##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934        
| 
|  |  | For the Fiscal Year Ended December 31,
    2003                                                 
| 
|o |  | 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.)
|                                                                  
|3200 Bridge Parkway, Suite 202                                     |  |                                         
|Redwood City, CA                                                   |  | 94065                                   
|(Address of principal executive
    offices)                       |  | (Zip code)                              

(650) 801-6500

(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).     Yes o          No þ

As of June 30, 2003 there were
8,100,682 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 $4.44 for such shares on The Nasdaq SmallCap Market on
June 30, 2003) was approximately $23.6 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,
2003 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 March 15, 2004 was 14,564,271.

DOCUMENTS INCORPORATED BY REFERENCE

Designated portions of the registrants
definitive proxy statement for the 2004 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this Form 10-K.



---






---

TABLE OF CONTENTS



|                                                               |                                                                                                         |  |  |  |  |  |  | 
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                        
|                                                               | Item 1. Business                                                                                       
|                                                               | Item 2. Properties                                                                                     
|                                                               | Item 3. Legal Proceedings                                                                              
|                                                               | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                                       
|                                                               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                               | Item 6. Selected Financial Data                                                                        
|                                                               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                               | Item 7A. Quantitative and Qualitative Disclosure about Market Risk                                     
|                                                               | Item 8. Financial Statements and Supplementary Data                                                    
|                                                               | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                               | Item 9A. Controls and Procedures                                                                       
|PART III                                                      
|                                                               | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                               | Item 11. Executive Compensation                                                                        
|                                                               | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                               | Item 13. Certain Relationships and Related Transactions                                                
|                                                               | Item 14. Principal Accountants Fees and Services                                                       
|PART IV                                                       
|                                                               | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                                    
|POWER OF ATTORNEY                                             
|REPORT OF INDEPENDENT AUDITORS                                
|FIRST VIRTUAL COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS
|EXHIBIT 10.5                                                  
|EXHIBIT 10.31                                                 
|EXHIBIT 10.33                                                 
|EXHIBIT 23.1                                                  
|EXHIBIT 31.1                                                  
|EXHIBIT 31.2                                                  
|EXHIBIT 32                                                    



---



##### Table of Contents






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 provider of software infrastructure and solutions for
real-time rich media communications. The Company delivers
integrated communications software solutions that address the
needs of a geographically distributed workforce, that needs 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 software solutions integrate seamlessly with
existing tools and methodologies, such as e-mail and web
browsing, while extending the advantages of instant messaging
and collaboration environments, such as Windows Messenger. The
Companys innovative solutions are deployed in over 1,200
customer sites worldwide, including Fortune 500 companies,
government agencies and service providers.

In June 2001, the Company acquired CUseeMe
Networks, a company that specialized in delivering innovative
software-based solutions to enable voice, video, and data
collaboration over IP-based enabling large-scale deployments of
real-time rich media collaboration to enterprise desktops.
Following the merger, the Company began to transition from its
hardware-based product line of specialty networking equipment to
being a completely software-based solution for real-time, rich
media communications. First Virtual Communications now provides
a broad range of integrated real-time rich media communications
software solutions to enterprise customers, government agencies
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
real-time rich media software solutions to enterprise,
government and education markets, either as systems sold through
channels or services delivered through service providers. Our
web-based Click to MeetTM products provide a
framework for real-time rich media communication 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 products have been well
received by the market and are gaining recognition as a robust
and versatile real-time rich media communications software
solution. Click to Meet Express, our web conferencing
application, received positive recognition in a number of
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 Innovative Use of Technology at the
Cisco Systems Innovation Through Convergence Exposition,
held in Dallas, Texas in April of 2002.

1



---



##### Table of Contents



First Virtual Communications distributes its
products primarily through resellers, integrators and
collaboration partners, which include Aethra S.R.L, British
Telecom, Comp View, Inc., Dataline Inc., Net One Systems,
NEC System Technologies, Ltd., Southern Business Communications
Inc., Synetrix, Verizon Network Integration and other leading
companies worldwide.

During the year ending December 31, 2003,
97% of the Companys revenues were from sales to resellers
or partners and 3% derived from direct sales by the
Companys sales force.

The Company markets its solutions to enterprise
customers, including business customers, government users,
education and healthcare providers. The Companys products
have been certified as part of the Defense Collaboration Tool
Suite within the United States Department of Defense and, as a
result, the Company has achieved substantial traction within the
United States military. The Company also sells its products to
service providers, including AT&T, Verizon, NTT, China
Telecom and Chunghwa Telecom, all of which are deploying
broadband rich media 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, 2003, 91% of
the Companys revenue was from enterprise customers and 9%
was from service providers, while for the year ended
December 31, 2002, 80% of the Companys revenue was
from enterprise customers and 20% was from service providers.

In 2003, 2002 and 2001, Comp View, Inc.,
AT&T Corporation and EDS Operating Services each represented
more than 10% of total revenue. At December 31, 2003 and
2002, outstanding receivables from one customer represented 18%
and 20%, respectively, of accounts receivable.

The Company maintains a network of distributors
in Asia and Europe to distribute its products into those
markets. The Companys revenues by geographic region are
shown in the following table:

|              |  |              |     |      |  |      |     |   |  |  |     |  
|------------- |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  |             
|              |  | Year Ended  
|              |  | December 31,
|              |  |             
|              |  | 2003         |     | 2002 |  | 2001
|              |  |              |     |      |  |     
|United States |  |              | 62  | %    |  |      | 68  | % |  |  | 79  | %
|Asia          |  |              | 22  | %    |  |      | 19  | % |  |  | 4   | %
|Europe        |  |              | 16  | %    |  |      | 13  | % |  |  | 17  | %
|              |  |              |     |      |  |      |     |   |  |  |     |  
|Total         |  |              | 100 | %    |  |      | 100 | % |  |  | 100 | %
|              |  |              |     |      |  |      |     |   |  |  |     |  

The Company expects that sales to customers
outside of North America will continue to represent a
significant portion of future revenues.

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 primarily
from three sources (i) Software: sales of software licenses
(ii) Products: sales of hardware and (iii) Support
services: services and support revenue, which includes software
license maintenance, training, installation and consulting
revenue. The Companys revenue from Products significantly
declined in 2003 after formally announcing that it was exiting
that market. Product revenues represented 27% of total revenues
in the year ended December 31, 2002 and dropped to 9%
during the year ended December 31, 2003. Largely because of
this change, the Company has experienced an increase in its
gross margins increasing from 66% in the year ended
December 31, 2002 to 83% in the year ending
December 31, 2003. The Company licenses its software
products under perpetual licenses, primarily under a concurrent
user model.

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

2



---



##### Table of Contents



incidental. For hardware transactions where
software is incidental, the Company applies the provisions of
Staff Accounting Bulletin 101.


Revenue from the license of the Companys
software products and sales of its hardware products 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 pursuant to software subscriptions and customer
support is deferred and recognized ratably over the service
period. Training, installation and consulting revenue is
recognized as services are performed.

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 allowed participants
to enter a meeting from any location equipped with a telephone
but did not allow meeting participants to see each other nor
have real-time access to the data of the participants. Video
conferencing in the past was notorious for its low quality, high
costs and the complexities of the technology, often requiring a
dedicated administrator to set-up a video conferencing session.
It required all participants to be in rooms that were equipped
with video conferencing technology and also did not allow for
real-time access to the data of the participants.

With continued improvements in the public
Internet, early web conferencing solutions appeared in the last
few years from companies such as 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. 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.

To offer an effective alternative to
face-to-face meetings, customers typically require
the following capabilities.



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The ability to present and/or share information
    easily and in real-time.                                                                             
|
| |  | The ability to clearly see and hear all of the
    meeting participants.                                                                                 
|
| |  | The ability to participate in meetings from
    conference rooms, workstations or offices, home or even from
    their car.                              
|
| |  | The ability to quickly convene ad hoc meetings or
    schedule meetings in advance.                                                                      
|
| |  | The ability to integrate with other existing
    productivity and communication tools such as e-mail,
    directories, calendaring and instant messaging.
|
| |  | A solution that leverages the participants
    existing IT infrastructure investments in PCs, networks and
    existing video systems.                  

First Virtual Communications
Strategy

The emergence of real-time rich media
communications provides, for the first time, the opportunity to
deliver on all the requirements described above and offers a
cost effective, easy to use and highly functional alternative to
traditional face-to-face meetings. Real-time rich media
communications represent the conver-

3



---



##### Table of Contents



gence of voice, video and web conferencing into a
unified solution that is fully integrated into the existing
information technology infrastructure, as well as with existing
desktop communications and productivity tools.


The Companys Click to Meet product family
offers one of the most complete and cost effective solutions for
real-time rich media communications. It incorporates multipoint
data and rich media collaboration into an open, standard,
scalable and completely software based client-server
architecture.

Our Click to Meet product family has been
designed to be cost effective and scalable to address a broad
spectrum of organizations  from enterprises with only
a few people to service providers with millions of potential
users.

Ease of use has been a cornerstone in the design
of our products. The user interface of Click to Meet functions
within a familiar, non-intimidating environment  the
PC browser.

Click to Meet software runs on industry-standard
hardware platforms, standard computer operating systems,
including Windows and Linux, and popular network operating
systems. Our products leverage the existing infrastructure of an
enterprise by interoperating with its existing video
conferencing platforms. Additionally, interoperability provided
by our products allows users to join conferences simply with
their telephones, extending the reach of the meeting to those
not next to a PC or in locations where there is no Internet
connectivity available.

Click to Meet has been designed to be open,
enabling easy customization and interoperability and to be
standards based, allowing us to easily benefit from the
technology advances in audio, video, data and communications
protocols.

Click to Meet has also been designed as a premise
based solution and the Company does not offer conferencing to
its customers as a service. Click to Meet provides an enterprise
with a more cost effective and secure solution that can be
better integrated into the existing IT infrastructure. For
service providers it is a solution that enables greater
customization and differentiation.

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 LinkingTM, 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.

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, groupware and e-mail infrastructure
to provide an easy-to-use next generation real-time rich media
communications solution.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click to Meet Conference Serveris our real-time rich media
    communications foundation, a software engine that powers the
    Click to Meet solution. 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.

4



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click to Meet Conference
    Serveris 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, and Session
    Initiation Protocol (SIP) for connectivity. It also
    contains a browser-based plug-in for real-time rich media
    communications 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 collaborative meetings. Click to Meet Express
    delivers ad-hoc real-time rich media communications 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
    Expressdelivers an on-demand
    real-time rich media environment where users can create
    conferences on-the-fly and invite participants by e-mail,
    instant messaging, or clicking on a link in a web page.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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 complete rich media real-time communications 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.                                                                                                              
|
| |  | Ad Hoc First Virtual Communications believes
    in a true ad hoc meeting environment, enabling virtually anyone
    with a PC to easily establish, participate or be invited into a
    meeting 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
    e-mail 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 premise-based software model allows organizations to
    realize a faster return on investment and maximizes security.
    Customers can install the First Virtual Communications
    solution 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 in 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 application
    solutions that organizations are currently using today, such as
    calendaring, scheduling, directory services, instant messaging
    and e-mail.                                                                
|
| |  | 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. Additionally, the support of industry                                                                                                    

5



---



##### Table of Contents



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | recognized standards for audio, video, data, and
    connectivity protocols provide a broad range of interoperability
    to other devices and endpoints.                                            
|
| |  | Anyone, Anywhere First Virtual Communications
    approach enables broad participation in meetings by allowing
    access to meetings from PCs, video conferencing room systems and
    telephones.

The Benefits of Our Products

Implementing a First Virtual Communications
real-time rich media 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.         
|
| |  | Improved access to data.                                                        
|
| |  | Improved continuity of operations in the event of
    disaster.                 

In addition, the Companys solutions:



| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage existing investments in PCs, servers,
    applications and network infrastructure.                                                                                                                                                               
|
| |  | Extend investments in existing videoconferencing
    infrastructure to real-time rich media communications.                                                                                                                                               
|
| |  | Provide unlimited use of concurrent ports, with
    no usage-based charges, 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, 2003, 2002
and 2001, the Company recorded revenues in the amount of $21.3,
$24.4 and $27.7 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.
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 services revenue
consists of software license subscriptions, hardware
maintenance, training, installation and consulting revenue. For
the years ended December 31, 2003, 2002 and 2001, Software
revenues were $13.0, $11.4 and $4.2 million, respectively.
For the years ended December 31, 2003, 2002 and 2001,
Product revenues were $1.9, $8.5 and $18.0 million,
respectively. In 2003, the Company formally announced that it
had exited from the legacy ATM hardware market that had been the
principal contributor to the Companys Product revenues.
For the years ended December 31, 2003, 2002 and 2001,
Support services revenues were $6.5, $4.6 and $5.5 million,
respectively.

Customer Support and Services

The Company provides support to its reseller
channels on a global basis through its Customer Service and
Technical Support Organizations. The support and service
products include subscriptions, pursuant to which customers may
receive updates to software products during the subscription
period, typically one year, telephone and on-site support,
repair of hardware products, installation and training.

6



---



##### Table of Contents



Marketing and Sales

The Company markets and sells its products
primarily through indirect sales channels, including value-added
resellers, original equipment manufactures (OEMs), service
providers and integrators supported by its sales and sales
engineering team. This effort is global in scope with Fist
Virtual Communications offices in the United Kingdom, France,
Germany, Italy, Japan, Korea and China. Although real-time rich
media communications is still an emerging technology and sales
activities require extensive involvement by its direct sales
force, the Company will continue to work primarily through
resellers because of the reach, access and support
infrastructure they provide. The Company also intends to expand
its business by marketing its products to a variety of
additional potential OEM customers in the real-time rich media
communications market.

For the years ended December 31, 2003, 2002,
and 2001, approximately 38%, 32% and 21%, 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 partners, end-user customers and market research
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 real-time
rich media communications market. The focus of the development
efforts will include continued integration with other
infrastructure and desktop products, increased scalability,
support of emerging standards and creation of additional tools
for developers and partners.

The Companys research and development
expenditures totaled $8.9 million, $9.9 million and
$12.6 million for the years ended December 31, 2003,
2002, and 2001, respectively. The Company performs its principal
research and product development activities at its facility in
Nashua, New Hampshire, and its facility in La Gaude, France.

Competition

The market for real-time rich media solutions and
infrastructure 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.

The Company currently competes, or expects to
compete, directly or indirectly with the following categories of
providers:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | H.323 multi-call unit (MCU) vendors, such as
    Polycom and RADVISION;       
|
| |  | Videoconferencing client vendors, such as
    Polycom, Tandberg and VCON;     
|
| |  | Groupware vendors, such as Lotus (SameTime) and
    Microsoft;                
|
| |  | IP communications infrastructure providers, such
    as Cisco and Alcatel; and
|
| |  | Application service providers, such as Microsoft,
    WebEx and Raindance.    

The competitive environment in real-time rich
media communications is predicated on two attributes. The first
is whether the method of delivery is a service through an
Application Service Provider (ASP) or premise based model,
in which customers operate the software on their own servers and
network. The second involves the richness of the media
experience, which is a combination of number of users and number
of media. The strength and uniqueness of the Companys
competitive position is its multipoint, multimedia, scalable,
standards-based and open software architecture for deployment at
the customer premise. This uniqueness is evident not only in the
Companys real-time rich media solutions but also in the
infrastructure

7



---



##### Table of Contents



that it provides to certain customers and
partners. Because of this, many of the competitors cited above
also represent potential partners for these infrastructure
product offerings.


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 currently produces its products at
its facility in Redwood City, California by transferring images
of the software to CD-ROM discs and shipping them directly to
its customers. Some customers also are provided software through
electronic download over the Internet. In the future, it is
likely that the Company will also use third parties to perform
some, or all, of these activities.

Employees

As of March 15, 2004, the Company employed
140 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.

Available Information

We make available free of charge on, or through,
our Internet web site our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission. Our Internet address is http://www.fvc.com. The
reference to our web site does not constitute incorporation by
reference of the information contained in, or that can be
accessed through, our web site.

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 $24.4 million for the year ended
December 31, 2002 to $21.3 million for the year ended
December 31, 2003. The Company incurred net losses of
$24.3 million and $9.9 million for the years ended
December 31, 2002 and 2003, respectively. At
December 31, 2003, the Company had an accumulated deficit
of $121.6 million.

8



---



##### Table of Contents





| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | 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 real-time, rich media
    Web conferencing business and in developing, introducing and
    shipping new products and product enhancements, particularly for
    Click to MeetTM and the Conference Server;                         
|
| |  | 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. 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 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.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys success depends on the
    markets acceptance of real-time, rich media communications
    products and services, including Click to Meet and Conference
    Server.

The Companys success depends in part on the
markets acceptance of real-time rich media communications
products, including Click to Meet and Conference Server.
Potential end-users must accept video applications as a viable
alternative to face-to-face meeting, conventional
classroom-based learning as well as relatively new applications,
such as the use of real-time rich media communications in
marketing, selling and manufacturing. The market for many of
these applications is still small and in the early development
stage. If real-time, 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 Conference Server products and
services. Broad market acceptance of these products and services
is therefore critical to the Companys operating success.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys software products may
    contain undetected defects or defects that have been detected
    but are more costly than anticipated to adequately
    address.

Software developed by the Company or developed by
others and incorporated by the Company into its products may
contain significant undetected errors or errors that have been
detected but are more significant and costly to address than
anticipated, 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,

9



---



##### Table of Contents



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;                         
|
| |  | the ability to raise additional
    financing; 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.



| |                                                                  
| | -----------------------------------------------------------------
| | The Company may need to raise additional
    funds in the future.

We believe the Company has adequate cash and
access to cash to meet its anticipated working capital and
capital expenditure requirements for the next 12 months.
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. Additionally, if delisting from
Nasdaq occurs, it will be more difficult to raise additional
funds. 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.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the Company is de-listed from The Nasdaq
    SmallCap Market, the market price and market liquidity of the
    Companys common stock would be materially adversely
    affected.

The Companys common stock currently is
listed on The Nasdaq SmallCap Market. Pursuant to its rules, The
Nasdaq National Market de-listed 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

10



---



##### Table of Contents



Company. 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 implemented a
1-for-5 reverse stock split on June 27, 2003. After
demonstrating a closing bid price of at least $1.00 per
share for a minimum of ten consecutive trading days, the Company
regained compliance with the Nasdaq SmallCap Market
requirements. However, on July 31, 2003, the Company
received an additional letter from Nasdaq indicating that as of
July 30, 2003, the Company failed to comply with Nasdaq
rules that require that the Company have a minimum of $2,500,000
in stockholders equity or $35 million market value of
listed securities or $500,000 of net income from continuing
operations for the most recently completed fiscal year.


The Company attended an oral appeal hearing with
a Nasdaq Listing Qualifications Panel (Panel) on
October 16, 2003 and requested an extension of time to
regain compliance and demonstrate its ability to sustain
compliance with the minimum stockholders equity
requirement. The Panel provided the Company with additional time
to regain compliance and demonstrate its ability to sustain
compliance with the minimum stockholders equity
requirement. On November 10, 2003, the Company announced
that it had entered into definitive agreements to sell
approximately 5.7 million shares of its common stock in a
private placement. The transaction closed on November 12,
2003, resulting in gross proceeds to the Company of
approximately $10.3 million, or approximately
$9.3 million net of placement fees and cash expenses.
Investors in the private placement also received five-year
warrants to purchase up to 2.9 million shares of common
stock at an exercise price of $1.79 per share. The Company
was notified by Nasdaq on December 2, 2003 that it was then
in compliance with the requirements for listing on the Nasdaq
SmallCap market. However, the Company could in the future again
fail to comply with Nasdaqs minimum listing requirements.



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | 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 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 third
    parties 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 and a large number of others. 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 through large resellers to
account for a significant percentage of

11



---



##### Table of Contents



its revenue in any particular quarter for the
foreseeable future. Additionally, a significant portion of the
Companys revenues from software products has been to
government agencies, including national, state and local
governments in the US and internationally. In 2003,
approximately one third of the Companys revenue was
through resellers to the US Federal Government, including the US
Department of Defense, various organizations of the US Army,
Navy and Air Force, and some agencies on the civilian side of
the Federal government. 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 and related cash
flows may be unpredictable. Lengthy delays in receiving orders
and payment, and recognizing revenue could have a material
adverse effect on the Companys 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 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 real-time rich media
communications products, including Web conferencing 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

12



---



##### Table of Contents



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. Therefore, 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.
In addition, as a result of Microsoft Corporations
acquisition of Placeware, Inc., Cisco Systems
acquisition of Latitude Communications, Inc., and
Polycoms acquisition of Voyant, companies with greater
resources are investing in the Web conferencing market which
will lead to even greater competition. 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
markets 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 patent applications relating to tunneling technology and
the initiation and support of video conferencing using instant
messaging. These patent applications 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 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 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

13



---



##### Table of Contents



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. For example, the Company has received letters from
Avistar Communications Corporation and Philips Electronics North
America Corporation advising the Company that it may need a
license to the respective companys patents based on the
technology used in the Companys products. 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.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Although no adjustments of the
carrying value of its long-lived assets was required in the year
ending December 31, 2003, the Company recorded impairment
charges of $3.3 million in the year ending
December 31, 2002 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 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 38%, 32% and 21%, respectively, of its total revenue
in the fiscal years ended December 31, 2003, 2002 and 2001,
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.

14



---



##### Table of Contents



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.                                                                                        



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Future changes in financial accounting
    standards or practices or existing taxation rules or practice
    may cause adverse unexpected revenue fluctuations and affect our
    reported results of operations.

A change in accounting standards or practices or
a change in existing taxation rules or practices can have a
significant effect on our reported results and may even affect
our reporting of transactions completed before the change is
effective. New accounting pronouncements and taxation rules and
varying interpretations of accounting pronouncements and
taxation practice have occurred and may occur in the future.
Changes to existing rules or the questioning of current
practices may adversely affect our reported financial results or
the way we conduct our business. For example, any changes
required that we record compensation expense in the statement of
operations for employee stock options using the fair value
method or changes in existing taxation rules related to stock
options could have a significant negative effect on our reported
results. Several agencies and entities are considering, and the
Financial Accounting Standards Board has announced, proposals to
change generally accepted accounting principles in the United
States that, if implemented, would require us to record charges
to earnings for employee stock option grants. This pending
requirement would negatively impact our financial results.



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The anti-takeover provisions of our
    certificate of incorporation and bylaws, and provisions of
    Delaware law could delay or prevent a change of control that you
    may favor.

Provisions of our certificate of incorporation
and bylaws may discourage, delay or prevent a merger or other
change of control that stockholders may consider favorable or
may impede the ability of the holders of our common stock to
change our management. The provisions of our certificate of
incorporation and bylaws, among other things:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | divide our board of directors into three classes,
    with members of each class to be elected for staggered
    three-year terms;
|
| |  | limit the right of stockholders to remove
    directors;                                                                          
|
| |  | regulate how stockholders may present proposals
    or nominate directors for election at annual meetings of
    stockholders; and
|
| |  | authorize our board of directors to issue
    preferred stock in one or more series, without stockholder
    approval.            

In addition, because we have not chosen to be
exempt from Section 203 of the Delaware General Corporation
Law, this provision could also delay or prevent a change of
control that you may favor. Section 203 provides that,
subject to limited exceptions, persons that acquire, or are
affiliated with a person that acquires, more than
15 percent of the outstanding voting stock of a Delaware
corporation shall not engage

15



---



##### Table of Contents



in any business combination with that
corporation, including by merger, consolidation or acquisitions
of additional shares, for a three-year period following the date
on which that person or its affiliate crosses the
15 percent stock ownership threshold.




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

As of March 15, 2004, the Companys
executive officers, directors and their affiliates beneficially
owned approximately 1.1 million shares, or approximately
8%, of the then outstanding shares of the Companys common
stock. As a result, these persons may have the ability to
influence control over 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 Redwood City,
California, where it leases approximately 19,700 square
feet of space that houses administrative, sales, marketing,
engineering, customer service and operations. The space is
occupied pursuant to an operating lease that expires in 2013.
The Company also leases approximately 27,225 square feet of
space in Nashua, New Hampshire that houses product development,
sales, marketing, customer service and related support
functions. The space is occupied pursuant to an operating lease
that expires in July of 2005. 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, 2003 was
approximately $1.3 million. The Company believes that its
existing facilities are adequate to meet current needs.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings



| |             
| | ------------
| | Visitalk.com

On February 11 2003, the Company received an
adversarial complaint filed by Visitalk.com in the United States
Bankruptcy Court for the District of Arizona, in connection with
Visitalk.coms reorganization proceedings, alleging a claim
for breach of contract and seeking damages in the amount of
$435,000, based on allegations that the Company, through CUseeMe
Networks, Inc., aka White Pine Software, Inc.,
acquired by the Company in June 2001, breached a written license
agreement entered into in April 1999. In April 2003, the Company
filed a Motion to Stay Proceedings and Compel Matter to
Arbitration with the United States Bankruptcy Court for the
District of Arizona. In June 2003, the parties reached a mutual
agreement to dismiss the adversarial action with prejudice,
exchange a mutual general release of all claims and waive
attorneys fees and costs. The parties have executed a
formal settlement agreement, but the settlement will not become
effective until approved by the Bankruptcy Court. On our about
December 5, 2003, Visitalk.com filed a Notice of Motion to
Approve Compromise of Preference Claims by which it has sought
the Bankruptcy Courts approval of the settlement. No order
of approval has yet been entered by the Bankruptcy Court.






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

Not applicable.

16



---



##### Table of Contents






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.

On June 26, 2003 the Companys Board of
Directors approved a 1-for-5 reverse split of the Companys
common stock, effective at 5:00 pm EDT on June 27,
2003, with trading commencing on a post-reverse stock split
basis on market open on Monday June 30, 2003. The reverse
split was previously approved by the stockholders at the
Companys June 13, 2003 Annual Stockholders Meeting.
As of 5:00 pm EDT on June 27, 2003, each five shares
of the Companys outstanding common stock was automatically
combined and converted into one share of common stock. In
addition, the Companys outstanding options, warrants and
other securities were automatically adjusted to reflect the
reverse stock split. All outstanding common stock and
outstanding option and warrant numbers reflected in this Report
on Form 10-K, reflect the 1-for-5 reverse stock split.

The following table sets forth, for the periods
indicated, the high and low price per share of the
Companys common stock as reported on The Nasdaq National
Market through September 8, 2002 and on The Nasdaq SmallCap
Market commencing September 9, 2002. All prices have been
adjusted to reflect the 1-for-5 reverse stock split of the
common stock described above.

|     |                |      |   |      |  |  |   |      | 
|---- | -------------- | ---- | - | ---- |  |  | - | ---- | 
|     |                | High |   | Low 
|     |                |      |   |     
|2002 |                |      |   |      |  |  |   |     
|     | First Quarter  |      | $ | 7.15 |  |  | $ | 3.65 | 
|     | Second Quarter |      | $ | 4.15 |  |  | $ | 2.15 | 
|     | Third Quarter  |      | $ | 3.50 |  |  | $ | 1.65 | 
|     | Fourth Quarter |      | $ | 2.15 |  |  | $ | 1.25 | 
|2003 |                |      |   |      |  |  |   |     
|     | First Quarter  |      | $ | 2.00 |  |  | $ | 1.35 | 
|     | Second Quarter |      | $ | 5.75 |  |  | $ | 1.50 | 
|     | Third Quarter  |      | $ | 4.30 |  |  | $ | 1.75 | 
|     | Fourth Quarter |      | $ | 2.63 |  |  | $ | 1.50 | 

As of March 15, 2004, there were
approximately 369 holders of record of the Companys Common
Stock. On March 15, 2004, the last sale price reported on
The Nasdaq SmallCap Market for the Companys Common Stock
was $1.50 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.

17



---



##### Table of Contents








|        |                        
|------- | -----------------------
|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, 2003.

|                                                  |                      |                                                 |          |       |   |      |          |       |   |      |         |       |   |   |         |       |   |   |         |       |  
|------------------------------------------------- | -------------------- | ----------------------------------------------- | -------- | ----- | - | ---- | -------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                  |                      |                                                
|                                                  |                      | Year Ended December 31                         
|                                                  |                      |                                                
|                                                  |                      | 2003                                            |          | 2002  |   | 2001 |          | 2000  |   | 1999
|                                                  |                      |                                                 |          |       |   |      |          |       |   |     
|                                                  |                      |                                                
|                                                  |                      | (In thousands, except share and per share data)
|Statement of operations data                      |                      |                                                 |          |       |   |      |          |       |   |      |         |       |   |   |         |       |   |   |         |      
|Revenues                                          |                      | $                                               | 21,323   |       |   | $    | 24,414   |       |   | $    | 27,661  |       |   | $ | 40,011  |       |   | $ | 45,700  |      
|Total operating expenses(1)                       |                      |                                                 | 27,625   |       |   |      | 40,472   |       |   |      | 39,651  |       |   |   | 37,024  |       |   |   | 31,803  |      
|Operating loss                                    |                      |                                                 | (9,882   | )     |   |      | (24,437  | )     |   |      | (32,540 | )     |   |   | (19,844 | )     |   |   | (14,954 | )    
|Net loss                                          |                      |                                                 | (9,974   | )     |   |      | (24,322  | )     |   |      | (31,601 | )     |   |   | (18,787 | )     |   |   | (14,328 | )    
|Net loss per share:                               |                      |                                                 |          |       |   |      |          |       |   |      |         |       |   |   |         |       |   |   |         |      
|                                                  | Basic and diluted(2) |                                                 |          | (1.11 | ) |      |          | (0.64 | ) |      |         | (6.28 | ) |   |         | (5.45 | ) |   |         | (4.35 | )
|Balance sheet data                                |                      |                                                 |          |       |   |      |          |       |   |      |         |       |   |   |         |       |   |   |         |      
|Cash, cash equivalents and short-term investments |                      |                                                 | 12,159   |       |   |      | 8,435    |       |   |      | 9,384   |       |   |   | 23,928  |       |   |   | 8,821   |      
|Working capital                                   |                      |                                                 | 5,040    |       |   |      | 735      |       |   |      | 8,363   |       |   |   | 31,729  |       |   |   | 21,878  |      
|Total assets                                      |                      |                                                 | 20,109   |       |   |      | 19,760   |       |   |      | 38,158  |       |   |   | 46,941  |       |   |   | 40,199  |      
|Total debt                                        |                      |                                                 | 2,500    |       |   |      |         |       |   |      | 36      |       |   |   | 119     |       |   |   | 228     |      
|Accumulated deficit                               |                      |                                                 | (121,563 | )     |   |      | (111,588 | )     |   |      | (87,266 | )     |   |   | (55,665 | )     |   |   | (36,878 | )    
|Total stockholders equity                        |                      |                                                 | 8,501    |       |   |      | 6,773    |       |   |      | 26,357  |       |   |   | 36,730  |       |   |   | 27,812  |      



---



|    |                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating expenses included non-cash employee
    stock compensation charges of $32,000, $26,000, $114,000,
    $267,000, and $493,000, for the years ended December 31,
    2003, 2002, 2001, 2000 and 1999, 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 Part IV, Item 15 of this
report on 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 real-time rich media Web conferencing and
communications 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
real-time rich media applications, including Web conferences,
broadcasts, video-on-demand, videoconferences and video calls
over converged multi-service networks. The Company was

18



---



##### Table of Contents



incorporated in California in October 1993 and
reincorporated in Delaware in December 1997. The Company first
shipped its products in 1995.


As a result of the Companys acquisition of
CUseeMe Networks in June 2001, we are now able to provide a
broad range of integrated real-time rich media Web conferencing
solutions that run seamlessly across multiple network types to
enterprise customers and service providers worldwide.

In the year ended December 31, 2003, the
Company recorded $21.3 million in revenue, a decrease of
13% compared to the previous year. The Company derived its
revenue in 2003 from the sale of real-time rich media
communications software and services, and to a relatively minor
extent, specialized networking hardware equipment. These
products were sold 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,
|                     |  |             
|                     |  | 2003         |     | 2002 |  | 2001
|                     |  |              |     |      |  |     
|Enterprise customers |  |              | 91  | %    |  |      | 80  | % |  |  | 71  | %
|Service providers    |  |              | 9   | %    |  |      | 20  | % |  |  | 29  | %
|                     |  |              |     |      |  |      |     |   |  |  |     |  
|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, 2003 CompView, Inc. represented 18% of
total accounts receivable. At December 31, 2002, CEWinc.com
represented 20% of total accounts receivable.

The Company maintains sales offices in the United
Kingdom, France, Germany, Italy, Japan, Korea and China and
distributes its products in both Europe and Asia through
resellers and distributors in more than 25 countries. For the
years ended December 31, 2003, 2002 and 2001, approximately
38%, 32% and 21%, 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 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) Software, the sale of software licenses,
(ii) Products, the sale of hardware, and (iii) Support
services, including software license

19



---



##### Table of Contents



maintenance, hardware maintenance and repair,
installation and training. 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 and through domestic and foreign
resellers and distributors. The Company delivers some of its
Software and Support services, primarily updates to software,
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 direct sales by the Company, 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.

A provision is made upon revenue recognition for
the estimated cost to repair or replace products under warranty
arrangements as described in Note 10 to our financial
statements.

20



---



##### Table of Contents



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 $204,000 at December 31,
2003, compared to $548,000 at December 31, 2002. Similarly,
management must estimate the extent to which outstanding
accounts receivable are collectible. 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, 2003, our accounts receivable balance
was $2.4 million, net of allowance for doubtful accounts of
$378,000. At December 31, 2002, our accounts receivable
balance was $4.1 million, net of allowance for doubtful
accounts of $1.0 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 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, 2003, 2002 and 2001, the Company recorded
inventory related charges of $24,000, $1.4 million and
$7.3 million, respectively, to reduce the value of
inventories for certain excess and obsolete products. During
2003, the Company completed its transition from selling hardware
products to selling software products. The Company had only
fully-reserved inventory related to its legacy hardware products
as of December 31, 2003. The production costs of software
are immaterial, with media, packaging materials and other direct
product costs charged to cost of revenues in the period incurred.

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

21



---



##### Table of Contents



goodwill may not be recoverable when the fair
value of the Company is less than the book value of the 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 $5.0 million and
$6.2 million as of December 31, 2003 and 2002,
respectively. The Company recorded no impairment losses related
to goodwill and other intangible assets during the year ended
2003. During the year ended December 31, 2002, the Company
recorded $9.9 million of impairment losses related to
goodwill and other intangible assets, as described below.


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 our acquisition of CUseeMe in 2001. In 2002 and
2003, we recorded approximately $619,000 and $1.6 million,
respectively, of amortization on intangible assets related to
technology and licenses acquired in the CUseeMe acquisition. We
performed an impairment review of our property and equipment,
goodwill and intangible assets in 2002 and an annual impairment
review in 2003. We recorded no impairment charges related to
goodwill during 2003 and $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 no impairment charges
related to intangible assets in 2003 and $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 $74.3 million as of
December 31, 2003, due to uncertainties related to our
ability to utilize all of the 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.

22



---



##### Table of Contents



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, 
|                            |                                             |                         
|                            |                                             | 2003                     |       | 2002 |       | 2001
|                            |                                             |                          |       |      |       |     
|Revenues                    |                                             |                          | 100.0 | %    |       |      | 100.0  | %    |       |   | 100.0  | %   
|Cost of revenues            |                                             |                          | 16.8  | %    |       |      | 34.3   | %    |       |   | 74.3   | %   
|                            |                                             |                          |       |      |       |      |        |      |       |   |        |     
|                            | Gross profit                                |                          |       | 83.2 | %     |      |        | 65.7 | %     |   |        | 25.7 | %    
|                            |                                             |                          |       |      |       |      |        |      |       |   |        |     
|Operating expenses:         |                                             |                          |       |      |       |      |        |      |       |   |        |     
|                            | Research and development                    |                          |       | 41.8 | %     |      |        | 40.7 | %     |   |        | 45.4 | %    
|                            | Sales and marketing                         |                          |       | 52.4 | %     |      |        | 39.3 | %     |   |        | 41.8 | %    
|                            | General and administrative                  |                          |       | 31.4 | %     |      |        | 45.2 | %     |   |        | 47.2 | %    
|                            | Acquisition and other non-recurring charges |                          |       | 3.9  | %     |      |        | 40.5 | %     |   |        | 8.9  | %    
|                            |                                             |                          |       |      |       |      |        |      |       |   |        |     
|                            |                                             | Total operating expenses |       |      | 129.5 | %    |        |      | 165.8 | % |        |      | 143.3 | %
|                            |                                             |                          |       |      |       |      |        |      |       |   |        |     
|Operating loss              |                                             |                          | (46.3 | )%   |       |      | (100.1 | )%   |       |   | (117.6 | )%  
|Other income (expense), net |                                             |                          | (0.4  | )%   |       |      | 0.5    | %    |       |   | 3.4    | %   
|                            |                                             |                          |       |      |       |      |        |      |       |   |        |     
|Net loss                    |                                             |                          | (46.7 | )%   |       |      | (99.6  | )%   |       |   | (114.2 | )%  
|                            |                                             |                          |       |      |       |      |        |      |       |   |        |     

Revenues.Revenues
decreased $3.1 million to $21.3 million in 2003, a
decline of 13% from $24.4 million in 2002 and 23% from
$27.7 million in 2001. The decrease in 2003 primarily
resulted from a decrease in revenues from the sales of Products,
primarily ATM legacy hardware, partially offset by increased
sales of Software and Support services, primarily software
subscriptions.

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

|                   |  |                         |        |      |  |      |        |  |  |   |        | 
|------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                   |  |                        
|                   |  | Year Ended December 31,
|                   |  |                        
|                   |  | 2003                    |        | 2002 |  | 2001
|                   |  |                         |        |      |  |     
|Software           |  | $                       | 12,958 |      |  | $    | 11,367 |  |  | $ | 4,192  | 
|Product (hardware) |  |                         | 1,878  |      |  |      | 8,469  |  |  |   | 17,967 | 
|Support services   |  |                         | 6,487  |      |  |      | 4,578  |  |  |   | 5,502  | 
|                   |  |                         |        |      |  |      |        |  |  |   |        | 
|Total revenues     |  | $                       | 21,323 |      |  | $    | 24,414 |  |  | $ | 27,661 | 
|                   |  |                         |        |      |  |      |        |  |  |   |        | 

Software revenues primarily consisted of revenue
from the sale of licenses for the Click to Meet
(CTM) family of software products including CTM
Express, CTM Select, CTM Premier and CTM Conference Server.
Software revenues increased $1.6 million to
$13.0 million in 2003, an increase of 14% from
$11.4 million in 2002. This increase resulted from the
Companys focus on marketing and selling software-based
products and the expansion of its customer base worldwide,
offset in part by a decrease in licensing fees from a reseller
in Japan pursuant to an agreement which expired in September
2002. Software revenues increased $7.2 million to
$11.4 million in 2002, an increase of 171% from
$4.2 million in 2001. This increase 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.

Product revenues consist of revenue from the sale
of ATM legacy hardware products including products sourced from
third parties and sold by the Company. Product revenues
decreased $6.6 million to $1.9 million in 2003, a
decrease of 78% from $8.5 million in 2002. Product revenues
decreased $9.5 million to $8.5 million, a decrease of
53% from $18.0 million in 2001. The decreases in both years
2003 and 2002 were primarily a result of the lower demand and
lower average selling prices for hardware-based ATM legacy
products.

23



---



##### Table of Contents



Additionally, the Company provided only limited
marketing and promotional support to these products in 2003 and
2002. The Company has not introduced any new or enhanced
products in this category during the past two years. The Company
notified its customers that as of May 1, 2003, it is no
longer offering ATM legacy products for sale other than products
currently in its fully reserved inventory. The Company expects
only minimal revenues from the sales of hardware products in the
future.


Support service revenues consist of software
license subscriptions, software support, hardware maintenance,
training, installation and consulting revenues. Support service
revenues increased $1.9 million to $6.5 million in
2003, an increase of 42% from $4.6 million in 2002,
primarily due to higher sales of software subscriptions for the
Companys CTM product family, offset in part by declining
revenues for support services associated with hardware products.
Support service revenues decreased 17% in 2002, compared to
2001, primarily due to a decline in hardware maintenance revenue
due to reduced shipments of hardware products, offset in part by
increased sales of software subscriptions.

Costs of Revenues.Costs of revenues consist primarily of costs associated with the
purchase of components from outside manufacturers or the
manufacture of the Companys legacy products by outside
manufacturers and related costs of freight, inventory
obsolescence, royalties, warranties and customer support costs,
which were charged against income in the period incurred. Total
costs of revenues decreased $4.8 million to
$3.6 million in 2003, a decrease of 57% from
$8.4 million in 2002. As a percentage of total revenues,
cost of sales declined to 17% in 2003, from 34% in 2002. Total
costs of revenues decreased $12.2 million to
$8.4 million in 2002, a decrease of 59% from
$20.6 million in 2001. As a percentage of total revenues,
cost of revenues declined to 34% in 2002, from 74% in 2002. In
the three years ended December 31, 2003, 2002 and 2001, the
decline in costs of revenues was the result of lower shipments
of hardware products, partially offset by increased sales of
software products and services. The Company expects costs of
revenues as a percent of revenue to remain in a range of 15% to
20% in 2004. Gross margin represents the difference between
revenues and cost of revenues as a percentage of revenues.
Overall gross margin in 2003 was 83%, compared to 66% in 2002
and 26% in 2001.

Cost of software revenues was $889,000 in 2003,
compared to $682,000 in 2002. The gross margin on software
revenues was 93% and 94% during the years ended
December 21, 2003 and 2002. Cost of software revenue
decreased to $682,000 in 2002 from $790,000 in 2001. The gross
margin on software revenue increased to 94% in 2002 from 81% in
2001, primarily due to fewer shipments of software bundled with
hardware.

Cost of product revenue decreased by 90%, or
$5.5 million, to $581,000 in 2003, from $6.1 million
in 2002. The decrease was primarily due to the lower sales
volume of product revenue and the sales of fully reserved legacy
ATM inventory of $882,000, which had no associated cost of
revenue during 2003. These write downs occurred in prior
periods, including a provision for excess and obsolete inventory
of $1.4 million related to legacy ATM products in 2002. The
gross margin on product revenue increased to 69% in 2003 from
29% in 2002, primarily due to sales of fully reserved inventory.
Cost of product revenue decreased by 65%, or $11.3 million,
to $6.1 million in 2002, from $17.4 million in 2001.
The decrease was primarily due to the lower sales volume of
product revenue and reduced charges for excess and obsolete
inventory of $5.9 million related to legacy ATM products in
2002. The gross margin on product revenue increased to 29% in
2002 from 3% in 2001, also primarily due to reduced charges for
excess and obsolete inventory of $5.9 million in 2002.

Cost of support service revenues increased
$466,000 to $2.1 million in 2003, from $1.6 million in
2002. This increase was primarily due to an increase in
personnel related expenses, including additional staff, to
support our increasing customer base. The gross margin on
support service revenues increased to 67% in 2003, from 64% in
2002, primarily due to the increase in the revenue from support
services, partially offset by increases in the cost of support
services. Cost of support service revenue decreased $736,000 to
$1.6 million in 2002, from $2.4 million in 2001. This
decrease was primarily due to a decrease in personnel related
expenses after the Company implemented cost cutting measures
throughout the organization. The gross margin on support service
revenues increased to 64% in 2002, from 57% in 2001, primarily
due to the decrease in cost of support service revenues.

24



---



##### Table of Contents



Research and
development.Research and development
expense consists primarily of personnel costs, cost of
contractors and outside consultants, supplies and material
expenses, equipment depreciation and overhead costs. Research
and development expenses decreased $1.0 million to
$8.9 million in 2003, a reduction of 10% from the
$9.9 million recorded in 2002. The decrease in absolute
dollars was principally due to the lower equipment and
maintenance expense and lower facility costs resulting from the
relocation of the Companys California office from
Santa Clara to Redwood City in May of 2003 and
discontinuation of development activities in India in May 2003.
As a percentage of total revenues, research and development
expense was 42% in 2003, compared to 41% in 2002 and 45% in
2001. The increase in research and development expense as a
percentage of revenue in 2003 compared to 2002 was due to lower
sales in 2003, while the decrease in research and development
expense as a percentage of revenue in 2002 compared to 2001 was
due to a lower spending for research and development activities.
The Company expects research and development expenses, as
expressed in absolute dollars, to be lower in 2004 compared to
2003, primarily due to a reduction in the number of software
products supported by research and development activities.

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 expense increased
$1.6 million to $11.2 million in 2003, an increase of
17% compared to the $9.6 million in 2002. Expenses in 2003
increased $518,000, primarily due to expansion of our Asia sales
office with higher personnel and other expenses and higher
compensation expense resulting from our acquisition of our
FVC.Com (Asia) distributor offset in part by lower facilities
costs. In 2002, the Company recorded a reduction in sales and
marketing expense of $359,000, reflecting collection of a
customer receivable that had previously been deemed
uncollectible. 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, in 2002, the Company recorded a
$359,000 benefit from the recovery of a customer receivable
which had previously been deemed uncollectible. As a percentage
of total revenues, sales and marketing expense was 52% in 2003,
compared to 39% in 2002 and 42% in 2001. The increase in sales
and marketing expense as a percentage of revenue in 2003
compared to 2002 was due to lower revenue and higher sales and
marketing expense in 2003, while the decrease in sales and
marketing expense as a percentage of revenue in 2002 compared to
2001 was due to lower spending in 2002. The Company expects
sales and marketing expense, as expressed in absolute dollars,
to increase slightly in 2004 compared to 2003.

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 also includes the cost of the Companys
Directors and Officers liability insurance, and the amortization
of the costs of intangible assets. General and administrative
expense declined by $4.3 million to $6.7 million in
2003, a 39% decrease from the $11.0 million in 2002. The
decrease in 2003 primarily was due to a reduction of $785,000 in
bad debt expense resulting from the Companys improved
credit procedures, a reduction of $513,000 in personnel
expenses, $900,000 in professional fees, $2.2 million in
amortization expense resulting from the write-down of
intangibles at December 31, 2002, reduced facilities costs
and other expenses. General and administrative expenses declined
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 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. As a percentage of
total revenue, general and administrative expense was 31% in
2003, 45% in 2002 and 47% in 2001. The decrease in general and
administrative expense as a percentage of revenue in 2003
compared to 2002 and 2001 was due to lower spending in 2003. The
Company expects general and administrative expenses, as
expressed in absolute dollars, to be lower for 2004 compared to
2003.

25



---



##### Table of Contents



Acquisition and other non-recurring costs,
net.Non-recurring charges of $838,000
in 2003 included $678,000 due to the relocation of the
Companys California office from Santa Clara to
Redwood City and $160,000 for costs related to the
discontinuation of the Companys India operations, both in
May 2003. The cost of the office relocation includes $350,000 of
loss from retirement of fixed assets, $259,000 of refurbishment
cost and $69,000 of moving cost. The $9.9 million of
non-recurring charges in 2002 included 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. Non-recurring charges of
$2.5 million in 2001 included $276,000 of in-process
research and development costs as a result of our 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 our 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 expense totaled $92,000 in 2003, compared
to other income of $115,000 and $665,000 in 2002 and 2001,
respectively. The decline in other income (expense), net in 2003
from 2002 primarily was due to the financing costs related to
our term loan with Silicon Valley Bank during 2003 and a decline
in interest income as a result of lower market interest rates
and lower cash balances. The decrease in other income in 2002
from 2001 was primarily the result of lower interest rates and a
lower average cash balance in 2002 compared to 2001.

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 aggregate consideration of $570,000. In
2001, the amount primarily reflects the portion of losses in
this subsidiary that were attributable to minority stockholders.

Income taxes.As of
December 31, 2003, the Company had net operating loss carry
forwards of approximately $152 million and $35 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, the Tax Reform Act of 1986
and similar California legislation impose substantial
restrictions on the utilization of net operating losses and tax
credits in the event of an ownership change of a
corporation. Accordingly, the Companys ability to utilize
net operating losses and credit carry forwards may be limited as
the result of such an ownership change as defined in
this legislation. 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 as set forth in
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, 2003, the Company had
cash, cash equivalents and short-term investments of
$12.2 million and working capital of $5.0 million.

In April 2003, the Company executed an agreement
with Silicon Valley Bank for a $3 million credit facility
that could be used by the Company at any time prior to
December 31, 2003. The interest rate was 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

26



---



##### Table of Contents



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. In June 2003, the Company borrowed the full
$3 million available under agreement.


In April 2003 the Company 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
$1.55 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. Following completion of the
private equity financing in November 2003 the Company determined
that use of this line of financing will not be required and it
is expected that the line will expire unused on April 13,
2004.

In November 2003, the Company completed a
financing in which it issued 5,732,408 shares of common
stock at $1.79 per share and warrants to purchase
2,866,199 shares of common stock with an exercise price of
$1.79 per share, resulting in proceeds of approximately
$9.3 million net of fees and expenses. The warrants are
exercisable for five years, commencing November 12, 2003.
The investors in the financing included Special Situations Fund,
including Special Situations Technology Fund, L.P., of which
Adam Stettner, a member of the Companys Board of
Directors, serves as Managing Director. The Company retained
Roth Capital Partners (Roth) as its exclusive agent
for this financing and paid to Roth a fee of 7% of the gross
proceeds and a warrant to purchase up to 458,592 shares of
the Companys common stock at a price of $2.15 per
share. The warrant has a five-year term and is exercisable
beginning May 12, 2004.

Since inception, the Company has experienced
significant net operating losses, including net losses in 2003
of $9.9 million with $7.8 million of cash used in
operating activities in 2003. In 2002, the Company incurred net
losses of $24.3 million and used $4.9 million of cash
in operating activities. Management currently expects that
operating losses and negative cash flows will continue in the
year 2004.

In order to reduce costs and conserve cash, in
February 2004 the Company commenced a reduction in its workforce
of approximately 20% or 30 employees. The reduction is expected
to be completed early in the second calendar quarter of 2004 and
will reduce the Companys payroll by approximately
$3 million annually.

Management believes that the Companys
existing cash and investments, together with the funds provided
pursuant to its credit facility with its bank are adequate to
fund the Companys operations through the first quarter of
2005. 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, 2005.

Net cash and cash equivalents increased by $3.7
and $1.4 million in 2003 and 2002, respectively.

Cash used in operating activities totaled
$7.8 million in 2003 and was comprised primarily of a
$9.9 million net loss and reductions of accrued liabilities
($882,000), deferred revenue ($810,000) and accounts payable
($292,000), partially offset by non-cash charges of
$2.0 million representing depreciation and amortization and
reductions in accounts receivable ($1.4 million). Cash used
in operating activities totaled $4.9 million in 2002,
comprised primarily of a $24.3 million 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 investment activities totaled
$613,000 in 2003, principally consisting of capital expenditures
($476,000) and disbursements related to the 2002 acquisition of
our UK-based subsidiary. In 2002, cash provided in investment
activities totaled $1.3, primarily from sales of short-term
investments, totaling $2.3 million, offset in part by
capital expenditures of $566,000 and cash paid to acquire
FVC.com UK of $437,000. Capital expenditures in both years were
comprised primarily of computers, computer peripherals and
computer-based equipment used in the Companys software
development activities.

27



---



##### Table of Contents



Cash provided by financing activities was
$12.1 million in 2003, primarily consisted of proceeds from
the issuance of common stock and warrants ($9.6 million)
and proceeds from a 3-year term loan with our bank
($3.0 million), offset in part by partial repayment of the
principal of the loan ($500,000). In 2002, cash provided by
financing activities was $5.0 million, primarily from the
proceeds from the sale of common stock and warrants and the
issuance of common stock under the Companys stock option
plans and the Employee Stock Purchase Plan.

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

|                                  |  |                           |        |       |  |      |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |     |  |  |   |       | 
|--------------------------------- |  | ------------------------- | ------ | ----- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | --- |  |  | - | --- |  |  | - | ----- | 
|                                  |  |                          
|                                  |  | Years Ending December 31,
|                                  |  |                          
|                                  |  |                           |        | After
|Contractual Obligation            |  | Total                     |        | 2004  |  | 2005 |       | 2006 |  | 2007 |       | 2008 |  | 2008
|                                  |  |                           |        |       |  |      |       |      |  |      |       |      |  |     
|Principal of long-term debt       |  | $                         | 2,500  |       |  | $    | 1,000 |      |  | $    | 1,000 |      |  | $    | 500   |  |  | $ |    |  |  | $ |    |  |  | $ |      | 
|Operating leases                  |  |                           | 7,810  |       |  |      | 1,022 |      |  |      | 924   |      |  |      | 784   |  |  |   | 762 |  |  |   | 768 |  |  |   | 3,550 | 
|                                  |  |                           |        |       |  |      |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |     |  |  |   |       | 
|Total contractual cash obligation |  | $                         | 10,310 |       |  | $    | 2,022 |      |  | $    | 1,924 |      |  | $    | 1,284 |  |  | $ | 762 |  |  | $ | 768 |  |  | $ | 3,550 | 
|                                  |  |                           |        |       |  |      |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |     |  |  |   |       | 

As of December 31, 2003, we had recorded
accrued liabilities of $4.3 million, including
$1.8 million for personnel related expenses, $126,000 for
trade show and other marketing related expenses, $465,000 for
legal and professional fees, $123,000 for warranty reserve,
$107,000 for severance related to the departure of certain
former employees and $1.7 million for other costs and
expenses. We also had a balance of $900,000 in accounts payable
as of December 31, 2003.

In order to aggressively pursue business
opportunities, the Company expects 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. The
Company also expects to seek additional capital from the public
and/or private equity markets that may 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, 2003, the Company held a
total of $12.2 million of cash, cash equivalents and
short-term investments. Of the $12.2 million, only $89,000
represented 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, 2003, 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. As
of March 15, 2004, the Company had $1 million of short
term debt and $1.3 million of long term debt representing
the amount owed to its bank under a term loan. The quarterly
rate of interest on this loan is the lower of the banks
prime rate plus 2.25 percentage points but in no event less
than 6.5%. Although changes in interest rates would increase the
Companys interest expense, it is not expected that such
increases would result in an adverse material impact on its
financial condition.






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

The Companys Consolidated Financial
Statements and Notes thereto are included in this Form 10-K
beginning on page F-1.

28



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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 two most
recent fiscal years.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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 as of the end of the period covered by
this Form 10-K. 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-15(e) and 15d-1(e) promulgated under
the Exchange Act) were effective.

An evaluation was also performed under the
supervision and with the participation of the Companys
management, including the CEO and CFO, of any changes in the
Companys internal controls over financial reporting that
occurred during the Companys past fiscal quarter and that
has materially affected, or is reasonably likely to materially
affect, the Companys internal controls. That evaluation
did not identify any change in the Companys internal
controls over financial reporting that occurred during the
Companys last fiscal quarter and that has materially
affected, or is reasonably likely to materially affect, the
Companys internal controls over financial reporting.

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 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 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 2004 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, 2004.






|         |                                                       
|-------- | ------------------------------------------------------
|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 Executive Officers 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.

29



---



##### Table of Contents



(d) We have adopted a code of ethics for
directors, officers (including our principal executive officer,
principal financial officer and principal accounting officer or
controller) and employees, known as the Code of Business Conduct
and Ethics. The Code of Business Conduct and Ethics is available
on our website at http://www.fvc.com. Stockholders may
request a free copy of the Code of Business Conduct and Ethics
from:

| |                                   
| | ----------------------------------
| | First Virtual Communications, Inc.
| | Attention: Investor Relations     
| | 3200 Bridge Parkway, Suite 202    
| | Redwood City, CA 94065            
| | (650) 801-6500                    
| | http://www.fvc.com                






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

The information required by this item is
incorporated by reference from the sections entitled
Compensation of Executive Officers and Other
Matters 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.

The information regarding our equity compensation
plans, including both stockholder approved plans and
non-stockholder approved plans, is incorporated by reference
from the section entitled Proposal 2  Approval
of the Amendment to the 1997 Equity Incentive Plan, As
Amended 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. | Principal Accountants Fees and
    Services

The information required by this item is
incorporated by reference from the section entitled
Proposal 5  Ratification of Selection of
Independent Auditors  Independent Auditor Fees
in the Proxy Statement.




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.

30



---



##### Table of Contents





|   |                     
|-- | --------------------
|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,
    2003 and 2002                                                             |  |  | F-2  | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2003               |  |  | F-3  | 
|Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    December 31, 2003 |  |  | F-4  | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2003               |  |  | 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.



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

(a) List of Exhibits required by
Item 601 of Regulation S-K. See part (c), below.

(b) Reports on Form 8-K.

On October 28, 2003, we filed a report on
Form 8-K dated October 28, 2003 relating to the
results of the fiscal quarter ended September 30, 2003.
Under the Form 8-K, we furnished (not filed) pursuant to
Item 12 under Item 7 the press release entitled
First Virtual Communications Announces Third Quarter
Results relating to the results of the fiscal quarter
ended September 30, 2003, which furnished press release
included our condensed consolidated balance sheet as of
December 31, 2002 and unaudited condensed consolidated
balance sheet as of September 30, 2003 and our unaudited
consolidated statement of operations for the three months and
nine months ended September 30, 2003.

On November 19, 2003, we filed a report on
Form 8-K dated November 20, 2003 announcing that we
received a letter from counsel to The Nasdaq Listing
Qualifications Panel (the Panel) that the Panel
determined to continue the listing on our securities on The
Nasdaq SmallCap Market, provided we made a public filing with
the Securities and Exchange Commission and Nasdaq evidencing
shareholders equity of at least $11 million. In response to
such request, we filed the report on Form 8-K and furnished
our unaudited pro forma condensed consolidated balance sheet as
of September 30, 2003, which balance sheet gave pro forma
effect to the issuance in October 2003 of 642,921 shares of
our Common Stock to Net One Systems Co., Ltd (Net
One) in exchange for a credit for the return of
approximately $1.5 million of our products previously
purchased by Net One and the issuance in November 2003 of
approximately 5.7 million shares of the our Common Stock
and warrants to purchase up to approximately 2.9 million
shares of our Common Stock in a private placement with
institutional investors, which private placement resulted in
gross proceeds to us of approximately $10.3 million, or
approximately $8.5 million net of placement fees and
expenses, which expenses include a warrant with a value of
approximately $800,000 issued to the placement agent as partial
consideration for services rendered in connection with the
private placement, resulting in net cash proceeds to us of
approximately $9.3 million.

(c) Exhibits. See the Exhibit Index and
exhibits filed as part of this report.

31



---



##### Table of Contents






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 26th day of March
2004.



| |                                    
| | -----------------------------------
| | 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 re-substitution, 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)       |  | March 26, 2004
|                                      
|/s/ GEORGE SOLLMANGeorge Sollman       |  | Chairman of the Board of Directors                                                          |  | March 26, 2004
|                                      
|/s/ TRUMAN COLETruman Cole             |  | Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | March 26, 2004
|                                      
|/s/ NORMAN GAUTNorman Gaut             |  | Director                                                                                    |  | March 26, 2004
|                                      
|/s/ EDWARD HARRISEdward Harris         |  | Director                                                                                    |  | March 26, 2004
|                                      
|/s/ WERNER SCHMÜCKINGWerner Schmücking |  | Director                                                                                    |  | March 26, 2004
|                                      
|/s/ ADAM STETTNERAdam Stettner         |  | Director                                                                                    |  | March 26, 2004

32



---



##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

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 31, present fairly, in all
material respects, the financial position of First Virtual
Communications, Inc., and its subsidiaries at
December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2003 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
the Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets.

/S/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

March 26, 2004


F-1



---



##### Table of Contents






FIRST VIRTUAL
COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |          |        | 
|------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ------ | - | ------ | -------- | ------ | 
|                                                       |                                                                                                                                                       | December 31,               |        | December 31,
|                                                       |                                                                                                                                                       | 2003                       |        | 2002        
|                                                       |                                                                                                                                                       |                            |        |             
|                                                       |                                                                                                                                                       |                           
|                                                       |                                                                                                                                                       | (In thousands,            
|                                                       |                                                                                                                                                       | except share data)        
|ASSETS                                                
|Current assets:                                        |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                       | Cash and cash equivalents                                                                                                                             |                            | $      | 11,562       |        |   | $      | 8,352    |       
|                                                       | Short-term investments                                                                                                                                |                            |        | 597          |        |   |        | 83       |       
|                                                       | Accounts receivable, net of allowances of $582
    and $1,018                                                                                         |                            |        | 2,381        |        |   |        | 4,080    |       
|                                                       | Inventory                                                                                                                                             |                            |        |             |        |   |        | 613      |       
|                                                       | Prepaid and other current assets                                                                                                                      |                            |        | 608          |        |   |        | 406      |       
|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                       |                                                                                                                                                       | Total current assets       |        |              | 15,148 |   |        |          | 13,534 | 
|Property and equipment, net                            |                                                                                                                                                       |                            | 977    |              |        |   | 2,197  |         
|Other assets                                           |                                                                                                                                                       |                            | 751    |              |        |   | 293    |         
|Intangible assets, net                                 |                                                                                                                                                       |                            | 3,233  |              |        |   | 3,736  |         
|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |         
|Total Assets                                           |                                                                                                                                                       | $                          | 20,109 |              |        | $ | 19,760 |         
|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                      
|LIABILITIES AND STOCKHOLDERS
    EQUITY              
|Current liabilities:                                   |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                       | Current portion of long-term debt                                                                                                                     |                            | $      | 1,000        |        |   | $      |         |       
|                                                       | Accounts payable                                                                                                                                      |                            |        | 900          |        |   |        | 1,192    |       
|                                                       | Accrued liabilities                                                                                                                                   |                            |        | 4,268        |        |   |        | 5,139    |       
|                                                       | Deferred revenue                                                                                                                                      |                            |        | 3,940        |        |   |        | 6,656    |       
|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                       |                                                                                                                                                       | Total current liabilities  |        |              | 10,108 |   |        |          | 12,987 | 
|Long term debt                                         |                                                                                                                                                       |                            | 1,500  |              |        |   |       |         
|Commitments and contingencies (See Notes 9
    and 13) |                                                                                                                                                       |                            |        |              |        |   |        |         
|Stockholders equity:                                  |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                       | Convertible preferred stock, $.001 par
    value; 5,000,000 shares authorized; 27,437 shares
    issued and outstanding at December 31, 2003 and 2002 |                            |        |             |        |   |        |         |       
|                                                       | Common stock, $.001 par value;
    100,000,000 shares authorized; 14,523,185 and
    8,077,691 shares issued and outstanding, respectively(1)         |                            |        | 47           |        |   |        | 40       |       
|                                                       | Additional paid-in capital                                                                                                                            |                            |        | 130,280      |        |   |        | 118,531  |       
|                                                       | Accumulated other comprehensive (loss) income                                                                                                         |                            |        | (263         | )      |   |        | (210     | )     
|                                                       | Accumulated deficit                                                                                                                                   |                            |        | (121,563     | )      |   |        | (111,588 | )     
|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                       |                                                                                                                                                       | Total stockholders equity |        |              | 8,501  |   |        |          | 6,773  | 
|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |         
|                                                       |                                                                                                                                                       | $                          | 20,109 |              |        | $ | 19,760 |         
|                                                       |                                                                                                                                                       |                            |        |              |        |   |        |         



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | All share and per share amounts reflect the
    five-for-one reverse split of the Companys Common Stock
    implemented June 27, 2003.

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

F-2



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                     |                                             |                                      
|                                                                     |                                             | Year Ended December 31,              
|                                                                     |                                             |                                      
|                                                                     |                                             | 2003                                  |        | 2002   |        | 2001
|                                                                     |                                             |                                       |        |        |        |     
|                                                                     |                                             |                                      
|                                                                     |                                             | (In thousands, except per share data)
|Revenue                                                              |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                     | Software                                    |                                       | $      | 12,958 |        |      | $       | 11,367 |        |   | $       | 4,192  |       
|                                                                     | Product                                     |                                       |        | 1,878  |        |      |         | 8,469  |        |   |         | 17,967 |       
|                                                                     | Support service                             |                                       |        | 6,487  |        |      |         | 4,578  |        |   |         | 5,502  |       
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                     |                                             | Total revenue                         |        |        | 21,323 |      |         |        | 24,414 |   |         |        | 27,661 | 
|Cost of revenue                                                      |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                     | Software                                    |                                       |        | 889    |        |      |         | 682    |        |   |         | 790    |       
|                                                                     | Product                                     |                                       |        | 581    |        |      |         | 6,053  |        |   |         | 17,380 |       
|                                                                     | Support service                             |                                       |        | 2,110  |        |      |         | 1,644  |        |   |         | 2,380  |       
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                     |                                             | Total cost of revenue                 |        |        | 3,580  |      |         |        | 8,379  |   |         |        | 20,550 | 
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|Gross profit                                                         |                                             |                                       | 17,743 |        |        |      | 16,035  |        |        |   | 7,111   |       
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|Operating expense:                                                   |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                     | Research and development                    |                                       |        | 8,922  |        |      |         | 9,945  |        |   |         | 12,573 |       
|                                                                     | Sales and marketing                         |                                       |        | 11,178 |        |      |         | 9,588  |        |   |         | 11,565 |       
|                                                                     | General and administrative                  |                                       |        | 6,687  |        |      |         | 11,045 |        |   |         | 13,045 |       
|                                                                     | Acquisition and other non-recurring charges |                                       |        | 838    |        |      |         | 9,894  |        |   |         | 2,468  |       
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                     |                                             | Total operating expense               |        |        | 27,625 |      |         |        | 40,472 |   |         |        | 39,651 | 
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|Operating loss                                                       |                                             |                                       | (9,882 | )      |        |      | (24,437 | )      |        |   | (32,540 | )     
|Other income (expense), net                                          |                                             |                                       | (92    | )      |        |      | 115     |        |        |   | 665     |       
|Minority interest in consolidated subsidiary                         |                                             |                                       |       |        |        |      |        |        |        |   | 274     |       
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|Net loss                                                             |                                             | $                                     | (9,974 | )      |        | $    | (24,322 | )      |        | $ | (31,601 | )     
|                                                                     |                                             |                                       |        |        |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share(1)                              |                                             | $                                     | (1.11  | )      |        | $    | (3.19   | )      |        | $ | (6.28   | )     
|Shares used in computing basic and diluted net
    loss per share(1) |                                             |                                       | 8,986  |        |        |      | 7,631   |        |        |   | 5,031   |       



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | All share and per share amounts reflect the
    five-for-one reverse split of the Companys Common Stock
    implemented June 27, 2003.

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

F-3



---



##### Table of Contents



FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                       |  |                 |        |              |  |            |   |               |  |             |            |               |  |         |    |        |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | --------------- | ------ | ------------ |  | ---------- | - | ------------- |  | ----------- | ---------- | ------------- |  | ------- | -- | ------ |  | - | ------- |  |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                                       |  |                 |        |              |  |            |   |               |  |             |            |               |  |        
|                                                                                       |  | Convertible     |        |              |  |            |   | Accumulated   |  |             |            |              
|                                                                                       |  | Preferred Stock |        | Common Stock |  | Additional |   | Other         |  |             |            | Total        
|                                                                                       |  |                 |        |              |  | Paid-in    |   | Comprehensive |  | Accumulated |            | Stockholders
|                                                                                       |  | Shares          |        | Amount       |  | Shares     |   | Amount        |  | Capital     |            | Income        |  | Deficit |    | Equity
|                                                                                       |  |                 |        |              |  |            |   |               |  |             |            |               |  |         |    |       
|Balance at December 31, 2000                                                           |  |                 | 27,437 |              |  |            |  |               |  |             | 3,466,838  |               |  |         | 17 |        |  |   | 92,168  |  |  |   | 210  |   |  | $ | (55,665  | ) |  |   | 36,730  |  
|Common shares issued in conjunction with the
    acquisition of CUseeMe Networks, Inc. |  |                 |       |              |  |            |  |               |  |             | 3,119,878  |               |  |         | 16 |        |  |   | 20,175  |  |  |   |     |   |  |   |         |   |  |   | 20,191  |  
|Issuance of common stock under stock purchase
    plans                                |  |                 |       |              |  |            |  |               |  |             | 77,339     |               |  |         |   |        |  |   | 1,024   |  |  |   |     |   |  |   |         |   |  |   | 1,024   |  
|Exercise of common stock options                                                       |  |                 |       |              |  |            |  |               |  |             | 1,544      |               |  |         |   |        |  |   | 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 |              |  |            |  |               |  |             | 6,665,599  |               |  |         | 33 |        |  |   | 113,437 |  |  |   | 153  |   |  |   | (87,266  | ) |  |   | 26,357  |  
|Issuance of common stock under private placement                                       |  |                 |       |              |  |            |  |               |  |             | 1,337,200  |               |  |         | 7  |        |  |   | 4,923   |  |  |   |     |   |  |   |         |   |  |   | 4,930   |  
|Issuance of common stock under stock purchase
    plans                                |  |                 |       |              |  |            |  |               |  |             | 73,483     |               |  |         |   |        |  |   | 137     |  |  |   |     |   |  |   |         |   |  |   | 137     |  
|Exercise of common stock options                                                       |  |                 |       |              |  |            |  |               |  |             | 1,409      |               |  |         |   |        |  |   | 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 |              |  |            |  |               |  |             | 8,077,691  |               |  | $       | 40 |        |  | $ | 118,531 |  |  | $ | (210 | ) |  | $ | (111,588 | ) |  | $ | 6,773   |  
|                                                                                       |  |                 |        |              |  |            |   |               |  |             |            |               |  |         |    |        |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|Issuance of common stock under private placement                                       |  |                 |       |              |  |            |  |               |  |             | 5,732,408  |               |  |         | 6  |        |  |   | 9,381   |  |  |   |     |   |  |   |         |   |  |   | 9,387   |  
|Issuance of common stock under equity agreement                                        |  |                 |       |              |  |            |  |               |  |             | 642,921    |               |  |         | 1  |        |  |   | 1,499   |  |  |   |     |   |  |   |         |   |  |   | 1,500   |  
|Issuance of common stock under stock purchase
    plans                                |  |                 |       |              |  |            |  |               |  |             | 65,969     |               |  |         |   |        |  |   | 93      |  |  |   |     |   |  |   |         |   |  |   | 93      |  
|Exercise of common stock options                                                       |  |                 |       |              |  |            |  |               |  |             | 4,196      |               |  |         |   |        |  |   | 14      |  |  |   |     |   |  |   |         |   |  |   | 14      |  
|Charges for stock compensation                                                         |  |                 |       |              |  |            |  |               |  |             |           |               |  |         |   |        |  |   | 32      |  |  |   |     |   |  |   |         |   |  |   | 32      |  
|Issuance of warrants                                                                   |  |                 |       |              |  |            |  |               |  |             |           |               |  |         |   |        |  |   | 730     |  |  |   |     |   |  |   |         |   |  |   | 730     |  
|Accumulated other income (loss)                                                        |  |                 |       |              |  |            |  |               |  |             |           |               |  |         |   |        |  |   |        |  |  |   | (53  | ) |  |   |         |   |  |   | (53     | )
|Net loss                                                                               |  |                 |       |              |  |            |  |               |  |             |           |               |  |         |   |        |  |   |        |  |  |   |     |   |  |   | (9,974   | ) |  |   | (9,974  | )
|                                                                                       |  |                 |        |              |  |            |   |               |  |             |            |               |  |         |    |        |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2003                                                           |  |                 | 27,437 |              |  |            |  |               |  |             | 14,523,185 |               |  | $       | 47 |        |  | $ | 130,280 |  |  | $ | (263 | ) |  | $ | (121,563 | ) |  | $ | 8,501   |  
|                                                                                       |  |                 |        |              |  |            |   |               |  |             |            |               |  |         |    |        |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  

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

F-4



---



##### Table of Contents



FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |         |       |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------- | ----- | ----- | ------ | ------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | -
|                                                         |                                                                                 |                                                                      
|                                                         |                                                                                 | Year Ended December 31,                                              
|                                                         |                                                                                 |                                                                      
|                                                         |                                                                                 | 2003                                                                  |                                   | 2002                                                    |       | 2001 
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |      
|                                                         |                                                                                 |                                                                      
|                                                         |                                                                                 | (In thousands)                                                       
|Cash flows from operating activities:                    |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|                                                         | Net loss                                                                        |                                                                       |                                   | (9,974                                                  | )     |       | $      | (24,322 | )     |        | $      | (31,601 | )    
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |         |      
|                                                         |                                                                                 | Depreciation and amortization                                         |                                   |                                                         | 1,954 |       |        |         | 3,172 |        |        |         | 3,890 |       
|                                                         |                                                                                 | Impairment of goodwill and intangibles                                |                                   |                                                         |      |       |        |         | 9,894 |        |        |         | 1,083 |       
|                                                         |                                                                                 | Write-off of notes receivable                                         |                                   |                                                         |      |       |        |         | 227   |        |        |         |      |       
|                                                         |                                                                                 | Provision for doubtful accounts                                       |                                   |                                                         | (162  | )     |        |         | 177   |        |        |         | 912   |       
|                                                         |                                                                                 | Stock compensation                                                    |                                   |                                                         |      |       |        |         | 26    |        |        |         | 115   |       
|                                                         |                                                                                 | Acquired in-process research and development                          |                                   |                                                         |      |       |        |         |      |        |        |         | 276   |       
|                                                         |                                                                                 | Provision for inventory                                               |                                   |                                                         | 24    |       |        |         | 1,438 |        |        |         | 7,347 |       
|                                                         |                                                                                 | Loss on disposal of fixed assets                                      |                                   |                                                         | 351   |       |        |         |      |        |        |         | 217   |       
|                                                         |                                                                                 | Other                                                                 |                                   |                                                         | (12   | )     |        |         | (263  | )      |        |         | (259  | )     
|                                                         |                                                                                 | Changes in assets and liabilities net of effects
    of acquisitions: |                                   |                                                         |       |       |        |         |       |        |        |         |       |       
|                                                         |                                                                                 |                                                                       | Accounts receivable               |                                                         |       | 1,406 |        |         |       | 2,108  |        |         |       | 3,642  |        
|                                                         |                                                                                 |                                                                       | Inventory                         |                                                         |       | 589   |        |         |       | 1,137  |        |         |       | (3,570 | )      
|                                                         |                                                                                 |                                                                       | Prepaid expenses and other assets |                                                         |       | 13    |        |         |       | 114    |        |         |       | 639    |        
|                                                         |                                                                                 |                                                                       | Accounts payable                  |                                                         |       | (292  | )      |         |       | (2,076 | )      |         |       | (1,924 | )      
|                                                         |                                                                                 |                                                                       | Accrued liabilities               |                                                         |       | (882  | )      |         |       | (237   | )      |         |       | (3,226 | )      
|                                                         |                                                                                 |                                                                       | Deferred revenue                  |                                                         |       | (810  | )      |         |       | 3,720  |        |         |       | 1,793  |        
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|                                                         |                                                                                 |                                                                       |                                   | Net cash used in operating activities                   |       |       | (7,795 | )       |       |        | (4,885 | )       |       |        | (20,666 | )
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|Cash flows from investing activities:                    |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|                                                         | Acquisition of businesses, net of cash received                                 |                                                                       |                                   | (132                                                    | )     |       |        | (437    | )     |        |        |        |      
|                                                         | Acquisition of property and equipment                                           |                                                                       |                                   | (476                                                    | )     |       |        | (566    | )     |        |        | (1,416  | )    
|                                                         | Purchase of short-term investments                                              |                                                                       |                                   | (628                                                    | )     |       |        | (10     | )     |        |        | (3,909  | )    
|                                                         | Sale of short-term investments                                                  |                                                                       |                                   | 115                                                     |       |       |        | 2,365   |       |        |        | 18,322  |      
|                                                         | Cash acquired in acquisition of CUseeMe Networks,
    Inc.                      |                                                                       |                                   |                                                        |       |       |        |        |       |        |        | 6,601   |      
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|                                                         |                                                                                 |                                                                       |                                   | Net cash provided by (used in) investing
    activities |       |       | (1,121 | )       |       |        | 1,252  |         |       |        | 19,547  |  
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|Cash flows from financing activities:                    |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|                                                         | Proceeds from issuance of stock, net                                            |                                                                       |                                   | 9,626                                                   |       |       |        | 5,075   |       |        |        | 1,071   |      
|                                                         | Repayment of capital lease obligations                                          |                                                                       |                                   |                                                        |       |       |        | (36     | )     |        |        | (83     | )    
|                                                         | Proceeds from term loan                                                         |                                                                       |                                   | 3,000                                                   |       |       |        |        |       |        |        |        |      
|                                                         | Payments on term loan                                                           |                                                                       |                                   | (500                                                    | )     |       |        |        |       |        |        |        |      
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|                                                         |                                                                                 |                                                                       |                                   | Net cash provided by financing activities               |       |       | 12,126 |         |       |        | 5,039  |         |       |        | 988     |  
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                 |                                                                       | 3,210                             |                                                         |       |       | 1,406  |         |       |        | (131   | )      
|Cash and cash equivalents at beginning of period         |                                                                                 |                                                                       | 8,352                             |                                                         |       |       | 6,946  |         |       |        | 7,077  |        
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|Cash and cash equivalents at end of period               |                                                                                 | $                                                                     | 11,562                            |                                                         |       | $     | 8,352  |         |       | $      | 6,946  |        
|                                                         |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|Supplemental cash flow information:                      |                                                                                 |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |        
|                                                         | Cash paid for interest                                                          |                                                                       | $                                 | 96                                                      |       |       | $      | 2       |       |        | $      | 7       |      
|                                                         | Issuance of options and warrants to third parties                               |                                                                       |                                   | 3,781                                                   |       |       |        |        |       |        |        |        |      
|                                                         | Common stock issued and options and warrants
    issued or                      |                                                                       |                                   |                                                         |       |       |        |         |       |        |        |         |      
|                                                         |                                                                                 | assumed in connection with acquisitions                               |                                   |                                                         |      |       |        |         |      |        |        |         | 4,038 |       

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

F-5



---



##### Table of Contents



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 real-time rich media
Web conferencing solutions that run seamlessly across multiple
network types to enterprise customers and service providers
worldwide.

The Companys management structure
represents a single reporting segment.

Liquidity

In April of 2003, the Company entered into an
agreement with Silicon Valley Bank for a $3 million credit
facility that could be used by the Company at any time prior to
December 31, 2003. On June 23, 2003, the Company
exercised its right under the agreement and borrowed
$3 million from the bank.

On April 14, 2003 the Company 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 $1.55 per share during the period from
April 14, 2003 through April 13, 2004. Following
completion of the private equity financing in November 2003 the
Company determined that use of this line of financing will not
be required and it is expected that the line will expire unused
on April 13, 2004.

On November 12, 2003, the Company issued
5,732,408 shares of common stock at $1.79 per share
and warrants to purchase 2,866,199 shares of common stock
at a price of $1.79 per share, resulting in proceeds of
approximately $9.3 million net of fees and expenses.

The Company has experienced significant net
operating losses from inception. In 2003, the Company incurred
net losses of $10.0 million and used $7.8 million of
cash in its operating activities. Management expects that
operating losses and negative cash flows will continue in 2004.
The Company believes that existing cash and investments together
with its existing financing will be adequate to fund its
operations through December 31, 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 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

F-6



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 100% 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, 2003, the Company owned,
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, 2003 and 2002, the Company recorded provisions
for bad debt in the amount of $58,000 and $177,000,
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, 2003, 2002 and 2001,
the Company recorded inventory related charges of $24,000,
$1.4 million and $7.3 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. As of December 31, 2003 all
remaining inventory related to legacy hardware products and was
fully reserved.

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

F-7



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 performs 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 review, no impairment charge was recorded for
the year ended December 31, 2003, while an impairment
charge of $6.6 million was recorded for the year ended
December 31, 2002 (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. The Company recorded no impairment
charges related to intangible assets during the year ended
December 31, 2003, while $3.3 million of impairment
losses were recorded related to intangible assets during the
year ended December 31, 2002 (see Note 2).

Revenue Recognition

The Companys revenue is derived from
primarily three sources (i) Software, the sale of software
licenses, (ii) Products, the sale of hardware, and
(iii) Support services, including software license
maintenance, hardware maintenance and repair, installation and
training.

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
resellers and distributors. The Company delivers some of its
Software and Support services, primarily updates to software,
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

F-8



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 pro forma 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.

F-9



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                                                                                            |  |                        
|                                                                                            |  | 2003                    |         | 2002 |  | 2001
|                                                                                            |  |                         |         |      |  |     
|Net loss                                                                                    |  | $                       | (9,974  | )    |  | $    | (24,322 | ) |  | $ | (31,601 | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Add: stock-based employee compensation expense
    included in reported net income          |  |                         | 32      |      |  |      | 26      |   |  |   | 23      |  
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Deduct: Total stock based employee compensation
    expense determined pursuant to SFAS 123 |  |                         | (1,878  | )    |  |      | (2,378  | ) |  |   | (2,956  | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss                                                                          |  | $                       | (11,820 | )    |  | $    | (26,674 | ) |  | $ | (34,534 | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|As reported net loss per share (basic and diluted)                                          |  | $                       | (1.11   | )    |  | $    | (3.19   | ) |  | $ | (6.28   | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss per share (basic and diluted)                                            |  | $                       | (1.32   | )    |  | $    | (3.50   | ) |  | $ | (6,86   | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  

Compensation cost (included in pro forma net loss
and net loss per share amounts only) for the years ended
December 31, 2003 2002, and 2001, 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,
|                                       |  |             
|                                       |  | 2003         |     | 2002 |  | 2001
|                                       |  |              |     |      |  |     
|Risk-free interest rate                |  |              | 3.4 | %    |  |      | 3.0 | % |  |  | 5.0 | %
|Volatility                             |  |              | 131 | %    |  |      | 113 | % |  |  | 123 | %
|Option term from grant date (in years) |  |              | 5   |      |  |      | 5   |   |  |  | 5   |  
|Dividend yield                         |  |              | 0.0 | %    |  |      | 0.0 | % |  |  | 0.0 | %

The pro forma SFAS 123 disclosures include
compensation expense for purchase rights granted during 2003,
2002, and 2001. The weighted average estimated grant date fair
value for purchase rights granted. under the Purchase Plan
during 2003, 2002 and 2001 was $0.81, $1.95, and $2.35
respectively.

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 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 are 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 2003,
2002, and 2001, all potential common shares were anti-dilutive
and excluded from the diluted net loss per share calculations.

F-10



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                                     |  |                        
|                                     |  | 2003                    |       | 2002 |  | 2001
|                                     |  |                         |       |      |  |     
|                                     |  |                        
|                                     |  | (In thousands)         
|Series A Convertible Preferred stock |  |                         | 27    |      |  |      | 27    |  |  |  | 27    | 
|Stock purchase warrants              |  |                         | 5,214 |      |  |      | 1,362 |  |  |  | 709   | 
|Stock options                        |  |                         | 2,174 |      |  |      | 2,248 |  |  |  | 2,027 | 

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 2003, 2002 and 2001, Comp View, Inc.,
AT&T Corporation and EDS Operating Services represented 18%,
10% and 10% of total revenue, respectively. At December 31,
2003 and 2002, outstanding receivables from one customer
represented 18% and 20%, respectively, of accounts receivable.

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

|              |  |              |     |      |  |      |     |   |  |  |     |  
|------------- |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  |             
|              |  | Year Ended  
|              |  | December 31,
|              |  |             
|              |  | 2003         |     | 2002 |  | 2001
|              |  |              |     |      |  |     
|United States |  |              | 62  | %    |  |      | 68  | % |  |  | 79  | %
|Asia          |  |              | 22  | %    |  |      | 19  | % |  |  | 4   | %
|Europe        |  |              | 16  | %    |  |      | 13  | % |  |  | 17  | %
|              |  |              |     |      |  |      |     |   |  |  |     |  
|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.

F-11



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                    |  |              |      |      |  |      |      |   |  |   |     |  
|------------------------------------------------------------------- |  | ------------ | ---- | ---- |  | ---- | ---- | - |  | - | --- | -
|                                                                    |  |             
|                                                                    |  | December 31,
|                                                                    |  |             
|                                                                    |  | 2003         |      | 2002 |  | 2001
|                                                                    |  |              |      |      |  |     
|Foreign currency translation                                        |  | $            | (113 | )    |  | $    | (59  | ) |  | $ | 204 |  
|Unrealized (loss) on marketable securities, net
    of income taxes |  |              | (150 | )    |  |      | (151 | ) |  |   | (51 | )
|                                                                    |  |              |      |      |  |      |      |   |  |   |     |  
|                                                                    |  | $            | (263 | )    |  | $    | (210 | ) |  | $ | 153 |  
|                                                                    |  |              |      |      |  |      |      |   |  |   |     |  

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

|                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                    |  |                        
|                                                                    |  | Year Ended December 31,
|                                                                    |  |                        
|                                                                    |  | 2003                    |         | 2002 |  | 2001
|                                                                    |  |                         |         |      |  |     
|Net loss                                                            |  | $                       | (9,974  | )    |  | $    | (24,322 | ) |  | $ | (31,601 | )
|Cumulative translation adjustment                                   |  |                         | (53     | )    |  |      | (263    | ) |  |   | (6      | )
|Unrealized (loss) on marketable securities, net
    of income taxes |  |                         | 1       |      |  |      | (100    | ) |  |   | (51     | )
|                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|Total comprehensive (loss)                                          |  | $                       | (10,026 | )    |  | $    | (24,685 | ) |  | $ | (31,658 | )
|                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  

Recent Accounting Pronouncements

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 addresses certain financial instruments
that, under previous guidance, could be accounted for as equity,
but now must be classified as liabilities in statements of
financial position. These financial instruments include:
1) mandatorily redeemable financial instruments,
2) obligations to repurchase the issuer s equity shares by
transferring assets, and 3) obligations to issue a variable
number of shares. SFAS No. 150 is effective for all
financial instruments entered into or modified after
May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15,2003. The
Company adopted SFAS No. 150 in the third quarter of
2003 and such adoption did not have a material effect on the
Companys financial position and results of operations.

In May 2003, the EITF reached a consensus on EITF
Issue No. 03-05, Applicability of AICPA Statement of
Position 97-2, Software Revenue Recognition, to Non-Software
Deliverables in Arrangement Containing More-Than-Incidental
Software. EITF No. 03-05 addresses the applicability of
Statement of Position No. 97-2 regarding software an
non-software deliverables in a multiple element arrangement,
giving consideration to whether the deliverables are essential
to the functionality of one another. EITF Issue No. 0305 is
effective for interim periods beginning after August 13,
2003. EITF Issue No. 03-05 did not have a material effect
on the Companys financial position or results of
operations in 2003.

In January 2003, the FASB issued FASB
Interpretation (FIN) No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN
No. 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN No. 46 is effective immediately for all new variable
interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN No. 46 must
be applied for the first interim or annual period ending after
December 15, 2003. FASB Interpretation (FIN) No. 46
did not have a material effect on the Companys financial
position or results of operations.

In November 2002, the EITF reached a consensus on
EITF No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF No. 00-21 addresses certain aspects of
the accounting by a vendor for

F-12



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

arrangements under which the vendor will perform
multiple revenue-generating activities. EITF No. 00-21 is
effective for interim periods beginning after June 15,
2003. The Company adopted EITF No. 00-21 in the third
quarter of 2003 and such adoption did not have a material effect
on the Companys financial position or results of
operations.

In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others. FIN No. 45 requires that a
liability be recorded at fair value in the guarantor s balance
sheet upon issuance of a guarantee. In addition, FIN No. 45
requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity s
product warranty liabilities. The initial recognition and
initial measurement provisions of FIN No. 45 are applicable
on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The Company adopted FIN No. 45 in the
first quarter of 2003. The recognition and initial measurement
provisions of FIN No. 45 did not have a material effect on
the Companys financial position or results of operations.
The disclosure requirements of FIN No. 45 are contained in
Note 9  Commitments and Note 10 
Warranties.

In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). This Statement requires that a
liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the
liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated
after December 31, 2002. The Company adopted
SFAS No. 146 in the first quarter of 2003 and there
was no material impact on the Companys financial position
or 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 in
2003, 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, which was
performed only for 2002, 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 no impairment charge in 2003, and an impairment charge
of $6.6 million, representing 78% of the Companys
goodwill in 2002. The adoption of SFAS 142 had an
unfavorable impact on the Companys results of operations.
Amortization of goodwill was $1.3 million in the year ended
December 31, 2001.

F-13



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                  |  |                    |         |  
|----------------------------------------------------------------- |  | ------------------ | ------- | -
|                                                                  |  | For the Year Ended
|                                                                  |  |                   
|                                                                  |  | December 31, 2001 
|                                                                  |  |                   
|                                                                  |  | (In thousands)    
|Reported net loss                                                 |  | $                  | (31,601 | )
|Add back: Goodwill amortization                                   |  |                    | 1,291   |  
|                                                                  |  |                    |         |  
|Adjusted net loss                                                 |  | $                  | (30,310 | )
|                                                                  |  |                    |         |  
|Net loss per share  Basic and diluted                            |  |                    |         |  
|Reported net loss per share                                       |  | $                  | (6.28   | )
|Adjustment for goodwill amortization                              |  |                    | 0.26    |  
|                                                                  |  |                    |         |  
|Adjusted net loss per share                                       |  | $                  | (6,02   | )
|                                                                  |  |                    |         |  
|Shares used in computing basic and diluted net
    loss per share |  |                    | 5,031   |  

The components of other intangibles as of
December 31, 2003, 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, 2003: |  |                |       |              |  |          |        |   |  |   |       | 
|Purchased technology     |  | $              | 3,524 |              |  | $        | (2,462 | ) |  | $ | 1,062 | 
|Licenses                 |  |                | 763   |              |  |          | (567   | ) |  |   | 196   | 
|                         |  |                |       |              |  |          |        |   |  |   |       | 
|Total                    |  | $              | 4,287 |              |  | $        | (3,029 | ) |  | $ | 1,258 | 
|                         |  |                |       |              |  |          |        |   |  |   |       | 
|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
$619,000, $1.4 million and $671,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Future
amortization expense related to purchased other intangible
assets is estimated to be $613,000 in 2004, $433,000 in 2005 and
$212,000 in 2006.

There are no changes in the carrying amount of
goodwill for the year ended December 31, 2003. 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  |  
|                                                   |  |   |        |  

F-14



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 no impairment charge
related to intangible assets in 2003, while $3.3 million of
impairment charge related to intangible assets in 2002 (see
Note 7). The impairment change in 2002 comprised of
$2.8 million attributable to purchased technology and
approximately $500,000 attributable to the CUseeMe trade name.
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 trade name 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.



|         |                          
|-------- | -------------------------
|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. At that time, 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 subsequently
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 outstanding as of
the acquisition date. Subsequent to the year ended
December 31, 2002, the Company fully collected the residual
balance of certain receivables outstanding as of the acquisition
date. In the quarter ended March 31, 2003, the purchase
price increased by $98,000, for a total aggregate 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 outstanding as of
January 25, 2002, less amounts paid or to be paid for the
outstanding 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

F-15



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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 fiscal 2001 (in thousands, except
per share data):

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

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

F-16



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

period 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.

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, 2003 and 2002, all short-term investments have
been classified as available-for-sale securities.

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

|                       |  |              |     |              |  |   |    | 
|---------------------- |  | ------------ | --- | ------------ |  | - | -- | 
|                       |  | December 31, |     | December 31,
|                       |  | 2003         |     | 2002        
|                       |  |              |     |             
|Corporate Notes        |  | $            | 508 |              |  | $ |   | 
|Certificate of Deposit |  |              | 75  |              |  |   | 70 | 
|Equity securities      |  |              | 14  |              |  |   | 13 | 
|                       |  |              |     |              |  |   |    | 
|                       |  | $            | 597 |              |  | $ | 83 | 
|                       |  |              |     |              |  |   |    | 

F-17



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2003 and 2002, 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, 2003 and
December 31, 2002 (in thousands):

|                  |  |      |     |            |  |            |   |            |  |   |      |   |  |   |     | 
|----------------- |  | ---- | --- | ---------- |  | ---------- | - | ---------- |  | - | ---- | - |  | - | --- | 
|                  |  |      |     | Unrealized |  | Unrealized |   |           
|                  |  | Cost |     | Gains      |  | Losses     |   | Fair Value
|                  |  |      |     |            |  |            |   |           
|December 31, 2003 |  |      |     |            |  |            |   |            |  |   |      |   |  |   |     | 
|Corporate Notes   |  | $    | 508 |            |  | $          |  |            |  | $ |     |   |  | $ | 508 | 
|Equity securities |  |      | 164 |            |  |            | 4 |            |  |   | (154 | ) |  |   | 14  | 
|Debt securities   |  |      | 75  |            |  |            |  |            |  |   |     |   |  |   | 75  | 
|                  |  |      |     |            |  |            |   |            |  |   |      |   |  |   |     | 
|Total             |  | $    | 747 |            |  | $          | 4 |            |  | $ | (154 | ) |  | $ | 597 | 
|                  |  |      |     |            |  |            |   |            |  |   |      |   |  |   |     | 
|December 31, 2002 |  |      |     |            |  |            |   |            |  |   |      |   |  |   |     | 
|Equity securities |  | $    | 164 |            |  | $          | 3 |            |  | $ | (154 | ) |  | $ | 13  | 
|Debt securities   |  |      | 70  |            |  |            |  |            |  |   |     |   |  |   | 70  | 
|                  |  |      |     |            |  |            |   |            |  |   |      |   |  |   |     | 
|Total             |  | $    | 234 |            |  | $          | 3 |            |  | $ | (154 | ) |  | $ | 83  | 
|                  |  |      |     |            |  |            |   |            |  |   |      |   |  |   |     | 

Note 5  Inventory

Inventories as of December 31, 2003 and
December 31, 2002 were (in thousands):

|                |  |              |   |              |  |   |     | 
|--------------- |  | ------------ | - | ------------ |  | - | --- | 
|                |  | December 31, |   | December 31,
|                |  | 2003         |   | 2002        
|                |  |              |   |             
|Raw materials   |  | $            |  |              |  | $ | 266 | 
|Finished goods  |  |              |  |              |  |   | 347 | 
|                |  |              |   |              |  |   |     | 
|Total inventory |  | $            |  |              |  | $ | 613 | 
|                |  |              |   |              |  |   |     | 

The Company notified its customers in May 2003
that it will no longer offer legacy ATM hardware products. All
remaining inventory of those products have been fully reserved
and the Company intends to dispose of those products by the end
of 2004.

F-18



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6  Balance Sheet
Components

|                                          |                                                |                |       |        |   |   |       |        |  
|----------------------------------------- | ---------------------------------------------- | -------------- | ----- | ------ | - | - | ----- | ------ | -
|                                          |                                                |               
|                                          |                                                | December 31,  
|                                          |                                                |               
|                                          |                                                | 2003           |       | 2002  
|                                          |                                                |                |       |       
|                                          |                                                |               
|                                          |                                                | (In thousands)
|Prepaid expenses and other current assets |                                                |                |       |        |   |   |       |       
|                                          | Prepaid expenses                               |                | $     | 515    |   |   | $     | 247    |  
|                                          | Other receivables                              |                |       | 93     |   |   |       | 159    |  
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                | $              | 608   |        |   | $ | 406   |       
|                                          |                                                |                |       |        |   |   |       |       
|Property and equipment:                   |                                                |                |       |        |   |   |       |       
|                                          | Computers and equipment                        |                | $     | 4,012  |   |   | $     | 7,215  |  
|                                          | Furniture and fixtures                         |                |       | 338    |   |   |       | 1,016  |  
|                                          | Leasehold improvements                         |                |       | 44     |   |   |       | 416    |  
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                |                | 4,394 |        |   |   | 8,647 |       
|                                          | Less accumulated depreciation and amortization |                |       | (3,417 | ) |   |       | (6,450 | )
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                | $              | 977   |        |   | $ | 2,197 |       
|                                          |                                                |                |       |        |   |   |       |       
|Accrued liabilities:                      |                                                |                |       |        |   |   |       |       
|                                          | Accrued employee compensation                  |                | $     | 1,845  |   |   | $     | 1,577  |  
|                                          | Accrued acquisition related liabilities        |                |       |       |   |   |       | 35     |  
|                                          | Accrued legal and professional fees            |                |       | 465    |   |   |       | 584    |  
|                                          | Accrued warranty                               |                |       | 123    |   |   |       | 428    |  
|                                          | Other                                          |                |       | 1,835  |   |   |       | 2,515  |  
|                                          |                                                |                |       |        |   |   |       |       
|                                          |                                                | $              | 4,268 |        |   | $ | 5,139 |       
|                                          |                                                |                |       |        |   |   |       |       

As of December 31, 2003 and 2002, 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,  
|                                                                        |  |               
|                                                                        |  | 2003           |     | 2002 |  | 2001
|                                                                        |  |                |     |      |  |     
|                                                                        |  |               
|                                                                        |  | (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   | 
|Relocation costs                                                        |  |                | 678 |      |  |      |      |  |  |   |      | 
|Closure of India operations                                             |  |                | 160 |      |  |      |      |  |  |   |      | 
|                                                                        |  |                |     |      |  |      |       |  |  |   |       | 
|Acquisition and other non=recurring charges, net                        |  | $              | 838 |      |  | $    | 9,894 |  |  | $ | 2,468 | 
|                                                                        |  |                |     |      |  |      |       |  |  |   |       | 

F-19



---



##### Table of Contents



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. No reductions in workforce were
recorded in 2002 or 2003.



| |                                                
| | -----------------------------------------------
| | 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
carry back 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,
|                                                                 |  |             
|                                                                 |  | 2003         |     | 2002 |  | 2001
|                                                                 |  |              |     |      |  |     
|Federal Statutory Rate                                           |  |              | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|Unrecognized benefit of net operating losses and
    tax credits |  |              | 34  | %    |  |      | 34  | %  |  |  | 34  | % 
|                                                                 |  |              |     |      |  |      |     |    |  |  |     |   
|                                                                 |  |              | 0   | %    |  |      | 0   | %  |  |  | 0   | % 
|                                                                 |  |              |     |      |  |      |     |    |  |  |     |   

F-20



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of the Companys deferred
tax assets and liabilities as of December 31, 2003 and 2002
related to the following:

|                                  |  |                |         |      |  |   |         |  
|--------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                  |  |               
|                                  |  | December 31,  
|                                  |  |               
|                                  |  | 2003           |         | 2002
|                                  |  |                |         |     
|                                  |  |               
|                                  |  | (In thousands)
|Net operating loss carry forwards |  | $              | 65,709  |      |  | $ | 49,106  |  
|Tax credits                       |  |                | 4,146   |      |  |   | 3,994   |  
|Accruals and reserves             |  |                | 1,782   |      |  |   | 4,576   |  
|Property equipment                |  |                | 183     |      |  |   |        |  
|State taxes                       |  |                | 11      |      |  |   |        |  
|Other                             |  |                | 21      |      |  |   |        |  
|Acquired intangibles              |  |                | 2,427   |      |  |   | (1,170  | )
|                                  |  |                |         |      |  |   |         |  
|Total                             |  |                | 74,279  |      |  |   | 56,506  |  
|Less: valuation allowance         |  |                | (74,279 | )    |  |   | (56,506 | )
|                                  |  |                |         |      |  |   |         |  
|Net deferred tax assets           |  | $              |        |      |  | $ |        |  
|                                  |  |                |         |      |  |   |         |  

As of December 31, 2003 and 2002, the
deferred tax assets were fully offset by a valuation allowance.
The net change in the total valuation allowance for the year
ended December 31, 2003 and 2002 was an increase of
$17,773,000.

In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management does not believe it is more likely than
not that the deferred tax assets will be realized; accordingly,
a full valuation allowance has been established and no deferred
tax asset and related tax benefit have been recognized in the
accompanying financial statements.

Deferred tax liabilities have not been recognized
for undistributed earnings of foreign subsidiaries because it is
managements intention to reinvest such undistributed
earnings outside the U.S. indefinitely.

As of December 31, 2003, the Company has net
operating loss carry forwards for federal and California income
tax purposes of approximately $152,386,000 and $34,804,000
respectively. The federal net operating loss carry forwards
expire in various periods through 2023. The California net
operating loss carry forwards expire in various periods through
2013.

As of December 31, 2003, unused research and
development tax credits of approximately $2,856,000 and
$1,709,000 are available to reduce future federal and California
income taxes, respectively. Federal credit carry forwards expire
in various periods through 2023. California credits will carry
forward indefinitely.

The Tax Reform Act of 1986 and similar California
legislation impose substantial restrictions on the utilization
of net operating losses and tax credits in the event of an
ownership change of a corporation. Accordingly, the
Companys ability to utilize net operating losses and
credit carry forwards may be limited as the result of such an
ownership change as defined in this legislation.

F-21



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                               |  |              |         |      |  |      |         |   |  |   |         |  
|------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2003         |         | 2002 |  | 2001
|                               |  |              |         |      |  |     
|US                             |  | $            | (10,953 | )    |  | $    | (24,561 | ) |  | $ | (31,738 | )
|Foreign                        |  |              | 979     |      |  |      | 239     |   |  |   | 137     |  
|                               |  |              |         |      |  |      |         |   |  |   |         |  
|Total income/(loss) before tax |  | $            | (9,974  | )    |  | $    | (24,322 | ) |  | $ | (31,601 | )
|                               |  |              |         |      |  |      |         |   |  |   |         |  

Note 9  Commitments

Leases

The Company leases its office facilities in the
United States, United Kingdom, France, Hong Kong, China and
India under non-cancelable operating lease agreements that
expire from 2004 to 2013. Future minimum lease payments under
these leases as of December 31, 2003 are as follows (in
thousands):

|                         |                              |           |   |       | 
|------------------------ | ---------------------------- | --------- | - | ----- | 
|                         |                              | Operating
|                         |                              | Leases   
|                         |                              |          
|Year ending December 31, |                              |           |   |      
|                         | 2004                         |           | $ | 1,005 | 
|                         | 2005                         |           |   | 907   | 
|                         | 2006                         |           |   | 767   | 
|                         | 2007                         |           |   | 749   | 
|                         | 2008                         |           |   | 768   | 
|                         | Thereafter                   |           |   | 3,550 | 
|                         |                              |           |   |      
|                         | Total minimum lease payments |           | $ | 7,746 | 
|                         |                              |           |   |      

Rent expense under operating leases for the years
ended December 31, 2003, 2002 and 2001, was approximately
$1.2 million, $1.7 million and $1.6 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 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 to 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

F-22



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

since the acquisition of CUseeMe. In 2003 the
Company formally notified its customers that it would no longer
offer hardware products for sale. During the year the Company
reduced its warranty reserve by $249,000 to reflect its warranty
liability as of December 31, 2003.

Changes in our warranty liability, which is
included as a component of Accrued liabilities on
the Consolidated Balance Sheet, during 2003 were as follows:

|                                          |  |                |        |  
|----------------------------------------- |  | -------------- | ------ | -
|                                          |  | (In thousands)
|Beginning balance as of December 31, 2000 |  | $              | 578    |  
|Provision for Warranty liability          |  |                | 1,163  |  
|Settlement made under Warranty            |  |                | (1,270 | )
|                                          |  |                |        |  
|Ending balance as of December 31, 2001    |  |                | 471    |  
|Provision for Warranty liability          |  |                | 683    |  
|Settlement made under Warranty            |  |                | (726   | )
|                                          |  |                |        |  
|Beginning balance as of December 31, 2002 |  |                | 428    |  
|Provision for warranty liability          |  |                | 123    |  
|Settlement made under warranty            |  |                | (179   | )
|Reduction to warranty reserve             |  |                | (249   | )
|Ending Balance as of December 31, 2003    |  | $              | 123    |  

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 866,888 shares of common stock of the
Company, as adjusted through June 13, 2003, 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 $31.65 per share. The
Company also issued a five-year warrant to Vulcan to purchase
182,346 shares of common stock at $32.65 per share, as
adjusted through June 13, 2003. 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 Companys Certificate
of Incorporation if such alteration would adversely affect the
Preferred Stock and for certain other matters.

Issuance of Common Stock and
Warrants

On March 29, 2002, the Company signed a
definitive binding agreement to raise approximately
$4.8 million from a private placement of its common stock
and warrants. On April 12, 2002, the Company issued
1,337,200 shares of common stock at $3.60 per share
and warrants to purchase 668,600 shares of common stock at
an exercise price of $5.05 per share, pursuant to the
agreement. The exercise price of the warrants is subject to
adjustment in the event of certain issuances by the Company. As
of December 31, 2003,

F-23



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the exercise price was $3.25 per share. The
warrants are exercisable for five years, commencing
October 12, 2002.

On September 30, 2003, First Virtual
Communications, Inc. entered into an agreement with Net One
Systems (Net One), its exclusive distributor in Japan, under
which the Company agreed to accept the return of approximately
$1.6 million of products previously purchased by Net One
and Net One agreed to invest $1.6 million in the Company.
In October 2003, following the return of the products, the
Company issued to Net One a total of 642,921 shares of the
Companys common stock at $2.45 per share.

On November 12, 2003, the Company issued
5,732,408 shares of common stock at $1.79 per share
and warrants to purchase 2,866,199 shares of common stock
with an exercise price of $1.79 per share, resulting in
proceeds of approximately $9.6 million net of fees and
expenses. The warrants are exercisable for five years,
commencing November 12, 2003. The Company retained Roth
Capital Partners (Roth) as its exclusive agent for
this financing and paid to Roth a fee of 7% of the gross
proceeds and a warrant to purchase up to 458,592 shares of
the Companys common stock at a price of $2.15 per
share. The warrant has a five-year term and is exercisable
beginning May 12, 2004.

Warrants

During the second quarter ended June 30,
2001, the Company issued a warrant to PictureTel Corporation to
purchase up to 522,875 shares of the common stock of the
Company at an exercise price of $4.55 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 and 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, 2003, the PictureTel Corporation warrant was
not exercisable.



|          |            
|--------- | -----------
|Note 12  | Stock Plans

1997 Equity Incentive Plan

The Company has a 1997 Equity Incentive Plan (the
1997 Plan), which has, as amended, an aggregate of
1,175,000 shares of common stock authorized to be issued
pursuant to stock awards granted under the plan. As of
December 31, 2003, 135,885 shares of common stock were
available for future grants under the 1997 Plan.

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. To date, the Company has not granted restricted stock
purchase awards under this plan.

F-24



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

1999 Equity Incentive Plan

Under the 1999 Equity Incentive Plan (the
1999 Plan), as amended, an aggregate of
1,200,000 shares of common stock were authorized to be
issued pursuant to stock awards granted under the plan. As of
December 31, 2003, 234,994 shares of common stock were
available for future grants under the 1999 Plan.

The 1999 Plan provides for the grant of
nonqualified stock options, stock purchase awards and stock
bonuses to selected employees and consultants. Directors are not
eligible for grants under the 1999 Plan. 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. To date, the Company has
not granted restricted stock purchase awards under this plan.

1997 Non-Employee Directors Stock Option
Plan

Under the 1997 Non-Employee Directors Stock
Option Plan (the Directors Plan), as amended,
an aggregate of 300,000 shares of the Companys common
stock are authorized for issuance thereunder. As of
December 31, 2003, 131,347 shares of common stock were
available for future grants under the Directors Plan.

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 8,000 shares of common stock. Each non-employee
director is additionally granted an option to purchase
8,000 shares of common stock on each anniversary of the
directors original grant under the Directors Plan,
so long as the director is not then an employee of the Company,
has continuously served as a director during such time and is a
member of the board at the time of grant. 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
5,000 shares, 3,000 shares and 3,000 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 equity incentive 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.

F-25



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Outstanding options to purchase up to
205,000 shares of the Companys common stock were
outstanding under these plans as of December 31, 2003, and
none of the grants outstanding represented restricted stock.

|                        |  |                             |                              |                    |  |  |     | 
|----------------------- |  | --------------------------- | ---------------------------- | ------------------ |  |  | --- | 
|                        |  |                             |                              | Shares Outstanding
|                        |  | Type of Stock Option Grants |                              | December 31, 2003 
|                        |  |                             |                              |                   
|                        |  |                             |                              | (In thousands)    
|CUseeMe 1996 Plan       |  |                             | ISO and Non-qualified grants |                    |  |  | 143 | 
|CUseeMe NQ97 Plan       |  |                             | ISO and Non-qualified grants |                    |  |  | 22  | 
|CUseeMe N/A Plan (1996) |  |                             | Non-qualified grants         |                    |  |  | 1   | 
|CUseeMe SEP Plan (1996) |  |                             | Non-qualified grants         |                    |  |  | 1   | 
|CUseeMe 2001 Plan       |  |                             | Non-qualified grants         |                    |  |  | 38  | 
|                        |  |                             |                              |                    |  |  |     | 
|                        |  |                             |                              |                    |  |  | 205 | 

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, 2000 |  |                     | 1,319 |                  |  | $ | 38.10 | 
|Granted                      |  |                     | 1,652 |                  |  |   | 5.55  | 
|Exercised                    |  |                     | (2    | )                |  |   | 2.45  | 
|Cancelled                    |  |                     | (942  | )                |  |   | 34.55 | 
|                             |  |                     |       |                  |  |   |       | 
|Balance at December 31, 2001 |  |                     | 2,027 |                  |  | $ | 18.20 | 
|                             |  |                     |       |                  |  |   |       | 
|Granted                      |  |                     | 993   |                  |  |   | 3.60  | 
|Exercised                    |  |                     | (1    | )                |  |   | 5.75  | 
|Cancelled                    |  |                     | (771  | )                |  |   | 13.80 | 
|                             |  |                     |       |                  |  |   |       | 
|Balance at December 31, 2002 |  |                     | 2,248 |                  |  | $ | 13.25 | 
|                             |  |                     |       |                  |  |   |       | 
|Granted                      |  |                     | 704   |                  |  |   | 2.64  | 
|Exercised                    |  |                     | (4    | )                |  |   | 3.46  | 
|Cancelled                    |  |                     | (786  | )                |  |   | 22.90 | 
|                             |  |                     |       |                  |  |   |       | 
|Balance at December 31, 2003 |  |                     | 2,162 |                  |  | $ | 6.24  | 
|                             |  |                     |       |                  |  |   |       | 

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 99,900 options previously granted at
prices of $2.04 and $2.20 to employees (excluding officers) were
exchanged for options with exercise prices of $1.70 per
share, which the Board concluded was the fair value of the
Companys common stock at that time. The Company has also
recognized a compensation charge of approximately
$1.3 million with respect to the 99,900 re-priced stock
options and 55,600 additional stock options granted in early
February 1998 with exercise prices of $1.70 per share,
computed based on a deemed value of $2.04 per share of
common stock. The charges referred to above were amortized over
the vesting period of the awards, generally five years. The
Company recognized $32,000, $26,000, and $115,000 of said
charges as compensation expense during the years ended
December 31, 2003, 2002 and, 2001, respectively. The
deferred compensation relating to these stock option grants was
fully amortized in the quarter ended March 31, 2003.

F-26



---



##### Table of Contents



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 |  |                    
|                         |       |                |     |                     |  | Options Exercisable
|                         |       |                |     | Weighted Average    |  |                     |      |               
|                         |       | Number         |     | Remaining           |  | Weighted Average    |      | Number         |  |                  
|                         |       | Outstanding    |     | Contractual Life    |  | Exercise Price      |      | Exercisable    |  | Weighted Average 
|Range of Exercise Prices |       | (In Thousands) |     | (In Years)          |  | (Per Share)         |      | (In Thousands) |  | Price (Per Share)
|                         |       |                |     |                     |  |                     |      |                |  |                  
|$0.31    $1.70          |       |                | 227 |                     |  |                     | 9.17 |                |  | $                 | 1.44  |      |  |  | 75  |       |  | $ | 1.47  |     
|$1.75    $2.16          |       |                | 290 |                     |  |                     | 9.48 |                |  |                   | 2.01  |      |  |  | 44  |       |  |   | 1.85  |     
|$2.25    $3.00          |       |                | 186 |                     |  |                     | 8.68 |                |  |                   | 2.75  |      |  |  | 95  |       |  |   | 2.83  |     
|$3.30    $3.75          |       |                | 334 |                     |  |                     | 8.22 |                |  |                   | 3.74  |      |  |  | 142 |       |  |   | 3.75  |     
|$3.95    $4.05          |       |                | 272 |                     |  |                     | 8.94 |                |  |                   | 4.03  |      |  |  | 92  |       |  |   | 4.01  |     
|$4.07    $4.98          |       |                | 226 |                     |  |                     | 7.52 |                |  |                   | 4.69  |      |  |  | 149 |       |  |   | 4.69  |     
|$5.00    $6.20          |       |                | 44  |                     |  |                     | 8.05 |                |  |                   | 5.25  |      |  |  | 33  |       |  |   | 5.26  |     
|$6.23    $6.25          |       |                | 248 |                     |  |                     | 7.02 |                |  |                   | 6.25  |      |  |  | 206 |       |  |   | 6.24  |     
|$6.35   $25.94          |       |                | 224 |                     |  |                     | 7.02 |                |  |                   | 8.91  |      |  |  | 150 |       |  |   | 9.95  |     
|$26.56  $101.175        |       |                | 110 |                     |  |                     | 5.62 |                |  |                   | 44.35 |      |  |  | 100 |       |  |   | 45.22 |     
|                         |       |                |     |                     |  |                     |      |                |  |                   |       |      |  |  |     |       |  |   |       |     
|                         | Total |                |     | 2,161               |  |                     |      | 8.15           |  |                   | $     | 6.23 |  |  |     | 1,086 |  |   | $     | 8.79 | 
|                         |       |                |     |                     |  |                     |      |                |  |                   |       |      |  |  |     |       |  |   |       |     

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,
|                                                                                            |  |                        
|                                                                                            |  | 2003                    |         | 2002 |  | 2001
|                                                                                            |  |                         |         |      |  |     
|Net loss                                                                                    |  | $                       | (9,974  | )    |  | $    | (24,322 | ) |  | $ | (31,601 | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Add: stock-based employee compensation expense
    included in reported net income          |  |                         | 32      |      |  |      | 26      |   |  |   | 23      |  
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Deduct: Total stock based employee compensation
    expense determined pursuant to SFAS 123 |  |                         | (1,878  | )    |  |      | (2,378  | ) |  |   | (2,956  | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss                                                                          |  | $                       | (11,820 | )    |  | $    | (26,674 | ) |  | $ | (34,534 | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|As reported net loss per share (basic and diluted)                                          |  | $                       | (1.11   | )    |  | $    | (3.19   | ) |  | $ | (6.28   | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss per share (basic and diluted)                                            |  | $                       | (1.32   | )    |  | $    | (3.50   | ) |  | $ | (6,86   | )
|                                                                                            |  |                         |         |      |  |      |         |   |  |   |         |  

F-27



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted-average estimated grant-date fair
value of options granted under the Companys various stock
option plans during 2003, 2002 and 2001 was $2.54 $3.07, and
$4.75, respectively. For the years ended December 31, 2003,
2002 and 2001, 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,
|                                         |  |             
|                                         |  | 2003         |     | 2002 |  | 2001
|                                         |  |              |     |      |  |     
|Risk-free interest rate                  |  |              | 3.4 | %    |  |      | 3.0 | % |  |  | 5.0 | %
|Volatility                               |  |              | 131 | %    |  |      | 113 | % |  |  | 123 | %
|Option term from vesting date (in years) |  |              | 5   |      |  |      | 5   |   |  |  | 5   |  
|Dividend yield                           |  |              | 0.0 | %    |  |      | 0.0 | % |  |  | 0.0 | %

1997 Employee Stock Purchase Plan

Under the Companys 1997 Employee Stock
Purchase Plan (the Purchase Plan), as amended to
date, an aggregate of 570,000 shares of common stock have
been authorized for issuance to participating employees who meet
eligibility requirements. As of December 31, 2003,
295,912 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. During 2003, 2001 and 2000, the Company issued 61,875,
73,484, and 77,337 shares of common stock, respectively,
under the Purchase Plan for aggregate proceeds of approximately
$84,150 $120,766, and $287,000, respectively.

Note 13  Litigation



| |             
| | ------------
| | Visitalk.com

On February 11 2003, the Company received an
adversarial complaint filed by Visitalk.com in the United States
Bankruptcy Court for the District of Arizona, in connection with
Visitalk.coms reorganization proceedings, alleging a claim
for breach of contract and seeking damages in the amount of
$435,000, based on allegations that the Company, through CUseeMe
Networks, Inc., aka White Pine Software, Inc.,
acquired by the Company in June 2001, breached a written license
agreement entered into in April 1999. In April 2003, the Company
filed a Motion to Stay Proceedings and Compel Matter to
Arbitration with the United States Bankruptcy Court for the
District of Arizona. In June 2003, the parties reached a mutual
agreement to dismiss the adversarial action with prejudice,
exchange a mutual general release of all claims and waive
attorneys fees and costs. The parties have executed a
formal settlement agreement, but the settlement will not become
effective until approved by the Bankruptcy Court. On our about
December 5, 2003, Visitalk.com filed a Notice of Motion to
Approve Compromise of Preference Claims by which it has sought
the Bankruptcy Courts approval of the settlement. No order
of approval has yet been entered by the Bankruptcy Court.

Note 14  Transactions with
Related Parties

On March 29, 2002, the Company signed a
definitive binding agreement to raise approximately
$4.8 million from a private placement of its common stock
and warrants. On April 12, 2002, the Company issued
1,337,200 shares of common stock at $3.60 per share
and warrants to purchase 668,600 shares of common stock at
an exercise price of $5.05 per share, pursuant to the
agreement. The exercise price of the warrants is subject to
adjustment in the event of certain issuances by the Company and
the current exercise price is $3.25 per share. The warrants
are exercisable for five years, commencing October 12,
2002. Investors in the offering included Ralph

F-28



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ungermann, Executive Chairman of the
Companys Board of Directors, Dr. Norman Gaut, a
member 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.

On April 14, 2003 the Company 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 $1.55 per share during the period from
April 14, 2003 through April 13, 2004. Following
completion of the private equity financing in November 2003, the
Company determined that use of this line of financing will not
be required and it is expected that the line will expire unused
on April 13, 2004.

On September 30, 2003, First Virtual
Communications, Inc. entered into an agreement with Net One
Systems (Net One), its exclusive distributor in Japan, under
which the Company agreed to accept the return of approximately
$1.6 million of products previously purchased by Net One,
and Net One agreed to invest $1.6 million in the Company.
In October 2003, following the return of the products, the
Company issued to Net One a total of 642,921 shares of the
Companys common stock at $2.45 per share.

On November 12, 2003, the Company issued
5,732,406 shares of common stock at $1.79 per share
and warrants to purchase 2,866,203 shares of common stock
with an exercise price of $1.79 per share, resulting in
proceeds of approximately $9.6 million net of fees and
expenses. The warrants are exercisable for five years,
commencing November 12, 2003. The investors in the
financing included Special Situations Fund, including Special
Situations Technology Fund, L.P., of which Adam Stettner, a
member of the Companys Board of Directors, serves as
Managing Director. The Company retained Roth Capital Partners
(Roth) as its exclusive agent for this financing and
paid to Roth a fee of 7% of the gross proceeds and a Warrant to
purchase up to 458,592 shares of the Companys common
stock at a price of $2.15 per share. The Warrant has a
five-year term and is exercisable beginning May 12, 2004.

Note 15  Loan from
Bank

In April 2003, the Company executed an agreement
with Silicon Valley Bank for a $3 million credit facility
that could be used by the Company at any time prior to
December 31, 2003. The interest rate was 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. In June 2003, the Company borrowed the full
$3 million available under agreement. At December 31,
2003 the Company had a total of $2.5 million outstanding
under this agreement, of which $1.0 million was included in
current liabilities.

Note 16  Subsequent
Events

On January 21, 2004, Ralph Ungermann,
resigned his position as Chairman of the Board of Directors and
as a director of the Company. The remaining directors
unanimously elected George Sollman as the Chairman of the Board
of Directors.

On February 4, 2004, the Securities and
Exchange Commission declared effective the Companys
registration statement on Form S-3 which registers the
resale of 6,375,329 shares of common stock and
3,325,151 shares of common stock issuable upon exercise of
warrants that were issued to investors and the placement agent
in a private

F-29



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

financing completed in November 2003 and to Net
One Systems Co., Ltd. in October 2003. The investors in the
financing included Special Situations Fund, including Special
Situations Technology Fund, L.P., of which Adam Stettner, a
member of the Companys Board of Directors, serves as
managing director.

In February, 2004, the Company commenced a
reduction of approximately 20% of its workforce or approximately
30 employees. The reductions will be primarily in the United
States and will result in an estimated cost to the Company in
the range of $600,000 to $700,000. The cost of this action will
be reflected in the Companys results for the three months
ending March 31, 2004.

QUARTERLY SUMMARY

(Unaudited)


|                                                                |  |                                       |        |         |  |              |        |             |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ | - |  | - | ------- | -
|                                                                |  |                                      
|                                                                |  | Three Months Ended                   
|                                                                |  |                                      
|                                                                |  | March 31                              |        | June 30 |  | September 30 |        | December 31
|                                                                |  |                                       |        |         |  |              |        |            
|                                                                |  |                                      
|                                                                |  | (In thousands, except per share data)
|2003                                                            |  |                                       |        |         |  |              |        |             |  |   |        |   |  |   |         |  
|Revenues                                                        |  | $                                     | 5,377  |         |  | $            | 5,894  |             |  | $ | 5,374  |   |  | $ | 4,678   |  
|Cost of revenues                                                |  | $                                     | 831    |         |  | $            | 991    |             |  | $ | 936    |   |  | $ | 822     |  
|Loss from operations                                            |  | $                                     | (2,161 | )       |  | $            | (2,851 | )           |  | $ | (1,940 | ) |  | $ | (2,930  | )
|Net loss                                                        |  | $                                     | (2,134 | )       |  | $            | (2,885 | )           |  | $ | (1,992 | ) |  | $ | (2,963  | )
|Basic and diluted earnings per share                            |  | $                                     | (0.26  | )       |  | $            | (0.36  | )           |  | $ | (0.24  | ) |  | $ | (0.27   | )
|Shares used to compute net loss per share                       |  |                                       | 8,097  |         |  |              | 8,107  |             |  |   | 8,136  |   |  |   | 10,959  |  
|Non-recurring charge:                                           |  |                                       |        |         |  |              |        |             |  |   |        |   |  |   |         |  
|Included in cost of revenues related to inventory
    valuation |  | $                                     |       |         |  | $            |       |             |  | $ | 24     |   |  | $ |        |  
|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                            |  | $                                     | (0.25  | )       |  | $            | (0.59  | )           |  | $ | (0.45  | ) |  | $ | (1.80   | )
|Shares used to compute net loss per share                       |  |                                       | 6,674  |         |  |              | 7,689  |             |  |   | 8,055  |   |  |   | 8,073   |  
|Non-recurring charge:                                           |  |                                       |        |         |  |              |        |             |  |   |        |   |  |   |         |  
|Included in cost of revenues related to inventory
    valuation |  | $                                     |       |         |  | $            | (1,000 | )           |  | $ |       |   |  | $ | (438    | )

F-30



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS 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 March 26, 2004
appearing in this Form 10-K also included an audit of the
financial statement schedule 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

March 26, 2004


S-1



---



##### Table of Contents



FIRST VIRTUAL
COMMUNICATIONS, INC.

VALUATION AND QUALIFYING ACCOUNTS


for the Fiscal Years 2003, 2002 and
2001


|                                                |  |            |           |                  |  |             |           |                |  |           |                          |  |  |   |         |  |  |   |           | 
|----------------------------------------------- |  | ---------- | --------- | ---------------- |  | ----------- | --------- | -------------- |  | --------- | ------------------------ |  |  | - | ------- |  |  | - | --------- | 
|                                                |  |            |           |                  |  |             |           |               
|                                                |  | Balance at |           |                  |  | Deductions  |           |               
|                                                |  | Beginning  |           | Charged to Costs |  |             |           | Balance at End
|Description                                     |  | of Period  |           | and Expenses     |  | Description |           | Amount         |  | of Period
|                                                |  |            |           |                  |  |             |           |                |  |          
|Allowance for Doubtful Accounts
    Receivable: |  |            |           |                  |  |             |           |                |  |           |                          |  |  |   |         |  |  |   |           | 
|Fiscal year 2003                                |  | $          | 1,018,000 |                  |  | $           | 58,000    |                |  |           | Write-offs & adjustments |  |  | $ | 698,000 |  |  | $ | 378,000   | 
|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 | 
|Reserve for Returns                             |  |            |           |                  |  |             |           |                |  |           |                          |  |  |   |         |  |  |   |           | 
|Fiscal year 2003                                |  | $          | 547,000   |                  |  | $           | (208,000  | )              |  |           | Write-offs & adjustments |  |  | $ | 135,000 |  |  | $ | 204,000   | 
|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   | 



---



|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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



---



##### Table of Contents



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(6)                                                                                                                                                                            
|        | 3  | .6                      |  | Certificate of Amendment of Restated Certificate
    of Incorporation filed on June 19, 2001(6)                                                                                                                                                   
|        | 3  | .7                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed on June 26, 2003(14)                                                                                                                                      
|        | 4  | .1                      |  | Specimen Common Stock Certificate(3)                                                                                                                                                                                                              
|        | 4  | .2                      |  | Specimen Series A Convertible Preferred
    Stock Certificate(5)                                                                                                                                                                                  
|        | 4  | .3                      |  | Warrant to purchase 522,875 shares, after
    giving effect to the 1-for-5 reverse stock split effected in
    June 2003, of the Companys Common Stock, dated May 7,
    2001, issued by the Company to PictureTel Corporation(7)                
|        | 4  | .4                      |  | Warrant to purchase 170,000 shares, after
    giving effect to the 1-for-5 reverse stock split effected in
    June 2003, subject to adjustment, of the Companys Common
    Stock, dated June 8, 2000 issued by the Company to Vulcan
    Inc.(5)
|        | 4  | .5                      |  | Registration Rights Agreement, dated June 8,
    2000, between the Company and Vulcan, Inc.(5)                                                                                                                                                    
|        | 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(8)                                                       
|        | 4  | .7                      |  | Registration Rights Agreement, dated
    April 12, 2002, by and among the Company and each of the
    purchasers listed therein(8)                                                                                                                
|        | 4  | .8                      |  | Warrant to purchase 60,000 shares, after
    giving effect to the 1-for-5 reverse stock split, of the
    Companys Common Stock, dated April 14, 2003, issued
    by the Company to Ralph Ungermann(12)                                          
|        | 4  | .9                      |  | Warrant to purchase 56,250 shares, after
    giving effect to the 1-for-5 reverse stock split, of the
    Companys Common Stock, dated April 3, 2003, issued by
    the Company to Silicon Valley Bank(12)                                       
|        | 4  | .10                     |  | Warrant to purchase 200,000 shares of the
    Companys Common Stock, dated September 30, 2003,
    issued by the Company to Richard T. Peery Separate Property
    Trust(15)                                                                     
|        | 4  | .11                     |  | Warrant to purchase 200,000 shares of the
    Companys Common Stock, dated September 30, 2003,
    issued by the Company to John Arrillaga Survivors Trust(15)                                                                                  
|        | 4  | .12                     |  | Registration Rights Agreement, dated as of
    November 7, 2003, by and among the Company and the
    purchasers set forth on the Schedule of Purchasers attached
    thereto(16)                                                                 
|        | 4  | .13                     |  | Warrant to purchase 2,866,199 shares of the
    Companys Common Stock, dated November 12, 2003,
    issued by the Company to the purchasers set forth on the
    Schedule of Purchasers attached thereto(16)                                     
|        | 4  | .14                     |  | Warrant to purchase up to 458,592 shares of
    the Companys Common Stock, dated November 12, 2003,
    issued by the Company to Roth Capital Partners LLC(15)                                                                                   
|        | 10 | .1*                     |  | 1997 Equity Incentive Plan, as amended(10)                                                                                                                                                                                                        
|        | 10 | .2*                     |  | 1997 Employee Stock Purchase Plan, as amended(10)                                                                                                                                                                                                 
|        | 10 | .3*                     |  | Form of 1997 Employee Stock Purchase Plan
    Offering(14)                                                                                                                                                                                        
|        | 10 | .4*                     |  | 1997 Non-Employee Directors Stock Option
    Plan(10)                                                                                                                                                                                            
|        | 10 | .5*                     |  | Executive Officers Change of Control Plan,
    as amended                                                                                                                                                                                        
|        | 10 | .6*                     |  | Non-Employee Directors Change of Control
    Plan(4)                                                                                                                                                                                             
|        | 10 | .7*                     |  | 1999 Equity Incentive Plan, as amended(13)                                                                                                                                                                                                        



---



##### Table of Contents



|        |    |                         |  |                                                                                                                                                                                                                
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 10 | .8*                     |  | Form of Indemnification Agreement between the
    Registrant and its directors and executive officers(2)                                                                                                       
|        | 10 | .9                      |  | Stock Purchase Agreement, dated June 8,
    2000, between the Company and Vulcan Ventures Incorporated(5)                                                                                                      
|        | 10 | .10                     |  | Purchase Agreement, dated as of March 29,
    2002, by and among the Company and each of the purchasers listed
    therein(8)                                                                                  
|        | 10 | .11**                   |  | First Virtual Communications Partner Agreement,
    dated April 1, 2002, between Net One Systems and the
    Company(9)                                                                                        
|        | 10 | .12*                    |  | Retention Agreement, dated October 3, 2002,
    between the Company and Ralph Ungermann(11)                                                                                                                    
|        | 10 | .13*                    |  | Settlement and Release Agreement, dated
    October 29, 2002, between the Company and Killko
    Caballero(11)                                                                                                 
|        | 10 | .14*                    |  | Settlement and Release Agreement, dated
    December 12, 2002 between the Company and Timothy Rogers(11)                                                                                                       
|        | 10 | .15*                    |  | Offer Letter, dated October 29, 2002,
    between the Company and Jonathan Morgan(11)                                                                                                                          
|        | 10 | .16*                    |  | Offer Letter, dated December 12, 2002
    between the Company and Frank Kaplan(11)                                                                                                                             
|        | 10 | .17*                    |  | Offer Letter, dated December 12, 2002
    between the Company and Truman Cole(11)                                                                                                                              
|        | 10 | .18*                    |  | Settlement and Release Agreement, dated
    January 10, 2003, between the Company and Jeffery Krampf(11)                                                                                                       
|        | 10 | .19                     |  | Lease Agreement dated March 10, 2003 for
    3200 Bridge Parkway, Redwood City, California between the
    Company and Westport Joint Venture(12)                                                              
|        | 10 | .20                     |  | Equity Line of Credit Agreement, dated
    April 14, 2003 between the Company and Ralph Ungermann(12)                                                                                                          
|        | 10 | .21                     |  | Line of Credit Agreement, dated April 3,
    2003 between the Company and Silicon Valley Bank(12)                                                                                                              
|        | 10 | .22                     |  | Lease Agreement between White Pine Software and
    Nash-Tamposi Limited Partnership, Five N Associates, dated
    May 15, 1996(12)                                                                            
|        | 10 | .23                     |  | Amendment No. 5 to Lease Agreement between
    Company and John Arrillaga and Richard T. Peery, dated
    March 10, 2003(12)                                                                                   
|        | 10 | .24*                    |  | Employment agreement between the Company and
    Jonathan Morgan, dated October 9, 2003(15)                                                                                                                    
|        | 10 | .25                     |  | Amendment Number One to the Partner Agreement
    between the Company and Net One Systems Co., Ltd., dated
    April 1, 2002(15)                                                                               
|        | 10 | .26**                   |  | Amendment Number Two to the Partner Agreement
    between the Company and Net One Systems Co., Ltd., dated
    September 30, 2003(15)                                                                          
|        | 10 | .27*                    |  | Employment agreement between the Company and
    David Weinstein, dated September 4, 2003(15)                                                                                                                  
|        | 10 | .28*                    |  | Employment agreement between the Company and
    Frank Kaplan, dated November 25, 2002(15)                                                                                                                     
|        | 10 | .29                     |  | Securities Purchase Agreement, dated as of
    November 7, 2003, by and among the Company and the
    purchasers set forth on the Schedule of Purchasers attached
    thereto(16)                              
|        | 10 | .30                     |  | Equity Investment Agreement effective as of
    September 30, 2003, by and between the Company and Net One
    Systems Co., Ltd.(16)                                                                           
|        | 10 | .31*                    |  | Offer Letter effective November 12, 2003,
    between the Company and Mark Reid                                                                                                                                
|        | 10 | .32*                    |  | Offer Letter between the Company and David
    Bundy(17)                                                                                                                                                       
|        | 10 | .33*                    |  | Offer Letter between the Company and Robert
    Romano, dated December 13, 2002.                                                                                                                               
|        | 23 | .1                      |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                          
|        | 24 | .1                      |  | Power of Attorney (included on signature page)                                                                                                                                                                 
|        | 31 | .1                      |  | Certificate of Principal Executive Officer, dated
    March 26, 2004, required by Section 302 of the Public
    Company Accounting Reform and Investor Protection Act of 2002
    (18 U.S.C. §1350, as adopted)
|        | 31 | .2                      |  | Certificate of Principal Financial Officer, dated
    March 26, 2004, required by Section 302 of the Public
    Company Accounting Reform and Investor Protection Act of 2002
    (18 U.S.C. §1350, as adopted)



---



##### Table of Contents



|        |    |                         |  |                                                                                                                                                                                                                                                      
|------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 32 |                         |  | Certification of Principal Executive Officer and
    Principal Financial Officer, dated March 26, 2004, 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 August 11, 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
    Quarterly Report on Form 10-Q filed on August 15, 2001
    (File No. 000-23305).      
|
| | (7) | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on November 14,
    2001 (File No. 000- 23305).   
|
| | (8) | Filed as an exhibit to the Companys
    Registration Statement on Form S-3 (File
    No. 333-88058), as filed on May 10, 2002.
|
| | (9) | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 14, 2002
    (File No. 000-23305).      



|     |                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------
|(10) | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on November 14,
    2002 (File No. 000-23305).      
|    
|(11) | Filed as an exhibit to the Companys Annual
    Report on Form 10-K filed on April 15, 2003 (File
    No. 000-23305).            
|    
|(12) | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on May 15, 2003
    (File No. 000-23305).           
|    
|(13) | Filed as an exhibit to the Companys
    Schedule TO, filed on July 25, 2003 (File
    No. 5-55273).                             
|    
|(14) | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on August 14, 2003
    (File No. 000-23305).        
|    
|(15) | Filed as an exhibit to the Companys
    Quarterly Report on Form 10-Q filed on November 14,
    2003 (File No. 000-23305).      
|    
|(16) | Filed as an exhibit to the Companys
    Registration Statement on Form S-3 (File
    No. 333-110976), as filed February 4, 2004.
|    
|(17) | Filed as an exhibit to the Companys
    Registration Statement on Form S-4 (File
    No. 333-594801), as filed on May 16, 2001.