | (36                                                     | )     |        |        | (83     | )     |        |         | (109    | )    
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|                                                         |                                                                                                    |                                                                                          |                                   | Net cash provided by financing activities               |       |        | 5,039  |         |       |        | 988     |         |       |        | 26,777  |  
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                    |                                                                                          | 1,406                             |                                                         |       |        | (131   | )       |       |        | 6,080   |        
|Cash and cash equivalents at beginning of period         |                                                                                                    |                                                                                          | 6,946                             |                                                         |       |        | 7,077  |         |       |        | 997     |        
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|Cash and cash equivalents at end of period               |                                                                                                    | $                                                                                        | 8,352                             |                                                         |       | $      | 6,946  |         |       | $      | 7,077   |        
|                                                         |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|Supplemental cash flow information:                      |                                                                                                    |                                                                                          |                                   |                                                         |       |        |        |         |       |        |         |        
|                                                         | Cash paid for interest                                                                             |                                                                                          | $                                 | 2                                                       |       |        | $      | 7       |       |        | $       | 32      |      
|                                                         | Issuance of options and warrants to third parties                                                  |                                                                                          |                                   |                                                        |       |        |        |        |       |        |         | 593     |      
|                                                         | Common stock issued and options and warrants
    issued or assumed in connection with acquisitions |                                                                                          |                                   |                                                        |       |        |        | 20,190  |       |        |         |        |      

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

F-5



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  The Company and a
Summary of its Significant Accounting Policies

The Company

First Virtual Communications, Inc. (the
Company) was incorporated in California under the
name First Virtual Corporation in October 1993 and subsequently
reincorporated in Delaware in December 1997. In July 1998, the
Company changed its name to FVC.COM, Inc., and on
February 5, 2001 the Company changed its name to First
Virtual Communications, Inc. The Company develops and markets
rich media Web conferencing and collaboration solutions for
telecommunications service providers, enterprises and government
agencies. The Company sells its products worldwide through
original equipment manufacturers (OEM partners),
distributors and resellers.

On June 19, 2001, the Company and CUseeMe
Networks, Inc. (CUseeMe) completed a merger,
pursuant to which CUseeMe became a wholly owned subsidiary of
the Company. CUseeMe provided innovative software-based
solutions to enable voice, video, and data collaboration over
IP-based networks. CUseeMe specialized in delivering a solution
that was both centrally managed and centrally deployed, enabling
large-scale deployments of rich media collaboration to
enterprise desktops. As a result of the merger, the Company is
able to provide a broad range of integrated rich media Web
conferencing solutions that run seamlessly across multiple
network types to enterprise customers and service providers
worldwide.

The Company has one reporting segment based on
its management structure.

Liquidity

In April of 2003, the Company entered into an
agreement with Silicon Valley Bank for a $3 million credit
facility that may be used by the Company at any time prior to
December 31, 2003. The Company also entered into an
agreement with Ralph Ungermann, Executive Chairman of the
Companys Board of Directors, under which the Company may
require Mr. Ungermann to purchase up to $1 million of
our common stock at $0.31 per share during the period from
April 14, 2003 through April 13, 2004. (see
Note 14).

The Company has experienced significant net
operating losses from inception. In 2002, the Company incurred
net losses of $24.3 million and used $4.8 million of
cash in its operating activities. Management expects that
operating losses and negative cash flows will continue in 2003.
In 2002, the Company decreased the size of its workforce by 7%
and instituted measures to control discretionary expenditures.
The Company believes that existing cash and investments together
with the new term loan facility with Silicon Valley Bank and the
financing agreement with Ralph Ungermann will be adequate to
fund its operations through December 31, 2003. However, the
Companys cash requirements depend on several factors,
including the rate of market acceptance of its products and
services, the ability to expand and retain its customer base and
other factors. If the Company fails to achieve its planned
revenue or expense targets, management believes that it has the
plans, intent and the ability to curtail capital and operating
spending to ensure that cash and investments will be sufficient
to meet the Companys cash requirements at least for the
next twelve months.

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 revenue
and expense during the reporting period. Actual results could
differ from those estimates.

F-6



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Investments in entities of which the Company owns between 20%
and 50% and on which the Company has the ability to exercise
significant influence but not control are accounted for under
the equity method. As of December 31, 2002, the Company
owns, directly or indirectly, 100% of all affiliates. Prior to
July 31, 2002, the Company owned 52% of the Companys
distributor in the United Kingdom. On July 31, 2002, the
Company acquired the remaining 48% interest of the distributor
(see Note 3).

Minority interest reflects the interest of
minority shareholders in the operating results of consolidated
subsidiaries.

Cash Equivalents and Short-Term
Investments

The Company considers all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents and those with maturities
greater than three months are considered short-term investments.
The Company has classified all short-term investments as
available for sale.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
its customers to make required payments. This estimate is based
on historical experience, current conditions, trends in the
industry and other business factors. In the years ended
December 31, 2002 and 2001, the Company recorded provisions
for bad debt in the amount of $177,000 and $912,000,
respectively. If the financial condition of the Companys
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required.

Inventory

Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
During the years ended December 31, 2002, 2001 and 2000,
the Company recorded inventory related charges of
$1.4 million, $7.3 million and $2.3 million,
respectively. The majority of these charges related to the write
down of inventories for certain excess and obsolete products and
to record physical inventory adjustments. The charge has been
included in cost of revenue.

Property and Equipment

Property and equipment are stated at cost and are
depreciated on a straight-line basis over the estimated useful
lives of the assets, generally three years. Leasehold
improvements are amortized using the straight-line method over
the shorter of the estimated useful lives of the assets or the
remaining lease term. When property or equipment is retired or
otherwise disposed of, the Company removes the asset and
accumulated depreciation from its records and recognizes any
related gain or loss in the determination of income.

Goodwill and Other Purchased Intangible
Assets

Goodwill, representing the excess of purchase
price and acquisition costs over the fair value of net assets of
businesses acquired, is no longer amortized commencing
January 1, 2002 in connection with the adoption of
Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets, (SFAS 142).
SFAS 142 requires a review of goodwill for impairment on an
annual basis. The Company will perform its annual impairment
review during the fourth quarter of each year. The Company
operates as one reporting unit for purposes of reviewing
goodwill for impairment. In connection with the Companys
annual impairment

F-7



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

review for the year ended December 31, 2002,
an impairment charge of $6.6 million was recorded (see
Note 2).

Other purchased intangibles which include
technology acquired in the acquisition of CuseeMe in 2001 and
licenses are amortized on a straight-line basis over the
estimated economic life of five years.

Impairment of Long-Term Assets

The Company continually monitors events and
changes in circumstances that could indicate carrying amounts of
long-term assets, including intangible assets, may not be
recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of long-term
assets by determining whether the carrying value of such assets
will be recovered through undiscounted expected future cash
flows. If the total of future cash flows is less than the
carrying amount of these assets, the Company recognizes an
impairment loss based on the excess of the carrying amount over
the fair value of the assets. During the year ended
December 31, 2002, the Company recorded $3.3 million
of impairment losses related to intangible assets (see Note 2).

Revenue Recognition

The Companys revenue is derived from
primarily three sources (i) sales of software licenses,
(ii) sales of hardware and (iii) services and support
revenue, which includes software license maintenance and
support, training and consulting revenue.

The Company licenses its software products under
perpetual licenses. The Company sells its products and services
via its direct sales force, through domestic and foreign
distributors and via the Internet.

The Company applies the provisions of Statement
of Position 97-2, Software Revenue Recognition, to
all transactions involving the sale of software products and
hardware transactions where the software is not incidental. For
hardware transactions where software is incidental, the Company
applies the provisions of SEC Staff Accounting
Bulletin 101, Revenue Recognition.

Revenue from the license of the Companys
software products and sale of hardware products is recognized
when persuasive evidence of an arrangement exists, the product
has been delivered and title has transferred, the fee is fixed
or determinable, and collection of the resulting receivable is
reasonably assured, and, if applicable, upon acceptance when
acceptance criteria are specified or upon expiration of the
acceptance period. Maintenance and support revenue for providing
product updates and customer support is deferred and recognized
ratably over the service period. Training and consulting revenue
is recognized as services are performed and billable according
to the terms of the service arrangement.

For all sales, except those completed via the
Internet, the Company uses either a binding purchase order or
other signed agreement as evidence of an arrangement. For sales
over the Internet, the Company uses a credit card authorization
as evidence of an arrangement. Sales through distributors are
evidenced by a master agreement governing the relationship with
or without binding purchase orders on a transaction by
transaction basis.

Fees due under an arrangement are generally
deemed not to be fixed and determinable if a significant portion
of the fee is due beyond the Companys normal payment terms
which are 30 to 90 days from the date of invoice. In these
cases, revenue is not recognized until the fees become due. The
Company assesses collectibility based on a number of factors,
including past transaction history with the customer and the
credit-worthiness of the customer. The Company does not request
collateral from its customers. If the Company determines that
collection of a fee is not reasonably assured, the fee is
deferred and revenue recognized at the time collection becomes
reasonably assured, which is generally upon receipt of cash.

F-8



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For arrangements with multiple obligations (e.g.,
undelivered maintenance and support bundled with perpetual
licenses), the Company allocates revenue to delivered elements
of the arrangements using the residual value method based on
evidence of the fair value of the undelivered elements, which is
specific to the Company. The vendor specific objective evidence
of fair values for the ongoing maintenance and support
obligations are based upon the prices paid for the separate
renewal of these services by the customer or upon substantive
renewal rates stated in the contractual arrangements. Vendor
specific objective evidence of the fair value of other services,
primarily consulting and training services, is based upon
separate sales of these services.

Revenue from sales to certain of the
Companys resellers are subject to agreements allowing
rights of return and price protection. In such cases, the
Company provides reserves for estimated future returns and
credits for price protection upon revenue recognition. Such
reserves are estimated based on historical rates of return and
allowances, reseller inventory levels, the Companys
estimates of expected sell through by resellers and other
related factors. Actual results could differ from these
estimates. In the event of inability to estimate returns from
any reseller, the Company defers revenue recognition until the
reseller has sold through the products. Advance payments
received from customers and gross margin deferred with respect
to sales for which revenues have not been recorded are recorded
as deferred revenue.

A provision is made upon revenue recognition for
the estimated cost to repair or replace products under warranty
arrangements (see Note 10).

Foreign Currency Translation

The assets and liabilities of the Companys
foreign subsidiaries are translated into U.S. dollars from local
currencies using current exchange rates; revenues and expenses
are translated using average exchange rates in effect during
each period. The resulting translation adjustments are recorded
in a separate component of stockholders equity.

Software Development Costs

Software development costs incurred prior to the
establishment of technological feasibility are included in
research and development expense and are expensed as incurred.
Software development costs incurred subsequent to the
establishment of technological feasibility through the period of
general market availability of the product are capitalized, if
material. To date, all software development costs have been
expensed as incurred.

Stock-Based Compensation

The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and
related interpretations thereof. Options and warrants granted to
non-employees are accounted for using the fair value method
prescribed by Statement of Financial Accounting Standard
No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. The Company makes the proforma disclosures
required by SFAS 123 and Statement of Financial Accounting
Standard No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an Amendment of SFAS 123.

Income Taxes

Income taxes are accounted for using an asset and
liability approach. The asset and liability approach requires
the recognition of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the
Companys financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets
are based on

F-9



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

provisions of currently enacted tax law; the
effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced,
if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.

Earnings Per Share

Basic earnings (loss) per share is based on
the weighted-average number of common shares outstanding
excluding contingently issuable or returnable shares, such as
shares of unvested restricted common stock. Diluted earnings
(loss) per share is based on the weighted-average number of
common shares outstanding and dilutive potential common shares
outstanding. As a result of the losses incurred by the Company
during 2002, 2001, and 2000, all potential common shares were
anti-dilutive and excluded from the diluted net loss per share
calculations.

The following table summarizes securities
outstanding as of each period end which were not included in the
calculation of diluted net loss per share since their inclusion
would be anti-dilutive:

|                                     |  |                         |        |      |  |      |        |  |  |  |       | 
|------------------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                                     |  |                        
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  | 2002                    |        | 2001 |  | 2000
|                                     |  |                         |        |      |  |     
|                                     |  |                        
|                                     |  | (In thousands)         
|Unvested restricted common stock     |  |                         |       |      |  |      |       |  |  |  | 4     | 
|Series A Convertible Preferred stock |  |                         | 27     |      |  |      | 27     |  |  |  | 27    | 
|Stock purchase warrants              |  |                         | 6,809  |      |  |      | 3,546  |  |  |  | 1,016 | 
|Stock options                        |  |                         | 11,241 |      |  |      | 10,136 |  |  |  | 6,594 | 

Unvested restricted common stock represents stock
that has been issued but which is subject to repurchase to the
extent the holder does not remain associated with the Company
until such shares are vested.

Concentration of Credit Risk and Geographic
Distribution of Revenue

Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents, short-term investments
and accounts receivable. The Company invests its excess cash in
a variety of financial instruments, such as corporate
medium-term notes and other corporate debt. The Company, by
policy, limits the amount of credit exposure to any one
financial institution or commercial issuer, and restricts the
placement of funds to financial institutions evaluated as highly
credit-worthy. The Company sells its products to original
equipment manufacturers, distributors, value-added resellers and
end-user customers throughout the world. The Company performs
ongoing credit evaluations of its customers financial
condition and generally requires no collateral from its
customers. The Company provides an allowance for uncollectible
accounts receivable based upon the expected collectibility of
such receivables.

In 2002 and 2001, AT&T Corporation and EDS
Operating Services represented more than 10% of total revenue,
respectively, and no customer represented more than 10% of total
revenue in 2000. At December 31, 2002 and 2001, outstanding
receivables from one customer represented 20% and 15%,
respectively, of accounts receivable.

F-10



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the percentage of
total revenue by geographic area based on the destination of the
related shipments:

|              |  |              |     |      |  |      |     |   |  |  |     |  
|------------- |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  |             
|              |  | Year Ended  
|              |  |             
|              |  |             
|              |  | December 31,
|              |  |             
|              |  | 2002         |     | 2001 |  | 2000
|              |  |              |     |      |  |     
|United States |  |              | 68  | %    |  |      | 79  | % |  |  | 88  | %
|Asia          |  |              | 19  | %    |  |      | 4   | % |  |  | 7   | %
|Europe        |  |              | 13  | %    |  |      | 17  | % |  |  | 5   | %
|              |  |              |     |      |  |      |     |   |  |  |     |  
|Total         |  |              | 100 | %    |  |      | 100 | % |  |  | 100 | %
|              |  |              |     |      |  |      |     |   |  |  |     |  

Fair Value of Financial Instruments

The carrying amounts of cash and cash
equivalents, short-term investments and other current assets and
liabilities such as accounts receivable, accounts payable and
accrued liabilities, as presented in the consolidated financial
statements, approximate fair value because of their short
maturities.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as
the change in equity of a business enterprise during a period
from transactions and other events and circumstances from
non-owner sources, including foreign currency translation
adjustments and unrealized gains and losses on marketable
securities.

Components of accumulated other comprehensive
income (loss) consist of the following (in thousands):

|                                                                    |  |              |      |      |  |      |     |   |  |   |     | 
|------------------------------------------------------------------- |  | ------------ | ---- | ---- |  | ---- | --- | - |  | - | --- | 
|                                                                    |  |             
|                                                                    |  | December 31,
|                                                                    |  |             
|                                                                    |  | 2002         |      | 2001 |  | 2000
|                                                                    |  |              |      |      |  |     
|Foreign currency translation                                        |  | $            | (59  | )    |  | $    | 204 |   |  | $ | 210 | 
|Unrealized (loss) on marketable securities,
    net of income taxes |  |              | (151 | )    |  |      | (51 | ) |  |   |    | 
|                                                                    |  |              |      |      |  |      |     |   |  |   |     | 
|                                                                    |  | $            | (210 | )    |  | $    | 153 |   |  | $ | 210 | 
|                                                                    |  |              |      |      |  |      |     |   |  |   |     | 

The following table represents the calculation of
comprehensive income (loss) (in thousands)-.

|                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                    |  |                        
|                                                                    |  | Year Ended December 31,
|                                                                    |  |                        
|                                                                    |  | 2002                    |         | 2001 |  | 2000
|                                                                    |  |                         |         |      |  |     
|Net loss                                                            |  | $                       | (24,322 | )    |  | $    | (31,601 | ) |  | $ | (18,787 | )
|Cumulative translation adjustment                                   |  |                         | (263    | )    |  |      | (6      | ) |  |   | 231     |  
|Unrealized (loss) on marketable securities,
    net of income taxes |  |                         | (100    | )    |  |      | (51     | ) |  |   |        |  
|                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|Total comprehensive (loss)                                          |  | $                       | (24,685 | )    |  | $    | (31,658 | ) |  | $ | (18,556 | )
|                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  

Reclassifications

Certain prior year amounts have been reclassified
to conform to the current year presentation. These
reclassifications had no impact on previously reported results
of operations or stockholders equity.

New Accounting Pronouncements

On January 1, 2003, the Company will adopt
Statement of Financial Accounting Standards No. 146
(SFAS 146), Accounting for Costs Associated with Exit
or Disposal Activities, which nullifies Emerging

F-11



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Issues Task Force 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 requires that a liability be
recognized for restructuring costs only when the liability is
incurred, that is, when it meets the definition of a liability
in the Financial Accounting Standards Boards conceptual
framework. SFAS 146 also establishes fair value as the
objective for initial measurement of liabilities related to exit
or disposal activities and is effective for exit or disposal
activities that are initiated after December 31, 2002. The
Company does not expect the adoption of SFAS 146 to have a
material impact on its results of operation, financial position
or cash flows, although SFAS 146 may impact the timing of
recognition of costs associated with future restructuring, exit
or disposal activities.

On January 1, 2003, the Company will adopt
Financial Accounting Standard Board Financial Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires
that upon issuance of a guarantee, the guarantor must disclose,
and may recognize a liability for, the fair value of the
obligation it assumes under that guarantee. The initial
recognition and measurement requirement of FIN 45 is
effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements of
FIN 45, applicable to product warranty liability and
certain guarantees issued before December 31, 2002, are
effective for this report and all future quarterly and annual
reports (see Note 10).

On April 1, 2002, the Financial Accounting
Standards Board issued Statement of Financial Standard
No. 143, Accounting for Asset retirement
Obligations (SFAS 143). SFAS 143 addresses
annual accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and associated
asset retirement costs. The Company will adopt this standard on
January 1, 2003 and does not believe the adoption of this
standard will have a material effect on its consolidated
financial position, results of operations or cash flows.

In December 2002, the Financial Accounting
Standard Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS 123 (SFAS 148). This
statement amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of
SFAS 123 to require disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The Company has adopted the annual
disclosure provisions of SFAS 148 and will adopt the
interim disclosure provisions for financial reports beginning
with the quarter ending March 31, 2003. As the adoption of
this standard involves disclosures only, the Company does not
expect any impact on its consolidated financial position,
results of operations or cash flows.

In January 2003, the Financial Accounting
Standard Board issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities. Under that
interpretation, certain entities known as Variable Interest
Entities (VIEs) must be consolidated by the primary beneficiary
of the entity. The primary beneficiary is generally defined as
having the majority of the risks and rewards arising from the
VIE. For VIEs in which a significant (but not majority) variable
interest is held, certain disclosures are required. It applies
immediately to variable interest entities created after
January 31, 2003, and applies in the first year or interim
period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The Company does not
believe the adoption of this interpretation will have a material
effect on its consolidated financial position, results of
operations or cash flows.

F-12



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dependence on Suppliers

The Companys ability to timely deliver its
products is dependent upon the availability of quality
components and subsystems used in these products. The Company
depends in part upon subcontractors to manufacture, assemble and
deliver certain items in a timely and satisfactory manner. The
Company obtains certain components and subsystems from single or
a limited number of sources. A significant interruption in the
delivery of such items could have a material adverse effect on
the Companys consolidated financial condition and results
of operations.



|         |                                                                                                                                                                                                                             
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2  | Adoption of Statements of Financial Accounting
    Standards No. 142, Goodwill and Other Intangible
    Assets (SFAS 142) and No. 144, Accounting
    for the Impairment of Disposal of Long-Lived Assets
    (SFAS 144)

On January 1, 2002, the Company adopted
SFAS 142 under which goodwill is no longer amortized but is
reviewed annually (or more frequently if impairment indicators
arise) for impairment. Upon adoption of SFAS 142, the
Company reclassified workforce related intangibles of
$1.4 million to goodwill.

As part of the annual assessment of impairment,
the Company used the fair value measurement requirement, to
assess whether or not an impairment of goodwill existed. The
fair value was determined primarily by the income approach,
which estimates the fair value based on the future discounted
cash flows. The first step evaluation of fair value as required
by SFAS 142, indicated that an impairment existed. Factors
contributing to the impairment charge were the difficult
environment in the information technology sector and the
slowdown in economic growth. As such, the Company was required
to perform the second step analysis to determine the amount of
the impairment loss. The second step analysis consisted of
comparing the implied fair value of the Companys goodwill
with the carrying amount of the Companys goodwill, with an
impairment charge resulting from any excess of the carrying
value of the goodwill over the implied fair value of the
goodwill. Based upon this evaluation, for which the Company used
an outside appraiser, the Company recorded an impairment charge
of $6.6 million, representing 78% of the Companys
goodwill. The adoption of SFAS 142 had a favorable impact
on the Companys results of operations because goodwill is
no longer being amortized subsequent to the adoption of
SFAS 142. Amortization of goodwill was $1.3 million
and $653,000 in the years ended December 31, 2001 and 2000,
respectively.

Net loss and basic and diluted net loss per share
for the years ended December 31, 2002, 2001 and 2000 is
disclosed below, adjusted to remove goodwill amortization as if
SFAS 142 had applied to that period.

|                                                                  |  |                                 |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                  |  |                                
|                                                                  |  | For the year ended December 31,
|                                                                  |  |                                
|                                                                  |  | 2002                            |         | 2001 |  | 2000
|                                                                  |  |                                 |         |      |  |     
|                                                                  |  |                                
|                                                                  |  | (In thousands)                 
|Reported net loss                                                 |  | $                               | (24,322 | )    |  | $    | (31,601 | ) |  | $ | (18,787 | )
|Add back: Goodwill amortization                                   |  |                                 |        |      |  |      | 1,291   |   |  |   | 653     |  
|                                                                  |  |                                 |         |      |  |      |         |   |  |   |         |  
|Adjusted net loss                                                 |  | $                               | (24,322 | )    |  | $    | (30,310 | ) |  | $ | (18,134 | )
|                                                                  |  |                                 |         |      |  |      |         |   |  |   |         |  
|Net loss per share  Basic and diluted                            |  |                                 |         |      |  |      |         |   |  |   |         |  
|Reported net loss per share                                       |  | $                               | (0.64   | )    |  | $    | (1.26   | ) |  | $ | (1.09   | )
|Adjustment for goodwill amortization                              |  |                                 |        |      |  |      | 0.06    |   |  |   | 0.04    |  
|                                                                  |  |                                 |         |      |  |      |         |   |  |   |         |  
|Adjusted net loss per share                                       |  | $                               | (0.64   | )    |  | $    | (1.20   | ) |  | $ | (1.05   | )
|                                                                  |  |                                 |         |      |  |      |         |   |  |   |         |  
|Shares used in computing basic and diluted net
    loss per share |  |                                 | 38,153  |      |  |      | 25,156  |   |  |   | 17,205  |  

F-13



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of other intangibles as of
December 31, 2002 and December 31, 2001 are shown in
the table below:

|                         |  |                |       |              |  |          |        |   |  |   |       | 
|------------------------ |  | -------------- | ----- | ------------ |  | -------- | ------ | - |  | - | ----- | 
|                         |  | Gross Carrying |       | Accumulated  |  | Net Book
|                         |  | Amount         |       | Amortization |  | Value   
|                         |  |                |       |              |  |         
|                         |  |               
|                         |  | (In thousands)
|As of December 31, 2002: |  |                |       |              |  |          |        |   |  |   |       | 
|Purchased technology     |  | $              | 3,524 |              |  | $        | (2,037 | ) |  | $ | 1,487 | 
|Licenses                 |  |                | 521   |              |  |          | (150   | ) |  |   | 371   | 
|                         |  |                |       |              |  |          |        |   |  |   |       | 
|Total                    |  | $              | 4,045 |              |  | $        | (2,187 | ) |  | $ | 1,858 | 
|                         |  |                |       |              |  |          |        |   |  |   |       | 
|As of December 31, 2001: |  |                |       |              |  |          |        |   |  |   |       | 
|Purchased technology     |  | $              | 8,106 |              |  | $        | (821   | ) |  | $ | 7,285 | 
|Licenses                 |  |                | 218   |              |  |          | (133   | ) |  |   | 85    | 
|                         |  |                |       |              |  |          |        |   |  |   |       | 
|Total                    |  | $              | 8,324 |              |  | $        | (954   | ) |  | $ | 7,370 | 
|                         |  |                |       |              |  |          |        |   |  |   |       | 

Amortization for purchased intangible assets was
$1.4 million and $671,000 for the years ended
December 31, 2002 and 2001, respectively. Future
amortization expense related to purchased other intangible
assets is estimated to be $614,000 in 2003, $600,000 in 2004,
$431,000 in 2005 and $213,000 in 2006.

The changes in the carrying amount of goodwill
for the year ended December 31, 2002, are as follows (in
thousands):

|                                                   |  |   |        |  
|-------------------------------------------------- |  | - | ------ | -
|Balance as of January 1, 2002                      |  | $ | 7,119  |  
|Reclassification of workforce-in-place to goodwill |  |   | 1,355  |  
|Impairment                                         |  |   | (6,596 | )
|                                                   |  |   |        |  
|Balance as of December 31, 2002                    |  | $ | 1,878  |  
|                                                   |  |   |        |  

On January 1, 2002, the Company adopted the
Statement of Financial Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 supercedes Statement
of Financial Accounting Standard No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS 121). SFAS 144
applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board
Opinion No. 30. SFAS 144 develops one accounting model
for long-lived assets that are to be disposed of by sale.
SFAS 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS 144
expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a
disposal transaction. The Company recorded $3.3 million of
impairment charge related to intangible assets in 2002 (see Note
7). The impairment change comprised of $2.8 million
attributable to purchased technology and approximately $500,000
attributable to the CUseeMe tradename. Factors contributing to
the impairment charge for the purchased technology were the
difficult environment in the information technology sector and
the slowdown in economic growth. The Company has ceased using
the CUseeMe tradename leading to its diminished valuation. The
fair value of the intangible assets was determined by management
with the assistance of an outside appraiser primarily by the
income approach, which estimates the fair value based on the
future discounted cash flows.

F-14



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 3  Acquisition of
Businesses

Acquisition of FVC.COM
(UK) Ltd.

In May 1999, the Company acquired a controlling
interest in FVC.COM (UK) Ltd., a distributor of the
Companys products in the United Kingdom and the Middle
East. The Company acquired 52% of the outstanding stock of a
newly incorporated holding company that owned 100% of the shares
of this entity, in exchange for a cash payment of $750,000. The
transaction was accounted for as a purchase; accordingly, the
purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair market
values at the date of acquisition.

In July 2002, the Company acquired the remaining
48% interest of FVC.COM (UK) Ltd. in a transaction
accounted for as a purchase business combination. The purchase
price comprised cash consideration of $437,000, including direct
acquisition costs of $178,000 for legal and consulting fees.
Contingent on certain events, the purchase price further
increased by $35,000 based on (1) a percentage of the gross
profit of the United Kingdom sales territory for the period from
June 1, 2002 to December 31, 2002 and (2) the
results of collection of certain receivables as of the
acquisition date. Subsequent to the year ended December 31,
2002, the Company fully collected the residual balance of
certain receivables as of the acquisition date. In the quarter
ended March 31, 2003, the purchase price will be increased
by $98,000, for a total final cash consideration of $570,000.
The purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair market
values at the date of acquisition. At the acquisition date, the
book value of the assets and liabilities acquired approximated
fair value; accordingly, the purchase price was allocated to
goodwill.

Acquisition of FVC.COM (Asia) Ltd.

On January 27, 2002, the Company acquired
its Hong Kong-based exclusive distributor for Asia, excluding
Japan. The purchase price comprised (1) cash consideration
of $50,000, plus the amount received by the Company from the
receivables of the acquired distributor as of January 25,
2002, less amounts paid or to be paid for the liabilities of the
acquired distributor as of January 19, 2002; and
(2) future cash payments equal to twenty percent of revenue
from sales in the territory of Asia, excluding Japan, until the
shareholders of the acquired distributor receive an aggregate of
$2.0 million. The primary shareholder of the acquired
distributor became an employee of the Company and the
Companys obligation to make the 20% of revenue-based
contingent consideration lapses upon termination of his
employment. Accordingly, the 20% revenue-based consideration to
former shareholders is being accounted for as employee
compensation expense.

Pro forma results of operations have not been
presented because the effects of the acquisitions of FVC.COM
(UK) Ltd. and FVC.COM (Asia) Ltd. were not material on
either an individual or aggregate basis.

Acquisition of CUseeMe Networks,
Inc.

On June 19, 2001, the Company completed its
acquisition of CUseeMe, a provider of innovative software
solutions that enable voice and visual communications over
IP-based networks. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the estimated fair
value of assets acquired and liabilities assumed were included
in the Companys consolidated results of operations as of
and since the effective date of the purchase. There were no
significant differences between the accounting policies of the
Company and CUseeMe.

The Company acquired CUseeMe, in a
stock-for-stock acquisition, for a total consideration of
$22.7 million, including direct acquisition costs of
$2.5 million for legal, consulting and accounting fees. The
Company exchanged options to purchase 4,109,888 shares of
CUseeMes common stock, for which the Black-Scholes
option-pricing model value of approximately $1.6 million
was included in the purchase price.

F-15



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company used an independent appraiser to
value the intangible assets. The total purchase price was
allocated to the estimated fair value of assets acquired and
liabilities assumed as follows:

|                                                                   |       |                |       |        | 
|------------------------------------------------------------------ | ----- | -------------- | ----- | ------ | 
|                                                                   |       | (In thousands)
|Fair value of tangible assets and liabilities                      |       | $              | 6,750 |       
|In-process research and development                                |       |                | 276   |       
|Trademark                                                          |       |                | 661   |       
|Current technology                                                 |       |                | 6,161 |       
|Assembled workforce                                                |       |                | 1,505 |       
|Deferred stock compensation                                        |       |                | 1,300 |       
|Excess of purchase price over identifiable net
    assets acquired |       |                | 6,066 |       
|                                                                   |       |                |       |       
|                                                                   | Total |                | $     | 22,719 | 
|                                                                   |       |                |       |       

In accordance with the adoption of SFAS 142,
the unamortized portion of assembled workforce was reclassified
to goodwill and goodwill is no longer being amortized.
Additionally, the Company recorded an impairment of goodwill in
2002 of which a portion related to the acquisition of CUseeMe
(see Note 7).

The following unaudited pro forma consolidated
amounts give effect to the acquisition of CUseeMe as if it had
occurred at the beginning of each of fiscal 2001 and 2000 (in
thousands, except per share data):

|                   |  |                     |         |      |  |   |        |  
|------------------ |  | ------------------- | ------- | ---- |  | - | ------ | -
|                   |  |                    
|                   |  | Twelve Months Ended
|                   |  | December 31,       
|                   |  |                    
|                   |  | 2001                |         | 2000
|                   |  |                     |         |     
|Revenue            |  | $                   | 30,033  |      |  | $ | 52,082 |  
|Net loss           |  | $                   | (46,558 | )    |  | $ | 30,808 |  
|Net loss per share |  | $                   | (1.40   | )    |  | $ | (1.04  | )

The above pro forma consolidated amounts are not
necessarily indicative of the actual results of operations that
would have been reported if the acquisition had actually
occurred as of the beginning of the periods described above, nor
does such information purport to indicate the results of the
Companys future operations. In the opinion of management,
all adjustments necessary to present fairly such pro forma
amounts have been made.

During the quarter ended June 30, 2001, the
Company recorded deferred compensation expense of approximately
$91,000 for the difference between the grant or issuance price
of unvested common stock options and the fair value of the
Companys common stock issued in conjunction with the
CUseeMe acquisition. These amounts are being amortized in
accordance with Financial Accounting. Standards Board
Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans, over the vesting period of the individual stock
options.

Note 4  Short-Term
Investments

Management determines the appropriate
classification of short term investments in marketable
securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Held-to-maturity
securities are carried at amortized cost, which approximates
fair value. Available-for-sale securities are stated at fair
value as determined by the most recently traded price of each
security at the balance sheet date. The net unrealized gains or
losses on available-for-sale securities are reported as a
component of comprehensive loss, net of tax. The specific
identification method is used to compute the realized gains and
losses on debt and equity securities.

F-16



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company regularly monitors and evaluates the
realizable value of its marketable securities. If events and
circumstances indicate that a decline in the value of these
assets has occurred and is other than temporary, the Company
records a charge to investment income (expense). At
December 31, 2002 and 2001, all short-term investments have
been classified as available-for-sale securities.

Available-for-sale securities are comprised as
follows (in thousands):

|                            |  |              |    |              |  |   |       | 
|--------------------------- |  | ------------ | -- | ------------ |  | - | ----- | 
|                            |  | December 31, |    | December 31,
|                            |  | 2002         |    | 2001        
|                            |  |              |    |             
|Corporate debt              |  | $            |   |              |  | $ | 414   | 
|Corporate medium-term notes |  |              |   |              |  |   | 1,850 | 
|Certificate of Deposit      |  |              | 69 |              |  |   | 60    | 
|Equity securities           |  |              | 14 |              |  |   | 114   | 
|                            |  |              |    |              |  |   |       | 
|                            |  | $            | 83 |              |  | $ | 2,438 | 
|                            |  |              |    |              |  |   |       | 

As of December 31, 2002 and 2001, the
Companys available for sale securities had contractual
maturities of less than one year.

Available-for-sale securities are comprised as
follows at December 31, 2002 and December 31, 2001 (in
thousands):

|                  |  |      |       |            |  |            |   |            |  |   |      |   |  |   |       | 
|----------------- |  | ---- | ----- | ---------- |  | ---------- | - | ---------- |  | - | ---- | - |  | - | ----- | 
|                  |  |      |       | Unrealized |  | Unrealized |   |           
|                  |  | Cost |       | Gains      |  | Losses     |   | Fair Value
|                  |  |      |       |            |  |            |   |           
|December 31, 2002 |  |      |       |            |  |            |   |            |  |   |      |   |  |   |       | 
|Equity securities |  | $    | 114   |            |  | $          | 3 |            |  | $ | (103 | ) |  | $ | 14    | 
|Debt securities   |  |      | 120   |            |  |            |  |            |  |   | (51  | ) |  |   | 69    | 
|                  |  |      |       |            |  |            |   |            |  |   |      |   |  |   |       | 
|Total             |  | $    | 234   |            |  | $          | 3 |            |  | $ | (154 | ) |  | $ | 83    | 
|                  |  |      |       |            |  |            |   |            |  |   |      |   |  |   |       | 
|December 31, 2001 |  |      |       |            |  |            |   |            |  |   |      |   |  |   |       | 
|Equity securities |  | $    | 169   |            |  | $          |  |            |  | $ | (55  | ) |  | $ | 114   | 
|Debt securities   |  |      | 2,320 |            |  |            | 5 |            |  |   | (1   | ) |  |   | 2,324 | 
|                  |  |      |       |            |  |            |   |            |  |   |      |   |  |   |       | 
|Total             |  | $    | 2,489 |            |  | $          | 5 |            |  | $ | (56  | ) |  | $ | 2,438 | 
|                  |  |      |       |            |  |            |   |            |  |   |      |   |  |   |       | 

Note 5  Inventory

Inventories as of December 31, 2002 and
December 31, 2001 were (in thousands):

|                |  |              |     |              |  |   |       | 
|--------------- |  | ------------ | --- | ------------ |  | - | ----- | 
|                |  | December 31, |     | December 31,
|                |  | 2002         |     | 2001        
|                |  |              |     |             
|Raw materials   |  | $            | 266 |              |  | $ | 2,384 | 
|Finished goods  |  |              | 347 |              |  |   | 804   | 
|                |  |              |     |              |  |   |       | 
|Total inventory |  | $            | 613 |              |  | $ | 3,188 | 
|                |  |              |     |              |  |   |       | 

In 2002 and 2001, the Company recorded impairment
charges to cost of revenue in the amount of $1.4 million
and $7.3 million, respectively, related to excess inventory
for certain legacy products. Sale of the Companys legacy
products declined significantly during 2002 and are expected to
continue to decline in the future due to changing market demand
and the change in the Companys strategic focus towards
sales of Click to MeetTM products.

F-17



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



Note 6  Balance Sheet
Components

|                                          |                                                |                |       |        |   |   |       |        |  
|----------------------------------------- | ---------------------------------------------- | -------------- | ----- | ------ | - | - | ----- | ------ | -
|                                          |                                                |               
|                                          |                                                | December 31,  
|                                          |                                                |               
|                                          |                                                | 2002           |       | 2001  
|                                          |                                                |                |       |       
|                                          |                                                |               
|                                          |                                                | (In thousands)
|Prepaid expenses and other current assets |                                                |                |       |        |   |   |       |       
|                                          | Prepaid expenses                               |                | $     | 247    |   |   | $     | 531    |  
|                                          | Other receivables                              |                |       | 159    |   |   |       | 696    |  
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                | $              | 406   |        |   | $ | 1,227 |       
|                                          |                                                |                |       |        |   |   |       |       
|Property and equipment:                   |                                                |                |       |        |   |   |       |       
|                                          | Computers and equipment                        |                | $     | 7,215  |   |   | $     | 6,681  |  
|                                          | Furniture and fixtures                         |                |       | 1,016  |   |   |       | 1,029  |  
|                                          | Leasehold improvements                         |                |       | 416    |   |   |       | 410    |  
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                |                | 8,647 |        |   |   | 8,120 |       
|                                          | Less accumulated depreciation and amortization |                |       | (6,450 | ) |   |       | (4,937 | )
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                | $              | 2,197 |        |   | $ | 3,183 |       
|                                          |                                                |                |       |        |   |   |       |       
|Accrued liabilities:                      |                                                |                |       |        |   |   |       |       
|                                          | Accrued employee compensation                  |                | $     | 1,577  |   |   | $     | 1,756  |  
|                                          | Accrued acquisition related liabilities        |                |       | 35     |   |   |       | 1,044  |  
|                                          | Accrued legal and professional fees            |                |       | 584    |   |   |       | 791    |  
|                                          | Accrued warranty                               |                |       | 428    |   |   |       | 471    |  
|                                          | Other                                          |                |       | 2,515  |   |   |       | 1,499  |  
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                | $              | 5,139 |        |   | $ | 5,561 |       
|                                          |                                                |                |       |        |   |   |       |       

As of December 31, 2002 and 2001, property
and equipment recorded under capital leases, consisting
primarily of computers and equipment, totaled approximately
$498,000, with related accumulated depreciation of approximately
$498,000 in both years.

Note 7  Acquisition and Other
Non-Recurring Charges, Net

|                                                                        |  |                |       |      |  |      |       |  |  |   |   | 
|----------------------------------------------------------------------- |  | -------------- | ----- | ---- |  | ---- | ----- |  |  | - | - | 
|                                                                        |  |               
|                                                                        |  | December 31,  
|                                                                        |  |               
|                                                                        |  | 2002           |       | 2001 |  | 2000
|                                                                        |  |                |       |      |  |     
|                                                                        |  |               
|                                                                        |  | (In thousands)
|Impairment of goodwill (see Note 2)                                     |  | $              | 6,600 |      |  | $    |      |  |  | $ |  | 
|Impairment of intangibles (see Note 2)                                  |  |                | 3,294 |      |  |      |      |  |  |   |  | 
|Impairment of intangibles from the acquisition of
    ICAST Corporation |  |                |      |      |  |      | 1,083 |  |  |   |  | 
|Workforce reduction                                                     |  |                |      |      |  |      | 1,109 |  |  |   |  | 
|In-process research and development charges                             |  |                |      |      |  |      | 276   |  |  |   |  | 
|                                                                        |  |                |       |      |  |      |       |  |  |   |   | 
|Acquisition and other non-recurring charges, net                        |  | $              | 9,894 |      |  | $    | 2,468 |  |  | $ |  | 
|                                                                        |  |                |       |      |  |      |       |  |  |   |   | 

F-18



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                        
| | -----------------------------------------------------------------------
| | Impairment of intangibles from the acquisition
    of ICAST Corporation

In August 1998, the Company completed its
acquisition of ICAST Corporation (ICAST). ICAST
developed, marketed and supported software design for Internet
and Intranet broadcasting and real-time video, audio and data.
The purchase price aggregated approximately $7.6 million.

As a result of the acquisition of CUseeMe, and
based on the Companys future strategic objectives, the
Company ceased to invest any further financial or engineering
resources into the development of video streaming technology
that was originally acquired in the purchase of ICAST, and the
Company does not expect any significant future revenue or cash
flows from ICAST related products. As a result, the Company
incurred an impairment charge pursuant to SFAS 121 of
approximately $1.1 million during the year ended
December 31, 2001. The impairment charges for intangible
assets represent the write-off of the unamortized intangible
assets recorded in connection with the acquisition of ICAST. The
charges of approximately $1.1 million.



| |                    
| | -------------------
| | Workforce reduction

During the year 2001, the Company reduced its
workforce by 73 employees. The cost recorded for the
layoffs was approximately $1.1 million.



| |                                                
| | -----------------------------------------------
| | In-process research and development
    charges

In-process research and development charges were
incurred in 2001 in conjunction with the CUseeMe acquisition.
See Note 3 for a description of the acquisition.

Note 8  Income Taxes

No provision or benefit for income taxes has been
recognized for any of the periods presented as the Company has
incurred net operating losses for income tax purposes and had no
carryback potential.

The provision for income taxes differs from the
expected tax benefit amount computed by applying the statutory
federal income tax rate of 34% to income (loss) before taxes as
follows:

|                                                                 |  |              |     |      |  |      |     |    |  |  |     |   
|---------------------------------------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                                 |  |             
|                                                                 |  | December 31,
|                                                                 |  |             
|                                                                 |  | 2002         |     | 2001 |  | 2000
|                                                                 |  |              |     |      |  |     
|Federal Statutory Rate                                           |  |              | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|Unrecognized benefit of net operating losses and
    tax credits |  |              | 34  | %    |  |      | 34  | %  |  |  | 34  | % 
|                                                                 |  |              |     |      |  |      |     |    |  |  |     |   
|                                                                 |  |              | 0   | %    |  |      | 0   | %  |  |  | 0   | % 
|                                                                 |  |              |     |      |  |      |     |    |  |  |     |   

Deferred tax assets (liabilities) consist of
the following:

|                                 |  |                |         |      |  |   |         |  
|-------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                 |  |               
|                                 |  | December 31,  
|                                 |  |               
|                                 |  | 2002           |         | 2001
|                                 |  |                |         |     
|                                 |  |               
|                                 |  | (In thousands)
|Net operating loss carryforwards |  | $              | 49,106  |      |  | $ | 40,184  |  
|Tax credits                      |  |                | 3,994   |      |  |   | 3,759   |  
|Accruals and reserves            |  |                | 4,576   |      |  |   | 5,504   |  
|Acquired intangibles             |  |                | (1,170  | )    |  |   | (2,893  | )
|                                 |  |                |         |      |  |   |         |  
|Total                            |  |                | 56,506  |      |  |   | 46,554  |  
|Less: valuation allowance        |  |                | (56,506 | )    |  |   | (46,554 | )
|                                 |  |                |         |      |  |   |         |  
|Net deferred tax assets          |  | $              |        |      |  | $ |        |  
|                                 |  |                |         |      |  |   |         |  

F-19



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Based on the available objective evidence,
management believes that it is more likely than not that the net
deferred tax assets will not be fully realizable. Accordingly,
the Company has provided a full valuation allowance against its
net deferred tax assets at December 31, 2002 and 2001.

At December 31, 2002, the Company had net
operating loss carry forwards of approximately $139 million
and $31 million for federal and state jurisdictions,
respectively, available to reduce future taxable income.
Approximately $5 million and $48 million of the
federal net operating loss carry forwards resulted from the
Companys acquisition of ICAST Corporation and CuseeMe
Networks, Inc., respectively. The federal net operating loss
carry forwards expire in various periods through 2022 and the
state net operating loss carryforwards expire in various periods
through 2012. The Company had federal and state research tax
credit carryforwards of approximately $2.6 million and
$1.9 million, respectively. The federal research credits
expire in various periods through 2022 and the California
research credits can be carried forward indefinitely. A
cumulative ownership change of more than 50% over a three year
period may limit the availability of the Companys loss and
credit carryforwards, including the loss and credit
carryforwards of acquired subsidiaries.

The components of income (loss) before tax are as
follows (in thousands):

|                               |  |              |         |      |  |      |         |   |  |   |         |  
|------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2002         |         | 2001 |  | 2000
|                               |  |              |         |      |  |     
|US                             |  | $            | (24,561 | )    |  | $    | (31,738 | ) |  | $ | (18,003 | )
|Foreign                        |  |              | 239     |      |  |      | 137     |   |  |   | (784    | )
|                               |  |              |         |      |  |      |         |   |  |   |         |  
|Total income/(loss) before tax |  | $            | (24,322 | )    |  | $    | (31,601 | ) |  | $ | (18,787 | )
|                               |  |              |         |      |  |      |         |   |  |   |         |  

Note 9  Commitments

Leases

The Company leases its office facilities in the
United States, United Kingdom, France, Hong Kong, China and
India under noncancelable operating lease agreements that expire
from 2003 to 2009. Future minimum lease payments under these
leases as of December 31, 2002 are as follows (in
thousands):

|                         |                              |           |   |        | 
|------------------------ | ---------------------------- | --------- | - | ------ | 
|                         |                              | Operating
|                         |                              | Leases   
|                         |                              |          
|Year ending December 31, |                              |           |   |       
|                         | 2003                         |           | $ | 1,649  | 
|                         | 2004                         |           |   | 1,549  | 
|                         | 2005                         |           |   | 1,574  | 
|                         | 2006                         |           |   | 1,622  | 
|                         | 2007                         |           |   | 1,680  | 
|                         | Thereafter                   |           |   | 2,626  | 
|                         |                              |           |   |       
|                         | Total minimum lease payments |           | $ | 10,700 | 
|                         |                              |           |   |       

Rent expense under operating leases for the years
ended December 31, 2002, 2001 and 2000, was approximately
$1.7 million, $1.6 million and $1.2 million,
respectively.

Note 10  Warranties

The Company sells both software and hardware
products. We provide for future warranty costs upon product
delivery or from the purchase date. The specific terms and
conditions of those warranties vary

F-20



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

depending upon the product sold, the country in
which the customers are located and agreements we have with
various customers.

Software products generally carry a 90 day
warranty from the date of delivery or purchase. Longer warranty
periods are provided on a contract by contract basis and are
limited. Our liability under these warranties is to replace
defective media and in some cases to provide a corrected copy of
any portion of the software found not to be in substantial
compliance with the published specifications in the product
documentation. In such cases, if the Company is unable to make
the products conform with published specifications, the Company
may be obligated to refund the amount actually paid by customers.

In the case of hardware manufactured by the
Company, our warranties generally commence on the delivery date
or purchase date and continue for twelve months.

Factors that affect our warranty liability
include the number of units sold, historical experience and
managements judgment regarding anticipated rates of
warranty claims and cost per claim. We assess the adequacy of
our recorded warranty liabilities every quarter and make
adjustments to the liability if necessary. The Company has gone
through the transition from a hardware-based company to a
software-based company since the acquisition of CuseeMe and
plans to further deemphasize the manufacture and the sale of
hardware products manufactured by the Company in 2003.

Changes in our warranty liability, which is
included as a component of Accrued liabilities on
the Consolidated Balance Sheet, during 2002 were as follows:

|                                          |  |                |      |  
|----------------------------------------- |  | -------------- | ---- | -
|                                          |  |               
|                                          |  | (In thousands)
|Beginning balance as of December 31, 2001 |  | $              | 471  |  
|Provision for warranty liability          |  |                | 684  |  
|Settlement made during 2002               |  |                | (727 | )
|                                          |  |                |      |  
|Ending Balance as of December 31, 2002    |  | $              | 428  |  
|                                          |  |                |      |  

Note 11  Issuance of Equity
Securities

Convertible Preferred Stock

On June 8, 2000, the Company issued
27,437 shares of Series A Convertible Preferred Stock
(the Preferred Stock) in a private placement to
Vulcan Ventures Incorporated (Vulcan) for an
aggregate purchase price of $27,437,000. The Preferred Stock is
convertible into 4,247,214 shares of common stock of the
Company, as adjusted in April 2002, subject to further
adjustment for dilution in the event the Company completes an
offering of common stock, subject to certain exceptions, at a
price less than $6.46 per share. The Company also issued a
five-year warrant to Vulcan to purchase 892,591 shares of
common stock at $6.67 per share, as adjusted in May 2001.
On the date of issuance, the warrant had an approximate fair
market value of $3,700,000 determined using the Black-Scholes
pricing model. The warrant provides anti-dilution protection to
Vulcan, including protection in the event the Company issues
additional shares of common stock, subject to certain
exceptions, at a price less than the adjusted purchase price per
share. Each share of Preferred Stock has voting rights equal to
an equivalent number of shares of common stock into which it is
convertible and votes together as one class with the common
stock, unless otherwise specified in the Companys
Certificate of Incorporation. The holder of the Preferred Stock
has dividend rights on parity with the common stock. Each share
of Preferred Stock has a liquidation preference of $1,000 per
share. The Company must obtain approval from a majority of the
holders of the Preferred Stock in order to alter the Certificate
of Incorporation if such alteration would adversely affect the
Preferred Stock and for certain other matters.

F-21



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Issuance of Common Stock and
Warrants

On March 29, 2002, the Company signed a
definitive binding agreement to raise approximately
$4.9 million from a private placement of its common stock
and warrants. On April 12, 2002, the Company issued
6,686,000 shares of common stock at $0.72 per share
and warrants to purchase 3,343,001 shares of common stock
at an exercise price of $1.01 per share, pursuant to the
agreement. The warrants are exercisable for five years,
commencing October 12, 2002. Among others, the investors in
the offering included Mr. Ungermann and Dr. Gaut,
members of the Companys Board of Directors, and Special
Situations Technology Fund L.P., of which Adam Stettner, a
member of the Companys Board of Directors, serves as the
Managing Director.

Warrants

During the second quarter ended June 30,
2001, the Company issued a warrant to PictureTel Corporation to
purchase up to 2,614,377 shares of the common stock of the
Company at an exercise price of $0.91 per share and a term
of five years. The warrant was issued in connection with the
formation of a strategic technology, marketing and distribution
alliance with PictureTel Corporation. The warrant provided that
it would vest and become exercisable only upon achievement by
PictureTel of various milestones set forth in the warrant. As of
December 31, 2002, the PictureTel Corporation warrant was
not exercisable.

Note 12  Stock Plans

1997 Equity Incentive Plan

The Company has a 1997 Equity Incentive Plan,
which has, as amended, an aggregate of 5,875,000 shares of
common stock are authorized to be issued pursuant to stock
awards. As of December 31, 2002, 1,310,689 shares of
common stock pursuant to awards under the 1997 Plan were
available for future grant.

The 1997 Plan provides for the grant of stock
options, stock purchase awards and stock bonuses to employees,
directors and consultants. Options granted under the 1997 Plan
are for periods not to exceed ten years, and must be issued at
prices not less than 100% and 85%, for incentive and
nonqualified stock options, respectively, of the fair market
value of the stock on the date of grant. Incentive stock options
granted to stockholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and
must be issued at prices not less than 110% of the fair market
value of the stock on the date of grant. Options granted under
the 1997 Plan are exercisable at such time and under such
conditions as determined by the Board of Directors, and
generally vest over four years.

Restricted stock purchase awards under the 1997
Plan are to be issued at a price not less than 85% of the fair
market value of the stock on the date of grant. Restricted stock
purchase awards may be accompanied by a repurchase option in
favor of the Company in accordance with a vesting schedule and
at a price determined by the Board of Directors. Shares subject
to stock awards that have expired or otherwise terminated shall
again become available for the grant of awards under the 1997
Plan.

As of December 31, 2002 and 2001, no
unvested shares of common stock were outstanding subject to
repurchase by the Company.

1999 Equity Incentive Plan

Under the 1999 Equity Incentive Plan (the
1999 Plan), as amended through November 2002,
an aggregate of 6,000,000 shares of common stock were
authorized to be issued pursuant to stock awards. As of
December 31, 2002, shares of common stock available for
future grants pursuant to awards under the 1999 Plan aggregated
825,578.

F-22



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The 1999 Plan provides for the grant of
nonqualified stock options, stock purchase awards and stock
bonuses to selected employees and consultants. Officers and
directors are not eligible for grants under the 1999 Plans.
Options granted under the 1999 Plan are for periods not to
exceed ten years, and must be issued at prices not less than 85%
of the fair market value of the stock on the date of grant.
Options granted under the 1999 Plan are exercisable at such time
and under such conditions as determined by the Board of
Directors, and generally vest over four years.

Restricted stock purchase awards under the 1999
Plan are to be issued at a price determined by the Board of
Directors. Restricted stock purchase awards may be accompanied
by a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board
of Directors. Shares subject to stock awards that have expired
or otherwise terminated shall again become available for the
grant of awards under the 1999 Plan. As of December 31,
2002 and 2001, no unvested shares of common stock were subject
to repurchase by the Company under the 1999 Plan.

1997 Non-Employee Directors Stock Option
Plan

Under the 1997 Non-Employee Directors Stock
Option Plan (the Directors Plan), as amended,
1,500,000 shares of the companys common stock are
reserved for issuance thereunder. As of December 31, 2002,
921,864 shares of common stock pursuant to awards under the
Directors Plan were available for future grant.

Under the Directors Plan, each non-employee
director who is first elected to the Board of Directors after
the adoption of the plan is automatically granted an option to
purchase 40,000 shares of Common Stock. Each non-employee
director is additionally granted an option to purchase
40,000 shares of Common Stock on each anniversary of the
directors original grant under the Directors Plan.
In addition, each non-employee director serving on the Audit,
Compensation and Nominating Committees of the Board of
Directors, is granted an option under the Directors Plan
to purchase 25,000 shares, 15,000 shares and
15,000 shares, respectively, of Common Stock upon the
directors appointment to the committee and on each
anniversary of such directors original grant upon joining
such committee, so long as the director is not then an employee
of the Company, has continuously served on the committee during
such time and is a member of the committee at the time of grant.
Options granted under the Directors Plan are granted at
the fair market value of the Common Stock on the date of the
grant. Options granted to non-employee directors under the
Directors Plan currently have a ten-year term and become
exercisable on a daily ratable basis over a one year period from
the date of the grant.

Other Stock Option Plans

In addition to the three stock option plans
described above, the Company has outstanding stock options
granted under eight plans originally established by other
companies that were subsequently acquired by the Company.

Stock options representing 1.8 million
shares of common stock were outstanding under these plans as of
December 31, 2002, and none of the grants outstanding
represented restricted stock.

F-23



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                         |  |                              |  |                    |       | 
|------------------------ |  | ---------------------------- |  | ------------------ | ----- | 
|                         |  |                              |  | Shares Outstanding
|                         |  | Type of Stock Option Grants  |  | December 31, 2002 
|                         |  |                              |  |                   
|                         |  |                              |  | (in thousands)    
|CUseeMe 1993 Plan        |  | ISO and Non-qualified grants |  |                    | 7     | 
|CUseeMe 1994 Plan        |  | ISO and Non-qualified grants |  |                    | 6     | 
|CUseeMe 1995 Plan        |  | ISO and Non-qualified grants |  |                    | 1     | 
|CUseeMe 1996 Plan        |  | ISO and Non-qualified grants |  |                    | 1,390 | 
|CUseeMe N/ A Plan (1996) |  | Non-qualified grants         |  |                    | 4     | 
|CUseeMe SEP Plan (1996)  |  | Non-qualified grants         |  |                    | 6     | 
|CUseeMe 2001 Plan        |  | Non-qualified grants         |  |                    | 376   | 
|                         |  |                              |  |                    |       | 
|                         |  |                              |  |                    | 1,790 | 

A summary of option activity under the all stock
plans are as follows:

|                             |  |                     |        |                  |  |   |       | 
|---------------------------- |  | ------------------- | ------ | ---------------- |  | - | ----- | 
|                             |  | Shares Subject to   |        | Weighted Average
|                             |  | Options Outstanding |        | Exercise Price  
|                             |  |                     |        |                 
|                             |  | (In thousands)      |        |                 
|Balance at December 31, 1999 |  |                     | 4,729  |                  |  | $ | 9.61  | 
|Granted                      |  |                     | 5,240  |                  |  |   | 7.48  | 
|Exercised                    |  |                     | (392   | )                |  |   | 6.41  | 
|Cancelled                    |  |                     | (2,983 | )                |  |   | 10.70 | 
|                             |  |                     |        |                  |  |   |       | 
|Balance at December 31, 2000 |  |                     | 6,594  |                  |  |   | 7.62  | 
|Granted                      |  |                     | 8,262  |                  |  |   | 1.11  | 
|Exercised                    |  |                     | (8     | )                |  |   | 0.49  | 
|Cancelled                    |  |                     | (4,712 | )                |  |   | 6.91  | 
|                             |  |                     |        |                  |  |   |       | 
|Balance at December 31, 2001 |  |                     | 10,136 |                  |  |   | 3.64  | 
|Granted                      |  |                     | 4,965  |                  |  |   | 0.72  | 
|Exercised                    |  |                     | (7     | )                |  |   | 1.15  | 
|Cancelled                    |  |                     | (3,853 | )                |  |   | 2.76  | 
|                             |  |                     |        |                  |  |   |       | 
|Balance at December 31, 2002 |  |                     | 11,241 |                  |  | $ | 2.65  | 
|                             |  |                     |        |                  |  |   |       | 

With respect to certain options and restricted
stock granted in 1996 and 1997, the Company has recognized a
deferred compensation charge of approximately $2.1 million.
Further, in early February 1998, after considering various
factors including the input provided by the Companys
investment bankers, the Board of Directors of the Company
approved a plan under which 499,500 options previously granted
at prices of $10.20 and $11.00 to employees (excluding officers)
were exchanged for options with exercise prices of
$8.50 per share, which the Board concluded was the fair
value of the Companys common stock at that time. The
Company is recognizing a compensation charge of approximately
$1.3 million with respect to the 499,500 repriced stock
options and 278,000 additional stock options granted in early
February 1998 with exercise prices of $8.50 per share,
computed based on a deemed value of $10.20 per share of common
stock. The charges referred to above are being amortized over
the vesting period of the awards, which is generally five years.
The Company recognized $26,000, $115,000 and $267,000 of said
charges as compensation expense during the years ended
December 31, 2002, 2001 and 2000, respectively. The future
compensation charges are subject to reduction for any employee
who terminates employment prior to the expiration of such
employees option vesting period.

F-24



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant option groups outstanding at
December 31, 2002 and related weighted average exercise
price and contractual life information are as follows:

|                |  |                    |        |                     |  |                  |      |                     |  |                   |       |  |  |  |       |  |  |   |       | 
|--------------- |  | ------------------ | ------ | ------------------- |  | ---------------- | ---- | ------------------- |  | ----------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |  |                    |        |                     |  |                  |      |                    
|                |  |                    |        | Options Outstanding |  |                  |      |                    
|                |  |                    |        |                     |  |                 
|                |  |                    |        | Weighted Average    |  |                  |      | Options Exercisable
|                |  |                    |        | Remaining           |  | Weighted Average |      |                    
|Range of        |  | Number Outstanding |        | Contractual Life    |  | Exercise Price   |      | Number Exercisable  |  | Weighted Average 
|Exercise Prices |  | (In Thousands)     |        | (In Years)          |  | (Per Share)      |      | (In Thousands)      |  | Price (Per Share)
|                |  |                    |        |                     |  |                  |      |                     |  |                  
|$ 0.27  $ 0.60 |  |                    | 1,610  |                     |  |                  | 9.60 |                     |  | $                 | .45   |  |  |  | 127   |  |  | $ | .59   | 
|$ 0.69  $ 0.75 |  |                    | 2,179  |                     |  |                  | 9.20 |                     |  |                   | .75   |  |  |  | 418   |  |  |   | .75   | 
|$ 0.79  $ 0.92 |  |                    | 1,317  |                     |  |                  | 8.57 |                     |  |                   | .87   |  |  |  | 628   |  |  |   | .85   | 
|$ 0.94  $ 1.24 |  |                    | 988    |                     |  |                  | 8.25 |                     |  |                   | 1.05  |  |  |  | 454   |  |  |   | 1.06  | 
|$ 1.25  $ 1.25 |  |                    | 1,375  |                     |  |                  | 8.03 |                     |  |                   | 1.25  |  |  |  | 789   |  |  |   | 1.25  | 
|$ 1.27  $ 2.29 |  |                    | 1,314  |                     |  |                  | 7.73 |                     |  |                   | 1.46  |  |  |  | 676   |  |  |   | 1.58  | 
|$ 2.34  $ 5.50 |  |                    | 1,133  |                     |  |                  | 7.23 |                     |  |                   | 4.99  |  |  |  | 757   |  |  |   | 4.93  | 
|$ 5.50  $15.12 |  |                    | 1,136  |                     |  |                  | 6.50 |                     |  |                   | 10.71 |  |  |  | 912   |  |  |   | 10.74 | 
|$15.75  $28.46 |  |                    | 185    |                     |  |                  | 6.98 |                     |  |                   | 19.73 |  |  |  | 139   |  |  |   | 19.72 | 
|$36.18  $36.18 |  |                    | 4      |                     |  |                  | 7.20 |                     |  |                   | 36.18 |  |  |  | 2     |  |  |   | 36.18 | 
|                |  |                    |        |                     |  |                  |      |                     |  |                   |       |  |  |  |       |  |  |   |       | 
|Total           |  |                    | 11,241 |                     |  |                  | 8.28 |                     |  | $                 | 2.65  |  |  |  | 4,902 |  |  | $ | 4.05  | 
|                |  |                    |        |                     |  |                  |      |                     |  |                   |       |  |  |  |       |  |  |   |       | 

Pro Forma Disclosures

The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per
share data):

|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                            |  |                        
|                                                                                            |  | Year Ended December 31,
|                                                                                            |  |                        
|                                                                                            |  | 2002                    |         | 2001 |  | 2000
|                                                                                            |  |                         |         |      |  |     
|Net loss                                                                                    |  | $                       | (24,322 | )    |  | $    | (31,601 | ) |  | $ | (18,787 | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Add: stock-based employee compensation expense
    included in reported net income          |  |                         | 26      |      |  |      | 23      |   |  |   | 267     |  
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Deduct: Total stock based employee compensation
    expense determined pursuant to SFAS 123 |  |                         | (2,378  | )    |  |      | (2,956  | ) |  |   | (9,165  | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss                                                                          |  | $                       | (26,674 | )    |  | $    | (34,534 | ) |  | $ | (27,685 | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|As reported net loss per share (basic and diluted)                                          |  | $                       | (0.64   | )    |  | $    | (1.26   | ) |  | $ | (1.09   | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss per share (basic and diluted)                                            |  | $                       | (0.70   | )    |  | $    | (1.37   | ) |  | $ | (1.61   | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  

The weighted-average estimated grant-date fair
value of options granted under the Companys various stock
option plans during 2002, 2001 and 2000 was $0.64, $0.95 and
$5.23, respectively. For the years ended December 31, 2002,
2001 and 2000, the fair value of each option on the date of
grant was determined using the Black-Scholes model with the
following assumptions:

|                                         |  |                          |     |      |  |      |     |   |  |  |     |  
|---------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                         |  |                         
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2002                     |     | 2001 |  | 2000
|                                         |  |                          |     |      |  |     
|Risk-free interest rate                  |  |                          | 3.0 | %    |  |      | 5.0 | % |  |  | 5.0 | %
|Volatility                               |  |                          | 113 | %    |  |      | 123 | % |  |  | 70  | %
|Option term from vesting date (in years) |  |                          | 5   |      |  |      | 5   |   |  |  | 5   |  
|Dividend yield                           |  |                          | 0.0 | %    |  |      | 0.0 | % |  |  | 0.0 | %

F-25



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

1997 Employee Stock Purchase Plan

The Companys 1997 Stock Purchase Plan (the
Purchase Plan) was adopted by the Board of Directors
and in October 1997 subsequently approved by the stockholders
and became effective upon the closing of the Companys
initial public offering. Under the Purchase Plan a total of
1,350,000 shares of common stock have been reserved for issuance
to participating employees who meet eligibility requirements. As
of December 31, 2002, 309,375 shares of common stock were
available for future issuance under the Purchase Plan.

The Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, which may not
exceed 15% of an employees base compensation, including
commissions, bonuses and overtime pay, at a price equal to 85%
of the fair value of the common stock at the beginning of each
offering period or the end of the purchase period, whichever is
lower. The initial purchase period commenced on April 29,
1998. During 2002, 2001 and 2000, the Company issued 367,415,
386,696 and 172,077 shares of common stock, respectively, under
the Purchase Plan for aggregate proceeds of approximately
$120,766, $287,000 and $438,000, respectively. Compensation cost
(included in pro forma net loss and net loss per share amounts
only) for the years ended December 31, 2002, 2001 and 2000,
for the grant date fair value, as defined by SFAS 123, of the
purchase rights granted under the Purchase Plan was calculated
using the Black-Scholes model with the following assumptions:

|                                       |  |                          |     |      |  |      |     |   |  |  |     |  
|-------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                       |  |                         
|                                       |  | Years Ended December 31,
|                                       |  |                         
|                                       |  | 2002                     |     | 2001 |  | 2000
|                                       |  |                          |     |      |  |     
|Risk-free interest rate                |  |                          | 3.0 | %    |  |      | 5.0 | % |  |  | 5.0 | %
|Volatility                             |  |                          | 113 | %    |  |      | 123 | % |  |  | 70  | %
|Option term from grant date (in years) |  |                          | 1   |      |  |      | 1   |   |  |  | 1   |  
|Dividend yield                         |  |                          | 0.0 | %    |  |      | 0.0 | % |  |  | 0.0 | %

The pro forma SFAS 123 disclosures include
compensation expense for purchase rights granted during 2002,
2001 and 2000. The weighted average estimated grant date fair
value for purchase rights granted under the Purchase Plan during
2002, 2001 and 2000 was $0.3, $0.46 and $5.05, respectively.

Note 13  Litigation

On or about April 9, 1999, several purported
class action suits were filed in the United States District
Court for the Northern District of California alleging
violations of the federal securities laws against the Company
and certain of its officers and directors in connection with the
Companys reporting of its financial results for the period
ended December 31, 1998. The court dismissed these actions
without leave to amend on February 14, 2000 and the
plaintiffs appealed the dismissal to the U.S. Court of Appeals
for the Ninth Circuit. The appeal was taken under submission by
the court of Appeals following the filing of briefs by the
parties and the presentation of oral argument on July 11,
2001. On March 15, 2002, the Court of Appeals affirmed the
district courts judgment. On March 28, 2002 the
plaintiffs filed a Petition for Rehearing in the Ninth Circuit.
On April 5, 2002, the Ninth Circuit denied the
plaintiffs Petition for a Rehearing. On December 12,
2002, the plaintiffs filed in the Ninth Circuit a Motion to
Recall the Mandate. On January 7, 2003, the Ninth Circuit
denied the motion.

On April 23, 2001, the Company received
notice of a stockholders derivative action filed in
California Superior Court in the County of Santa Clara, alleging
that, among other things, certain directors and officers of the
Company sold shares of the Companys common stock between
January 21, 1999 and April 6, 1999, while in
possession of material non-public information pertaining to the
Company. The Company and the individual defendants demurred to
the complaint, and moved to dismiss the action, or in the
alternative to stay the action pending the outcome of the appeal
in the related federal court class action or, if necessary, the
investigation of the claims by the Company. The court granted
the demurrer in part and denied it in part, granting plaintiff
leave to file an amended complaint, and stayed the action
pending the outcome of the appeal

F-26



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

in the federal court class action. The court also
ordered that certain limited discovery of documents could take
place with respect to the filing of the amended complaint. In
December 2001, the plaintiff moved for leave to take certain
third-party discovery. The motion was denied by the court.
Plaintiff filed an amended complaint on February 22, 2002.
A hearing on the defendants demurrer to the amended
complaint was scheduled to take place on May 21, 2002. The
parties agreed to a continuance of the hearing in order to
permit them to engage in settlement discussions with a
third-party mediator. On July 25, 2002, the parties reached
a tentative settlement of the derivative action, subject to a
number of conditions, including approval of the settlement by a
special committee of independent directors appointed by the
Companys Board of Directors and empowered to act on behalf
of the Company with respect to the action. Under the terms of
the tentative settlement, the Company would not pay any money to
any party in connection with the settlement, nor would it pay
any money as indemnification to present or former officers and
directors in the event of a settlement of the SEC enforcement
action described in the following paragraph. On
December 19, 2002, the court approved the settlement and
dismissed the complaint with prejudice.

On April 25, 2002, the Company was informed
by the staff of the SEC that the staff intends to recommend that
the SEC commence an enforcement action against the Company,
Ralph Ungermann and two former officers of the Company in
connection with the Companys January 1999 announcement of
unaudited financial results for the quarter and year ended
December 31, 1998, which were revised by the Company prior
to the release of the Companys Form 10-K in April
1999. The staff indicated that the basis for such an action
would be allegations that the January 1999 announcement was
misleading and/or the result of inadequate financial controls.
The staff did not state what remedies it would seek in such an
action, but noted that the remedies it might seek could include
an injunction against future violations, disgorgement, civil
penalties and an officer and director bar against the
individuals. The Company and each of the individuals
subsequently concluded separate settlements with the SEC. The
Company agreed that the SEC could file an administrative
proceeding against the Company, and that the Company would
settle the proceeding without admitting or denying the
allegations thereof. Pursuant to the Companys agreement,
on or about November 26, 2002, the SEC commenced an
administrative proceeding and entered therein an order making
findings and requiring the Company to cease and desist from any
violations of specified provisions of the federal securities
laws. The individuals agreed that the SEC could file a civil
injunctive action against them, and that they would settle the
action without admitting or denying the allegations thereof.
Pursuant to the individuals agreements, on or about
November 26, 2002, the SEC filed a complaint in the United
States District Court for the Northern District of California
entitled SEC v. Ralph K. Ungermann, et al.,
Civil Action No. C 02 05613 RS, in which the
SEC alleged that the individuals had violated various provisions
of the federal securities laws, and, upon the consent of each of
the individuals, the court contemporaneously entered final
judgments that each of the individuals be permanently enjoined
from violations of certain provisions of the federal securities
laws and pay certain sums representing disgorgement, penalties
and pre-judgment interest. All such sums were subsequently paid.

On May 1, 2002, the Company received notice
that Clover Technologies, Inc. (Clover) submitted a
claim to the American Arbitration Association initiating an
arbitration proceeding claiming that Clover is entitled to
compensation from the Company for allegedly defective video
access nodes (VANS) supplied by the Company to
Clover. The Company filed an answer to Clovers demand for
arbitration, denying all material allegations and claims, on
May 30, 2002. Since filing a demand for arbitration against
the Company, Clover has specified that its claim is for damages
totaling in excess of $2.7 million, based on claims that
certain of the VANS which Clover purchased for resale to its
customers were defective. The purchase arises out of a written
agreement between the Company and Clover, dated June 22,
1998. Clover seeks damages based on claims for alleged breach of
express and implied warranties, in the amount purportedly paid
for replacement products, plus unspecified incidental and
consequential damages. The Companys insurer has retained
counsel to defend the Company in this matter. The Company has
responded to the arbitration demand by denying all material
allegations, and it intends to vigorously defend itself. An
arbitration hearing

F-27



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

before the American Arbitration Association is
scheduled for April 7, 2003 through April 14, 2003 in
Santa Clara, California. Prior to that date, the parties held a
mediation session on March 31, 2003 and agreed to a
settlement of this matter.

On August 28, 2002, the Company was served
with a Complaint filed by Eric Hamilton (Hamilton)
in the United States District Court for the District of Maryland
alleging that in connection with the Companys use of its
CUseeME and Click-to-Meet products the Company infringes the
United States Patent No. 5,176,520 (the 520 Patent),
issued on January 5, 1993 and relating to Computer
Assisted Instructional Delivery System and Method, seeking
unspecified damages for infringement and willful infringement,
in addition to seeking injunctive relief. On November 1,
2002, the Company filed its Answer to the Complaint in which it
denied all material allegations made against it. The Company
also filed a Counterclaim seeking a judicial declaration that
(i) its products do not infringe any valid claim of the
520 Patent and (ii) the 520 Patent is invalid
and unenforceable on the grounds of obviousness, lack of
enablement and failure to meet the written description
requirements under the patent laws. On or about January 5,
2003, the Company and Hamilton reached a tentative agreement on
material terms to settle the litigation. The Company agreed to
pay to Hamilton the total sum of $35,000 and dismiss its
counterclaim in exchange for a fully paid up, worldwide,
nonexclusive license to practice under the 520 patent and
a dismissal of Hamiltons claims. The parties exchanged a
mutual general release of all claims. The parties executed a
formal settlement agreement on January 28, 2003.

Note 14  Subsequent
Events

On April 3, 2003, the Company entered into a
term loan facility agreement with its bank, that allows the
Company to borrow up to $3.0 million at any time prior to
December 31, 2003. Funds drawn under the facility will be
recorded as a term loan fully amortized over a three-year period
with an interest rate equal to the banks prime rate plus
2.25% with a floor at 6.5%. The Company paid a $22,500
commitment fee at the closing and is subject to a commitment fee
of 0.25% per annum on any unused borrowings. In connection with
the term loan facility, the Company agreed to issue a warrant to
purchase up to 281,250 shares of the Companys common
stock at an exercise price of $0.32 per share. The term loan
will be secured by all of the Companys assets, including
intellectual property rights, and requires that the Company
maintain cash deposits at the bank of not less than
$2.9 million and adhere to a liquidity covenant. The
liquidity covenant stipulates that the sum of (i) the
amount of the Companys unrestricted cash on deposit in the
bank, plus (ii) the companys eligible accounts
receivable divided by (iii) the amount outstanding under
the term loan facility be at all times equal to 2.0 or higher.
The liquidity covenant is only applicable if the loan is drawn
down.

On April 11, 2003, the company signed an
agreement with its landlord to terminate the lease of its 48,000
square foot Santa Clara, California headquarters facility and
concurrently executed a new lease for approximately
19,700 square feet of space in Redwood City, California.
For the period May through December 2003 lease payments under
the new lease will total approximately $452,000 compared to
$1.0 million for the same period under the terms of the
prior lease. For the five-year period from January 2004 through
December 2008, payments under the new lease will aggregate
approximately $3.7 million compared to $8.2 million that
would have been paid under the prior lease. As compensation for
the early termination of the lease the company agreed to issue
warrants to the lessor for the purchase of two million shares of
the Companys common stock. The warrants will have a
five-year life and an exercise price of $0.27 per share. The
Company plans to occupy the new office space at the beginning of
May 2003.

On April 14, 2003, the Company entered into
a private equity line of financing agreement with Ralph
Ungermann, Executive Chairman of the Board of Directors of the
Company. Under this agreement, the company may sell up to
$1 million of the Companys common stock to
Mr. Ungermann at a purchase price of $0.31 per share during
the period from April 14, 2003 through April 13, 2004.
The Company may draw down funds under the private equity line
financing up to four times during the 12 month term of the
agreement, with

F-28



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

each draw for a minimum of $250,000. Common stock
sold to Mr. Ungermann pursuant to this agreement will be
issued on a private placement basis pursuant to an exemption
from registration under Section 4(2) of the Securities Act
of 1933. The warrant will have a five-year term and allows
Mr. Ungermann to purchase up to 300,000 additional shares
of the Companys stock at an exercise price equal to $0.38
per share, 125% of the fair market value of the Companys
common stock as measured on the date of issuance of the warrant.
The Company has agreed to provide registration rights with
respect to the shares of the Companys common stock issued
under the equity line of financing agreement and issued upon
exercise of the warrant issued to Mr. Ungermann.

F-29



---



##### 



QUARTERLY SUMMARY

(Unaudited)

|                                                                |  |                                       |        |         |  |              |        |             |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------- | - |  | - | ------- | -
|                                                                |  |                                      
|                                                                |  | Three Months Ended                   
|                                                                |  |                                      
|                                                                |  | March 31                              |        | June 30 |  | September 30 |        | December 31
|                                                                |  |                                       |        |         |  |              |        |            
|                                                                |  |                                      
|                                                                |  | (In thousands, except per share data)
|2002                                                            |  |                                       |        |         |  |              |        |             |  |   |         |   |  |   |         |  
|                                                                |  |                                       |        |         |  |              |        |             |  |   |         |   |  |   |         |  
|Revenues                                                        |  | $                                     | 6,601  |         |  | $            | 6,644  |             |  | $ | 6,137   |   |  | $ | 5,032   |  
|Cost of revenues                                                |  | $                                     | 1,348  |         |  | $            | 3,653  |             |  | $ | 2,039   |   |  | $ | 1,339   |  
|Loss from operations                                            |  | $                                     | (1,703 | )       |  | $            | (4,592 | )           |  | $ | (3,650  | ) |  | $ | (14,492 | )
|Net loss                                                        |  | $                                     | (1,674 | )       |  | $            | (4,512 | )           |  | $ | (3,627  | ) |  | $ | (14,509 | )
|Basic and diluted earnings per share                            |  | $                                     | (0.05  | )       |  | $            | (0.12  | )           |  | $ | (0.09   | ) |  | $ | (0.36   | )
|Shares used to compute net loss per share                       |  |                                       | 33,380 |         |  |              | 38,445 |             |  |   | 40,275  |   |  |   | 40,367  |  
|Non-recurring charge:                                           |  |                                       |        |         |  |              |        |             |  |   |         |   |  |   |         |  
|Included in cost of revenues related to inventory
    valuation |  | $                                     |       |         |  | $            | (1,000 | )           |  | $ |        |   |  | $ | (438    | )
|2001                                                            |  |                                       |        |         |  |              |        |             |  |   |         |   |  |   |         |  
|                                                                |  |                                       |        |         |  |              |        |             |  |   |         |   |  |   |         |  
|Revenues                                                        |  | $                                     | 4,382  |         |  | $            | 8,135  |             |  | $ | 7,767   |   |  | $ | 7,377   |  
|Cost of revenues                                                |  | $                                     | 2,587  |         |  | $            | 4,389  |             |  | $ | 8,893   |   |  | $ | 4,681   |  
|Loss from operations                                            |  | $                                     | (8,645 | )       |  | $            | (6,300 | )           |  | $ | (10,688 | ) |  | $ | (6,907  | )
|Net loss                                                        |  | $                                     | (8,331 | )       |  | $            | (6,142 | )           |  | $ | (10,522 | ) |  | $ | (6,606  | )
|Basic and diluted earnings per share                            |  | $                                     | (0.48  | )       |  | $            | (0.33  | )           |  | $ | (0.34   | ) |  | $ | (0.20   | )
|Shares used to compute net loss per share                       |  |                                       | 17,414 |         |  |              | 18,859 |             |  |   | 30,707  |   |  |   | 33,328  |  
|Non-recurring charge:                                           |  |                                       |        |         |  |              |        |             |  |   |         |   |  |   |         |  
|Included in cost of revenues related to inventory
    valuation |  | $                                     |       |         |  | $            |       |             |  | $ | (5,515  | ) |  | $ | (1,091  | )

F-30



---



##### 



REPORT OF INDEPENDENT ACCOUNTANTS ON

FINANCIAL STATEMENT SCHEDULE


To the Board of Directors and Stockholders

of First Virtual Communications, Inc.


Our audits of the consolidated financial
statements referred to in our report dated February 5,
2003, except for Note 14, which is as of April 14, 2003,
appearing in this Form 10-K also included an audit of the
financial statement schedules listed in Item 15(a)(2) of
this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP




San Jose, California

February 5, 2003


S-1



---



##### 



FIRST VIRTUAL COMMUNICATIONS, INC.

VALUATION AND QUALIFYING ACCOUNTS


for the Fiscal Years 2002, 2001 and
2000


|                                                |  |                      |           |                  |  |             |           |                |  |           |                          |  |  |   |           |  |  |   |           | 
|----------------------------------------------- |  | -------------------- | --------- | ---------------- |  | ----------- | --------- | -------------- |  | --------- | ------------------------ |  |  | - | --------- |  |  | - | --------- | 
|                                                |  |                      |           |                  |  |             |           |               
|                                                |  |                      |           |                  |  | Deductions  |           |               
|                                                |  | Balance at Beginning |           | Charged to Costs |  |             |           | Balance at End
|Description                                     |  | of Period            |           | and Expenses     |  | Description |           | Amount         |  | of Period
|                                                |  |                      |           |                  |  |             |           |                |  |          
|Allowance for Doubtful Accounts
    Receivable: |  |                      |           |                  |  |             |           |                |  |           |                          | 
|Fiscal year 2002                                |  | $                    | 1,640,000 |                  |  | $           | 185,000   |                |  |           | Write-offs & adjustments |  |  | $ | 807,000   |  |  | $ | 1,018,000 | 
|Fiscal year 2001                                |  |                      | 470,000   |                  |  |             | 1,170,000 | (1)            |  |           | Write-offs & adjustments |  |  |   |          |  |  |   | 1,640,000 | 
|Fiscal year 2000                                |  |                      | 1,269,000 |                  |  |             | 524,000   |                |  |           | Write-offs & adjustments |  |  |   | 1,323,000 |  |  |   | 470,000   | 
|Reserve for Returns                             |  |                      |           |                  |  |             |           |                |  |           |                          | 
|Fiscal year 2002                                |  | $                    | 869,000   |                  |  | $           | (8,000    | )              |  |           | Write-offs & adjustments |  |  | $ | 314,000   |  |  | $ | 547,000   | 
|Fiscal year 2001                                |  |                      | 542,000   |                  |  |             | 502,000   |                |  |           | Write-offs & adjustments |  |  |   | 175,000   |  |  |   | 869,000   | 
|Fiscal year 2000                                |  |                      | 910,000   |                  |  |             | 375,000   |                |  |           | Write-offs & adjustments |  |  |   | 743,000   |  |  |   | 542,000   | 



---



|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $912,000 provision for doubtful accounts
    recorded during the year ended December 31, 2001 and
    $258,000 of additional allowance for doubtful accounts,
    resulting from the acquisition of CUseeMe Networks, Inc.

S-2



---



##### 



EXHIBIT INDEX

|        |    |                         |  |                                                                                                                                                                                              
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 2  | .1                      |  | Agreement and Plan of Merger and Reorganization,
    dated as of March 22, 2001, by and among First Virtual
    Communications, Inc., FVC Acquisition Corp. and CUseeMe
    Networks, Inc.(1)
|        | 3  | .1                      |  | Amended and Restated Certificate of Incorporation
    of the Company(2)                                                                                                                      
|        | 3  | .2                      |  | Certificate of Ownership and Merger, effective
    August 3, 1998(3)                                                                                                                         
|        | 3  | .3                      |  | Certificate of Designation of Series A
    Convertible Preferred Stock(5)                                                                                                                    
|        | 3  | .4                      |  | Amended Bylaws of the Registrant(2)                                                                                                                                                          
|        | 3  | .5                      |  | Certificate of Ownership and Merger, effective
    February 5, 2001(8)                                                                                                                       
|        | 3  | .6                      |  | Certificate of Amendment of Restated Certificate
    of Incorporation filed on June 19, 2001(8)                                                                                              
|        | 4  | .1                      |  | Specimen Common Stock Certificate(3)                                                                                                                                                         
|        | 4  | .2                      |  | Specimen Series A Convertible Preferred
    Stock Certificate(5)                                                                                                                             
|        | 4  | .3                      |  | Warrant to purchase 2,614,377 shares of the
    Companys Common Stock, dated May 7, 2001, issued by
    the Company to PictureTel Corporation(9)                                            
|        | 4  | .4                      |  | Warrant to purchase 850,000 shares, subject to
    adjustment, of the Companys Common Stock, dated
    June 8, 2000 issued by the Company to Vulcan Ventures
    Incorporated(5)            
|        | 4  | .5                      |  | Warrant to purchase 18,750 shares of the
    Companys Common Stock, dated April 30, 1997 issued by
    the Company to Silicon Valley Bank(1)                                                
|        | 4  | .6                      |  | Warrant to purchase the Companys Common
    Stock, dated April 12, 2002, issued by the Company to the
    purchasers and in the amounts as set forth on Schedule A
    attached thereto(12) 
|        | 4  | .7                      |  | Registration Rights Agreement, dated
    April 12, 2002, by and among the Company and each of the
    purchasers listed therein(12)                                                          
|        | 10 | .1*                     |  | 1997 Equity Incentive Plan(6)                                                                                                                                                                
|        | 10 | .4*                     |  | 1997 Employee Stock Purchase Plan(2)                                                                                                                                                         
|        | 10 | .5*                     |  | Form of 1997 Employee Stock Purchase Plan
    Offering(2)                                                                                                                                    
|        | 10 | .6*                     |  | 1997 Non-Employee Directors Stock Option
    Plan(6)                                                                                                                                        
|        | 10 | .8*                     |  | Executive Officers Change of Control Plan(4)                                                                                                                                                
|        | 10 | .9*                     |  | Non-Employee Directors Change of Control
    Plan(4)                                                                                                                                        
|        | 10 | .10*                    |  | 1999 Equity Incentive Plan(6)                                                                                                                                                                
|        | 10 | .12*                    |  | Form of Indemnification Agreement between the
    Registrant and its directors and executive officers(2)                                                                                     
|        | 10 | .14                     |  | Lease Agreement between the Company and John
    Arrillaga, or his successor Trustee, UTA 7/20/77, dated July 19,
    1995 (the Lease Agreement)(2)                                        
|        | 10 | .15                     |  | Amendment No. 1 to the Lease Agreement,
    dated November 7, 1997(2)                                                                                                                        
|        | 10 | .16                     |  | Amendment No. 4 to the Lease Agreement,
    dated February 4, 1999(4)                                                                                                                        
|        | 10 | .17                     |  | Master Lease Agreement between the Company and
    Comdisco, Inc. (Comdisco), dated April 30,
    1997(2)                                                                                  
|        | 10 | .18                     |  | Subordinated Loan and Security Agreement between
    the Company and Comdisco, dated April 30, 1997(2)                                                                                       
|        | 10 | .19                     |  | Development and License Agreement between the
    Company and Advanced Telecommunications Modules Limited, dated
    February 25, 1994, as amended(2)                                        
|        | 10 | .20                     |  | Technology Licensing Agreement between IBM
    Corporation and the Company, dated October 16, 1997(2)                                                                                        
|        | 10 | .22                     |  | Subordinated Loan and Security Agreement between
    the Company and Comdisco, dated October 23, 1997(2)                                                                                     
|        | 10 | .23                     |  | Lease Agreement between the Company and John
    Arrillaga, or his successor Trustee, UTA 7/20/77, dated
    November 7, 1997(2)                                                             
|        | 10 | .24                     |  | Letter Agreement between IBM Corporation and the
    Company, dated February 8, 1998(2)                                                                                                      



---



##### 



|        |    |                         |  |                                                                                                                                                                                   
|------- | -- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 10 | .27                     |  | Stock Purchase Agreement, dated June 8,
    2000, between the Company and Vulcan Ventures Incorporated(5)                                                                         
|        | 10 | .28                     |  | Registration Rights Agreement, dated June 8,
    2000, between the Company and Vulcan Ventures Incorporated(5)                                                                    
|        | 10 | .30*                    |  | Employment and Non-Competition Agreement, dated
    March 22, 2001, between the Company and Killko Caballero(10)                                                                  
|        | 10 | .31*                    |  | Offer Letter, dated January 7, 2002, between
    the Company and Timothy Rogers(11)                                                                                               
|        | 10 | .32*                    |  | Letter Agreement, dated January 7, 2002,
    between the Company and Randy Acres(11)                                                                                              
|        | 10 | .33*                    |  | Letter Agreement, dated January 7, 2002,
    between the Company and Raymond Cavanaugh(11)                                                                                        
|        | 10 | .34*                    |  | Release and Waiver, dated March 12, 2002,
    between the Company and James Griffin(11)                                                                                           
|        | 10 | .35*                    |  | Letter Agreement, dated March 20, 2002,
    between the Company and Robert Scott(11)                                                                                              
|        | 10 | .36                     |  | Purchase Agreement, dated as of March 29,
    2002, by and among the Company and each of the purchasers listed
    therein(12)                                                    
|        | 10 | .37*                    |  | Amended and Restated Promissory Note and restated
    Security Agreement executed on May 14, 2002 by Killko
    Caballero in favor of the Company(11)                             
|        | 10 | .38**                   |  | First Virtual Communications Partner Agreement,
    dated April 1, 2002, between Net One Systems and the
    Company(13)                                                          
|        | 10 | .39*                    |  | Retention Agreement, dated October 3, 2002,
    between the Company and Ralph Ungermann                                                                                           
|        | 10 | .40*                    |  | Settlement and Release Agreement, dated
    October 29, 2002, between the Company and Killko Caballero                                                                            
|        | 10 | .41*                    |  | Settlement and Release Agreement, dated
    December 12, 2002 between the Company and Timothy Rogers                                                                              
|        | 10 | .42*                    |  | Offer Letter, dated October 29, 2002,
    between the Company and Jonathan Morgan                                                                                                 
|        | 10 | .43*                    |  | Offer Letter, dated December 12, 2002
    between the Company and Frank Kaplan                                                                                                    
|        | 10 | .44*                    |  | Offer Letter, dated December 12, 2002
    between the Company and Truman Cole                                                                                                     
|        | 10 | .45*                    |  | Settlement and Release Agreement, dated
    January 10, 2003, between the Company and Jeffery Krampf                                                                              
|        | 23 | .1                      |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                             
|        | 24 | .1                      |  | Power of Attorney (included on signature page)                                                                                                                                    
|        | 99 | .1                      |  | Certification, dated April 15, 2003,
    required by Section 906 of the Public Company Accounting
    Reform and Investor Protection Act of 2002 (18 U.S.C.
    §1350, as adopted)



---

Notes to Exhibits



|    |  |                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Management contract or compensatory plan or
    arrangement.                                                                                                                                  
|   
|**  |  | Confidential Treatment has been granted with
    respect to certain portions of this Exhibit. Omitted portions
    have been filed separately with the Securities and Exchange
    Commission.
|   
|(1) |  | Filed as an exhibit to the Companys Current
    Report on Form 8-K dated April 4, 2001 (File
    No. 000-23305).                                                                             
|   
|(2) |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-1, as amended (File
    No. 333-38755).                                                                             
|   
|(3) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on June 10, 1998
    (File No. 000-23305).                                                                       
|   
|(4) |  | Filed as an exhibit to the Companys Annual
    Report on Form 10-K filed on April 15, 1999 (File
    No. 333-72533).                                                                         
|   
|(5) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 14, 2000
    (File No. 000-23305).                                                                     
|   
|(6) |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-8 filed on July 17,
    2000 (File No. 333-4159).                                                                   



---



##### 





|     |  |                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------
|(7)  |  | Filed as an exhibit to the Companys Annual
    Report on Form 10-K filed on March 30, 2000 (File
    No. 333-72533).            
|    
|(8)  |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 15, 2001
    (File No. 000-23305).        
|    
|(9)  |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on November 14,
    2001 (File No. 000- 23305).     
|    
|(10) |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-4 (File
    No. 333-59480), as filed on April 25, 2001.
|    
|(11) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on May 15, 2002.                                    
|    
|(12) |  | Filed as an exhibit to the Companys
    Registration Statement on Form S-3 (File
    No. 333-88058), as filed on May 10, 2002.  
|    
|(13) |  | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 14, 2002.