##### Table of Contents



---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For The Quarterly Period Ended March 31, 2003

OR

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

For the transition period from                      to

Commission file number 000-23305

FIRST VIRTUAL COMMUNICATIONS, INC.

(Exact name of registrant in its character)


|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 77-0357037
(I.R.S. employer identification number)

3200 Bridge Parkway
Redwood City, CA 94065
(Address of principal executive offices)

(650) 801-6500
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]  No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [X]

The number of shares of Common Stock outstanding as of May 8, 2003 was
40,483,594.



---

---





---

TABLE OF CONTENTS



|                              |                                                                                               |                                                                |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART 1. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Condensed Consolidated Balance Sheets                         
|                              |                                                                                               | Condensed Consolidated Statements of Operations               
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows               
|                              |                                                                                               | 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                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities.                                                               
|                              | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURES                   
|CERTIFICATIONS               
|EXHIBIT INDEX                
|EXHBIIT 4.9                  
|EXHIBIT 4.10                 
|EXHIBIT 10.46                
|EXHIBIT 10.47                
|EXHIBIT 10.48                
|EXHIBIT 10.49                
|EXHIBIT 10.50                
|EXHIBIT 99.1                 



---



##### Table of Contents



First Virtual Communications, Inc.

Form 10-Q


Index

|              |                                                                                           |  |      |    | 
|------------- | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |                                                                                           |  | Page
|              |                                                                                           |  |     
|PART 1.       | FINANCIAL INFORMATION                                                                     |  |      |    | 
|Item 1.       | Financial Statements                                                                      |  |      |    | 
|              | Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002             |  |      | 3  | 
|              | Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 |  |      | 4  | 
|              | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 |  |      | 5  | 
|              | Notes to Unaudited Condensed Consolidated Financial Statements                            |  |      | 6  | 
|Item 2.       | Managements Discussion and Analysis of Financial Condition and Results of Operations     |  |      | 12 | 
|Item 3.       | Quantitative and Qualitative Disclosures About Market Risk                                |  |      | 25 | 
|Item 4.       | Controls and Procedures                                                                   |  |      | 25 | 
|PART II       | OTHER INFORMATION                                                                         |  |      |    | 
|Item 1.       | Legal Proceedings                                                                         |  |      | 25 | 
|Item 2.       | Changes in Securities                                                                     |  |      | 26 | 
|Item 6.       | Exhibits and Reports on Form 8-K                                                          |  |      | 27 | 
|SIGNATURES    |                                                                                           |  | 29   |   
|EXHIBIT INDEX |                                                                                           |  | 32   |   

2



---



##### Table of Contents






PART 1. FINANCIAL INFORMATION




Item 1. Financial Statements




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

|                                                                                                                                    |                                   |                           |          |           |        |              |          |       |        | 
|----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------- | -------- | --------- | ------ | ------------ | -------- | ----- | ------ | 
|                                                                                                                                    |                                   |                           |          | March 31, |        | December 31,
|                                                                                                                                    |                                   |                           |          | 2003      |        | 2002        
|                                                                                                                                    |                                   |                           |          |           |        |             
|ASSETS                                                                                                                              |                                   |                           |          |           |        |              |          |      
|Current assets:                                                                                                                     |                                   |                           |          |           |        |              |          |      
|                                                                                                                                    | Cash and cash equivalents         |                           | $        | 7,057     |        |              | $        | 8,352 |       
|                                                                                                                                    | Short-term investments            |                           |          | 81        |        |              |          | 83    |       
|                                                                                                                                    | Accounts receivable, net          |                           |          | 3,580     |        |              |          | 4,080 |       
|                                                                                                                                    | Inventory                         |                           |          | 293       |        |              |          | 613   |       
|                                                                                                                                    | Prepaids and other current assets |                           |          | 438       |        |              |          | 406   |       
|                                                                                                                                    |                                   |                           |          |           |        |              |          |      
|                                                                                                                                    |                                   | Total current assets      |          |           | 11,449 |              |          |       | 13,534 | 
|Property and equipment, net                                                                                                         |                                   |                           | 1,934    |           |        |              | 2,197    |      
|Other assets                                                                                                                        |                                   |                           | 298      |           |        |              | 293      |      
|Intangible assets, net                                                                                                              |                                   |                           | 3,679    |           |        |              | 3,736    |      
|                                                                                                                                    |                                   |                           |          |           |        |              |          |      
|                                                                                                                                    |                                   | $                         | 17,360   |           |        | $            | 19,760   |      
|                                                                                                                                    |                                   |                           |          |           |        |              |          |       |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |                                   |                           |          |           |        |              |          |      
|Current liabilities:                                                                                                                |                                   |                           |          |           |        |              |          |      
|                                                                                                                                    | Accounts payable                  |                           | $        | 1,268     |        |              | $        | 1,192 |       
|                                                                                                                                    | Accrued liabilities               |                           |          | 4,963     |        |              |          | 5,139 |       
|                                                                                                                                    | Deferred revenue                  |                           |          | 6,498     |        |              |          | 6,656 |       
|                                                                                                                                    |                                   |                           |          |           |        |              |          |      
|                                                                                                                                    |                                   | Total current liabilities |          |           | 12,729 |              |          |       | 12,987 | 
|Stockholders equity:                                                                                                               |                                   |                           |          |           |        |              |          |      
|Convertible Preferred Stock, $.001 par value;
5,000,000 shares authorized; 27,437 shares
issued and outstanding, respectively       |                                   |                           |         |           |        |              |         |      
|Common stock, $.001 par value; 100,000,000
shares authorized; 40,483,594 and 33,430,179
shares issued and outstanding, respectively |                                   |                           | 40       |           |        |              | 40       |      
|Additional paid-in capital                                                                                                          |                                   |                           | 118,531  |           |        |              | 118,531  |      
|Accumulated other comprehensive (loss)                                                                                              |                                   |                           | (218     | )         |        |              | (210     | )    
|Accumulated deficit                                                                                                                 |                                   |                           | (113,722 | )         |        |              | (111,588 | )    
|                                                                                                                                    |                                   |                           |          |           |        |              |          |      
|                                                                                                                                    | Total stockholders equity        |                           |          | 4,631     |        |              |          | 6,773 |       
|                                                                                                                                    |                                   |                           |          |           |        |              |          |      
|                                                                                                                                    |                                   | $                         | 17,360   |           |        | $            | 19,760   |      
|                                                                                                                                    |                                   |                           |          |           |        |              |          |       |       

See accompanying notes to condensed consolidated financial statements.

3



---



##### Table of Contents






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

|                                                              |                            |   |                         |       |                    |       |        |       |  |       | 
|------------------------------------------------------------- | -------------------------- | - | ----------------------- | ----- | ------------------ | ----- | ------ | ----- |  | ----- | 
|                                                              |                            |   |                         |       | Three months ended
|                                                              |                            |   |                         |       |                   
|                                                              |                            |   |                         |       | March 31,         
|                                                              |                            |   |                         |       |                   
|                                                              |                            |   |                         |       | 2003               |       | 2002  
|                                                              |                            |   |                         |       |                    |       |       
|Revenue:                                                      |                            |   |                         |       |                    |       |        |      
|                                                              | Software                   |   | $                       | 3,393 |                    |       | $      | 4,082 | 
|                                                              | Product                    |   |                         | 648   |                    |       |        | 1,341 | 
|                                                              | Support service            |   |                         | 1,336 |                    |       |        | 1,178 | 
|                                                              |                            |   |                         |       |                    |       |        |      
|                                                              |                            |   | Total revenue           |       |                    | 5,377 |        |       |  | 6,601 | 
|Cost of revenue:                                              |                            |   |                         |       |                    |       |        |      
|                                                              | Software                   |   | $                       | 166   |                    |       | $      | 159   | 
|                                                              | Product                    |   |                         | 219   |                    |       |        | 753   | 
|                                                              | Support Service            |   |                         | 446   |                    |       |        | 436   | 
|                                                              |                            |   |                         |       |                    |       |        |      
|                                                              |                            |   | Total cost of revenue   |       |                    | 831   |        |       |  | 1,348 | 
|                                                              |                            |   |                         |       |                    |       |        |      
|Gross profit                                                  |                            |   | 4,546                   |       |                    |       | 5,253  |      
|                                                              |                            |   |                         |       |                    |       |        |      
|Operating expense:                                            |                            |   |                         |       |                    |       |        |      
|                                                              | Research and development   |   |                         | 2,487 |                    |       |        | 2,757 | 
|                                                              | Sales and marketing        |   |                         | 2,593 |                    |       |        | 1,915 | 
|                                                              | General and administrative |   |                         | 1,627 |                    |       |        | 2,284 | 
|                                                              |                            |   |                         |       |                    |       |        |      
|                                                              |                            |   | Total operating expense |       |                    | 6,707 |        |       |  | 6,956 | 
|                                                              |                            |   |                         |       |                    |       |        |      
|Operating loss                                                |                            |   | (2,161                  | )     |                    |       | (1,703 | )    
|Other income, net                                             |                            |   | 27                      |       |                    |       | 44     |      
|Minority interest in consolidated subsidiary                  |                            |   |                        |       |                    |       | (15    | )    
|                                                              |                            |   |                         |       |                    |       |        |      
|Net loss                                                      |                            | $ | (2,134                  | )     |                    | $     | (1,674 | )    
|                                                              |                            |   |                         |       |                    |       |        |       | 
|Basic and diluted net loss per share                          |                            | $ | (0.05                   | )     |                    | $     | (0.05  | )    
|Shares used in computing basic and diluted net loss per share |                            |   | 40,484                  |       |                    |       | 33,380 |      

See accompanying notes to condensed consolidated financial statements.

4



---



##### Table of Contents






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

|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |       |        |        |  
|--------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------- | ------------------------------------- | ---- | ------------------ | ------ | ------ | ----- | ------ | ------ | -
|                                                                            |                                                    |                                                      |                                       |      | Three Months Ended
|                                                                            |                                                    |                                                      |                                       |      | March 31,         
|                                                                            |                                                    |                                                      |                                       |      |                   
|                                                                            |                                                    |                                                      |                                       |      | 2003               |        | 2002  
|                                                                            |                                                    |                                                      |                                       |      |                    |        |       
|Net Income/(Loss)                                                           |                                                    | $                                                    | (2,134                                | )    |                    | $      | (1,674 | )    
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                    |                                                      |                                       |      |                    |        |        |      
|                                                                            | Depreciation and amortization                      |                                                      |                                       | 550  |                    |        |        | 771   |       
|                                                                            | Stock Compensation                                 |                                                      |                                       |     |                    |        |        | 13    |       
|                                                                            | Provision for returns and doubtful accounts        |                                                      |                                       | (85  | )                  |        |        | (488  | )     
|                                                                            | Acquired in-process research and development       |                                                      |                                       |     |                    |        |        |      |       
|                                                                            | Provision for inventory                            |                                                      |                                       | (156 | )                  |        |        |      |       
|                                                                            | Other                                              |                                                      |                                       | (6   | )                  |        |        | (50   | )     
|                                                                            | Changes in assets and liabilities:                 |                                                      |                                       |      |                    |        |        |       |       
|                                                                            |                                                    | Accounts receivable                                  |                                       |      | 193                |        |        |       | 396    |       
|                                                                            |                                                    | Inventory                                            |                                       |      | 476                |        |        |       | 447    |       
|                                                                            |                                                    | Prepaid expenses and other assets                    |                                       |      | (37                | )      |        |       | 230    |       
|                                                                            |                                                    | Accounts payable                                     |                                       |      | 76                 |        |        |       | (1,080 | )     
|                                                                            |                                                    | Accrued liabilities                                  |                                       |      | (291               | )      |        |       | (430   | )     
|                                                                            |                                                    | Deferred revenue                                     |                                       |      | 252                |        |        |       | 92     |       
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      
|                                                                            |                                                    |                                                      | Net cash used in operating activities |      |                    | (1,162 | )      |       |        | (1,773 | )
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      
|Cash flows from investing activities:                                       |                                                    |                                                      |                                       |      |                    |        |        |      
|                                                                            | Acquisition of property and equipment, net         |                                                      |                                       | (133 | )                  |        |        | (256  | )     
|                                                                            | Proceeds from sales of short-term investments, net |                                                      |                                       |     |                    |        |        | 1,837 |       
|                                                                            | Cash acquired/(paid) in acquisition                |                                                      |                                       |     |                    |        |        |      |       
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      
|                                                                            |                                                    | Net cash provided by (used in) investing activities: |                                       |      | (133               | )      |        |       | 1,581  |       
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      
|Cash flows from financing activities:                                       |                                                    |                                                      |                                       |      |                    |        |        |      
|                                                                            | Proceeds from issuance of common stock, net        |                                                      |                                       |     |                    |        |        | 8     |       
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      
|                                                                            |                                                    | Net cash provided by financing activities            |                                       |      |                   |        |        |       | 8      |       
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      
|Net decrease in cash and cash equivalents                                   |                                                    |                                                      | (1,295                                | )    |                    |        | (184   | )    
|Cash and cash equivalents at beginning of period                            |                                                    |                                                      | 8,352                                 |      |                    |        | 6,946  |      
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      
|Cash and cash equivalents at end of period                                  |                                                    | $                                                    | 7,057                                 |      |                    | $      | 6,762  |      
|                                                                            |                                                    |                                                      |                                       |      |                    |        |        |      

See accompanying notes to condensed consolidated financial statements.

5



---



##### Table of Contents



First Virtual Communications, Inc.




Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

First Virtual Communications, Inc. (the Company) has prepared the
accompanying financial data for the quarterly period ended March 31, 2003
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations.

In the opinion of management, the accompanying condensed consolidated
financial statements contain all normal and recurring adjustments necessary to
present fairly the Companys consolidated financial position as of March 31,
2003, consolidated results of operations for the three months ended March 31,
2003 and 2002, and consolidated cash flow activities for the three months ended
March 31, 2003 and 2002.

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes.
Actual results may differ from those estimates.

The results of operations for the three months ended March 31, 2003 are
not necessarily indicative of the results to be expected for the full year. The
information included in this Form 10-Q should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included
in the Companys 2002 Annual Report on Form 10-K.

The unaudited condensed consolidated balance sheet at December 31, 2002
that has been derived from the audited consolidated financial statements at
that date does not include all of the information and footnotes required by
generally accepted accounting principles in the United States of America for
complete financial statements.

Concentrations of credit risk

Revenue and accounts receivable of customers comprising more than 10% of
revenue or receivable are summarized as follows:

|         |           |  |                              |    |      |  |  |    |  
|-------- | --------- |  | ---------------------------- | -- | ---- |  |  | -- | -
|         |           |  | Three Months Ended March 31,
|         |           |  |                             
|         |           |  | 2003                         |    | 2002
|         |           |  |                              |    |     
|Revenue: |           |  |                              |    |      |  |  |   
|         | Company A |  |                              | 10 | %    |  |  | 28 | %
|         | Company B |  |                              |   |      |  |  | 16 | %

|                     |           |  |           |    |              |  |  |    |  
|-------------------- | --------- |  | --------- | -- | ------------ |  |  | -- | -
|                     |           |  | March 31, |    | December 31,
|                     |           |  | 2003      |    | 2002        
|                     |           |  |           |    |             
|Accounts receivable: |           |  |           |    |              |  |  |   
|                     | Company A |  |           | 12 | %            |  |  | 20 | %
|                     | Company B |  |           | 10 | %            |  |  |   |  

2. Short Term Investments

Management determines the appropriate classification of short-term
investments in marketable securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. Available-for-sale securities
are

6



---



##### Table of Contents



stated at fair value as determined by the most recently traded price of
each security at the balance sheet date. The net unrealized gains or losses on
available-for-sale securities are reported as a component of comprehensive
loss, net of tax. The specific identification method is used to compute the
realized gains and losses on debt and equity securities.

The Company regularly monitors and evaluates the realizable value of its
marketable securities. If events and circumstances indicate that a decline in
the value of these assets has occurred and is other than temporary, the Company
records a charge to investment income (expense). At March 31, 2003, all
short-term investments have been classified as available-for-sale securities.

Marketable securities are comprised as follows (in thousands):

|                       |  |           |    |              |  |   |    | 
|---------------------- |  | --------- | -- | ------------ |  | - | -- | 
|                       |  | March 31, |    | December 31,
|                       |  | 2003      |    | 2002        
|                       |  |           |    |             
|Certificate of deposit |  | $         | 69 |              |  | $ | 69 | 
|Equity securities      |  |           | 12 |              |  |   | 14 | 
|                       |  |           |    |              |  |   |    | 
|                       |  | $         | 81 |              |  | $ | 83 | 
|                       |  |           |    |              |  |   |    | 

As of March 31, 2003, the Companys available for sale securities had
contractual maturities of less than one year. Available for sale securities are
comprised as follows at March 31, 2003 and December 31, 2002 (in thousands):

|                  |  |      |     |       |  |            |   |            |  |   |      |   |  |   |    | 
|----------------- |  | ---- | --- | ----- |  | ---------- | - | ---------- |  | - | ---- | - |  | - | -- | 
|                  |  |      |     |       |  | Unrealized |   | Unrealized |  |   |      |  
|                  |  | Cost |     | Gains |  | Losses     |   | Fair Value
|                  |  |      |     |       |  |            |   |           
|March 31, 2003    |  |      |     |       |  |            |   |            |  |   |      |   |  |   |    | 
|Equity securities |  | $    | 114 |       |  | $          | 3 |            |  | $ | (105 | ) |  | $ | 12 | 
|Debt securities   |  |      | 120 |       |  |            |  |            |  |   | (51  | ) |  |   | 69 | 
|                  |  |      |     |       |  |            |   |            |  |   |      |   |  |   |    | 
|Total             |  | $    | 234 |       |  | $          | 3 |            |  | $ | (156 | ) |  | $ | 81 | 
|                  |  |      |     |       |  |            |   |            |  |   |      |   |  |   |    | 
|December 31, 2002 |  |      |     |       |  |            |   |            |  |   |      |   |  |   |    | 
|Equity securities |  | $    | 114 |       |  | $          | 3 |            |  | $ | (103 | ) |  | $ | 14 | 
|Debt securities   |  |      | 120 |       |  |            |  |            |  |   | (51  | ) |  |   | 69 | 
|                  |  |      |     |       |  |            |   |            |  |   |      |   |  |   |    | 
|Total             |  | $    | 234 |       |  | $          | 3 |            |  | $ | (154 | ) |  | $ | 83 | 
|                  |  |      |     |       |  |            |   |            |  |   |      |   |  |   |    | 

3. Inventory

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

|                |  |                |     |                   |  |   |     | 
|--------------- |  | -------------- | --- | ----------------- |  | - | --- | 
|                |  | March 31, 2003 |     | December 31, 2002
|                |  |                |     |                  
|Raw materials   |  | $              | 191 |                   |  | $ | 266 | 
|Finished goods  |  |                | 102 |                   |  |   | 347 | 
|                |  |                |     |                   |  |   |     | 
|Total inventory |  | $              | 293 |                   |  | $ | 613 | 
|                |  |                |     |                   |  |   |     | 

4. Net Loss Per Share

Basic loss per share is based on the weighted-average number of common
shares outstanding excluding contingently issuable or returnable shares, such
as shares of unvested restricted common stock. Diluted loss per share is based
on the weighted-average number of common shares outstanding and dilutive
potential common shares outstanding.

As a result of the losses incurred by the Company for the three months
ended March 31, 2003 and 2002, all potential common shares were anti-dilutive
and were excluded from the diluted net loss per share calculations for such
periods.

The following table summarizes securities outstanding that were not included in
the calculations of diluted net loss per share for the three months ended March
31, 2003 and 2002, since their inclusion would be anti-dilutive:

7



---



##### Table of Contents



|                            |  |                    |        |      |  |  |        | 
|--------------------------- |  | ------------------ | ------ | ---- |  |  | ------ | 
|                            |  | Three months ended
|                            |  | March 31,         
|                            |  |                   
|                            |  | 2003               |        | 2002
|                            |  |                    |        |     
|                            |  | (in thousands)    
|Common stock options        |  |                    | 10,670 |      |  |  | 11,626 | 
|Common stock warrants       |  |                    | 6,850  |      |  |  | 3,589  | 
|Convertible preferred stock |  |                    | 4,247  |      |  |  | 3,617  | 

The common stock warrants are exercisable at $.91 to $6.67 per share and
expire at various times from June 8, 2005 through April 12, 2007. The stock
options outstanding at March 31, 2003 had a weighted average exercise price per
share of $2.52 and expire beginning in June 2004 through March 2013.

5. Warranties

The Company sells both software and hardware products. We provide for
future warranty costs upon product delivery or from the purchase date. The
specific terms and conditions of those warranties vary depending upon the
product sold, the country in which the customers are located and agreements we
have with various customers.

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

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

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

Changes in our warranty liability, which is included as a component of
Accrued liabilities on the Consolidated Balance Sheet, during the first
quarter ended March 31, 2003 were as follows:

|                                          |  |                |     |  
|----------------------------------------- |  | -------------- | --- | -
|                                          |  | (in thousands)
|Beginning balance as of December 31, 2002 |  | $              | 428 |  
|Provision for warranty liability          |  |                | 25  |  
|Settlement
made under warranty            |  |                | (54 | )
|                                          |  |                |     |  
|Ending balance as of March 31, 2003       |  | $              | 399 |  
|                                          |  |                |     |  

6. Stock Based Compensation

As of March 31, 2003, the Company maintained stock option plans under
which the Company may grant incentive stock options and non-qualified stock
options to employees, consultants and non-employee directors. The Company has
chosen to account for those plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations.

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

-8-



---



##### Table of Contents



|                                                                                        |  |                                      |        |      |  |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ---- |  | - | ------ | -
|                                                                                        |  | For the Three Months Ended March 31,
|                                                                                        |  |                                     
|                                                                                        |  | 2003                                 |        | 2002
|                                                                                        |  |                                      |        |     
|Net Loss                                                                                |  | $                                    | (2,134 | )    |  | $ | (1,674 | )
|                                                                                        |  |                                      |        |      |  |   |        |  
|Add: Stock-based employee compensation expense
included in reported net income          |  |                                      |       |      |  |   | 5      |  
|Deduct: Total stock based employee compensation
expense determined pursuant to SFAS 123 |  |                                      | (280   | )    |  |   | (227   | )
|                                                                                        |  |                                      |        |      |  |   |        |  
|Pro forma net loss                                                                      |  | $                                    | (2,414 | )    |  | $ | (1,669 | )
|                                                                                        |  |                                      |        |      |  |   |        |  
|As reported net loss per share (basic and diluted)                                      |  | $                                    | (0.05  | )    |  | $ | (0.05  | )
|                                                                                        |  |                                      |        |      |  |   |        |  
|Pro forma net loss per share (basic and diluted)                                        |  | $                                    | (0.06  | )    |  | $ | (0.06  | )
|                                                                                        |  |                                      |        |      |  |   |        |  

In December 2002, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of SFAS 123 (SFAS
148). This statement amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Company has adopted the annual disclosure provisions of SFAS 148 and
adopted the interim disclosure provisions for financial reports beginning with
this quarter ended March 31, 2003.

The weighted-average estimated grant-date fair value of options granted
under the Companys various stock option plans during the three months ended
March 31, 2003 and 2002 was $0.28 and $.77, respectively. For the three months
ended March 31, 2003 and 2002, the fair value of each stock option on the date of
grant was determined using the Black-Scholes model with the following
assumptions:

|                        |  |                              |     |      |  |  |     |  
|----------------------- |  | ---------------------------- | --- | ---- |  |  | --- | -
|                        |  | Three Months Ended March 31,
|                        |  |                             
|                        |  | 2003                         |     | 2002
|                        |  |                              |     |     
|Risk-free interest rate |  |                              | 3.0 | %    |  |  | 3.0 | %
|Volatility              |  |                              | 113 | %    |  |  | 113 | %
|Option term (in years)  |  |                              | 5   |      |  |  | 5   |  
|Dividend yield          |  |                              | 0.0 | %    |  |  | 0.0 | %

7. Comprehensive Loss

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

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

|                                                              |  |           |      |              |  |   |      |  
|------------------------------------------------------------- |  | --------- | ---- | ------------ |  | - | ---- | -
|                                                              |  | March 31, |      | December 31,
|                                                              |  | 2003      |      | 2002        
|                                                              |  |           |      |             
|Foreign currency translation                                  |  | $         | (65  | )            |  | $ | (59  | )
|Unrealized loss on marketable securities, net of income taxes |  |           | (153 | )            |  |   | (151 | )
|                                                              |  |           |      |              |  |   |      |  
|                                                              |  | $         | (218 | )            |  | $ | (210 | )
|                                                              |  |           |      |              |  |   |      |  

Comprehensive losses for the three-month periods ended March 31, 2003 and
2002 were as follows (in thousands):

|                                                              |  |                    |        |      |  |   |        |  
|------------------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                              |  | Three months ended
|                                                              |  | March 31,         
|                                                              |  |                   
|                                                              |  | 2003               |        | 2002
|                                                              |  |                    |        |     
|Net loss, as reported                                         |  | $                  | (2,134 | )    |  | $ | (1,674 | )
|Cumulative translation adjustment                             |  |                    | (6     | )    |  |   | 25     |  
|Unrealized loss on marketable securities, net of Income Taxes |  |                    | (2     | )    |  |   |       |  
|                                                              |  |                    |        |      |  |   |        |  
|Comprehensive loss                                            |  | $                  | (2,142 | )    |  | $ | (1,649 | )
|                                                              |  |                    |        |      |  |   |        |  

9



---



##### Table of Contents



8. Litigation

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

On May 1, 2002, the Company received notice that Clover Technologies, Inc.
(Clover) submitted a claim to the American Arbitration Association initiating
an arbitration proceeding claiming that Clover is entitled to compensation from
the Company for allegedly defective video access nodes (VANS) supplied by the
Company to Clover. The Company filed an answer to Clovers demand for
arbitration, denying all material allegations and claims, on May 30, 2002.
Since filing a demand for arbitration against the Company, Clover has specified
that its claim is for damages totaling in excess of $2.7 million, based on
claims that certain of the VANS which Clover purchased for resale to its
customers were defective. The purchase arises out of a written agreement
between the Company and Clover, dated June 22, 1998. Clover sought damages
based on claims for alleged breach of express and implied warranties, in the
amount purportedly paid for replacement products, plus unspecified incidental
and consequential damages. The Companys insurer retained counsel to defend the
Company in this matter. The Company responded to the arbitration demand by
denying all material allegations. An arbitration hearing before the American
Arbitration Association was scheduled for April 7, 2003 through April 14, 2003
in Santa Clara, California. Prior to that date, the parties held a mediation
session on March 31, 2003 and agreed to a settlement of this
matter. The Company's insurance carrier provided for the cost of
defense and settlement of this matter.

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

10



---



##### Table of Contents



9. New Accounting Pronouncements

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

10. Subsequent Events

On
April 3, 2003, the Company entered into a credit facility agreement
with its bank that allows the Company to borrow up to $3.0 million at any time
prior to December 31, 2003. Funds drawn under the facility will be recorded as
a term loan fully amortized over a three-year period with an interest rate
equal to the banks prime rate plus 2.25%, with a floor at 6.5%. The Company
paid a $22,500 commitment fee at the closing and is subject to a commitment fee
of 0.25% per annum on any unused borrowings. In connection with the term loan
facility, the Company agreed to issue a five-year warrant to the bank to
purchase up to 281,250 shares of the Companys common stock at an exercise
price of $0.32 per share. The warrant has a fair value of $68,000, as
determined
using the Black-Scholes model. The term loan will be secured by all of the
Companys assets, including intellectual property rights, and requires that the
Company maintain cash deposits at the bank of not less than $2.9 million and
adhere to a liquidity covenant. The liquidity covenant stipulates that the sum
of (i) the amount of the Companys unrestricted cash on deposit in the bank,
plus (ii) the companys eligible accounts receivable, divided by (iii) the
amount outstanding under the term loan facility, be at all times equal to 2.0
or higher. The liquidity covenant is only applicable if the loan is drawn down.

On April 11, 2003, the company signed an agreement with its landlord to
terminate the lease of its 48,000 square foot Santa Clara, California
headquarters facility and concurrently executed a new lease for approximately
19,700 square feet of space in Redwood City, California. For the period May
through December 2003 lease payments under the new lease will total
approximately $452,000 compared to $1.0 million for the same period under

11



---



##### Table of Contents



the terms of the prior lease. For the five-year period from January 2004
through December 2008, payments under the new lease will aggregate
approximately $3.7 million compared to $8.2 million that would have been paid
under the prior lease. As compensation for the early termination of the lease,
the Company agreed to issue warrants to the lessor for the purchase of up to
two million shares of the Companys common stock. The warrants will have a
five-year life and an exercise price of $0.27 per share. The warrants have a
fair value of $509,000, as determined using the Black Scholes model. The Company occupied the new office space in early
May 2003.

On April 14, 2003, the Company entered into a private equity line of
financing agreement with Ralph Ungermann, Executive Chairman of the Board of
Directors of the Company. Under this agreement, the Company may sell up to $1
million of the Companys common stock to Mr. Ungermann at a purchase price of
$0.31 per share (up to 3,225,806 shares) during the period from April 14, 2003
through April 13, 2004. The Company may draw down funds under the private
equity line financing agreement up to four times during the 12-month term of
the agreement, with each draw for a minimum of $250,000. Common stock sold to
Mr. Ungermann pursuant to this agreement will be issued on a private placement
basis pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. As compensation for the agreement, the Company issued
to Mr. Ungermann a warrant with a five-year term exercisable for up to 300,000
shares of the Companys stock at an exercise price equal to $0.38 per share,
125% of the fair market value of the Companys common stock as measured on the
date of issuance of the warrant. The warrant has a fair value of
$73,000, as determined using the Black Scholes model. The
Company has agreed to provide registration rights with respect to any shares of
the Companys common stock issued under the equity line of financing agreement
and issued upon exercise of the warrant.




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

The following discussion of the financial condition and results of
operations of First Virtual Communications, Inc. should be read in conjunction
with the Unaudited Condensed Consolidated Financial Statements and the Notes
thereto included in Item 1 of this Quarterly Report on Form 10-Q, and
Managements Discussion and Analysis of Financial condition and Results of
Operations contained in our form 10-K as filed with the Securities and
Exchange Commission on April 15, 2003.

In
addition to the historical information contained in this Quarterly
Report, this
Quarterly Report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that involve risks and uncertainties. These
forward looking statements include, without limitation, statements containing
the words believes, anticipates, expects, and words of similar import.
Such forward-looking statements will have known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others: the
Companys limited operating history and variability of operating results,
market acceptance of web conferencing technology, web conferencing and
collaboration technology dependence on IP-based networks and other
technologies, the Companys potential inability to maintain business
relationships with telecommunications carriers, distributors and suppliers,
rapid technological changes, competition and consolidation in the web
conferencing industry, the importance of attracting and retaining personnel,
management of the Companys growth, cost pressures in the web conferencing
industry, dependence on key employees, and other risk factors set forth below
and described in this Quarterly Report on Form 10-Q and in other
documents the Company files with the SEC. The Company assumes no obligation to
update any forward-looking statements contained herein. The Companys
expectations and the events, conditions and circumstances on which these
forward-looking statements are based, may change.

Overview

The Company delivers integrated, software technologies for rich media Web
conferencing and collaboration solutions. The Company combines its expertise in
networking systems, real-time audio and video technology, and Web-based
collaboration to provide integrated voice, video, data, text and streaming
media solutions for a wide range of rich media enterprise applications,
including Web conferences, broadcasts, video-on-demand, videoconferences and
video calls over converged multi-service networks. The Company was incorporated
in California in October 1993 and reincorporated in Delaware in December 1997.
The Company first shipped its products in 1995.

12



---



##### Table of Contents



On June 19, 2001, the Company and CUseeMe Networks completed a merger,
pursuant to which CUseeMe Networks became a wholly owned subsidiary of the
Company. As a result of the merger, the Company is able to provide a broad
range of integrated rich media Web conferencing solutions that run seamlessly
across multiple network types to enterprise customers and service providers
worldwide.

In the three months ended March 31, 2003, the Company recorded $5.4
million in revenue, a decrease of 19% compared to the same period of the
previous year. The Company derived its revenue in the three months ended March
31, 2003 and fiscal 2002 from sales to distributors, original equipment
manufacturers, or OEMs, value-added resellers, or VARS, federal government
agencies, enterprise customers and telecommunications service providers.

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

|                     |  |                    |     |                |  |  |     |  
|-------------------- |  | ------------------ | --- | -------------- |  |  | --- | -
|                     |  | Three Months Ended
|                     |  |                   
|                     |  | March 31, 2003     |     | March 31, 2002
|                     |  |                    |     |               
|Enterprise customers |  |                    | 90  | %              |  |  | 87  | %
|Service providers    |  |                    | 10  | %              |  |  | 13  | %
|                     |  |                    |     |                |  |  |     |  
|Total                |  |                    | 100 | %              |  |  | 100 | %

The Companys internal sales force qualifies and stimulates end-user
demand, and manages the Companys strategic relationships with its distribution
partners, including OEMs, VARs and systems integrators. At March 31, 2003,
Beijing Thumb Communications, Ltd. and AT&T Corporation accounted for 12% and
10%, respectively, of total accounts receivable. At March 31, 2002, GSA and
Tomen Cyber-Business Solutions, Inc. accounted for 26% and 14%, respectively,
of total accounts receivable.

The Company maintains sales offices in the United Kingdom, France,
Germany, Italy, China and Japan, and distributes its products in both Europe
and Asia through resellers and distributors in more than 25 countries. For the
three months ended March 31, 2003 and 2002 and the years ended December 31,
2002 and 2001, approximately 49%, 25%, 32% and 21%, respectively, of the
Companys sales were generated from customers outside of the United States. The
Company expects that revenue from shipments to customers outside of the United
States will continue to represent a significant portion of its future revenue.
In addition, the Company believes that a small portion of its sales through
OEMs, resellers and integrators are ultimately sold to international end-users.
Revenue from the Companys international operations are subject to various
risks, including seasonality, longer payment cycles, changes in regulatory
requirements and tariffs, reduced protection of intellectual property rights,
political and economic restraints, and currency risks, among others. To date,
the Company has not engaged in any foreign currency hedging activity.

Critical Accounting Policies

There have been no material changes to our critical accounting policies
and estimates as disclosed in the Company's Quarterly Report on
Form 10-Q for the three months
ended March 31, 2003.

13



---



##### Table of Contents



Results of Operations

The following table sets forth certain items from the Companys condensed
consolidated statements of operations as a percentage of total revenue for the
periods indicated:

|                |  |  |       |                    |  |      |       |   |  | 
|--------------- |  |  | ----- | ------------------ |  | ---- | ----- | - |  | 
|                |  |  |       | Three months ended
|                |  |  |       | March 31,         
|                |  |  |       |                   
|                |  |  |       | 2003               |  | 2002
|                |  |  |       |                    |  |     
|Revenue         |  |  | 100.0 | %                  |  |      | 100.0 | %
|Cost of revenue |  |  | 15.5  | %                  |  |      | 20.4  | %
|                |  |  |       |                    |  |      |       |  

|                                             |                            |                         |       |                    |       |      |       |      |       |  
|-------------------------------------------- | -------------------------- | ----------------------- | ----- | ------------------ | ----- | ---- | ----- | ---- | ----- | -
|                                             |                            |                         |       | Three months ended
|                                             |                            |                         |       | March 31,         
|                                             |                            |                         |       |                   
|                                             |                            |                         |       | 2003               |       | 2002
|                                             |                            |                         |       |                    |       |     
|                                             | Gross profit / (loss)      |                         |       | 84.5               | %     |      |       | 79.6 | %    
|                                             |                            |                         |       |                    |       |      |       |     
|Operating expense:                           |                            |                         |       |                    |       |      |       |     
|                                             | Research and development   |                         |       | 46.3               | %     |      |       | 41.8 | %    
|                                             | Sales and marketing        |                         |       | 48.2               | %     |      |       | 29.0 | %    
|                                             | General and administrative |                         |       | 30.3               | %     |      |       | 34.6 | %    
|                                             |                            |                         |       |                    |       |      |       |     
|                                             |                            | Total operating expense |       |                    | 124.7 | %    |       |      | 105.4 | %
|                                             |                            |                         |       |                    |       |      |       |     
|Operating loss                               |                            |                         | (40.2 | )%                 |       |      | (25.8 | )%  
|Other income, net                            |                            |                         | 0.5   | %                  |       |      | 0.7   | %   
|Minority interest in consolidated subsidiary |                            |                         | 0.0   | %                  |       |      | (0.2  | )%  
|                                             |                            |                         |       |                    |       |      |       |     
|Net loss                                     |                            |                         | (39.7 | )%                 |       |      | (25.4 | )%  
|                                             |                            |                         |       |                    |       |      |       |     

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Revenue.Revenue was $5.4 million for the three months ended March 31, 2003, a
decrease of 19% from the $6.6 million recorded in the three months ended March
31, 2002. The following table summarizes the total revenue by software,
products and support services (in thousands):

|                |  |                              |       |      |  |   |       | 
|--------------- |  | ---------------------------- | ----- | ---- |  | - | ----- | 
|                |  | Three Months Ended March 31,
|                |  |                             
|                |  | 2003                         |       | 2002
|                |  |                              |       |     
|Software        |  | $                            | 3,393 |      |  | $ | 4,082 | 
|Product         |  |                              | 648   |      |  |   | 1,341 | 
|Support service |  |                              | 1,336 |      |  |   | 1,178 | 
|                |  |                              |       |      |  |   |       | 
|Total Revenue   |  | $                            | 5,377 |      |  | $ | 6,601 | 
|                |  |                              |       |      |  |   |       | 

Software revenue primarily consists of revenue from the sale of the Click
to Meet (CTM) family of software products which include CTM Express, CTM
Select, CTM Premier and CTM Conference Server. Software revenue decreased
$689,000 to $3.4 million in the three months ended March 31, 2003, a decrease
of 17% from $4.1 million in the same period of last year. In the first quarter
of 2002, the Company realized revenue of $1.1 million pursuant to a licensing
agreement with a reseller in Japan. The principal reason for the decline in
software revenue in the quarter ended March 31, 2003 as compared to the same
period last year was the expiration of that agreement in September 2002.

Product revenue consists of revenue from the sale of ATM legacy hardware
products, including hardware products sourced from third parties and sold by
the Company. Product revenue decreased $693,000 to $648,000 in the three months
ended March 31, 2003, a decrease of 52% from $1.3 million in the same period of
last year. The decrease was primarily a result of the lower demand and lower
average selling prices for hardware-based ATM legacy products. Additionally,
the Company provided only limited marketing and promotional support to these
products in 2002. The Company has notified its customers that it will not be
offering certain ATM legacy products for sale subsequent to May 1, 2003. We
are uncertain of future product revenue.

Support service revenue consists of software license subscriptions,
hardware maintenance, training, installation and consulting revenue. Support
service revenue increased 13% in the three month ended March 31, 2003, compared
to the same period of 2002, primarily due to an increase in the sale of
software subscriptions for the Companys Click to Meet product family
throughout 2002.

Costs of Revenue. Cost of revenue consists primarily of costs
associated with the purchase of components from outside manufacturers or the
manufacture of the Companys products by outside manufacturers and related
costs of freight, inventory obsolescence, royalties, warranties and customer
support costs, which were charged against income in the period incurred. Total costs of
revenue decreased by 38% or $517,000 to $831,000 for the three months ended
March 31, 2003 from $1.3 million for the three months ended March 31, 2002. As
a percentage of total revenues, cost of sales declined to 15% for the three
months ended March 31, 2003 from 20% for the three months ended March 31, 2002.
The Company expects costs of revenue as a percent of revenue to remain in a
range of 15% to 20% for the balance of 2003. Gross margin represents the
difference between revenue and cost of revenue as a percentage

14



---



##### Table of Contents



of revenue. Overall gross margin in the three months ended March 31, 2003
was 85% compared to 80% in the comparable period of 2002.

Cost of software revenue was $166,000 for the three months ended March 31,
2003, compared to $159,000 for the three months ended March 31, 2002. The
gross margin on software revenue decreased to 95% for the three months ended
March 31, 2003 from 96% for the three months ended March 31, 2002.

Cost of
product revenue decreased by 71% or $535,000 to $218,000 for the
three months ended March 31, 2003 from $753,000 for the three months ended
March 31, 2002. The decrease was primarily due to the lower sales volume of
product revenue and the sales of fully reserved legacy ATM inventory
of $156,000 which had no associated cost of revenue due to inventory
writedowns in prior periods during the three months ended March 31, 2003. The gross margin
on product revenue increased to 66% for the three months ended March 31, 2003
from 44% for the three months ended March 31, 2002 primarily due to sales of
fully reserved inventory of $156,000 during the three months ended March 31,
2003.

Cost of
support service revenue was $446,000 for the three months ended March 31,
2003, compared to $436,000 for the three months ended March 31, 2002. The gross
margin on support service revenues increased to 67% for the three months ended
March 31, 2003 from 63% for the three months ended March 31, 2002 primarily due
to the increase in the revenue from support services with relatively fixed
support costs.

Research and Development.Research and development expense consists primarily of
personnel costs, costs of contractors and outside consultants, supplies and
materials expenses, equipment depreciation and overhead costs. Research and
development expense decreased $270,000 to $2.5 million in the three months
ended March 31, 2003, a decrease of 10% compared to the $2.8 million during the
three months ended March 31, 2002. The decrease in absolute dollars was
principally due to the lower spending in professional fees and other expenses
in the three months ended March 31, 2003. As a percentage of total revenue,
research and development expense increased to 46% for the three months ended
March 31, 2003, from 42% for the three months ended March 31, 2002, primarily
as a result of the lower sales during the three months ended March 31, 2003
compared to relatively fixed research and development expenses. The Company
expects research and development expenses, as expressed in absolute dollars, to
remain approximately at current levels for the balance of 2003.

Sales and Marketing.Sales and marketing expense includes personnel and related
overhead costs for sales and marketing, costs of outside contractors,
advertising, trade shows and other related marketing and promotional expenses.
Sales and marketing expense increased $678,000 to $2.6 million for the three
months ended March 31, 2003, an increase of 35% compared to the $1.9 million
for the three months ended March 31, 2002. Expenses in the first quarter of
2003 increased $310,000 primarily due to expansion of our Asia sales office
with higher personnel and other expenses and higher compensation
expense (resulting from our acquisition of our FVC.Com (Asia)
distributor) equal
to 20% of revenue from sales in the territory of Asia, excluding
Japan. In the
same quarter of 2002, the Company recorded a reduction in sales and marketing
expense of $359,000 to reflect collection of a customer receivable that had
previously been deemed uncollectible. The increase as a percentage of revenue
in the three months ended March 31, 2003 compared to the three months ended
March 31, 2002, primarily was due to lower revenue and higher sales and
marketing expense during the three months ended March 31, 2003. The Company
expects sales and marketing expense, as expressed in absolute dollars, to
increase slightly each quarter during the balance of 2003. The increases will
be primarily related to increased staffing in both the sales and the marketing
functions, and, to the extent that revenues may increase in future quarters,
due to higher sales commissions.

General and Administrative.General and administrative expense includes
personnel and related overhead costs for finance, human resources, information
technology, product operations and general management and the amortization of
intangible assets. General and administrative expense decreased $657,000 to
$1.6 million for the three months ended March 31, 2003, a 29% decrease from
the $2.3 million in the three months ended March 31, 2002. The decrease in 2003
primarily was due to a $236,000 decrease in personnel-related expenses, a
reduction of $271,000 in amortization expense resulting from the writedown of
intangibles at December 31, 2002 and reductions of costs in other areas. As a
percentage of revenue, general and administrative expense decreased slightly to
30% in the three months ended March 31, 2003, compared to 35% for the three
months ended March 31, 2002. The decrease in general and administrative expense
as a percentage of revenues for the three months ended March 31, 2003 primarily
reflects the lower expense from the comparable period of 2002 offset in part by
the impact of lower

15



---



##### Table of Contents



revenues in the quarter ended March 31, 2003. The Company expects general and
administrative expenses, as expressed in absolute dollars, to remain
approximately at current levels for the balance of 2003.

Other Income, Net.Other income, net, consists primarily of interest income
earned on short-term investments and cash balances, offset by interest expense
relating to the Companys credit facilities and long-term debt, if any. Other
income totaled $27,000 for the three months ended March 31, 2003, compared to
$44,000 for the three months ended March 31, 2002. The decline is primarily due
to a decline in interest income as a result of lower market interest rates and
lower cash balances.

Minority Interest in Consolidated Subsidiary.Minority interest reflects the
interest of minority stockholders in the operating results of the Companys
consolidated subsidiary in the United Kingdom. In July 2002, the Company
acquired the remaining 48% minority interest in this subsidiary for $570,000.
For the three months ended March 31, 2002, the amount reflects the portion of
losses in this subsidiary that were attributable to minority stockholders.
There was no minority interest in the three months ended March 31, 2003.

Income Taxes.The Company has incurred losses since its inception. No tax
benefit was recorded for any period presented, as the Company believes that,
based on the history of such losses and other factors, the weight of available
evidence indicates that it is more likely than not that the Company will not be
able to realize the benefit of these net operating losses, and thus a full
valuation reserve has been recorded.

Liquidity and Capital Resources

Since inception, the Company has financed its operations primarily through
private and public placements of equity securities, revenue from sales of the
Companys products and services and to a lesser extent through certain credit
facilities and long-term debt. As of March 31, 2003, the Company had cash and
cash equivalents and short-term investments of $7.1 million.

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

In April 2003 the Company also signed an agreement with its landlord to
terminate the Companys lease for its Santa Clara, California headquarters and
executed a new lease that will reduce annual rental expense and cash payments
by approximately $900,000 for each of the next five years.

The Company has experienced significant net operating losses since
inception. In the three months ended March 31, 2003, the Company incurred
losses of $2.1 million and used $1.2 million of cash in its operating
activities. In the comparable period of 2002, the Company incurred net losses
of $1.7 million and used $1.8 million of cash in its operating activities.
Management currently expects that operating losses and negative cash flows will
continue for the foreseeable future and that the Companys existing cash and
investments, together with the funds provided pursuant to its credit facility
with its bank and the financing agreement with Ralph Ungermann are adequate to
fund the Companys operations through the first quarter of 2004. However, the
Companys cash

16



---



##### Table of Contents



requirements depend on several factors, including the rate of market
acceptance of its products and services, the ability to expand and retain its
customer base and other factors. If the Company fails to achieve its planned
revenue or expense targets, management believes that it has the plans, intent
and ability to curtail capital and operating spending to ensure that cash and
investments will be sufficient to meet the Companys cash requirements through
March 31, 2004.

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

In the three months ended March 31, 2003, cash used in operating
activities totaled $1.2 million, compared to $1.7 million in the three months
ended March 31, 2002. The decrease was primarily due to the increase in
accounts payable and accrued liabilities and decrease in accounts receivable
and other assets.

Cash used in investment activities totaled $133,000 for the three months
ended March 31, 2003, primarily used in acquisition of property and equipment.
Cash provided by investment activities totaled $1.6 million for the three
months ended December 31, 2002, primarily consisted of $1.8 million of net
sales and maturities of short-term investments, partially offset by the acquisition of
property and equipment.

As of March 31, 2003, our contractual obligation and other commitments
were as follows:

|                       |                                   |       |            |            |  |      |                    |           |  |            |           |           |              |   |           |           |  |   |           |           | 
|---------------------- | --------------------------------- | ----- | ---------- | ---------- |  | ---- | ------------------ | --------- |  | ---------- | --------- | --------- | ------------ | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                                   |       |            |            |  |      | For the
Remaining  |           |  |            |           |           |              |   |           |           | 
|                       |                                   |       |            |            |  |      | Nine Months Ending |           |  |            |           |           | Years Ending |   |           |           | 
|                       |                                   |       |            |            |  |      | December 31,       |           |  |            |           |           | December 31, |   |           |           | 
|                       |                                   |       |            |            |  |      |                    |           | 
|Contractual obligation |                                   | Total |            | 2003       |  | 2004 |                    | 2005      |  | After 2005
|                       |                                   |       |            |            |  |      |                    |           |  |           
|Operating leases       |                                   | $     | 10,284,885 |            |  | $    | 1,213,974          |           |  | $          | 1,567,251 |           |              | $ | 1,575,660 |           |  | $ | 5,928,000 |          
|License payable        |                                   |       | 300        |            |  |      | 113                |           |  |            | 150       |           |              |   | 37        |           |  |   |          |          
|                       |                                   |       |            |            |  |      |                    |           |  |            |           |           |              |   |           |           |  |   |           |          
|                       | Total contractual cash obligation |       | $          | 10,285,185 |  |      | $                  | 1,214,087 |  |            | $         | 1,567,401 |              |   | $         | 1,575,697 |  |   | $         | 5,928,000 | 
|                       |                                   |       |            |            |  |      |                    |           |  |            |           |           |              |   |           |           |  |   |           |          

New Accounting Pronouncements.

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

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

17



---



##### Table of Contents



Risk Factors

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

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

The Company has incurred operating losses in each quarter since it
commenced operations in 1993. The Company expects to continue to devote
substantial resources to its research and development and sales and marketing
activities. As a result, the Company expects that it will continue to incur
operating losses for the foreseeable future. The Companys revenue decreased
from $27.7 million for the year ended December 31, 2001, to $24.4 million for
the year ended December 31, 2002, while its net loss decreased from $31.6
million for the year ended December 31, 2001 to $24.3 million for the year
ended December 31, 2002. At March 31, 2003, the Company had an accumulated
deficit of $113.7 million.

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

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



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

Additionally, the Companys operating results may vary significantly
depending on a number of factors that are outside of its control. Further, a
significant portion of the Companys expenses are fixed. The Company has made
significant progress in reducing its operating expenses in the last fiscal year
and during the first quarter of 2003 and expects that operating expenses will
decrease in the future due to continued expense reduction measures. However, to
the extent that operating expenses are not reduced and to the extent that
revenue or gross margin cannot be increased, the Companys business, financial
condition and results of operations would be materially adversely affected. Due
to all the foregoing factors, it is likely that in some future quarter, as at
times in past quarters, the Companys results of operations will be below the
expectations of public market analysts and investors, resulting in a negative
impact on the Companys common stock price.

18



---



##### Table of Contents



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

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

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

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

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

The Companys common stock currently is listed on The Nasdaq SmallCap
Market. Pursuant to its rules, The Nasdaq National Market delisted the
Companys shares from the Nasdaq National Market based on the shares trading
below $1.00 per share on The Nasdaq National Market for a period of 30
consecutive trading days. On September 9, 2002, the Companys shares began
trading on The Nasdaq SmallCap Market. In October 2002, the Company received a
letter from Nasdaq advising it that the Companys common stock must have a
closing bid price of at least $1.00 per share for a minimum of ten consecutive
trading days by March 26, 2003 in order to continue trading on the Nasdaq
SmallCap Market, subject to appeal by the Company. On March 26, 2003, the last
sale reported on The Nasdaq SmallCap Market for the Companys stock was at
$.32. On April 1, 2003, the Company received an additional letter from Nasdaq
advising that, based on recent Nasdaq modifications to the bid price rules, it
would be granted an additional 90 calendar day period within which to remedy
the bid price deficiency. To demonstrate compliance with the minimum bid price
requirement, the Company is required to demonstrate a closing bid price of at
least $1.00 per share on or before June 30, 2003, and immediately thereafter, a
closing bid price of at least $1.00 per share for a minimum of ten consecutive
trading days. On May 13, 2003, the last sale reported on the Nasdaq
SmallCap Market for the Company's common stock was at $.66.

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

The Companys software products may contain undetected defects.

Software developed by the Company or developed by others and incorporated
by the Company into its products may contain significant undetected errors,
especially when first released or as new versions are released. Although

19



---



##### Table of Contents



the Companys software products are tested before commercial release,
errors in the products may be found after customers begin to use the software.
Any defects in the Companys current or future products may result in
significant decreases in revenue or increases in expenses because of adverse
publicity, reduced orders, product returns, uncollectible accounts receivable,
delays in collecting accounts receivable, and additional and unexpected costs
of further product development to correct the defects.

The Companys common stock price is volatile.

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



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

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

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

We believe the Company has adequate cash and access to cash to meet its
anticipated working capital and capital expenditure requirements through the
first quarter of 2004. However, the Company may need to raise additional funds
through debt sources and/or the issuance of equity securities in the future. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of existing stockholders of the Company will be reduced,
stockholders may experience additional dilution, and the new equity securities
may have rights, preferences or privileges senior to those of the holders of
the Companys common stock. Additional financing may not be available when
needed or on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, it could have a
material adverse effect on the Companys business, financial condition and
operating results. The Company may be required to delay, scale back or
eliminate some or all of its development programs for its products and may be
unable to take advantage of future opportunities or respond to competitive
pressures.

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

Due to the way that many customers in the Companys target markets
allocate and spend their budgeted funds for acquisition of the Companys
products and other products, a large percentage of the Companys business is
booked at

20



---



##### Table of Contents



the end of each quarterly accounting period. Because of this, the Company
may not be able to reliably predict order volumes. If the Company is unable to
ship its customer orders on time, there could be a material adverse effect on
the Companys results of operations.

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

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

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

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

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

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

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

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

21



---



##### Table of Contents



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

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

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



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

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

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

The Company does not rely on patent protection for its products, and does
not hold any patents, although it has filed patent applications relating to
tunneling technology and the initiation and support of video conferencing using
instant messaging. This patent application may not be approved, however, and
even if issued by the United States Patent and Trademark Office, it may not
give the Company an advantage over competitors. The Companys adherence to
industry-wide technical standards and specifications may limit its
opportunities to provide proprietary product features. The Company currently
licenses certain technology from third parties and plans to continue to do so
in the future. The commercial success of the Company will depend, in part, on
its ability to continue to obtain

22



---



##### Table of Contents



licenses to use third-party technology in its products.

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

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

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

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

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

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

The Company faces additional risks from its international operations.

The Companys international business involves a number of risks that could
adversely affect its operating results or contribute to fluctuations in those
results. The Companys revenue from international sales represented 49% of its
total revenue in the three months ended March 31, 2003 and 32% and 21%,
respectively, of its total revenue in the

23



---



##### Table of Contents



fiscal years ended December 31, 2002 and 2001, respectively. The Company
intends to seek opportunities to expand its product and service offerings into
additional international markets, although the Company may not succeed in
developing localized versions of its products for new international markets or
in marketing or distributing products and services in those markets.

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

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



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

Control by Insiders

As of March 31, 2003, the Companys executive officers, directors and
their affiliates beneficially owned approximately 6.2 million shares, or
approximately 13%, of the outstanding shares of the Companys common stock. As
a result, these persons may have the ability to effectively control the Company
and direct its affairs and business, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying, deferring or preventing a change in
control of the Company, and making certain transactions more difficult or
impossible absent the support of these stockholders, including proxy contests,
mergers involving the Company, tender offers, open-market purchase programs or
other purchases of common stock that could give stockholders of the Company the
opportunity to realize a premium over the then prevailing market price for
shares of common stock.

The spread of SARS may harm our sales in Asia

The threat of severe acute respiratory syndrome (SARS) has increased fears and
anxiety in a number of Asian countries as well as the United States. This fear
and anxiety, along with the ongoing efforts taken by a number of countries to
control the spread of SARS, may have a material adverse effect on commerce in
Asia and in other parts of the world. Sales to customers in Asia accounted for
approximately 78% of our revenue in the period ended March 31, 2003. Any
significant reduction in commerce in Asia and between companies with operations
in Asia may have a material adverse effect on our revenue and operations.

24



---



##### Table of Contents






Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Companys market risk exposures as set forth in its Annual Report on
Form 10-K for the year ended December 31, 2002, have not materially changed.




Item 4. Controls and Procedures

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

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

Limitations on the Effectiveness of Controls.The Companys management,
including the CEO and CFO, does not expect that its disclosure controls will
prevent all error or potential fraud. A control system, no matter how well
conceived and operated, can provide only reasonable not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their cost. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons or by collusion of
two or more people. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

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

On May 1, 2002, the Company received notice that Clover Technologies, Inc.
(Clover) submitted a claim to the American Arbitration Association initiating
an arbitration proceeding claiming that Clover is entitled to compensation from
the Company for allegedly defective video access nodes (VANS) supplied by the
Company to Clover. The Company filed an answer to Clovers demand for
arbitration, denying all material allegations and claims, on May 30, 2002.
Since filing a demand for arbitration against the Company, Clover has specified
that its claim is for damages totaling in excess of $2.7 million, based on
claims that certain of the VANS which Clover

25



---



##### Table of Contents



purchased for resale to its customers were defective. The purchase arises
out of a written agreement between the Company and Clover, dated June 22, 1998.
Clover sought damages based on claims for alleged breach of express and implied
warranties, in the amount purportedly paid for replacement products, plus
unspecified incidental and consequential damages. The Companys insurer
retained counsel to defend the Company in this matter. The Company has
responded to the arbitration demand by denying all material allegations. An
arbitration hearing before the American Arbitration Association was scheduled
for April 7, 2003 through April 14, 2003 in Santa Clara, California. Prior to
that date, the parties held a mediation session on March 31, 2003 and agreed to
a settlement of this matter. The Companys insurance carrier provided for the
cost of defense and settlement of this matter.

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




Item 2. Changes in Securities.

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

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

On April 14, 2003, the Company entered into a private equity line of
financing agreement with Ralph Ungermann, Executive Chairman of the Board of
Directors of the Company. Under this agreement, the Company may sell up to $1
million of the Companys common stock to Mr. Ungermann at a purchase price of
$0.31 per share (up to 3,225,806 shares) during the period from April 14, 2003
through April 13, 2004. The Company may draw down funds under the private
equity line financing agreement up to four times during the 12-month term of
the agreement, with each draw for a minimum of $250,000. Common stock sold to
Mr. Ungermann pursuant to this agreement will be issued on a private placement
basis pursuant to an exemption from registration under Section 4(2)

26



---



##### Table of Contents



of the Securities Act of 1933. As compensation for the agreement, the Company
issued to Mr. Ungermann a warrant with a five-year term exercisable for up to
300,000 shares of the Companys stock at an exercise price equal to $0.38 per
share, 125% of the fair market value of the Companys common stock as measured
on the date of issuance of the warrant. The Company has agreed to provide
registration rights with respect to any shares of the Companys common stock
issued under the equity line of financing agreement and issued upon exercise of
the warrant.

The parties intended the above private placements to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended (the Act), pursuant to Section 4(2) of the Act and
Regulation D promulgated thereunder. Each of the investors represented that
they were an accredited investor and that the investors intention was to
acquire the securities for investment only and not with a view to distribution
thereof. An appropriate legend was affixed to each warrant issued in the above
private placements and will be placed on any Common Stock certificates issued
under the private equity line of financing agreement. Each investor was
knowledgeable, sophisticated and experienced in making investment decisions of
this kind and received adequate information about the Company or had adequate
access, through the investors business relationship with the Company, to
information about the Company.




Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits

|        |  |                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                 
|No.     |  | Description of Document                                                                                                                                                         
|        |  |                                                                                                                                                                                 
|3.1     |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                                                            
|        |  |                                                                                                                                                                                 
|3.2     |  | Certificate of Ownership and Merger, effective August 3, 1998(2)                                                                                                                
|        |  |                                                                                                                                                                                 
|3.3     |  | Certificate of Designation of Series A Convertible Preferred Stock (3)                                                                                                          
|        |  |                                                                                                                                                                                 
|3.4     |  | Amended Bylaws of the Registrant(1)                                                                                                                                             
|        |  |                                                                                                                                                                                 
|3.5     |  | Certificate of Ownership and Merger, effective February 5, 2001(4)                                                                                                              
|        |  |                                                                                                                                                                                 
|3.6     |  | Certificate of Amendment of Restated Certificate of Incorporation filed on June 19, 2001(4)                                                                                     
|        |  |                                                                                                                                                                                 
|4.1     |  | Specimen Common Stock Certificate (2)                                                                                                                                           
|        |  |                                                                                                                                                                                 
|4.2     |  | Specimen Series A Convertible Preferred Stock Certificate (3)                                                                                                                   
|        |  |                                                                                                                                                                                 
|4.3     |  | Warrant to purchase 2,614,377 shares of the Companys Common Stock, dated May 7, 2001,
issued by the Company to PictureTel Corporation (5)                                      
|        |  |                                                                                                                                                                                 
|4.4     |  | Warrant to purchase 850,000 shares, subject to adjustment, of the Companys Common Stock,
dated June 8, 2000 issued by the Company to Vulcan Ventures Incorporated (3)          
|        |  |                                                                                                                                                                                 
|4.6     |  | Warrant to purchase the Companys Common Stock, dated April 12, 2002, issued by the
Company to the purchasers and in the amounts as set forth on Schedule A attached thereto
(6)
|        |  |                                                                                                                                                                                 
|4.7     |  | Registration Rights Agreement, dated April 12, 2002, by and among the Company and each of
the purchasers listed therein (6)                                                     
|        |  |                                                                                                                                                                                 
|4.8     |  | Registration Rights Agreement, dated June 8, 2000, between the Company and Vulcan Ventures
Incorporated (3)                                                                     
|        |  |                                                                                                                                                                                 
|4.9     |  | Warrant to purchase 300,000 shares of the Companys Common Stock, dated April 14, 2003,
issued by the Company to Ralph Ungermann                                                
|        |  |                                                                                                                                                                                 
|4.10    |  | Warrant to purchase 281,250 of the Companys Common Stock, dated April 3, 2003, issued
by the Company to Silicon Valley Bank                                                    
|        |  |                                                                                                                                                                                 
|10.46   |  | Lease Agreement dated March 10, 2003 for 3200 Bridge Parkway, Redwood City, California
between the Company and Westport Joint Venture                                           
|        |  |                                                                                                                                                                                 
|10.47   |  | Equity Line of Credit Agreement, dated April 14, 2003 between the Company and Ralph
Ungermann                                                                                   
|        |  |                                                                                                                                                                                 
|10.48   |  | Line of Credit Agreement, dated April 3, 2003 between the Company and Silicon Valley Bank                                                                                       
|        |  |                                                                                                                                                                                 
|10.49   |  | Lease Agreement between White Pine Software and Nash-Tamposi Limited Partnership, Five N
Associates, dated May 15, 1996                                                         
|        |  |                                                                                                                                                                                 
|10.50   |  | Amendment No. 5 to Lease Agreement between Company and John
Arrillaga and Richard T.
Peerey, dated March 10, 2003                                                               
|        |  |                                                                                                                                                                                 
|24.1    |  | Power of Attorney (included on signature page)                                                                                                                                  
|        |  |                                                                                                                                                                                 
|99.1    |  | Certification, dated May 15, 2003, required by Section 906 of the Public Company Accounting
Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)            

27



---



##### Table of Contents



Notes to Exhibits

|    |  |                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------
|(1) |  | Filed as an exhibit to the Companys Registration Statement on Form S-1,
as amended (File No. 333-38755).              
|(2) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on August 11, 1998 (File No. 000-23305).      
|(3) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on August 14, 2000 (File No. 000-23305).      
|(4) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on August 15, 2001 (File No. 000-23305).      
|(5) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on November 14, 2001 (File No. 000- 23305).   
|(6) |  | Filed as an exhibit to the Companys Registration Statement on Form S-3
(File No. 333-88058), as filed on May 10, 2002.

(b)  Reports on Form 8-K.

No reports on Form 8-K were filed in the first quarter of 2003.

28



---



##### Table of Contents






SIGNATURES

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

|                   |                                    |     |  |                                                                                                                              
|------------------ | ---------------------------------- | --- |  | -----------------------------------------------------------------------------------------------------------------------------
|Date: May 15, 2003 | FIRST VIRTUAL COMMUNICATIONS, INC.
|                  
|                   |                                    | By: |  | /s/ Truman Cole

Truman Cole
Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)

29



---



##### Table of Contents






CERTIFICATIONS

I, Jonathan Morgan, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of First Virtual
Communications, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

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

|                    |  |                                                                          
|------------------- |  | -------------------------------------------------------------------------
|Dated: May 15, 2003 |  |                                                                          
|                    |  | /s/ Jonathan Morgan
Jonathan Morgan
President and Chief Executive Officer

30



---



##### Table of Contents



I, Truman Cole, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of First Virtual
Communications, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

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

|                    |  |                                                    
|------------------- |  | ---------------------------------------------------
|Dated: May 15, 2003 |  |                                                    
|                    |  | /s/ Truman Cole
Truman Cole
Chief Financial Officer

31



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                 
|No.     |  | Description of Document                                                                                                                                                         
|        |  |                                                                                                                                                                                 
|3.1     |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                                                            
|        |  |                                                                                                                                                                                 
|3.2     |  | Certificate of Ownership and Merger, effective August 3, 1998(2)                                                                                                                
|        |  |                                                                                                                                                                                 
|3.3     |  | Certificate of Designation of Series A Convertible Preferred Stock(3)                                                                                                           
|        |  |                                                                                                                                                                                 
|3.4     |  | Amended Bylaws of the Registrant(1)                                                                                                                                             
|        |  |                                                                                                                                                                                 
|3.5     |  | Certificate of Ownership and Merger, effective February 5, 2001(4)                                                                                                              
|        |  |                                                                                                                                                                                 
|3.6     |  | Certificate of Amendment of Restated Certificate of Incorporation filed on June 19, 2001(4)                                                                                     
|        |  |                                                                                                                                                                                 
|4.1     |  | Specimen Common Stock Certificate (2)                                                                                                                                           
|        |  |                                                                                                                                                                                 
|4.2     |  | Specimen Series A Convertible Preferred Stock Certificate (3)                                                                                                                   
|        |  |                                                                                                                                                                                 
|4.3     |  | Warrant to purchase 2,614,377 shares of the Companys Common Stock, dated May 7, 2001,
issued by the Company to PictureTel Corporation (5)                                      
|        |  |                                                                                                                                                                                 
|4.4     |  | Warrant to purchase 850,000 shares, subject to adjustment, of the Companys Common Stock,
dated June 8, 2000 issued by the Company to Vulcan Ventures Incorporated (3)          
|        |  |                                                                                                                                                                                 
|4.6     |  | Warrant to purchase the Companys Common Stock, dated April 12, 2002, issued by the
Company to the purchasers and in the amounts as set forth on Schedule A attached thereto
(6)
|        |  |                                                                                                                                                                                 
|4.7     |  | Registration Rights Agreement, dated April 12, 2002, by and among the Company and each of
the purchasers listed therein (6)                                                     
|        |  |                                                                                                                                                                                 
|4.8     |  | Registration Rights Agreement, dated June 8, 2000, between the Company and Vulcan Ventures
Incorporated (3)                                                                     
|        |  |                                                                                                                                                                                 
|4.9     |  | Warrant to purchase 300,000 shares of the Companys Common Stock, dated April 14, 2003,
issued by the Company to Ralph Ungermann                                                
|        |  |                                                                                                                                                                                 
|4.10    |  | Warrant to purchase 281,250 of the Companys Common Stock, dated April 3, 2003, issued
by the Company to Silicon Valley Bank                                                    
|        |  |                                                                                                                                                                                 
|10.46   |  | Lease Agreement dated March 10, 2003 for 3200 Bridge Parkway, Redwood City, California
between the Company and Westport Joint Venture                                           
|        |  |                                                                                                                                                                                 
|10.47   |  | Equity Line of Credit Agreement, dated April 14, 2003 between the Company and Ralph
Ungermann                                                                                   
|        |  |                                                                                                                                                                                 
|10.48   |  | Line of Credit Agreement, dated April 3, 2003 between the Company and Silicon Valley Bank                                                                                       
|        |  |                                                                                                                                                                                 
|10.49   |  | Lease Agreement between White Pine Software and Nash-Tamposi Limited Partnership, Five N
Associates, dated May 15, 1996                                                         
|        |  |                                                                                                                                                                                 
|10.50   |  | Amendment No. 5 to Lease Agreement between Company and John
Arrillaga and Richard T.
Peerey, dated March 10, 2003                                                               
|        |  |                                                                                                                                                                                 
|24.1    |  | Power of Attorney (included on signature page)                                                                                                                                  
|        |  |                                                                                                                                                                                 
|99.1    |  | Certification, dated May 15, 2003, required by Section 906 of the Public Company Accounting
Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)            

32



---



##### Table of Contents



EXHIBIT INDEX Continued

Notes to Exhibits

|    |  |                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------
|(1) |  | Filed as an exhibit to the Companys Registration Statement on Form S-1,
as amended (File No. 333-38755).              
|(2) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on August 11, 1998 (File No. 000-23305).      
|(3) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on August 14, 2000 (File No. 000-23305).      
|(4) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on August 15, 2001 (File No. 000-23305).      
|(5) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed
on November 14, 2001 (File No. 000-23305).    
|(6) |  | Filed as an exhibit to the Companys Registration Statement on Form S-3
(File No. 333-88058), as filed on May 10, 2002.

(b)  Reports on Form 8-K.

No reports on Form 8-K were filed in the first quarter of 2003.

33