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**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM10-Q**

 
| ý                                                 | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                   |                                                                                          |
| **For The Quarterly Period Ended  June 30, 2001** |
|                                                   |
| **OR**                                                 |
|                                                   |
| o                                                      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |                                                                                          |

**Forthe transition period from             to**

**Commissionfile number 000-23305**

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**FIRSTVIRTUAL COMMUNICATIONS, Inc.******(Exact name of registrant in its character)

 

| **Delaware**                                                    | **77–0357037**                     |
|-----------------------------------------------------------------|-----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | (I.R.S. Employer Identification Number) |

**3393Octavius DriveSanta Clara, CA 95054**(Address of principal executive offices)

**(408)567–7200**(Registrant's telephone number, including area code)

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             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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý No o

|                           |                                     |
|--------------------------------|------------------------------------------|
| Common Stock, $0.001 par value | 33,226,315                               |
|                           |                                     |
| (Class)                        | Outstanding as of   August 10, 2001 |
|                           |                                     |

----

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**FirstVirtual Communications, Inc.****Form 10-Q**

**Index**

|               |                                                                                                        |   |
|--------------------|-------------------------------------------------------------------------------------------------------------|--------|
|  **PART 1.**  | **FINANCIAL INFORMATION**                                                                                   |   |
|  Item 1.      | Financial Statements  (unaudited)                                                                           |   |
|               | Condensed  Consolidated Balance Sheets at June 30, 2001 and December 31, 2000                               |   |
|               | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2001 and 2000 |   |
|               | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2001  and 2000           |   |
|               | Notes  to Unaudited Condensed Consolidated Financial Statements                                             |   |
|  Item 2.      | Management's  Discussion and Analysis of Financial Condition and Results of Operations                      |   |
|  Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                                 |   |
|  **PART II.** | **OTHER INFORMATION**                                                                                       |   |
|  Item 1.      | Legal Proceedings                                                                                           |   |
|  Item 4.      | Submission  of Matters to Vote of Security Holders                                                          |   |
|  Item 6.      | Exhibits and Reports on Form 8–K                                                                       |   |
| **SIGNATURES**     |                                                                                                        |
| **EXHIBIT  INDEX** |                                                                                                        |
|               |                                                                                                        |   |

** **

**PART 1.FINANCIAL INFORMATION**

             Item 1.Financial Statements

**First Virtual Communications, Inc.Condensed Consolidated BalanceSheets(in thousands, except share data; unaudited)**

 

|                                          | **June 30,**                                                                                                                          |       | **December 31,** |       |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
|                                          | **2001**                                                                                                                              |       | **2000**         |       |
|                                          | ****                                                                                                                                  |       | ****             |       |
| **ASSETS**                                    |                                                                                                                                  |       |             |       |
|                                          |                                                                                                                                  |       |             |       |
|                                          | Cash and cash equivalents                                                                                                             | $          | 10,926           |       | $ | 7,077 |   |
|                                          | Short-term investments                                                                                                                | 4,819      |             | 16,851     |   |
|                                          | Accounts receivable                                                                                                                   | 8,457      |             | 9,937      |   |
|                                          | Inventory                                                                                                                             | 10,516     |             | 6,912      |   |
|                                          | Prepaids and other current assets                                                                                                     | 1,959      |             | 871        |   |
|                                          |                                                                                                                                       |       |                  |       |
|                                          | Total current assets                                                                                                                  | 36,677     |             | 41,648     |   |
| Property and  equipment, net                  | 4,215                                                                                                                                 |       | 2,815            |       |
| Intangible assets, net                        | 15,886                                                                                                                                | ** ** | 1,894            | ** ** |
| Other assets                                  | 398                                                                                                                                   |       | 584              |       |
|                                          |                                                                                                                                       |       |                  |       |
|                                          | $                                                                                                                                     | 57,176     |             | $          | 46,941 |   |
|                                          |                                                                                                                                       |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**      |                                                                                                                                  |       |             |       |
| Current liabilities:                          |                                                                                                                                  |       |             |       |
|                                          | Current portion of long-term debt                                                                                                     | $          | 36               |       | $ | 80 |   |
|                                          | Accounts payable                                                                                                                      | 3,807      |             | 5,122      |   |
|                                          | Accrued liabilities                                                                                                                   | 8,026      |             | 3,574      |   |
|                                          | Deferred revenue                                                                                                                      | 2,475      |             | 1,143      |   |
|                                          |                                                                                                                                       |       |                  |       |
|                                          | Total current liabilities                                                                                                             | 14,344     |             | 9,919      |   |
|                                          |                                                                                                                                  |       |             |       |
| Long-term debt, net of  current portion       | 112                                                                                                                                   |       | 39               |       |
|                                          |                                                                                                                                  |       |             |       |
| Minority interest in  consolidated subsidiary | 265                                                                                                                                   |       | 253              |       |
|                                          |                                                                                                                                  |       |             |       |
| Stockholders' equity:                         |                                                                                                                                  |       |             |       |
|                                          | Convertible Preferred Stock,  $.001 par value; 5,000,000 shares authorized; 27,437 shares issued and outstanding  at June 30, 2001    | -          |             | -          |   |
|                                          | Common Stock, $.001 par value;  100,000,000 shares authorized; 33,028,794 and 17,334,189 shares issued and  outstanding, respectively | 33         |             | 17         |   |
|                                          | Additional paid-in capital                                                                                                            | 112,324    |             | 92,168     |   |
|                                          | Accumulated other comprehensive  income                                                                                               | 236        |             | 210        |   |
|                                          | Accumulated deficit                                                                                                                   | (70,138    | )                | (55,665    | ) |
|                                          |                                                                                                                                       |       |                  |       |
|                                          | Total stockholders' equity                                                                                                            | 42,455     |             | 36,730     |   |
|                                          |                                                                                                                                       |       |                  |       |
|                                          | $                                                                                                                                     | 57,176     |             | $          | 46,941 |   |
|                                          |                                                                                                                                       |       |                  |       |
|                                               |                                                                                                                                       |            |                  |            |  |  |  |  |

See accompanyingnotes to condensed consolidated financial statements.

**First Virtual Communications, Inc.Condensed ConsolidatedStatements of Operations(in thousands, except per share data; unaudited)**

 

|                                          | **Three months ended**                          |     | **Six months ended** |     |
|-----------------------------------------------|-------------------------------------------------|----------|----------------------|----------|
|                                          |                                                 |     |                      |     |
|                                          | **June 30,**                                    |     | **June 30,**         |     |
|                                          |                                                 |     |                      |     |
|                                          | **2001**                                        |     | **2000**             |     | **2001** |   | **2000** |   |
|                                          |                                                 |     |                      |     |  |   |  |   |
| Revenues                                      | $                                               | 8,135    |                 | $        | 10,772 |   | $ | 12,517 |   | $ | 20,855 |   |
| Cost of revenues                              | 4,389                                           |     | 5,810                |     | 6,976 |   | 11,360 |   |
|                                          |                                                 |     |                      |     |  |   |  |   |
|                                          | Gross profit                                    | 3,746    |                 | 4,962    |   | 5,541 |   | 9,495 |   |
|                                          | **                                              | * * | **                   | * * |  |   |  |   |
| Operating expenses:                           |                                            |     |                 |     |   |   |   |   |
|                                          | Research and development                        | 2,842    |                 | 3,034    |   | 6,828 |   | 5,715 |   |
|                                          | Selling, general and  administrative            | 5,423    |                 | 5,504    |   | 11,877 |   | 11,348 |   |
|                                          | Acquisition and other  non-recurring costs, net | 1,781    | ** **           | **-**    |   | 1,781 |   | **-** | ** ** |
|                                          |                                                 |     | ****                 |     | **** |   | **** |   |
|                                          | Total operating expenses                        | 10,046   |                 | 8,538    |   | 20,486 |   | 17,063 |   |
|                                          |                                                 |     |                      |     |  |   |  |   |
| Operating loss                                | (6,300                                          | )        | (3,576               | )        | (14,945 | ) | (7,568 | ) |
|                                          |                                            |     |                 |     |   |   |   |   |
| Other income, net                             | 170                                             |     | 209                  |     | 486 |   | 308 |   |
| Minority interest in  consolidated subsidiary | (12                                             | )        | 32                   |     | (14 | ) | (49 | ) |
|                                          |                                                 |     |                      |     |  |   |  |   |
| Net loss                                      | $                                               | (6,142   | )                    | $        | (3,335 | ) | $ | (14,473 | ) | $ | (7,309 | ) |
|                                          |                                                 |     |                      |     |  |   |  |   |
| Net loss per share:                           |                                            |     |                 |     |   |   |   |   |
|                                          | Basic and diluted                               | $        | (0.33                | )        | $ | (0.19 | ) | $ | (0.79 | ) | $ | (0.43 | ) |
|                                          |                                            |     |                 |     |   |   |   |   |
| Shares used to compute  net loss per share:   |                                            |     |                 |     |   |   |   |   |
|                                          | Basic and diluted                               | 18,859   |                 | 17,244   |   | 18,238 |   | 17,093 |   |
|                                               |                                                 |          |                      |          |  |  |  |  |  |  |  |  |  |  |

See accompanyingnotes to condensed consolidated financial statements.

**First Virtual Communications, Inc.Condensed ConsolidatedStatements of Cash Flows(in thousands; unaudited)**

 

|                                                                                                           | **Six Months Ended June  30**                                                               |    |
|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|---------|
|                                                                                                           | ****                                                                                        |    |
|                                                                                                           | **2001**                                                                                    |    | **2000** |   |
|                                                                                                           |                                                                                             |    |  |   |
| Cash flows from  operating activities:                                                                         |                                                                                        |    |   |   |
|                                                                                                           | Net loss                                                                                    | $       | (14,473 | ) | $ | (7,309 | ) |
|                                                                                                           | Adjustments to reconcile net loss  to net cash used in operating activities:                |    |     |   |     |
|                                                                                                           | Depreciation and  amortization                                                              | 1,900   |   | 1,036 |   |
|                                                                                                           | Stock compensation                                                                          | (122    | ) | 156 |   |
|                                                                                                           | Acquired in-process research and  development                                               | 276     |   | - |   |
|                                                                                                           | Other non-recurring costs                                                                   | 1,083   |   | - |   |
|                                                                                                           | Other                                                                                       | 113     |   | 26 |   |
|                                                                                                           | Changes in assets and liabilities  net of effects of acquisition of CUseeMe Networks, Inc.: |    |   |   |   |
|                                                                                                           |                                                                                        |    |   |   |   |
|                                                                                                           | Accounts receivable                                                                         | 2,422   |   | (885 | ) |
|                                                                                                           | Inventory                                                                                   | (3,551  | ) | 745 |   |
|                                                                                                           | Prepaid expenses and  other assets                                                          | (1,407  | ) | 1,416 |   |
|                                                                                                           | Accounts payable                                                                            | (1,385  | ) | (1,614 | ) |
|                                                                                                           | Accrued liabilities                                                                         | (1,389  | ) | 1,733 |   |
|                                                                                                           | Deferred revenue                                                                            | 1,332   |   | (612 | ) |
|                                                                                                           |                                                                                             |    |  |   |
|                                                                                                           | Net cash used in  operating activities                                                      | (15,201 | ) | (5,308 | ) |
|                                                                                                           |                                                                                             |    |  |   |
| Cash flows from investing  activities:                                                                         |                                                                                        |    |   |   |
|                                                                                                           | Acquisition of property and  equipment,net                                                  | 218     |   | (381 | ) |
|                                                                                                           | Proceeds from sales of short-term  investments, net                                         | 12,032  |   | (21,555 | ) |
|                                                                                                           | Cash acquired in acquisition of  CUseeMe Networks, Inc.                                     | 6,601   |   | - |   |
|                                                                                                           |                                                                                             |    |  |   |
|                                                                                                           | Net cash provided by/(used in)  investing activities                                        | 18,851  |   | (21,936 | ) |
|                                                                                                           |                                                                                             |    |  |   |
| Cash flows from  financing activities:                                                                         |                                                                                        |    |   |   |
|                                                                                                           | Proceeds from issuance of stock,  net                                                       | 170     |   | 26,898 |   |
|                                                                                                           | Increase (repayment)  of capital lease obligations                                          | 29      |   | (48 | ) |
|                                                                                                           |                                                                                             |    |  |   |
|                                                                                                           | Net cash provided by financiing  activities                                                 | 199     |   | 26,850 |   |
|                                                                                                           |                                                                                             |    |  |   |
| Net  increase/(decrease) in cash and cash equivalents                                                          | 3,849                                                                                       |    | (394 | ) |
| Cash and cash  equivalents at beginning of period                                                              | 7,077                                                                                       |    | 997 |   |
|                                                                                                           |                                                                                             |    |  |   |
| Cash and cash  equivalents at end of period                                                                    | $                                                                                           | 10,926  |   | $ | 603 |   |
|                                                                                                           |                                                                                             |    |  |   |
| Supplemental cash flow  information:                                                                           |                                                                                        |    |   |   |
|                                                                                                           |                                                                                        |    |   |   |
| Common stock issued  and options and warrant assumed in connection with acquisition of CUseeMe  Networks, Inc. | $                                                                                           | 20,190  |   | $ | - |   |
|                                                                                                           |                                                                                             |    |  |   |
|                                                                                                                |                                                                                             |         |  |  |  |  |  |  |  |  |  |

See accompanyingnotes to condensed consolidated financial statements.

**FirstVirtual Communications, Inc.**

**Notesto Unaudited Condensed Consolidated Financial Statements**

**1. Basisof Presentation**

             The unaudited condensed consolidated financialstatements included herein reflect all adjustments, consisting only of normalrecurring adjustments, which, in the opinion of management, are necessary for afair statement of First Virtual Communications, Inc.’s (the"Company") consolidated financial position, results of operations andcash flows for the periods presented. These condensed consolidated financialstatements should be read in conjunction with the Company's auditedconsolidated financial statements included in the Company's Annual Report onForm 10-K for the year ended December 31, 2000. The December 31,2000 condensed consolidated balance sheet was derived from audited financial statements,but does not include all disclosures required by generally accepted accountingprinciples. The results of operations for the period ended June 30, 2001are not necessarily indicative of the results to be expected for any subsequentquarter or for the entire fiscal year ending December 31, 2001.

**2.Acquisition of CUseeMe Networks, Inc.**

             On June 19, 2001, theCompany completed its acquisition of CUseeMe Networks, Inc., ("CUseeMeNetworks"), a provider of innovative software solutions that enable voiceand visual communications over IP-based networks. The acquisition was accountedfor using the purchase method of accounting. Accordingly, the estimated fairvalue of assets acquired and liabilities assumed were included in the Company’scondensed consolidated results of operations as of and since the effective dateof the purchase. There were no significant differences between the accountingpolicies of the Company and CUseeMe Networks.

The Company acquired CUseeMe Networks for totalconsideration of $22.7 million, including direct acquisition costs of $2.5million for legal, consulting and accounting fees. The Company exchangedoptions to purchase 4,109,888 shares of CUseeMe Networks common stock withoptions to purchase shares of the Company’s stock for which the Black-Scholesoption-pricing model value of approximately $1.6 million was included in thepurchase price.

The Company engaged an independent appraiser to value theintangible assets.  The total purchaseprice was preliminarily allocated to the estimated fair value of assetsacquired and liabilities assumed as follows:

| (In thousands)                                                  |   |   |
|-----------------------------------------------------------------|--------|--------|
|                                                            |   |   |
| Fair value of tangible assets and liabilities                   | $      | 7,235  |   |
| In-process research and development                             | 276    |   |
| Trademark                                                       | 661    |   |
| Current technology                                              | 5,918  |   |
| Assembled workforce                                             | 1,505  |   |
| Deferred stock compensation                                     | 1,300  |   |
| Excess of purchase price over identifiable net assets  acquired | 5,824  |   |
|                                                            |        |   |
|                                                            | Total  | $      | 22,719 |   |
|                                                            |   |        |   |

             Theamounts allocated to current technology, assembled workforce and residualgoodwill are being amortized using the straight-line method over theirrespective estimated useful lives, which range from 3 to 5 years.

The following unaudited pro forma consolidated amountsgive effect to the acquisition of CUseeMe Networks as if it had occurred at thebeginning of each of fiscal 2001 and 2000 (in thousands, except per sharedata):

 

|               | Three  months ended June 30, |    | Six  months ended June 30, |   |
|--------------------|------------------------------|---------|----------------------------|--------|
|               | 2001                         |    | 2000                       |   | 2001 |   | 2000 |   |
|               |                              |    |                            |   |  |   |  |   |
| Revenue            | $                            | 8,626   |                       | $      | 13,367 |   | $ | 14,889 |   | $ | 27,542 |   |
| Net loss           | $                            | (17,352 | )                          | $      | (7,524 | ) | $ | (30,476 | ) | $ | (12,557 | ) |
| Net loss per share | $                            | (1.09   | )                          | $      | (0.46 | ) | $ | (1.87 | ) | $ | (0.75 | ) |

             Theabove unaudited pro forma consolidated amounts are not necessarily indicativeof the actual results of operations that would have been reported if theacquisition had actually occurred as of the beginning of the periods describedabove, nor does such information purport to indicate the results of theCompany’s future operations. In the opinion of management, all adjustmentsnecessary to present fairly such pro forma amounts have been made.

             Duringthe quarter ended June 30, 2001, the Company recorded deferred compensation ofapproximately $91,000 for the difference between the grant or issuance price ofcommon stock options and the fair value of the Company’s common stock issued inconjunction with the CUseeMe Networks acquisition.  These amounts are being amortized in accordance with FinancialAccounting Standards Board Interpretation No. 28 over the vesting period of theindividual stock options.

**3.Inventory**

             Inventories as of June 30, 2001 andDecember 31, 2000 were (in thousands):

|             | **June 30, 2001** |   | **December 31, 2000** |   |
|------------------|-------------------|--------|-----------------------|--------|
|             |                   |   |                       |   |
| Raw  materials   | $                 | 5,297  |                  | $      | 1,553 |   |
| Finished  goods  | 5,219             |   | 5,359                 |   |
|             |                   |   |                       |   |
| Total  inventory | $                 | 10,516 |                  | $      | 6,912 |   |
|             |                   |   |                       |   |

**4. NetLoss Per Share**

             Net loss per share is computed in accordance withStatement of Financial Accounting Standards No. 128 "Earnings PerShare" ("FAS 128"). FAS 128 requires the Company toreport both basic earnings (loss) per share, which is based on the weighted–averagenumber of common shares outstanding excluding contingently issuable orreturnable shares such as shares of unvested restricted common stock, anddiluted earnings (loss) per share, which is based on the weighted–averagenumber of common shares outstanding and dilutive potential common sharesoutstanding.

             As a result of the losses incurred by the Company forthe three and six months ended June 30, 2001 and 2000, all potentialcommon shares were anti-dilutive and were excluded from the diluted net lossper share calculations for such periods.

             The following table summarizes securities outstanding(on an as-converted basis) which were not included in the calculations ofdiluted net loss per share for the six months ended June 30, 2001 and2000, since their inclusion would be anti-dilutive (in thousands):

|                              | **June 30,** |   |
|-----------------------------------|--------------|--------|
|                              | ****         |   |
|                              | **2001**     |   | **2000** |   |
|                              |              |   |  |   |
| Unvested restricted  common stock | —       |   | 30 |   |
| Common stock options              | 12,208       |   | 5,807 |   |
| Common stock warrants             | 3,589        |   | 1,016 |   |
| Convertible preferred  stock      | 3,617        |   | 3,430 |   |

 

             Unvested restrictedcommon stock represents stock that has been issued but which is subject torepurchase to the extent the holder does not remain associated with the Companyuntil such shares are vested. The common stock warrants are exercisable at $.91to $12.00 per share and expire at various times from April 2002 throughMay 2006. The stock options outstanding at June 30, 2001, had a weightedaverage exercise price per share of $4.71, and expire beginning inJuly 2001 through June 2011. Convertible preferred stock representsthe number of shares of common stock that would be outstanding if theSeries A Preferred Stock was converted at a conversion rate of 131.8 for1.

**5.Comprehensive Loss**

             The Company's comprehensive net loss for the three andsix months ended June 30, 2001 was $6,142,000 and $14,473,000,respectively. The comprehensive net loss for the three and six months endedJune 30, 2000  was $3,335,000 and$7,309,000.

**6.Litigation**

             On or about April 9, 1999, several purported classaction suits were filed in the United States District Court for the NorthernDistrict of California alleging violations of the federal securities lawsagainst the Company and certain of its officers and directors in connectionwith the Company's reporting of its financial results for the period endedDecember 31, 1998. The court dismissed these actions without leave toamend on February 14, 2000, and the plaintiffs appealed the dismissal tothe U.S. Court of Appeals for the Ninth Circuit. The appeal was taken undersubmission by the Court of Appeals following the filing of briefs by theparties and the presentation of oral argument on July 11, 2001. The Court ofAppeals has not yet issued a ruling on the appeal.

             On April 23, 2001, the Company received notice of ashareholder's derivative action filed in California Superior Court in theCounty of Santa Clara, alleging that, among other things, certain directors andofficers of the Company sold shares of the Company stock betweenJanuary 21, 1999 and April 6, 1999, while in possession of materialnon-public information pertaining to the Company. The Company and theindividual defendants moved to dismiss the action, or in the alternative tostay the action pending the outcome of the appeal in the related federal courtclass action or, if necessary, the investigation of the claims by the Company.These motions were presented to the Superior Court on July 23, 2001 and thecourt has not yet issued a ruling on the motions.

**7.Issuance of Convertible Preferred Stock**

             On June 8, 2000, the Company issued 27,437 sharesof Series A Convertible Preferred Stock (the "Preferred Stock")in a private placement to Vulcan Ventures Incorporated ("Vulcan") foran aggregate purchase price of $27,437,000. The Preferred Stock is convertibleinto 3,616,778 shares of common stock of the Company. The Company also issued afive-year warrant to Vulcan to purchase 850,000 shares of the Company's commonstock at an exercise price of $7.00 per share. On the date of issuance, thewarrant had an approximate fair market value of $3,700,000, determined usingthe Black–Scholes pricing model. The aggregate gross proceeds from thetransaction exceed the fair value of the stock and warrants issued. The warrantprovides anti-dilution protection to Vulcan in the event that the Companyissues additional shares of common stock at a price less than $7.00 per share,subject to certain exceptions. As of June 30, 2001, the anti-dilutionprotection provisions have not been enacted.

**8. NewAccounting Pronouncements**

             In June 1998, the Financial Accounting StandardsBoard ("FASB") issued Statement of Financial Accounting StandardsNo. 133, "Accounting for Derivative Instruments and HedgingActivities" ("FAS 133"). The standard requires companies torecord derivatives on the balance sheet as assets or liabilities, measured atfair value. Under FAS 133, gains or losses resulting from changes in thevalues of derivatives are to be reported in the statement of operations or as adeferred item, depending on the use of the derivatives and whether they qualifyfor hedge accounting. The key criterion for hedge accounting is that thederivative must be highly effective in achieving offsetting changes in fairvalue or cash flows of the hedged items during the term of the hedge. Theadoption of FAS 133 on January 1, 2001 did not have a material impacton the Company's financial position, results of operations or cash flows.

             In July 2001, theFASB issued Statement of Financial Accounting Standard No. 141,  “Business Combinations” (FAS No. 141) andNo. 142, “Goodwill and Other Intangible Assets” (FAS No. 142). FAS 141 requiresthat all business combinations be accounted for under the purchase method andestablishes criteria for the separate recognition of intangible assets acquiredin a business combination. FAS 142 requires that goodwill no longer beamortized to earnings, but instead be subject to periodic testing forimpairment. FAS 141 is applicable to all business combinations initiatedsubsequent to June 30, 2001. FAS 142 is effective for fiscal years beginningafter December 15, 2001, with earlier application permitted only in specifiedcircumstances. The Company is evaluating the impact that FAS 141 and 142 willhave on the balance sheet and statement of operations.

**9. Acquisition and other non-recurringcharges, net**

| Impairment of investment in ICAST                | $       | 1,083,231 |   |
|--------------------------------------------------|---------|-----------|--------|
| Workforce reduction                              | 422,000 |      |
| In-process research and development charges      | 276,000 |      |
|                                             |         |      |
|                                             |    |      |
| Acquisition and other non-recurring charges, net | $       | 1,781,231 |   |
|                                             |         |      |

Impairment of investment in ICAST Corporation

             InAugust 1998, the Company completed its acquisition of ICAST Corporation("ICAST"). ICAST developed, marketed and supported software designfor Internet and Intranet broadcasting and real-time video, audit and data. Thepurchase price aggregated approximately $7.6 million.

             As aresult of the acquisition of CUseeMe Networks, and based on the Company'sfuture strategic objectives, the Company has ceased to invest any furtherfinancial or engineering resources into the development of video streamingtechnology, that was orginally acquired in the purchase of ICAST. The Companydoes not anticipate deriving any significant revenues or cash flows fromproducts using the ICAST technology. The Company recorded an impairment chargeof approximately $1.1 million during the quarter ended June 30, 2001 for thewrite-off of the unamortized intangible assets recorded in connection with theacquisition of ICAST. The charges of approximately $1.1 million includedapproximately $1.0 million for the goodwill and $74,000 for other identifiedintangibles related to the ICAST acquisition.

Workforce reduction

**            **On June 5, 2001, the Company reduced its workforceby 24 employees. The cost recorded for this layoff was $422,000, whichincluded six weeks of severance pay and all earned vacation time for theaffected employees.

In-process research and development charges

             In-processresearch and development charges were incurred in conjunction with the CUseeMeacquisition. See Note 2 for a description of the acquisition.

 

Item 2. Management's Discussion and Analysis of FinancialCondition and  Results of Operations

             Thefollowing discussion of the financial condition and results of operations ofFirst Virtual Communications, Inc. (the "Company") should be read inconjunction with the Condensed Consolidated Financial Statements and the Notesthereto included in Item 1 of this Quarterly Report on Form 10-Q.

             In addition to the historicalinformation contained in this Item, this Item contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, that involve risks and uncertainties. These forward- lookingstatements include, without limitation, statements containing the words"believes," "anticipates," "expects," and wordsof similar import. Such forward-looking statements will have known and unknownrisks, uncertainties and other factors that may cause the actual results,performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Such factors include,among others: the Company's limited operating history and variability ofoperating results, market acceptance of video technology, including theCompany's new broadband video services business, dependence on ATM and othertechnologies, the Company's potential inability to maintain businessrelationships with telecommunications carriers, distributors and suppliers,rapid technological changes, competition and consolidation in the videonetworking industry, the importance of attracting and retaining personnel,management of the Company's growth, the risk that the benefits expected from the merger with CUseeMe Networkswill not be realized, consolidationand cost pressures in the video networking industry, dependence on keyemployees, and other risk factors set forth below and described in this 10-Qreport and in other documents the Companyfiles with the SEC. The Company assumes no obligation to update anyforward-looking statements contained herein.

**Overview**

             Founded in 1993, First VirtualCommunications, Inc., a Delaware corporation, delivers integrated,end-to-end rich media communications solutions, including both hardware andsoftware technologies, for IP, ISDN and ATM networks The Company combines itsexpertise in networking systems, real-time video technology, and web-basedcollaboration to provide both interactive and integrated streaming mediasolutions for a wide range of enterprise video applications, including videocalls, videoconferences, video broadcasts and video-on-demand over convergedmulti–service networks. The Company's strategy is to become the leadingprovider of high quality, cost-effective, rich media communications solutionsin broadband Internet and intranet environments for telecommunications carriersand enterprise customers.

             OnJune 19, 2001, the Company and CUseeMe Networks completed a merger, pursuant towhich CUseeMe Networks became a wholly owned subsidiary of the Company. CUseeMeNetworks historically provided innovative software-based solutions to enablevoice, video, and data collaboration over IP-based networks.  CUseeMe Networks specialized in delivering asolution that was both centrally managed and centrally deployed, enabling large–scaledeployments of video collaboration to enterprise desktops. As a result of themerger, it is anticipated that the combined company will provide a broad rangeof integrated rich media communications solutions that run seamlessly acrossmultiple network types to enterprise, service provider, and consumer customersworldwide.

             On July 27, 2001, the Company executed an agreement withPictureTel Corporation  for a strategictechnology, marketing,  and distributoralliance.  The alliance is expected tocreate a more comprehensive,  scalableand functional rich media communications solution by combining the technologiesand expertise of both the Company and PictureTel.

             First Virtual Communications’ original equipmentmanufacturer ("OEM") distribution and system integration partnersinclude Accord, Adaptive Broadband, Ameritech, Alcatel***,*** AT&T, BritishTelecommunications plc , Cisco Systems, Inc. , China Telecom, ElectronicData Systems Corporation, Ezenia!, France Telecom S.A., Nortel NetworksCorporation , Polycom, Qwest Communications International, Inc., SBCCommunications Inc., Shanghai Telecom, Telstra, Verizon Communications  and other leading companies worldwide***.***

             The Company is leveraging its leadership position invideo networking to capitalize on the rapidly emerging opportunity to providebroadband rich media communications solutions to enterprise markets, either assystems sold through channels or services delivered through service providers.First Virtual Communications' web-based Click To MeetÔ is the Company’sflagship product.   It provides a  framework for rich media communications thatis simple to use, effectively managing all the components of the end to endsolution while hiding traditional complexities from the end user.   CUseeMe Videoware, a product formerly ofCUseeMe Networks, is currently being merged with the Click to Meet productfamily.   CUseeMe Videoware enables richmedia communications to be integrated with existing workflow applications, suchas Microsoft Exchange/Outlook, Instant Messaging, and other businessapplications.

             To date, solutions sales announcements by the Companywith service providers include expanded customer relationships with AT&T,Electronic Data Systems, Wind, Noicom and China Telecom, all of which aredeploying broadband video services using the Company's products and solutions.The Company's broadband rich media communications solutions enabletelecommunications carriers to deliver a comprehensive set of rich mediaapplications over the carrier's existing broadband networks into conferencerooms, as well as to the users' desktops.

             The Company also markets its systems to enterprisecustomers, which include business customers, government users, education andhealthcare providers, primarily through indirect sales channels. For thequarter ended June 30, 2001, 52% of the company’s revenue was from enterprisecustomers and 48% was from service providers, while in 2000, revenue fromenterprise customers was 83% and 17% was from service providers.

             The Company maintains a network of distributors inEurope and Asia licensed to sell its products under the FVC.COM name.Approximately 20% and 17% of the Company's revenues were generated fromcustomers outside of North America during the three months ended June 30,2001 and 2000, respectively. The Company expects that direct sales fromshipments to customers outside of North America will continue to represent asignificant portion of its future revenues. In addition, the Company believesthat a small portion of its sales through some of its distribution partners issold to international end-users.

             Revenues from theCompany's international operations are subject to various risks, includingseasonality, longer payment cycles, changes in regulatory requirements andtariffs, reduced protection of intellectual property rights, political andeconomic restraints, and currency risks, among others.

             Revenues are recognized upon shipment of product tocustomers, provided no significant obligations remain, collectibility isprobable and returns are estimable. Revenues from sales to certain of theCompany's resellers are subject to agreements allowing rights of return. Insuch cases, the Company provides reserves for estimated future returns uponrevenue recognition. These reserves are estimated based upon historical ratesof returns and allowances, reseller inventory levels, the Company's estimatesof sell through by resellers and other related factors. Actual results coulddiffer from these estimates. In the event of the inability to estimate returnsfrom any reseller, the Company defers revenue recognition until the resellerhas sold through the products. Advance payments received from customers andgross margin deferred with respect to sales to resellers wherein the Companydoes not have the ability to estimate returns are recorded as deferred revenue.At June 30, 2001, deferred revenue totaled $2,475,000.

             The Company has experienced, and is likely to experiencein the future, fluctuations in revenues, gross margins and operating results.Various factors contribute to the fluctuations in revenues, gross margins andoperating results, including the Company's success in developing its rich mediabusiness and in developing, introducing and shipping new products and productenhancements, the Company's success in accurately forecasting demand for neworders, which may have short lead-times before required shipment, product mix,percentage of revenues derived from original equipment manufacturers, or OEMs,versus distributors or resellers, new product introductions and pricereductions by competitors, the efforts of OEMs, distributors, resellers, andother third parties on behalf of the Company, the Company's ability to attract,retain and motivate qualified personnel, the timing and amount of research anddevelopment efforts and success, and selling, general and administrativeexpenditures. Further, a significant portion of the Company's expenses is fixed.The Company expects that operating expenses will increase in the future to fundexpanded operations, including the expansion of the Company's broadband videoservices to telecommunications carriers. To the extent these increased expensesare not accompanied by an increase in revenues or gross margin, as is expectedto be the case as the Company expands its broadband video services business,the Company's business, financial condition and results of operations would bematerially adversely affected. Due to all the foregoing factors, it is likelythat in some future quarter, as at times in past quarters, the Company'sresults of operations will be below the expectations of public market analystsand investors.

             The Company out-sources certain functions to independentservice providers, and the majority of the Company's products are assembled andtested by subcontract manufacturers, the largest subcontract manufacturer beingSaturn Electronics and Engineering, Inc.

**Results ofOperations**

             The following table sets forth certain items from theCompany's condensed consolidated statements of operations as a percentage oftotal revenues for the periods indicated.

 

|                                          | **Three months ended**                          |   | **Six months ended** |   |
|-----------------------------------------------|-------------------------------------------------|--------|----------------------|--------|
|                                          | ****                                            |   | ****                 |   |
|                                          | **June 30,**                                    |   | **June 30,**         |   |
|                                          | ****                                            |   | ****                 |   |
|                                          | **2001**                                        |   | **2000**             |   | **2001** |   | **2000** |   |
|                                          | ****                                            |   | ****                 |   | **** |   | **** |   |
| Revenues                                      | 100.0                                           | %      | 100.0                | %      | 100.0 | % | 100.0 | % |
| Cost of revenues                              | 54.0                                            | %      | 53.9                 | %      | 55.7 | % | 54.5 | % |
|                                          |                                                 |   |                      |   |  |   |  |   |
|                                          | Gross profit                                    | 46.0   | %                    | 46.1   | % | 44.3 | % | 45.5 | % |
|                                          |                                                 |   |                      |   |  |   |  |   |
| Operating expenses:                           |                                            |   |                 |   |   |   |   |   |
|                                          | Research and development                        | 34.9   | %                    | 28.2   | % | 54.5 | % | 27.4 | % |
|                                          | Selling, general and  administrative            | 66.7   | %                    | 51.1   | % | 94.9 | % | 54.4 | % |
|                                          | Acquisition and other  non-recurring costs, net | 21.9   | %                    | 0.0    | % | 14.2 | % | 0.0 | % |
|                                          |                                                 |   |                      |   |  |   |  |   |
|                                          | Total operating expenses                        | 123.5  | %                    | 79.3   | % | 163.7 | % | 81.8 | % |
|                                          |                                                 |   |                      |   |  |   |  |   |
| Operating loss                                | -77.4                                           | %      | -33.2                | %      | -119.4 | % | -36.3 | % |
|                                          |                                            |   |                 |   |   |   |   |   |
| Other income, net                             | 2.1                                             | %      | 1.9                  | %      | 3.9 | % | 1.5 | % |
| Minority interest in  consolidated subsidiary | -0.1                                            | %      | 0.3                  | %      | -0.1 | % | -0.2 | % |
|                                          |                                                 |   |                      |   |  |   |  |   |
| Net loss                                      | -75.4                                           | %      | -31.0                | %      | -115.5 | % | -35.0 | % |
|                                          |                                                 |   |                      |   |  |   |  |   |
|                                               |                                                 |        |                      |        |  |  |  |  |  |  |

----

| (1) | Operating expenses  include non-cash stock compensation charges of $122,000 (1.5% of total  revenues) and $72,000 (0.7% of total revenues) for the three months ended  June 30, 2001 and 2000, respectively, and $162,000 (1.3% of total revenues)  and $156,000 (0.7% of total revenues) for the six months ended June 30, 2001  and 2000, respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

* Revenues.*  Revenues were $8.1 million for the three months endedJune 30, 2001, a decrease of 24.5% from the three months endedJune 30, 2000. The slowing economy is causing many of our customers toslow their purchase decision making process. Revenue for the six months endedJune 30, 2001 compared to the first six months of 2000 decreased 40.0%, from$20.9 million to $12.5 million. The decrease in revenues resulted from lowerproduct shipments to both enterprise customers and service providers. Thedecrease in revenues was partially offset from revenues from CUseeMe Networksproducts in the three and six months ended June 30, 2001 of $816,000.

 *Gross Profit.*  Gross profit consists of revenues less thecost of revenues, which consists primarily of costs associated with themanufacture of the Company's products by outside manufacturers and relatedcosts of freight, inventory obsolescence, royalties and warranties. Thesemanufacturers procure the majority of materials, except for certain keycomponents, which the Company purchases from third–party vendors.

             Gross profit for the three months ended June 30,2001 remained consistent at 46.0%, as in the comparable period of 2000.  Gross profit decreased by $3,954,000 to44.3% during the six months ended June 30, 2001, as compared to 45.5% in thefirst six months of 2000.

 *Research and Development.*  Research and development expenses consistprimarily of personnel costs, costs of contractors and outside consultants,supplies and materials expenses, equipment depreciation and overhead costs.Research and development expenses increased to 34.9% of revenues in the quarterended June 30, 2001, from 28.2% during the quarter ended June 30,2000. The increase as a percentage of revenues was due to the reduction inrevenues during the three month period ended June 30, 2001. Research anddevelopment expenses increased to 54.5% of revenues in the six months endedJune 30, 2001, from 27.4% in the first six months of 2000.

             There was a $200,000 decrease in absolute dollars of spending in the three months ended June30, 2001 compared to the three months ended June 30, 2000. The decrease wasprincipally due to the aggressive cost cutting measures put in place by theCompany. The Company will continue to invest in various development projectsand believes that research and development expenses will increase in absolutedollars for the foreseeable future. However, such expenses will fluctuatedepending on various factors, including the status of development projects.

 *Selling, General andAdministrative.*  Selling,general and administrative (SG&A) expenses include personnel and relatedoverhead costs for sales, marketing, finance, human resources and generalmanagement. SG&A expenses also include costs of outside contractors,advertising trade shows, other marketing and promotional expenses, and goodwillamortization. As a percentage of revenue, SG&A expenses increased to 66.7%,or $5.4 million during the quarter ended June 30, 2001, from 51.1%,or $5.5 million during the quarter ended June 30, 2000 and to 94.9% forthe six months ended June 30, 2001, from 54.4% in the comparable period of2000. The increase in absolute dollars was primarily due to $1.8 million in onetime charges.  The increase in SG&Aas a percentage of revenues in the quarter ended June 30, 2001 alsoreflected the decline in revenues from the comparable period of 2000.

*Acquisitionand other non-recurring costs, net.* The $1.8 million of one time charges include $276,000 ofin-process research and development activities as a result of the acquisitionof CUseeMe Networks, the impairment of $1.1 million of goodwill, associatedwith the 1998 acquisition of ICAST Corporation and $422,000 of costs associatedwith the reduction in workforce during the quarter.

 *Other Income, Net.*  Other income, net consists primarily ofinterest income earned on short-term investments and cash balances, offset byinterest expense relating to the Company's credit facilities and long-termdebt.  Other income, net totaled$170,000 for the three months ended June 30, 2001, compared to otherincome, net of $209,000 for the three months ended June 30, 2000. Thedecrease was as a result of lower interest income from lower average cash balancesin 2001.  The decrease of $178,000 inother income, net for the six months ended June 30, 2001 compared to the firstsix months of 2000 was also due to lower cash balances and lower interestrates.

 *Minority Interest inConsolidated Subsidiary.*  Minorityinterest reflects the interest of minority stockholders in the operatingresults of the Company's consolidated subsidiary in the United Kingdom. TheCompany acquired a controlling interest in this entity in May 1999. Forthe three and six month periods ended June 30, 2001, the amounts reflectthe portion of profits and losses in this subsidiary that were attributable tominority stockholders.

 *Income Taxes.*  The Company has incurred losses sinceinception. No tax benefit was recorded for any period presented, as the Companybelieves that, based on the history of such losses and other factors, theweight of available evidence indicates that it is more likely than not that itwill not be able to realize the benefit of these net operating losses, and thusa full valuation reserve has been recorded.

**Liquidityand Capital Resources**

             Since inception, the Company has financed its operationsprimarily through private and public placements of equity securities and to alesser extent through certain credit facilities and long-term debt. As ofJune 30, 2001, the Company had cash and cash equivalents and short-terminvestments of $15.7 million and working capital of $22.3 million.The Company believes that its cash and cash equivalents and short-terminvestments will provide adequate cash to fund its current operations for thenext twelve months.

             During the six months ended June 30, 2001, theCompany used $15.2 million in its operating activities. This was comprisedof the loss of $14.5 million and reductions in accounts payable($1.3 million) and accrued liabilities ($1.4 million), increase ininventory ($3.6 million) and deferred revenue ($1.3 million), andpartially offset by reductions in accounts receivables ($2.4 million). Thereduction in receivables was due to collection activity and reduced revenuescompared with the preceding quarter. During the six months ended June 30,2000, the Company used $5.3 million in operating activities. This wascomprised of the loss of $7.3 million and a reduction in accounts payableof $1.6 million, and deferred revenue ($600,000), partially offset byreductions in inventory ($700,000), and changes in other assets and liabilityaccounts. Net cash provided by investing activities totaled $18.9 millionfor the six months ended June 30, 2001, primarily consisting of $12.0 million in net sales of short-terminvestments and $6.6 million in cash acquired from the acquisition of CUseeMeNetworks. Net cash provided by investing activities for the six months endedJune 30, 2000 totaled $21.9 million, primarily from the purchase ofshort term investments ($25.0 million) and partially offset by proceeds fromthe sale of short-term investment ($3.5 million).

             Cash provided by financing activities was $199,000 forthe six months ended June 30, 2001, principally from issuance ofstock.  Cash provided by financingactivities was $26.9 million for the six months ended June 30, 2000,principally due from the issuance of preferred and common stock.

             *Acquisitionof CUseeMe Networks, Inc.*  OnJune 19, 2001, the Company completed its acquisition of CUseeMe Networks, Inc.(CUseeMe Networks), a provider of innovative software solutions that enablevoice and visual communications over IP-based networks. The acquisition wasaccounted for using the purchase method of accounting. Accordingly, theestimated fair value of assets acquired and liabilities assumed were includedin the Company's condensed consolidated results of operations as of and sincethe effective date of the purchase. There were no significant differencesbetween the accounting policies of the Company and CuseeMe Networks.

             The Company acquired CUseeMeNetworks for a total consideration of $22.7 million, including directacquisition costs of $2.5 million for legal, consulting and accounting fees.The Company exchanged options to purchase 4,109,888 shares of CUseeMe Networkscommon stock with options to purchase shares of the Company's stock for whichthe Black-Scholes option-pricing model value of approximately $1.6 million wasincluded in the purchase price.

             The Company engaged an independentappraiser to value the intangible assets. The total purchase price waspreliminarily allocated to the estimated fair value of assets acquired andliabilities assumed as follows (in thousands):

| Fair  value of tangible assets and liabilities                  | $      | 7,235  |   |
|-----------------------------------------------------------------|--------|--------|--------|
| In-process  research and development                            | 276    |   |
| Trademark                                                       | 661    |   |
| Current  technology                                             | 5,918  |   |
| Assembled  workforce                                            | 1,505  |   |
| Deferred  stock compensation                                    | 1,300  |   |
| Excess  of purchase price over identifiable net assets acquired | 5,824  |   |
|                                                            |        |   |
|                                                            | Total  | $      | 22,719 |   |
|                                                            |   |        |   |

             The amounts allocated to currenttechnology, assembled workforce and residual goodwill are being amortized usingthe straight-line method over their respective estimated useful lives, whichrange from 3 to 5 years.

             During the quarter ended June 30,2001, the Company recorded deferred compensation of approximately $91,000 forthe difference between the grant or issuance price of common stock options andthe fair value of the Company's common stock issued in conjunction with theCUseeMe Networks acquisition. These amounts are being amortized in accordancewith Financial Accounting Standards Board Interpretation No. 28 over thevesting period of the individual stock options.

             *Impairmentof Investment in ICAST Corporation.* In August 1998, the Company completed its acquisition of ICASTCorporation ("ICAST"). ICAST developed, marketed and supportedsoftware design for Internet and Intranet broadcasting and real-time video, auditand data. The purchase price aggregated approximately $7.6 million. As a resultof the acquisition of CUseeMe Networks and based on the Company's futurestrategic objectives, the Company has ceased to invest any further financial orengineering resources into the development of video streaming technology thatwas originally acquired in the purchase of ICAST. The Company does notanticipate deriving any significant revenues or cash flows from products usingthe ICAST technology. The Company recorded an impairment charge ofapproximately $1.1 million during the quarter ended June 30, 2001 for thewrite-off of the unamortized intangible assets recorded in connection with theacquisition of ICAST. The charges of approximately $1.1 million includeapproximately $1.0 million for the goodwill and $74,000 for other identifiedintangibles related to the ICAST acquisition.

             *NewAccounting Pronouncements.* In July 2001, the FASB issued Statement of Financial Accounting StandardNo. 141, "Business combinations" (FAS No. 141) and No. 142, Goodwilland Other Intangible Assets (FAS No. 142). FAS 141 requires that all businesscombinations be accounted for under the purchase method and establishescriteria for the separate recognition of intangible assets acquired in abusiness combination. FAS 142 requires that goodwill no longer be amortized toearnings, but instead be subject to periodic testing for impairment. FAS 141 isapplicable to all business combinations initiated subsequent to June 30, 2001.FAS 142 is effective for fiscal years beginning after December 15, 2001, withearlier application permitted only in specified circumstances. The Company isevaluating the impact that FAS 141 and 142 will have on the balance sheet andstatement of operations.

**RiskFactors**

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

*TheCompany 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 eachquarter since it commenced operations. The Company expects to devotesubstantial resources to expand its research and development and sales andmarketing activities. As a result, the Company expects that it will continue toincur operating losses for the foreseeable future. The Company's revenuesdecreased from $10.8 million for the three months ended June 30, 2000to $8.1 million for the three months ended June 30, 2001, while itsnet loss increased from $3.3 million for the three months endedJune 30, 2000 to $6.1 million for the three months endedJune 30, 2001. At June 30, 2001, the Company had an accumulateddeficit of $70.1 million.

*TheCompany's quarterly results are expected to fluctuate and may cause the priceof the Company’s common stock to fall.*

             The Company has experienced in the past, and is likelyto experience in the future, fluctuations in revenues, gross margins andoperating results. Various factors could contribute to the fluctuations inrevenues, gross margins and operating results, including the Company's:

|   | • | success  in developing its rich media business and in developing, introducing and  shipping new products and product enhancements;                                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                          |
|   | • | success  in accurately forecasting demand for new orders, which may have short  lead-times before required shipment, product mix, percentage of revenues  derived from OEMs versus distributors or resellers; |
|   |   |                                                                                                                                                                                                          |
|   | • | new  product introductions and price reductions by its competitors;                                                                                                                                           |
|   |   |                                                                                                                                                                                                          |
|   | • | the  success of the Company’s 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 quarterly operating resultsmay vary significantly depending on a number of factors outside of its control.Further, a significant portion of the Company's expenses will be fixed. TheCompany expects that operating expenses will increase in the future to fundexpanded operations. To the extent these increased expenses are not accompaniedby an increase in revenues or gross margin, the Company's business, financialcondition and results of operations would be materially adversely affected. Dueto all the foregoing factors, it is likely that in some future quarter, as attimes in past quarters, the Company's results of operations will be below theexpectations of public market analysts and investors, resulting in a negativeimpact on the Company's common stock price.

*TheCompany's success depends in part on the market's acceptance of rich media andbroadband video service and the CUseeMe Conference Server .*

             The Company's success depends in part on the market'sacceptance of rich media and broadband video services and the CUseeMeConference Server. Potential end-users must accept video applications as aviable alternative to face-to-face meetings and conventional classroom based learning.New applications, such as the use of video in marketing, selling andmanufacturing, are still in the development stage. The Company has onlyrecently entered into its first contracts with telecommunications serviceproviders to provide broadband video services and does not expect any materialrevenues from these services to be generated until the second half of 2002. Ifrich media and broadband video services fail to achieve broad commercialacceptance or if such acceptance is delayed, the Company's business, financialcondition and results of operations will be materially adversely affected. The Company anticipates thatsignificant revenue and growth in the foreseeable future will come from thesale of the CUseeMe Conference Server and related products and services. Broadmarket acceptance of the CUseeMe Conference Server, therefore, is critical tothe Company’s operating success.

*Integrationof the operations of the Company and CUseeMe Networks pursuant to the proposedmerger of the companies may be difficult, expensive and lead to adverseeffects.*

             The realization of the anticipated benefits of the  merger of the Company and CUseeMe Networkswill depend in part on whether the Company and CUseeMe Networks can integratetheir operations in an efficient and effective manner. Integrating the Companyand CUseeMe Networks will be a complex, time consuming and expensive process.Successful integration will require combining the companies' respective:

|   | • | products  and services;              |
|--------|--------|--------------------------------------|
|   |   |                                 |
|   | • | sales  and marketing groups;         |
|   |   |                                 |
|   | • | information  and software systems;   |
|   |   |                                 |
|   | • | hiring  and training practices;      |
|   |   |                                 |
|   | • | strategic  goals;                    |
|   |   |                                 |
|   | • | management  and other employees;     |
|   |   |                                 |
|   | • | boards  of directors;                |
|   |   |                                 |
|   | • | business  development efforts; and   |
|   |   |                                 |
|   | • | geographically  separate facilities. |

             The Company and CUseeMe Networks may not accomplish thisintegration smoothly or successfully and the business synergies may not developas quickly or to the extent currently expected. The diversion of the attentionof management to the integration effort and any difficulties encountered incombining operations could cause the interruption of, or a loss of momentum in,the activities of either or both of the companies' businesses. Furthermore,employee morale may suffer, and the combined company may have difficultiesretaining key employees. In addition, the merger may result in a loss ofcustomers and suppliers. Some customers of the Company or CUseeMe may seekalternative sources of products or services after the merger due to, amongother reasons, a desire not to do business with the combined company. TheCompany anticipates that the combined company could experience some customerattrition after the merger. Difficulties in combining operations can alsoresult in the loss of suppliers. Steps by management to counter potentialcustomer and supplier attrition may not be effective. If the Company is unableto address any of the foregoing risks, it could materially harm the Company'sbusiness and impair the value of the Company’s common stock.

*TheCompany's reliance on third party manufacturers and suppliers could adverselyaffect the Company's business.*

             The Company currently outsources the manufacturing ofits products and purchases critical components for its products from singlesuppliers. The Company relies on several vendors to manufacture certain of itsproducts. If one or more of these manufacturers experiences quality control orother problems, product shipments by the Company may be delayed. The Companydoes not have long-term agreements with suppliers, and its current suppliersare not obligated to provide components to the Company for any specific period,in any specific quantity or at any specific price, except as may be provided ina particular purchase order. Qualifying additional suppliers is a timeconsuming and expensive process, and there is a greater likelihood of problemsarising during a transition period to a new supplier. If the Company isrequired to find replacements for its manufacturers or suppliers, this couldresult in short-term cost increases and delays in delivery, which could have amaterial adverse effect on the Company's business, financial condition andresults of operations. The Company may not be able to continue to negotiatearrangements with its existing, or any future, manufacturers or suppliers onterms favorable to the Company. Existing manufacturers and suppliers may notcontinue to meet the Company's requirements for products and components.

*TheCompany's success depends on the performance of participants in the Company'sdistribution channels.*

             The Company currently sells its products through OEMs,distributors and resellers. The Company's future performance will depend inlarge part on sales of its products through these distribution relationships,such as SBC Communications, Verizon and other key partners. In addition, theCompany’s future performance will depend in part on the success of its alliancewith PictureTel. Past performance by the Company should not be considered areliable indicator of the future performance. Agreements with distributionpartners generally provide for discounts based on the Company's list prices,and do not require minimum purchases or restrict development or distribution ofcompetitive products. Therefore, entities that distribute the Company'sproducts may compete with the Company. In addition, OEMs, distributors andresellers may not dedicate sufficient resources or give sufficient priority toselling the Company's products. The Company additionally depends on itsrespective distribution relationships for most customer support, and expendssignificant resources to train its respective OEMs, distributors and resellersto support customers. These entities can generally terminate the distributionrelationship upon 30 days notice for a material breach. The loss of adistribution relationship or a decline in the efforts of a materialdistributor, or loss in business or cancellation of orders from, significantchanges in scheduled deliveries to, or decreases in the prices of products soldto, any of these distribution relationships, could have a material adverseeffect on the Company's results of operations.

*TheCompany expects to rely on a limited number of large projects for its revenuesin the future. Losing one or more of these customers may adversely affect theCompany's future revenue growth.*

             The Company depends on a limited number of largeend-user projects for a majority of its revenues, which has resulted in, andmay in the future result in, significant fluctuations in quarterly revenues.The Company expects that revenues from the sale of products to large end-userswill continue to account for a significant percentage of its revenues in anyparticular quarter for the foreseeable future. Additionally, a significantportion of Company's sales of video networking products has historically beento government–related agencies, such as military and educationalinstitutions, or third parties using the Company's products on behalf ofgovernment agencies. Such government–related customers are often subjectto budgetary pressures and may from time to time reduce their expendituresand/or cancel orders. The loss of any major customer, or any reduction or delayin orders by such customer, or the failure of the Company or its distribution partnersto market the Company's products successfully to new customers could have amaterial adverse effect on the Company's business, financial condition andresults of operations.

*Becausesales of the Company's products require a lengthy sales effort andimplementation cycle, revenues may be unpredictable and the Company's businessmay be harmed.*

             Sales of the Company's products have required and willcontinue to require an extended sales effort. The Company must first train theentities with which it has distribution relationships to market its products.The period from an initial sales call to an end-user agreement typically rangesfrom six to 12 months, and can be longer. Therefore, the timing of revenues maybe unpredictable. A lengthy delay in recognizing revenue could have a materialadverse effect on the Company's business, financial condition and results ofoperations.

*Rapidtechnological change and evolving industry standards and regulations may impairthe Company's ability to develop and market its services.*

             Rapid technological change and evolving industrystandards characterize the market for the Company's respective products. TheCompany's success will depend, in part, on its ability to maintaintechnological leadership and enhance and expand its existing product andservices offerings. The Company's success also will depend in part upon itsability and the ability of its strategic partners to comply with evolvingindustry standards. The Company's products must meet a significant number ofdomestic and international video, voice and data communications regulations andstandards, some of which are evolving as new technologies are deployed. TheCompany's products are currently in compliance with applicable regulatoryrequirements. However, as standards evolve, the Company will be required tomodify its products, or develop and support new versions of its products. Inaddition, telecommunications service providers require that equipment connectedto their networks comply with their own standards, which may vary from industrystandards.

             The Company'sability to compete successfully also is dependent upon the continuedcompatibility and interoperability of its products with products andarchitectures offered by various vendors. The Company's business, financialcondition and results of operations would be materially adversely affected ifit were unable in a timely manner to comply with evolving industry standards orto address compatibility issues. In addition, from time to time, the Companymay announce new products, capabilities or technologies that have the potentialto replace or shorten the life cycle of the Company's existing productofferings. The announcement of product enhancements or new product or serviceofferings could cause customers to defer purchasing the Company's products. Inaddition, the Company has experienced delays in the introduction of newproducts in the past and may experience such delays in the future. The failureof the Company to  successfullyintroduce new products, product enhancements or services, or customer delays inpurchasing products in anticipation of new product introductions or because ofchanges in industry standards, could have a material adverse effect on theCompany's business, financial condition and results of operations.

*TheCompany faces potential volatility in its common stock price.*

             The market price of the Company’s common stock has beenextremely volatile in the past and, like that of other technology companies,may be subject to significant volatility in the future, depending upon manyfactors, including:

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

             One or more of these factors could significantly harmthe Company's business and decrease the price of its common stock in the publicmarket. Severe price fluctuations in a company's stock have frequently beenfollowed by securities litigation. Such litigation can result in substantialcosts and a diversion of management's attention and resources and thereforecould have a material adverse effect on the Company's business, financialcondition and results of operations. Past financial performance of the Companyshould not be considered a reliable indicator of future performance, andinvestors should not use historical trends to anticipate results or trends infuture periods.

*If theCompany's common stock price consistently trades below $1.00 per share, theCompany will face potential delisting from The Nasdaq National Market. Ifdelisting occurs, the market price and market liquidity of the Company's commonstock may be adversely affected.*

             The Company's common stock is listed on The NasdaqNational Market. Pursuant to Nasdaq rules, Nasdaq may commence procedures todelist any shares trading below $1.00 per share on The Nasdaq National Marketfor a period of 30 consecutive trading days. The Company's common stock has attimes been trading below $1.00 per share. If the Company's common stock priceconsistently trades below $1.00 per share, the Company will face potentialdelisting from The Nasdaq National Market.

             If delisting occurs, the trading of the Company's commonstock is likely to be conducted on the OTC Bulletin Board which will have anadverse affect on the market price of the Company’s common stock and on theability of stockholders and investors to buy and sell the common stock.

*TheCompany will face intense competition from other industry participants and maynot be able to compete effectively.*

             The market for multimedia group communications andnetworking products and services is extremely competitive. Because the barriersto entry in the market are relatively low and the potential market is large,the Company expects continued growth in the industry and the entrance of newcompetitors in the future. Many of the Company's current and potentialcompetitors have significantly longer operating histories and significantlygreater managerial, financial, marketing, technical and other competitiveresources, as well as greater name recognition, than that of the Company. As aresult, these companies may be able to adapt more quickly to new or emergingtechnologies and changes in customer requirements and may be able to devotegreater resources to the promotion and sale of their competing products andservices. In addition, to the extent that competitors choose to bundlecompeting multimedia conferencing applications with other products, the demandfor the Company's products and services might be substantially reduced.

             As a result, the Company may not be able to competesuccessfully with existing or new competitors in the multimedia groupcommunications products and services market. The Company believes that itsability to compete successfully in this market will depend on a number offactors both within and outside its control, including:

|   | • | the  timing of the introduction of new software products 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.                                                         |

*TheCompany's business may be harmed if it is unable to protect its proprietaryrights.*

             The Company's success and ability to compete in thevideo networking industry depends, in part, upon its ability to protect itsproprietary technology. The Company may be unable to deter misappropriation ofits proprietary technology, detect unauthorized use or take appropriate stepsto enforce its intellectual property rights. In addition, the Company'scompetitors could, without violating its proprietary rights, develop technologiesthat are superior to the Company’s technology. The development of alternativetechnologies by third parties could adversely affect the competitiveness of theCompany's products.

             The Company does not rely on patent protection for, anddoes not hold, any patents relating to its products, although it has filed onepatent application related to its recently developed video services technology.This application may not issue, however, and even if issued by the UnitedStates Patent and Trademark Office, it may not give the Company an advantageover competitors. The Company's adherence to industry-wide technical standardsand specifications may limit its opportunities to provide proprietary productfeatures. The Company currently licenses certain technology from third parties,and plans to continue to do so in the future. The commercial success of theCompany will depend, in part, on its ability to continue to obtain licenses tothird-party technology for use in its products.

             The Company relies upon a combination of trade secret,copyright and trademark laws and contractual restrictions to establish andprotect proprietary rights in its products. The Company also enters intoconfidentiality and invention assignment agreements with its employees andenters into non-disclosure agreements with its suppliers, distributors andcustomers to limit access to and disclosure of its proprietary information.

             However, these statutory and contractual arrangementsmay not be sufficient to deter misappropriation of the Company's proprietarytechnologies. In addition, independent third parties may develop similar orsuperior technologies to those of the Company. Furthermore, the laws of someforeign countries do not provide the same degree of protection of the Company'sproprietary information as do the laws of the United States.

*Claims bythird parties that the Company infringes their proprietary technology couldprevent the Company from offering its products or otherwise hurt its businessand financial condition.*

             The commercial success of the Company also will depend,in part, on the Company not breaching the Company's current and future licensesof third-party technology used in certain of its products. The Company is,however, subject to the risk of litigation alleging infringement of third partyintellectual property rights from the Company's licensed and proprietarytechnology and from third parties. A number of companies have developedtechnologies or received patents on technologies that may be related to or becompetitive with the Company's technologies. The Company has not conducted apatent search relating to the technology used in its respective products. Inaddition, since patent applications in the United States are not publiclydisclosed until the patent issues, applications may have been filed which, ifissued as patents, would relate to the Company's products. The Company's lackof patents may inhibit the Company's ability to negotiate or obtain licensesfrom or oppose patents of third parties, if necessary.

             Given the rapid development of technology in the videonetworking industry, it is possible that the Company's existing or futureproducts may in the future infringe upon the existing or future proprietaryrights of others.  The Company couldincur substantial costs in defending itself and its customers against any suchclaims, regardless of the merits of such claims. The Company may also berequired by contract or by statutory implied warranties to indemnify itsdistribution partners and end-users against third-party infringement claims.Parties making infringement claims against the Company may be able to obtaininjunctive or other equitable relief which could effectively block theCompany's ability to sell its products in the United States and abroad, and couldresult in an award of substantial damages. In the event of a successful claimof infringement, the Company, its customers and end-users may be required toobtain 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 reasonablecost, or at all. The defense of any lawsuit could result in time-consuming andexpensive litigation, damages, license fees, royalty payments and restrictionson the Company's ability to sell its products, any of which could have amaterial adverse effect on the Company's business, financial condition, andresults of operations.

*TheCompany will be dependent on key personnel and must hire and retain skilledpersonnel.*

             The Company's success is significantly dependent on thecontributions of a number of its key personnel. The Company's success dependsto a significant degree on the services of Ralph Ungermann, its chairman of theboard of directors, and Killko Caballero, its chief executive officer andpresident. The loss of the services of either of these individuals or any ofthe Company's key personnel could have a material adverse effect on theCompany. The Company believes that its future success also will depend upon itsability to attract and retain additional highly skilled technical, managerial,manufacturing, sales and marketing personnel. Competition for these personnelis intense. The Company may not be able to anticipate accurately, or to obtain,the personnel that it may require in the future.

*TheCompany's inability to secure additional funding could adversely effect itsbusiness.*

             In order to meet the Company's anticipated workingcapital and capital expenditure requirements, the Company may need to raiseadditional funds through the issuance of equity securities in the future. Ifadditional funds are raised through the issuance of equity securities, thepercentage ownership of the stockholders of the Company will be reduced,stockholders may experience additional dilution, and the new equity securitiesmay have rights, preferences or privileges senior to those of the holders ofthe Company's common stock. Additional financing may not be available whenneeded or on terms favorable to the Company, or at all. If adequate funds arenot available or are not available on acceptable terms, the Company may berequired to delay, reduce or eliminate some or all of its development programsfor its products or services, and may be unable to take advantage of futureopportunities or respond to competitive pressures, which could have a materialadverse effect on the Company's business, financial condition or operatingresults.

*TheCompany faces additional risks from its international operations.*

             The Company's international business  involves a number of risks that could hurtits operating results or contribute to fluctuations in those results. TheCompany's revenue from international sales represented 21.3% of its totalrevenue in the six months  endedJune 30, 2001, 12% of its total revenue in 2000 and 14% of its totalrevenue in 1999. The Company intends to seek opportunities to expand itsproduct and service offerings into additional international markets, althoughthe Company may not succeed in developing localized versions of its productsfor new international markets or in marketing or distributing products andservices in those markets.

             The majority of theCompany's international sales are currently denominated in U.S. dollars.However, it is possible that a significantly higher level of future sales ofthe Company may be denominated in foreign currencies. To the extent that theCompany's sales are denominated in currencies other than U.S. dollars,fluctuations in exchange rates may render the Company's products lesscompetitive relative to local product offerings or result in foreign exchangelosses. The Company does not have experience in implementing hedging techniquesthat might minimize the Company's risks from exchange rate fluctuations.

             The Company's international business also will involve anumber of other difficulties and risks, including risks associated with:

|   | • | changing  economic conditions 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;                                                                                                       |
|   |   |                                                                                                                    |
|   | • | political  instability;                                                                                                 |
|   |   |                                                                                                                    |
|   | • | seasonal  reductions in business activity in Europe and certain other parts of the  world during the summer months; and |
|   |   |                                                                                                                    |
|   | • | potentially  adverse tax consequences.                                                                                  |

*TheCompany's software products may contain potential undetected defects.*

             Software developed by the Company or developed by othersand incorporated by the Company into its products may contain significantundetected errors when first released or as new versions are released. Althoughthe Company's software products will be 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 insignificant decreases in revenue or increases in expenses because of adversepublicity, reduced orders, product returns, uncollectible accounts receivable,delays in collecting accounts receivable, and additional and unexpected costsof further product development to correct the defects.

*ControlBy Insiders*

             As of August 10, 2001, the Company's executiveofficers, directors and their affiliates beneficially owned approximately8,591,518 shares or 22.2% of the outstanding shares of the Company'soutstanding common stock, on an as-converted to common stock basis. As a result,these persons may have the ability to effectively control the Company anddirect its affairs and business, including the election of directors andapproval of significant corporate transactions. This concentration of ownershipmay also have the effect of delaying, deferring or preventing a change incontrol of the Company, and making certain transactions more difficult orimpossible absent the support of these stockholders, including proxy contests,mergers involving the Company, tender offers, open-market purchase programs orother purchases of common stock that could give stockholders of the Company theopportunity to realize a premium over the then prevailing market price forshares of common stock.

Item 3. Quantitative andQualitative Disclosures about Market Risk

             The Company's market risk exposures as set forth in itsAnnual Report on Form 10-K for the year ended December 31, 2000, havenot materially changed.

PART II. OTHER INFORMATION

Item1.

Legal Proceedings

             On or about April 9, 1999, several purported classaction suits were filed in the United States District Court for the NorthernDistrict of California alleging violations of the federal securities lawsagainst the Company and certain of its officers and directors in connectionwith the Company’s reporting of  itsfinancial results for the period ended December 31, 1998. The courtdismissed these actions without leave to amend on February 14, 2000 andthe plaintiffs appealed the dismissal to the U.S. Court of Appeals for theNinth Circuit. The appeal was taken under submission by the court of Appealsfollowing the filing of briefs by the parties and the presentation of oralargument on July 11, 2001. The Court of Appeals has not yet issued a ruling onthe appeal.

             On April 23, 2001, the Company received notice of ashareholder's derivative action filed in California Superior Court in theCounty of Santa Clara, alleging that, among other things, certain directors andofficers of the Company sold shares of the Company stock between January 21,1999 and April 6, 1999, while in possession of material non-publicinformation pertaining to the Company. The Company and the individualdefendants moved to dismiss the action, or in the alternative to stay theaction pending the outcome of the appeal in the related federal court classaction or, if necessary, the investigation of the claims by the Company. Thesemotions were presented to the Superior Court on July 23, 2001, and the courthas not yet issued a ruling on the motions.

Item 4.  

Submission of Matters to Vote of Security Holders

             Atthe Company’s Special Meeting of Stockholders held on June 19, 2001, pursuantto the Notice of Special Meeting of Stockholders and Proxy Statement dated May22, 2001, the following matters were submitted to the Company’s stockholders:

             (1)  the approval of the issuance of up to16,081,579 shares of the Company’s Common Stock to holders of CUseeMe Networksand up to 4,249,826 shares of the Company’s Common Stock to be issued uponexercise of CUseeMe outstanding options and a warrant assumed by the Company inthe merger with CUseeMe.  There were5,691,496 votes cast for approval and 105,262 votes cast against approval.  There were 72,550 abstentions and 9,046,652broker non-votes.

             (2)  the amendment of the Company’s certificateof incorporation to increase the number of authorized shares of the Company’sCommon Stock by 65,000,000 shares, from 35,000,000 to 100,000,000 shares.  There were 14,623,645 votes cast forapproval and 224,308 votes cast against approval.  There were 67,207 abstentions and 800 broker non-votes.

             Basedon the voting results, the first and second matters were approved.

             TheCompany’s Annual Meeting of Stockholders was held on June 22, 2001 (the “AnnualMeeting”).  The following matters wereconsidered and voted upon at the Annual Meeting:

             (1)  the election of two director nominees, RalphUngermann and Allwyn Sequeira, to serve as directors until the 2004 AnnualMeeting of Stockholders.  The votes castfor and against such nominees were as follows:

| Name:           | For        | Withheld |
|-----------------|------------|----------|
| Ralph Ungermann | 15,102,792 | 169,416  |
| Allwyn Sequeira | 15,053,252 | 218,956  |

             (2)  the approval of the Company’s 1997 EmployeeStock Purchase Plan, as amended, to increase the aggregate number of shares ofCommon Stock authorized for issuance under such plan by 1,000,000 shares, to anaggregate of 1,350,000 shares.  Therewere 5,365,842 votes cast for approval and 419,618 votes cast againstapproval.  There were 44,920 abstentionsand 9,441,828 broker non-votes.

             (3)  theapproval of the Company’s Non-Employee Directors’ Stock Option Plan, asamended, to increase the aggregate number of shares of Common Stock authorizedunder such plan by 350,000 shares, to an aggregate of 700,000 shares, and toauthorize an annual grant of an option to purchase 10,000 shares of CommonStock to non-employee directors of the Company for service on each committee ofthe Board of Directors.  There were5,121,912 votes cast for approval and 660,013 votes cast against approval.  There were 48,455 abstentions and 9,441,828broker non-votes.

             (4)  the ratification of the appoint ofPricewaterhouseCoopers LLP as independent accountants of the Company for itsfiscal year ending December 31, 2001. There were 15,166,240 votes cast for ratification and 75,124 votes castagainst ratification.  There were 16,908abstentions and 13,936 broker non-votes.

             Basedon the voting results, each of the directors nominated was elected and thesecond, third and fourth matters were approved.

Item6.

Exhibits and Reports onForm 8-K.

             (a)         Exhibits

|                 |                                                                                      |
|----------------------|-------------------------------------------------------------------------------------------|
| **Exhibit   Number** | **Description**                                                                           |
|                      |                                                                                           |
| 3.1                  | Amended  and Restated Certificate of Incorporation (1)                                    |
| 3.1(i)               | Certificate  of Ownership and Merger, effective August 3, 1998 (2)                        |
| 3.1(ii)              | Certificate  of Designation of Series A Convertible Preferred Stock (4)                   |
| 3.1(iii)             | Certificate  of Ownership and Merger, effective February 5, 2001                          |
| 3.1(iv)              | Certificate  of Amendment of Restated Certificate of Incorporation filed on June 19, 2001 |
| 3.2                  | Amended  Bylaws of the Registrant (3)                                                     |
| 4.1                  | Specimen  Common Stock Certificate (2)                                                    |
| 4.2                  | Specimen  Series A Convertible Preferred Stock Certificate (4)                            |
|                 |                                                                                      |

----

| (1)    | Filed  as an exhibit to the Company's Registration Statement on Form S-1, File  No, 333-38755, declared effective on April 29, 1998, incorporated herein  by reference.                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                    |
| (2)    | Filed  as an exhibit to the Company's Quarterly Report on Form 10-Q for the  period ended September 30, 1998, as amended, as filed on April 29,  1999, incorporated herein by reference. |
|   |                                                                                                                                                                                                    |
| (3)    | Filed  as an exhibit to the Company's Annual Report on Form 10-K, as amended,  for the period ended December 31, 1999, as filed on April 5, 2000,  incorporated herein by reference.     |
|   |                                                                                                                                                                                                    |
| (4)    | Filed  as an exhibit to the Company's Quarterly Report on Form 10–Q for  the period ended June 30, 2000, as filed on August 14, 2000,  incorporated herein by reference.            |

             (b)        Reportson Form 8-K.

             The Company filed a Current Report on Form 8-K on April4, 2001 announcing the signing of a merger agreement with CUseeMe Networks.

             **SIGNATURES**

             Pursuant to the requirements of the Securities Exchange Actof 1934, as amended, the registrant has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

| Date:  August 15, 2001 | **FIRST VIRTUAL COMMUNICATIONS, Inc.** |
|------------------------|----------------------------------------|
|                   | By:                                    | /s/  Randy Acres |
|                   |                                   |  |
|                   |                                   | Randy  Acres |
|                   |                                   | Chief  Financial Officer(Duly Authorized Officer and Principal Financial and Accounting  Officer) |

** **

**ExhibitIndex**

| **Exhibit  Number** | **Description**                                                                          |
|---------------------|------------------------------------------------------------------------------------------|
|                     |                                                                                          |
| 3.1                 | Amended  and Restated Certificate of Incorporation (1)                                   |
| 3.1(i)              | Certificate  of Ownership and Merger, effective August 3, 1998 (2)                       |
| 3.1(ii)             | Certificate  of Designation of Series A Convertible Preferred Stock (4)                  |
| 3.1(iii)            | Certificate  of Ownership and Merger, effective February 5, 2001                         |
| 3.1  (iv)           | Certificate  of Amendment of Restated Cerificate of Incorporation filed on June 19, 2001 |
| 3.2                 | Amended  Bylaws of the Registrant (4)                                                    |
| 4.1                 | Specimen  Common Stock Certificate (3)                                                   |
| 4.2                 | Specimen  Series A Convertible Preferred Stock Certificate (4)                           |
|                |                                                                                     |

----

| (1)    | Filed  as an exhibit to the Company's Registration Statement on Form S-1, File  No, 333-38755, declared effective on April 29, 1998, incorporated herein  by reference.                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                    |
| (2)    | Filed  as an exhibit to the Company's Quarterly Report on Form 10-Q for the  period ended September 30, 1998, as amended, as filed on April 29,  1999, incorporated herein by reference. |
|   |                                                                                                                                                                                                    |
| (3)    | Filed  as an exhibit to the Company's Annual Report on Form 10-K, as amended,  for the period ended December 31, 1999, as filed on April 5, 2000,  incorporated herein by reference.     |
|   |                                                                                                                                                                                                    |
| (4)    | Filed  as an exhibit to the Company's Quarterly Report on Form 10–Q for  the period ended June 30, 2000, as filed on August 14, 2000,  incorporated herein by reference.            |