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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 September 30, 2002

OR

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

3393 Octavius Drive
Santa Clara, CA 95054
(Address of principal executive offices)

(408) 567-7200
(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 o

|                               |  |                                   
|------------------------------ |  | ----------------------------------
|Common Stock, $0.001 par value |  | 40,328,535 shares                 
|                              
|                              
|                              
|                              
|(Class)                        |  | Outstanding as of November 8, 2002



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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 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURES                                                    
|Exhibit Index                                                 
|EXHIBIT 10.1                                                  
|EXHIBIT 10.2                                                  
|EXHIBIT 10.3                                                  
|EXHIBIT 10.4                                                  
|EXHIBIT 10.5                                                  
|EXHIBIT 99.1                                                  



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##### 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 September 30, 2002 and December 31,
2001                      |    | 1   
|             
|             
|             
|             
|              |  | Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 |    | 2   
|             
|             
|             
|             
|              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002           |    | 3   
|             
|             
|             
|             
|              |  | Notes to Unaudited Condensed Consolidated Financial Statements                                         |    | 4   
|             
|             
|             
|             
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |    | 9   
|             
|             
|             
|             
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                             |    | 23  
|             
|             
|             
|             
|Item 4.       |  | Controls and Procedures                                                                                |    |     
|             
|             
|             
|             
|PART II       |  | OTHER INFORMATION                                                                                      |    |     
|             
|             
|             
|             
|Item 1.       |  | Legal Proceedings                                                                                      |    | 24  
|             
|             
|             
|             
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                       |    | 26  
|             
|             
|             
|             
|SIGNATURES    |  |                                                                                                        | 27
|             
|             
|             
|             
|EXHIBIT INDEX |  | 28                                                                                                    

2



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##### 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)


|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |        | 
|----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------- | ------- | ------------- | ------ | ------------ | ------- | ------ | ------ | 
|                                                                                                                                    |                                   |                           |         | September 30, |        | December 31,
|                                                                                                                                    |                                   |                           |         | 2002          |        | 2001        
|                                                                                                                                    |                                   |                           |         |               |        |             
|ASSETS                                                                                                                              |                                   |                           |         |               |        |              |         |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Current assets:                                                                                                                     |                                   |                           |         |               |        |              |         |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Cash and cash equivalents         |                           | $       | 8,666         |        |              | $       | 6,946  |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Short-term investments            |                           |         | 483           |        |              |         | 2,438  |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Accounts receivable               |                           |         | 6,109         |        |              |         | 6,365  |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Inventory                         |                           |         | 1,374         |        |              |         | 3,188  |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Prepaids and other current assets |                           |         | 898           |        |              |         | 1,227  |       
|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |       
|                                                                                                                                    |                                   | Total current assets      |         |               | 17,530 |              |         |        | 20,164 | 
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Property and equipment, net                                                                                                         |                                   |                           | 2,522   |               |        |              | 3,183   |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Other assets                                                                                                                        |                                   |                           | 374     |               |        |              | 322     |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Intangible assets, net                                                                                                              |                                   |                           | 13,971  |               |        |              | 14,489  |       
|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |       
|                                                                                                                                    |                                   | $                         | 34,397  |               |        | $            | 38,158  |       
|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |                                   |                           |         |               |        |              |         |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Current liabilities:                                                                                                                |                                   |                           |         |               |        |              |         |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Current portion of long-term debt |                           | $       | 261           |        |              | $       | 36     |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Accounts payable                  |                           |         | 2,182         |        |              |         | 3,268  |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Accrued liabilities               |                           |         | 4,468         |        |              |         | 5,561  |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Deferred revenue                  |                           |         | 5,987         |        |              |         | 2,936  |       
|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |       
|                                                                                                                                    |                                   | Total current liabilities |         |               | 12,898 |              |         |        | 11,801 | 
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Long-term debt, net of current portion                                                                                              |                                   |                           | 225     |               |        |              |        |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|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; 40,328,535 and
33,327,995 shares issued and outstanding, respectively |                                   |                           | 40      |               |        |              | 33      |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Additional paid-in capital                                                                                                          |                                   |                           | 118,434 |               |        |              | 113,437 |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Accumulated other comprehensive (loss) income                                                                                       |                                   |                           | (121    | )             |        |              | 153     |       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Accumulated deficit                                                                                                                 |                                   |                           | (97,079 | )             |        |              | (87,266 | )     
|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |       
|                                                                                                                                    | Total stockholders equity        |                           |         | 21,274        |        |              |         | 26,357 |       
|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |       
|                                                                                                                                    |                                   | $                         | 34,397  |               |        | $            | 38,158  |       
|                                                                                                                                    |                                   |                           |         |               |        |              |         |        |       

See accompanying notes to condensed consolidated financial statements.

3



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##### Table of Contents






First Virtual Communications, Inc.

Condensed Consolidated Statements of Operations


(in thousands, except per share data; unaudited)


|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |        |       |        | 
|------------------------------------------------------------- | ------------------------------------------- | ------------ | ----------------------- | ----- | ------------------ | ----- | ----------------- | ----- | ------ | ----- | ------ | ----- | ------ | ------ | ------- | ------ | ----- | ------ | 
|                                                              |                                             |              |                         |       | Three months ended |       | Nine months ended
|                                                              |                                             |              |                         |       |                    |       |                  
|                                                              |                                             |              |                         |       | September 30,      |       | September 30,    
|                                                              |                                             |              |                         |       |                    |       |                  
|                                                              |                                             |              |                         |       | 2002               |       | 2001              |       | 2002   |       | 2001  
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |       
|Revenue:                                                      |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Software                                    |              |                         | 2,052 |                    |       |                   | 921   |        |       |        | 8,050 |        |        |         | 1,684  |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Product                                     |              |                         | 2,956 |                    |       |                   | 5,719 |        |       |        | 7,865 |        |        |         | 14,720 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Support
Service                             |              |                         | 1,129 |                    |       |                   | 1,127 |        |       |        | 3,467 |        |        |         | 3,880  |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|                                                              |                                             |              | Total
revenue           |       | $                  | 6,137 |                   |       | $      | 7,767 |        |       | $      | 19,382 |         |        | $     | 20,284 | 
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|                                                             
|                                                             
|                                                             
|                                                             
|Cost of revenue                                               |                                             |              | 2,039                   |       |                    |       | 8,893             |       |        |       | 7,040  |       |        |        | 15,869  |       
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|                                                              |                                             | Gross profit |                         |       | 4,098              |       |                   |       | (1,126 | )     |        |       | 12,342 |        |         |        | 4,415 |       
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|Operating expense:                                            |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Research and development                    |              |                         | 2,346 |                    |       |                   | 3,128 |        |       |        | 7,534 |        |        |         | 9,956  |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Sales and marketing                         |              |                         | 2,618 |                    |       |                   | 3,004 |        |       |        | 6,908 |        |        |         | 8,372  |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | General and administrative                  |              |                         | 2,784 |                    |       |                   | 3,430 |        |       |        | 7,845 |        |        |         | 9,939  |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Acquisition and other non-recurring charges |              |                         |      |                    |       |                   |      |        |       |        |      |        |        |         | 1,781  |      
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|                                                              |                                             |              | Total operating expense |       |                    | 7,748 |                   |       |        | 9,562 |        |       |        | 22,287 |         |        |       | 30,048 | 
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|Operating loss                                                |                                             |              | (3,650                  | )     |                    |       | (10,688           | )     |        |       | (9,945 | )     |        |        | (25,633 | )     
|                                                             
|                                                             
|                                                             
|                                                             
|Other income, net                                             |                                             |              | 40                      |       |                    |       | 122               |       |        |       | 132    |       |        |        | 608     |       
|                                                             
|                                                             
|                                                             
|                                                             
|Minority interest in consolidated subsidiary                  |                                             |              | (17                     | )     |                    |       | 44                |       |        |       |       |       |        |        | 30      |       
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|Net loss                                                      |                                             | $            | (3,627                  | )     |                    | $     | (10,522           | )     |        | $     | (9,813 | )     |        | $      | (24,995 | )     
|                                                              |                                             |              |                         |       |                    |       |                   |       |        |       |        |       |        |        |         |       
|Basic and diluted net loss per share                          |                                             | $            | (0.09                   | )     |                    | $     | (0.34             | )     |        | $     | (0.26  | )     |        | $      | (1.10   | )     
|                                                             
|                                                             
|                                                             
|                                                             
|Shares used in computing basic and diluted
net loss per share |                                             |              | 40,275                  |       |                    |       | 30,707            |       |        |       | 37,485 |       |        |        | 22,735  |       

See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents






First Virtual Communications, Inc.

Condensed Consolidated Statements of Cash Flows


(in thousands; unaudited)


|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |        |       |        |         |  
|------------------------------------------------------------------------------------------------------------ | -------------------------------------------------- | ---------------- | ------------------------------------------ | ------------------------------------- | ----- | ------------------------------ | ------- | ------ | ----- | ------ | ------- | -
|                                                                                                             |                                                    |                  |                                            |                                       |       | Nine Months Ended September 30
|                                                                                                             |                                                    |                  |                                            |                                       |       |                               
|                                                                                                             |                                                    |                  |                                            |                                       |       | 2002                           |         | 2001  
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|Net Income/(Loss)                                                                                            |                                                    | $                | (9,813                                     | )                                     |       | $                              | (24,995 | )     
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Adjustments to reconcile net loss to net cash used in operating activities:                                  |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Depreciation and amortization                      |                  |                                            | 2,372                                 |       |                                |         | 2,092  |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Stock Compensation                                 |                  |                                            |                                      |       |                                |         | 148    |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Provision for doubtful accounts                    |                  |                                            | 281                                   |       |                                |         |       |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Acquired in-process research and development       |                  |                                            |                                      |       |                                |         | 276    |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Other non-recurring costs                          |                  |                                            |                                      |       |                                |         | 1,083  |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Provision for inventory                            |                  |                                            | 1,000                                 |       |                                |         | 6,092  |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Other                                              |                  |                                            | (189                                  | )     |                                |         | (9     | )    
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Changes in assets and liabilities:                 |                  |                                            |                                       |       |                                |         |        |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                                    |                  | Accounts receivable                        |                                       |       | 202                            |         |        |       | 3,632  |        
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                                    |                  | Inventory                                  |                                       |       | 814                            |         |        |       | (3,706 | )      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                                    |                  | Prepaid expenses and other assets          |                                       |       | (362                           | )       |        |       | (806   | )      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                                    |                  | Accounts payable                           |                                       |       | (1,086                         | )       |        |       | (2,091 | )      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                                    |                  | Accrued liabilities                        |                                       |       | (493                           | )       |        |       | (2,051 | )      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                                    | Deferred revenue |                                            |                                       | 3,051 |                                |         |        | 1,139 |       
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                             |                                                    |                  |                                            | Net cash used in operating activities |       |                                | (4,223  | )      |       |        | (19,196 | )
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|Cash flows from investing activities:                                                                        |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Acquisition of property and equipment, net         |                  |                                            | (494                                  | )     |                                |         | (439   | )    
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Proceeds from sales of short-term investments, net |                  |                                            | 1,852                                 |       |                                |         | 12,130 |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Cash acquired/(paid) in acquisition                |                  |                                            | (437                                  | )     |                                |         | 6,601  |      
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                             |                                                    |                  | Net
cash provided by investing activities: |                                       |       | 921                            |         |        |       | 18,292 |        
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|Cash flows from financing activities:                                                                        |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Proceeds from issuance of common stock, net        |                  |                                            | 5,022                                 |       |                                |         | 1,233  |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Repayment of Capital lease obligations             |                  |                                            |                                      |       |                                |         | 70     |      
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                             |                                                    |                  | Net cash provided by financing activities  |                                       |       | 5,022                          |         |        |       | 1,303  |        
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|Net increase in cash and cash equivalents                                                                    |                                                    |                  | 1,720                                      |                                       |       |                                | 399     |       
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Cash and cash equivalents at beginning of period                                                             |                                                    |                  | 6,946                                      |                                       |       |                                | 7,077   |       
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Cash and cash equivalents at end of period                                                                   |                                                    | $                | 8,666                                      |                                       |       | $                              | 7,476   |       
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       
|Supplemental cash flow information:                                                                          |                                                    |                  |                                            |                                       |       |                                |         |       
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Common stock issued and options and warrant assumed in connection with
acquisition of CUseeMe Networks, Inc. |                                                    | $                |                                           |                                       |       | $                              | 20,190  |       
|                                                                                                             |                                                    |                  |                                            |                                       |       |                                |         |       

See accompanying notes to condensed consolidated financial statements.

5



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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 September 30, 2002
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 September
30, 2002, consolidated results of operations for the three and nine months
ended September 30, 2002 and 2001, and consolidated cash flow activities for
the nine months ended September 30, 2002 and 2001.

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 nine months ended September 30, 2002 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 2001 Annual Report on Form 10-K/A.

2. Acquisition of Business

In July 2002, the Company acquired the remaining 48% interest of FVC.COM
(UK) Ltd. in a transaction accounted for as a purchase business combination.
The purchase price comprised cash consideration of $437,000, including direct
acquisition costs of $178,000 for legal and consulting fees. Contingent on
certain events, the purchase price may be further adjusted based on (1) 5.4% of
the gross profit of the UK sales territory for the period from June 1, 2002 to
December 31, 2002 and (2) the results of collection of certain receivables as
of the acquisition date. The purchase price was allocated to the assets
acquired and liabilities assumed based upon their estimated fair market values
at the date of acquisition. At the acquisition date, the book value of the
assets and liabilities acquired approximated fair value; accordingly, the
purchase price was allocated to goodwill.

3. Short Term Investments

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

The Company regularly monitors and evaluates the realizable value of its
marketable securities. If events and circumstances indicate that a decline in
the value of these assets has occurred and is other than temporary, the Company
records a charge to investment income (expense).

Marketable securities are comprised as follows (in thousands):

|                    |                |  |               |     |              |  |    |     | 
|------------------- | -------------- |  | ------------- | --- | ------------ |  | -- | --- | 
|                    |                |  | September 30, |     | December 31,
|                    |                |  | 2002          |     | 2001        
|                    |                |  |               |     |             
|Available-for-sale: |                |  | --            |     |              |  | -- |    
|                   
|                   
|                   
|                   
|                    | Corporate debt |  | $             | 403 |              |  | $  | 414 | 

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##### Table of Contents



| |                             |   |               |    |              |   |       |       | 
| | --------------------------- | - | ------------- | -- | ------------ | - | ----- | ----- | 
| |                             |   | September 30, |    | December 31,
| |                             |   | 2002          |    | 2001        
| |                             |   |               |    |             
|
|
|
|
| | Corporate medium-term notes |   |               |   |              |   |       | 1,850 | 
|
|
|
|
| | Certificate of deposit      |   |               | 70 |              |   |       | 60    | 
|
|
|
|
| | Equity securities           |   |               | 10 |              |   |       | 114   | 
| |                             |   |               |    |              |   |       |      
| |                             | $ | 483           |    |              | $ | 2,438 |      
| |                             |   |               |    |              |   |       |      

As of September 30, 2002, the Companys available for sale securities had
contractual maturities of less than one year. Available for sale securities are
comprised as follows at September 30, 2002 and December 31, 2001 (in
thousands):

|                   |  |      |       |       |  |            |   |            |  |   |      |   |  |   |       | 
|------------------ |  | ---- | ----- | ----- |  | ---------- | - | ---------- |  | - | ---- | - |  | - | ----- | 
|                   |  |      |       |       |  | Unrealized |   | Unrealized |  |   |      |  
|                   |  | Cost |       | Gains |  | Losses     |   | Fair Value
|                   |  |      |       |       |  |            |   |           
|September 30, 2002 |  |      |       |       |  |            |   |            |  |   |      |   |  |   |       | 
|                  
|                  
|                  
|                  
|Equity securities  |  | $    | 169   |       |  | $          |  |            |  | $ | (159 | ) |  | $ | 10    | 
|                  
|                  
|                  
|                  
|Debt securities    |  |      | 473   |       |  |            |  |            |  |   |     |   |  |   | 473   | 
|                   |  |      |       |       |  |            |   |            |  |   |      |   |  |   |       | 
|Total              |  | $    | 642   |       |  | $          |  |            |  | $ | (159 | ) |  | $ | 483   | 
|                   |  |      |       |       |  |            |   |            |  |   |      |   |  |   |       | 
|December 31, 2001  |  |      |       |       |  |            |   |            |  |   |      |   |  |   |       | 
|                  
|                  
|                  
|                  
|Equity securities  |  | $    | 169   |       |  | $          |  |            |  | $ | (55  | ) |  | $ | 114   | 
|                  
|                  
|                  
|                  
|Debt securities    |  |      | 2,320 |       |  |            | 5 |            |  |   | (1   | ) |  |   | 2,324 | 
|                   |  |      |       |       |  |            |   |            |  |   |      |   |  |   |       | 
|Total              |  | $    | 2,489 |       |  | $          | 5 |            |  | $ | (56  | ) |  | $ | 2,438 | 
|                   |  |      |       |       |  |            |   |            |  |   |      |   |  |   |       | 

4. Inventory

Inventories as of September 30, 2002 and December 31, 2001 were (in
thousands):

|                |  |                    |       |                   |  |   |       | 
|--------------- |  | ------------------ | ----- | ----------------- |  | - | ----- | 
|                |  | September 30, 2002 |       | December 31, 2001
|                |  |                    |       |                  
|Raw materials   |  | $                  | 936   |                   |  | $ | 2,384 | 
|               
|               
|               
|               
|Finished goods  |  |                    | 438   |                   |  |   | 804   | 
|                |  |                    |       |                   |  |   |       | 
|Total inventory |  | $                  | 1,374 |                   |  | $ | 3,188 | 
|                |  |                    |       |                   |  |   |       | 

5. 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 and nine
months ended September 30, 2002 and 2001, 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 and
nine months ended September 30, 2002 and 2001, since their inclusion would be
anti-dilutive:

|                                 |  |                             |        |      |  |  |        | 
|-------------------------------- |  | --------------------------- | ------ | ---- |  |  | ------ | 
|                                 |  | Three and Nine months ended
|                                 |  | September 30,              
|                                 |  |                            
|                                 |  | 2002                        |        | 2001
|                                 |  |                             |        |     
|                                 |  | (in thousands)             
|Unvested restricted common stock |  |                             |       |      |  |  |       | 
|                                
|                                
|                                
|                                
|Common stock options             |  |                             | 11,780 |      |  |  | 11,083 | 
|                                
|                                
|                                
|                                
|Common stock warrants            |  |                             | 6,913  |      |  |  | 1,803  | 
|                                
|                                
|                                
|                                
|Convertible preferred stock      |  |                             | 4,274  |      |  |  | 3,617  | 

The common stock warrants are exercisable at $.91 to $12.00 per share and
expire at various times from December 31, 2002 through April 12, 2007. The
stock options outstanding at September 30, 2002, had a weighted average
exercise price per share of $2.67 and expire beginning in June 2004 through
July 2012.

7



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##### Table of Contents



6. Adoption of SFAS 142, Goodwill and Other Intangible Assets

The Company adopted Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets, in the first quarter of
2002. SFAS 142 supersedes Accounting Principles Board Opinion No. 17,
Intangible Assets, and discontinues the amortization of goodwill. In
addition, SFAS 142 includes provisions regarding: 1) the reclassification
between goodwill and identifiable intangible assets in accordance with the new
definition of intangible assets set forth in Statement of Financial Accounting
Standards No. 141, Business Combinations; 2) the reassessment of the useful
lives of existing recognized intangibles; and 3) the testing for impairment of
existing goodwill and other intangibles.

In accordance with SFAS 142, beginning January 1, 2002, goodwill is no
longer being amortized, but will be reviewed periodically for impairment. The
Company did not identify any intangibles to be reclassified out of previously
reported goodwill under the new definition of intangible assets. Purchased
technology and other intangible assets are being amortized over their estimated
useful lives of five years using the straight-line method. No changes were made
to the useful lives of amortizable intangibles in connection with the adoption
of SFAS 142.

Components of intangible assets were as follows (in thousands):

|                               |                      |          |       |                    |       |                   |        |                |        |              |       |       |       |   |      |      |        |  
|------------------------------ | -------------------- | -------- | ----- | ------------------ | ----- | ----------------- | ------ | -------------- | ------ | ------------ | ----- | ----- | ----- | - | ---- | ---- | ------ | -
|                               |                      |          |       | September 30, 2002 |       | December 31, 2001
|                               |                      |          |       |                    |       |                  
|                               |                      |          |       | Gross Carrying     |       | Accumulated       |        | Gross Carrying |        | Accumulated 
|                               |                      |          |       | Amount             |       | Amortization      |        | Amount         |        | Amortization
|                               |                      |          |       |                    |       |                   |        |                |        |             
|Amortized intangible assets:   |                      |          |       |                    |       |                   |        |                |        |              |       |       |       |   |      |     
|                              
|                              
|                              
|                              
|                               | Purchased technology |          | $     | 6,161              |       |                   | $      | (1,531         | )      |              | $     | 6,161 |       |   | $    | (651 | )     
|                              
|                              
|                              
|                              
|                               | Assembled workforce  |          |       |                   |       |                   |        |               |        |              |       | 1,505 |       |   |      | (159 | )     
|                              
|                              
|                              
|                              
|                               | Trademark            |          |       | 661                |       |                   |        | (165           | )      |              |       | 661   |       |   |      | (70  | )     
|                              
|                              
|                              
|                              
|                               | Other                |          |       | 744                |       |                   |        | (325           | )      |              |       | 218   |       |   |      | (74  | )     
|                               |                      |          |       |                    |       |                   |        |                |        |              |       |       |       |   |      |      |       
|Total                          |                      | $        | 7,566 |                    |       | $                 | (2,021 | )              |        |              | 8,545 |       |       | $ | (954 | )   
|                               |                      |          |       |                    |       |                   |        |                |        |              |       |       |       |   |      |      |       
|Unamortized intangible assets: |                      |          |       |                    |       |                   |        |                |        |              |       |       |       |   |      |     
|                              
|                              
|                              
|                              
|                               |                      | Goodwill |       | $                  | 9,554 |                   |        | $              | (1,128 | )            |       |       | 8,026 |   |      | $    | (1,128 | )
|                               |                      |          |       |                    |       |                   |        |                |        |              |       |       |       |   |      |      |       

The Company reclassified previously identified intangible assets related to the
purchase of an assembled workforce with a net unamortized balance of $1,346,000
to goodwill. During the nine months ended September 30, 2002, the Company
settled certain pre-acquisition contingencies, resulting in a net decrease of
goodwill in the amount of approximately $303,000.

Aggregate amortization expense was $396,000 for the three months ended
September 30, 2002 and $793,000 for the three months ended September 30, 2001.
Aggregate amortization expense was $1.2 million for the nine months ended
September 30, 2002 and $1.1 million for the nine months ended September 30,
2001. As of September 30, 2002, future estimated amortization expense is
expected to be: $0.4 million for the last quarter of 2002, $1.5 million for
2003, $1.5 million for 2004, $1.4 million for 2005 and $0.6 million for 2006.

Net income on a pro forma basis, excluding goodwill amortization expense, would
have been as follows (in thousands):

|                                     |                       |   |                    |       |                   |   |         |       |      |   |        |       |   |   |         |       |  
|------------------------------------ | --------------------- | - | ------------------ | ----- | ----------------- | - | ------- | ----- | ---- | - | ------ | ----- | - | - | ------- | ----- | -
|                                     |                       |   | Three months ended |       | Nine months ended
|                                     |                       |   | September 30,      |       | September 30,    
|                                     |                       |   |                    |       |                  
|                                     |                       |   | 2002               |       | 2001              |   | 2002    |       | 2001
|                                     |                       |   |                    |       |                   |   |         |       |     
|Reported net loss                    |                       | $ | (3,627             | )     |                   | $ | (10,522 | )     |      | $ | (9,813 | )     |   | $ | (24,995 | )    
|                                    
|                                    
|                                    
|                                    
|Adjustments                          |                       |   |                    |       |                   |   |         |       |      |   |        |       |   |   |         |      
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill amortization |   |                    |      |                   |   |         | 389   |      |   |        |      |   |   |         | 697   |  
|                                     |                       |   |                    |       |                   |   |         |       |      |   |        |       |   |   |         |      
|Adjusted net loss                    |                       |   | (3,627             | )     |                   |   | (10,133 | )     |      |   | (9,813 | )     |   |   | (24,298 | )    
|                                     |                       |   |                    |       |                   |   |         |       |      |   |        |       |   |   |         |      
|Basic and diluted net loss per share |                       |   |                    |       |                   |   |         |       |      |   |        |       |   |   |         |      
|                                    
|                                    
|                                    
|                                    
|                                     | Reported net loss     |   | $                  | (0.09 | )                 |   | $       | (0.34 | )    |   | $      | (0.26 | ) |   | $       | (1.10 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Adjusted net loss     |   | $                  | (0.09 | )                 |   | $       | (0.33 | )    |   | $      | (0.26 | ) |   | $       | (1.07 | )

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##### Table of Contents



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):

|                                                              |  |   |               |   |              |   |     |   | 
|------------------------------------------------------------- |  | - | ------------- | - | ------------ | - | --- | - | 
|                                                              |  |   | September 30, |   | December 31,
|                                                              |  |   | 2002          |   | 2001        
|                                                              |  |   |               |   |             
|Foreign currency translation                                  |  | $ | 38            |   |              | $ | 209 |  
|                                                             
|                                                             
|                                                             
|                                                             
|Unrealized loss on marketable
securities, net of income taxes |  |   | (159          | ) |              |   | (56 | )
|                                                              |  |   |               |   |              |   |     |   | 
|                                                              |  | $ | (121          | ) |              | $ | 153 |  
|                                                              |  |   |               |   |              |   |     |   | 

Comprehensive losses for the three and nine month periods ended September 30,
2002 and 2001 were as follows (in thousands):

|                                                              |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                              |  | Three months ended |        | Nine months ended
|                                                              |  | September 30,      |        | September 30,    
|                                                              |  |                    |        |                  
|                                                              |  | 2002               |        | 2001              |  | 2002 |         | 2001
|                                                              |  |                    |        |                   |  |      |         |     
|Net loss, as reported                                         |  | $                  | (3,627 | )                 |  | $    | (10,522 | )    |  | $ | (9,813  | ) |  | $ | (24,995 | )
|                                                             
|                                                             
|                                                             
|                                                             
|Cumulative translation adjustment                             |  |                    | (89    | )                 |  |      | 44      |      |  |   | (171    | ) |  |   | 70      |  
|                                                             
|                                                             
|                                                             
|                                                             
|Unrealized loss on marketable
securities, net of Income Taxes |  |                    | (8     | )                 |  |      | 13      |      |  |   | (103    | ) |  |   | 13      |  
|                                                              |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                            |  | $                  | (3,724 | )                 |  | $    | (10,465 | )    |  | $ | (10,087 | ) |  | $ | (24,912 | )
|                                                              |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  

8. Litigation

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

On April 25, 2002, the Company was informed by the staff of the SEC that
the staff intends to recommend that the SEC commence an enforcement action
against the Company, Ralph Ungermann and two former officers of the Company in
connection with the Companys January 1999 announcement of unaudited financial
results for the quarter and year ended December 31, 1998, which were revised by
the Company prior to the release of the Companys Form 10-K in April 1999. The
staff indicated that the basis for such an action would be allegations that the
January 1999 announcement was misleading and/or the result of inadequate
financial controls. The staff did not state what remedies it would seek in
such an action, but noted that the remedies it might seek could include an
injunction against future violations, disgorgement, civil penalties and an
officer and director bar against the individuals. The Company expresses no
opinion as to the likely outcome of this matter. While no assurances can be provided, the Company does not believe
that the

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##### Table of Contents



investigation will have a material adverse effect on its business,
financial condition or results of operations. However, the Companys evaluation
of the likely impact of these actions could change in the future and an
unfavorable outcome, depending upon the amount and timing, could have a
material effect on our results of operations or cash flows of a future period.

On August 28, 2002, the Company was served with a Complaint filed by Eric
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. The Company intends to vigorously defend itself against these
claims.

On May 1, 2002, the Company received notice that Clover Technologies, Inc.
(Clover) submitted a claim to the American Arbitration Association initiating
an arbitration proceeding claiming that Clover is entitled to compensation from
the Company for allegedly defective video access nodes (VANS) supplied by the
Company to Clover. The Company filed an answer to Clovers demand for
arbitration, denying all material allegations and claims, on May 30, 2002.
Since filing a demand for arbitration against the Company, Clover has specified
that its claim is for damages totaling in excess of $2.7 million, based on
claims that certain of the VANS which Clover purchased for resale to its
customers were defective. The purchase arises out of a written agreement
between the Company and Clover, dated June 22, 1998. Clover seeks damages
based on claims for alleged breach of express and implied warranties, in the
amount purportedly paid for replacement products, plus unspecified incidental
and consequential damages. The Company has responded to the arbitration demand
by denying all material allegations, and it intends to vigorously defend
itself. An arbitration hearing before the American Arbitration Association is
scheduled for March 10, 2003 through March 17, 2003 in Santa Clara, California.

9. New Accounting Pronouncements

On October 3, 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 supercedes Statement of Financial Accounting
Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of. SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30. SFAS 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower
of book value or fair value less cost to sell. Additionally, SFAS 144 expands
the scope of discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for the Company for all financial statements
issued in fiscal 2002.

In April 2002, the FASB issued FAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
which is effective for transactions occurring after May 15, 2002. FAS 145
rescinds FAS 4 and FAS 64, which addressed the accounting for gains and losses
from extinguishment of debt. FAS 44 set forth industry-specific transitional
guidance that did not apply to the Company. FAS 145 amends FAS 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. FAS 145 also makes technical corrections to
certain existing pronouncements that are not substantive in nature. The
Company does not expect the adoption of FAS 145 to have a significant impact on
its financial position or results of operations.

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring). SFAS 146
is effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company is currently
evaluating the provisions of SFAS 146 but does not believe that the adoption
will have a material impact on its results of operations, financial position,
or cash flows.

10



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##### Table of Contents



10. Issuance of Common Stock and Warrants

On
March 29, 2002, the Company signed a definitive binding
agreement to raise approximately $4.8 million from a private
placement of its common stock and warrants. On April 12, 2002,
the Company issued 6,686,000 shares of common stock at $0.72 per
share and warrants to purchase 3,343,001 shares of common stock at an
exercise price of $1.01 per share. The warrants are exercisable for
five years, commencing six months from the closing date. among
others, the investors in the offering included Mr. Ungermann and Dr. Gaut, members of the Company's
Board of Directors, and Special Situations Technology Fund L.P., of
which Adam Stettner, a member of the Company's Board of Directors,
serves as the Managing Director.

11. Subsequent Event(s)

On October 29, 2002 the Company announced that Killko Caballero, the
Companys Chief Executive Officer, left the Company. Jonathan Morgan, a member
of the Companys Board of Directors, was appointed as the Companys acting
President and Chief Executive Officer, while the Companys Board of Directors
searches for a permanent replacement.




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.

In addition to the historical information contained in this Item, this
Item 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 video technology, web conferencing and collaboration
technology dependence on IP, ISDN, ATM 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 video conferencing industry, the importance of
attracting and retaining personnel, management of the Companys growth, the
risk that the benefits expected from the merger with CUseeMe Networks will not
be realized, consolidation and cost pressures in the video conferencing
industry, dependence on key employees, and other risk factors set forth below
and described in this Form 10-Q report and in other documents the Company files
with the SEC. The Company assumes no obligation to update any forward-looking
statements contained herein.

Overview

The Company delivers integrated, end-to-end rich media Web conferencing
and collaboration solutions, including both hardware and software technologies,
for IP, ISDN and ATM networks. 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, video conferences and video calls over converged
multi-service networks. The Company provides integrated, end-to-end rich media
communications solutions, including both hardware and software technologies,
for IP, ISDN and ATM networks. The Company was incorporated in California in
October 1993 and reincorporated in Delaware in December 1997. The Company first
shipped its products in 1995.

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

In the three months ended September 30, 2002, the Company recorded $6.1
million in revenue, a decrease of 21% compared to the same period of the
previous year. In the nine months ended September 30, 2002, the Company
recorded $19.4 million in revenue, a decrease of 4.4% compared to the same
period of the previous year. The Company derived its revenue in the nine months
ended September 30, 2002 from the sale of products and services to
distributors, value-added resellers, or VARS, federal government agencies, enterprise
customers and telecommunications service providers. The Company sells primarily
through indirect sales channels and directly to certain telecommunications
service providers and other major end-users. Major customers include companies
such as Net One Systems, Hitron, EDS Operating Services, AT&T and France
Telecom. For the three months ended September 30, 2002, 91.3% of the Companys
revenue was from enterprise customers and 8.7% was from service providers,
compared to 80.7% from enterprise customers and 19.3% from service providers in
the same period of the prior year. For the nine months ended September 30,
2002, 77.2% of the Companys revenue was from enterprise customers and 22.8%
was from service providers, while for the nine months ended September 30, 2001,
revenue

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from enterprise customers was 69.8% and 30.2% was from service providers.
The Companys internal sales force qualifies and stimulates end-user demand,
and manages the Companys strategic relationships with its distribution
partners, including original equipment manufacturers, or OEMs, and
value-added
resellers and systems integrators. IBM accounted for 23.7% of net
revenue in the three months ended September 30, 2002, and AT&T Corp. accounted
for 10.3% of net revenue in the nine months ended September 30, 2002. General
Motors Corp. accounted for 11.3% of net revenue in the three months ended
September 30, 2001, and EDS Operating Services accounted for 13.5% of net
revenue in the nine months ended September 30, 2001. At September 30, 2002,
one customer accounted for 26.1% of total accounts receivable. At September
30, 2001, no single customer accounted for 10% or more of the Companys total
accounts receivable.

Internationally, the Company maintains sales offices in the United
Kingdom, France, Italy, Hong Kong, Beijing, Shanghai and Japan, and distributes its products under
the FVC.COM name in both Europe and Asia through resellers and distributors in
more than 25 countries. For the three months
ended September 30, 2002 and September 30, 2001, approximately 30.9% and 23.1%,
respectively, of the Companys sales were generated from customers outside of
the United States. For the nine months ended September 30, 2002 and September
30, 2001, approximately 30.4% and 22.0%, respectively, of the Companys sales
were generated from customers outside of the United States.

The Company expects that direct sales 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 in the United States are
ultimately sold to international end-users. Revenue from the Companys
international operations is 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.

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 |       | Nine months ended
|                                             |                                             |                         |       | September 30,      |       | September 30,    
|                                             |                                             |                         |       |                    |       |                  
|                                             |                                             |                         |       | 2002               |       | 2001              |        | 2002  |       | 2001
|                                             |                                             |                         |       |                    |       |                   |        |       |       |     
|Revenue                                      |                                             |                         | 100.0 | %                  |       |                   | 100.0  | %     |       |      | 100.0 | %    |       |   | 100.0  | %   
|                                            
|                                            
|                                            
|                                            
|Cost of revenue                              |                                             |                         | 33.2  | %                  |       |                   | 114.5  | %     |       |      | 36.3  | %    |       |   | 78.2   | %   
|                                             |                                             |                         |       |                    |       |                   |        |       |       |      |       |      |       |   |        |     
|                                             | Gross profit / (loss)                       |                         |       | 66.8               | %     |                   |        | (14.5 | )%    |      |       | 63.7 | %     |   |        | 21.8 | %    
|                                             |                                             |                         |       |                    |       |                   |        |       |       |      |       |      |       |   |        |     
|Operating expense:                           |                                             |                         |       |                    |       |                   |        |       |       |      |       |      |       |   |        |     
|                                            
|                                            
|                                            
|                                            
|                                             | Research and development                    |                         |       | 38.2               | %     |                   |        | 40.3  | %     |      |       | 38.9 | %     |   |        | 49.1 | %    
|                                            
|                                            
|                                            
|                                            
|                                             | Sales and marketing                         |                         |       | 42.7               | %     |                   |        | 38.7  | %     |      |       | 35.6 | %     |   |        | 41.3 | %    
|                                            
|                                            
|                                            
|                                            
|                                             | General and administrative                  |                         |       | 45.4               | %     |                   |        | 44.2  | %     |      |       | 40.5 | %     |   |        | 49.0 | %    
|                                            
|                                            
|                                            
|                                            
|                                             | Acquisition and other non-recurring charges |                         |       | 0.0                | %     |                   |        | 0.0   | %     |      |       | 0.0  | %     |   |        | 8.8  | %    
|                                             |                                             |                         |       |                    |       |                   |        |       |       |      |       |      |       |   |        |     
|                                             |                                             | Total operating expense |       |                    | 126.3 | %                 |        |       | 123.1 | %    |       |      | 115.0 | % |        |      | 148.1 | %
|                                             |                                             |                         |       |                    |       |                   |        |       |       |      |       |      |       |   |        |     
|Operating loss                               |                                             |                         | (59.5 | )%                 |       |                   | (137.6 | )%    |       |      | (51.3 | )%   |       |   | (126.4 | )%  
|                                            
|                                            
|                                            
|                                            
|Other income, net                            |                                             |                         | 0.7   | %                  |       |                   | 1.6    | %     |       |      | 0.7   | %    |       |   | 3.0    | %   
|                                            
|                                            
|                                            
|                                            
|Minority interest in consolidated subsidiary |                                             |                         | (0.3  | )%                 |       |                   | 0.6    | %     |       |      | 0.0   | %    |       |   | 0.1    | %   
|                                             |                                             |                         |       |                    |       |                   |        |       |       |      |       |      |       |   |        |     
|Net loss                                     |                                             |                         | (59.1 | )%                 |       |                   | (135.5 | )%    |       |      | (50.6 | )%   |       |   | (123.2 | )%  
|                                             |                                             |                         |       |                    |       |                   |        |       |       |      |       |      |       |   |        |     

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

Revenue.Revenue was $6.1 million for the three months ended September 30,
2002, a decrease of 21.0% from $7.8 million for the three months ended
September 30, 2001. The decrease in revenue was primarily a result of deferral
of software orders

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booked and shipped in the quarters ending June 30, 2002 and September 30, 2002,
as well as lower demand and lower average selling prices of hardware-based ATM
legacy products.

Gross Profit.Gross profit consists of revenue less the cost of revenue, which
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 expensed in the period
incurred.

Gross profit for the three months ended September 30, 2002 increased by
$5.2 million to $4.1 million, or 66.8% of revenue, compared to gross loss of
$1.1 million in the comparable period of 2001. The increase was primarily due
to the provision for excess and obsolete inventory of $5.5 million related to
legacy ATM products in the three months ended September 30, 2001.

Research and Development.Research and development expense consist primarily
of personnel costs, costs of contractors and outside consultants, supplies and
materials expenses, equipment depreciation and overhead costs. Research and
development expense decreased $782,000 to $2.3 million in the three months
ended September 30, 2002, a decrease of 25.0% over the $3.1 million during the
three months ended September 30, 2001. The decrease in absolute dollars was
principally due to a $563,000 decrease in personnel-related expenses and a
$219,000 decrease in other expenses after the Company implemented cost cutting
measures throughout the organization. As a percentage of total revenue,
research and development expense decreased to 38.2% for the three months ended
September 30, 2002, from 40.3% for the three months ended September 30, 2001.
The decrease as a percentage of revenue primarily was due to the lower spending
during the three months ended September 30, 2002.

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 decreased $386,000 to $2.6 million for the three
months ended September 30, 2002, a decrease of 12.8% from the
$3.0 million for the three months ended September 30, 2001. The
decrease in 2002 primarily was due to a $318,000 decrease in trade show and advertising
activities. As a percentage of total revenue, sales and marketing expense
increased to 42.7% for the three months ended September 30, 2002, from 38.7%
for the three months ended September 30, 2001. The increase as a percentage of
revenue primarily was due to lower revenue during the three months ended
September 30, 2002.

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 $646,000,
or 18.8%, for the three months ended September 30, 2002, to $2.8 million, from
$3.4 million in the three months ended September 30, 2001.
The decrease primarily was due to a $504,000 decrease in personnel-related expenses, and a $521,000
decrease in depreciation and amortization expense and a $245,000 decrease in
equipment and maintenance costs after the Company implemented cost cutting
measures throughout the organization, offset by an increase of $625,000 in
legal expense. As a percentage of revenue, general and administrative expense
increased slightly to 45.4% in the three months ended September 30, 2002,
compared to 44.2% for the three months ended September 30, 2001. The increase
in general and administrative expense as a percentage of revenues for the three
months ended September 30, 2002 primarily reflects the lower revenue from the
comparable period of 2001.

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, net totaled $40,000 for the three months ended September 30, 2002,
compared to $122,000 for the three months ended September 30, 2001. The
decrease was primarily related to a decline in interest income due to lower market interest rates and 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. The Company acquired a
controlling interest in this entity in May 1999. For the three months ended
September 30, 2002, the amount reflects the portion of losses in this
subsidiary that were attributable to minority stockholders. On July 31, 2002,
the Company acquired the remaining 48% interest in this subsidiary for
$437,000.

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 it will not be able to
realize the benefit of these net operating losses, and thus a full valuation
reserve has been recorded.

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Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

Revenue.Revenue was $19.4 million for the nine months ended September 30,
2002, a decrease of 4.4% from $20.3 million for the nine months ended
September 30, 2001. The decrease in revenue primarily was due to deferral of
software orders booked and shipped in the nine months ending September 30, 2002
as well as to the lower demand and lower average selling prices of hardware
based ATM legacy products.

Gross Profit.Gross profit consists of revenue less the cost of revenue,
which 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 expensed in the
period incurred. Gross profit for the nine months ended September 30, 2002
increased by $7.9 million to $12.3 million, or 63.7% of revenue, compared to
$4.4 million, or 21.8% of revenue in the comparable period of 2001. The
increase primarily was due to a higher percentage of revenue from
software-based products in the nine months ended September 30,
2002 and gross profit for the nine months ended September 30, 2001
included an incremental provision for excess and obsolete inventory
of $5.9 million.

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 $2.4 million to $7.5 million for the nine months
ended September 30, 2002, a decrease of 24.3% from the $10.0 million for the
nine months ended September 30, 2001. The decrease in absolute dollars in 2002
principally was due to $1.5 million decrease in personnel-related expenses,
a $412,000 decrease in professional expenditures, a $230,000 decrease in travel
and entertainment expenses, a $146,000 decrease in equipment and supply
expenses and a decrease of $112,000 in other expenses after the Company
implemented cost cutting measures throughout the organization. As a percentage
of total revenue, research and development expense decreased to 38.9% for the
nine months ended September 30, 2002, from 49.1% for the nine months ended
September 30, 2001. The decrease as a percentage of revenue primarily was due
to the lower spending during the nine months ended September 30, 2002.

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 decreased $1.5 million, or 17.5%, for the nine
months ended September 30, 2002, to $6.9 million from $8.4 for the nine months
ended September 30, 2001. The decrease in absolute dollars in 2002 primarily
was due to a $596,000 decrease in trade show and marketing activity
expenditures, a $340,000 decrease in personnel-related expenses, a $200,000
decrease in equipment and supply expense and other expenses after the Company
implemented cost cutting measures throughout the organization and a $359,000
decrease in bad debt expense due to the subsequent collection of the accounts
receivable from one of our subsidiaries, which was originally reserved as
doubtful accounts in the quarter ended December 31, 2001. As a percentage of
total revenue, sales and marketing expense decreased to 35.6% for the nine
months ended September 30, 2002, from 41.3% for the nine months ended September
30, 2001. The decrease as a percentage of revenue primarily was due to lower
spending during the nine months ended September 30, 2002.

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 $2.1 million,
or 21.1%, for the nine months ended September 30, 2002, to $7.8 million, from
$9.9 million for the nine months ended September 30, 2001. The decrease
primarily was due to a $1.5 million decrease in personnel-related expenses, a
$236,000 decrease in equipment and supply expense, a $232,000 decrease in
professional expenditures, a $193,000 decrease in depreciation and amortization
expenses, a $172,000 decrease in travel and entertainment expenditures and a
$365,000 decrease in other expenses after the Company implemented cost cutting
measures throughout the organization, offset by an increase of $598,000 in bad
debt expense. As a percentage of revenue, general and administrative expense
decreased to 40.5% in the nine months ended September 30, 2002, compared to
49.0% for the nine months ended September 30, 2001. The decrease in general and
administrative expense as a percentage of revenue for the nine months ended
September 30, 2002 primarily reflects the lower spending from the comparable
period of 2001.

Acquisition and other non recurring costs, net.The $1.8 million of one time
charges in the second quarter of 2001 includes $276,000 of in process research
and development activities as a result of the acquisition of CUseeMe Networks,
the impairment of $1.1 million of goodwill, associated with the 1998
acquisition of ICAST Corporation and $422,000 of costs associated with the
reduction in workforce during the quarter ended of September 30, 2001. We
incurred no acquisition or other non-recurring costs, net, in the period ending
September 30, 2002.

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. Other income,
net totaled $132,000 for

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the nine months ended September 30, 2002, compared to $608,000 for the nine
months ended September 30, 2001. The decrease primarily related to a decline in
interest income due to lower market interest rates and 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. The Company acquired a
controlling interest in this entity in May 1999 and acquired the remaining 48%
interest on July 31, 2002 for $437,000. For the nine months ended September 30,
2002, the amount reflects the portion of losses in this subsidiary that were
attributable to minority stockholders.

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 it 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 and to a lesser extent
through certain credit facilities and long-term debt. As of September 30, 2002,
the Company had cash and cash equivalents and short-term investments of $9.1
million and working capital of $4.6 million.

On March 29, 2002, the Company entered into a binding agreement to sell
common stock and warrants to purchase common stock to investors in a private
placement for aggregate proceeds of approximately $4.8 million. On April 12,
2002, the company issued 6,686,000 shares of common stock at $0.72 per share
and warrants to purchase 3,343,001 shares of common stock at an exercise price
of $1.01 per share. The warrants are exercisable for five years, commencing
six months from the closing date. The investors in the financing included
Special Situations Funds, including Special Situations Technology Funds, L.P.,
of which Adam Stettner, a member of the companys Board of Directors, serves as
Managing Director, Mr. Ungermann and Dr. Gaut, each of whom are members of the
Companys Board of Directors, and other purchasers.

The Company has experienced significant net operating losses from
inception. In the nine months ended September 30, 2002, the Company incurred
losses of $9.8 million and used $4.2 million of cash in its operating
activities. In the comparable period of 2001, the Company incurred net losses
of $25.0 million and used $19.2 million of cash in its operating activities.
Management currently expects that operating losses and negative cash flows will
continue for the foreseeable future. The Company decreased the size of its
workforce by 26% in 2001 and 7% in 2002, and also instituted measures to
control discretionary spending. Management currently believes that the
Companys existing cash and investments are adequate to fund the Companys
operations through December 31, 2002. Management is currently
evaluating liquidity needs for fiscal 2003. The Companys cash requirements depend
on several factors, including the rate of market acceptance of its products and
services, the ability to expand and retain its customer base, the Companys
ability to continue to control its expenses and other factors.

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.

Cash used in operating activities totaled $4.2 million for the nine months
ended September 30, 2002, compared to $19.2 million for the nine months ended
September 30, 2001. Cash used in operating activities primarily consisted of
$9.8 million from a net loss adjusted for non-cash items, a decrease of $1.1
million in accounts payable and $493,000 in accrued liabilities and an increase
of $362,000 in prepaid expenses and other current assets, partially offset by
an increase of $3.1 million of deferred revenue, a decrease of $814,000 in
inventory and $202,000 in accounts receivable. Cash used in operating
activities for the nine months ended September 30, 2001, reflects $25.0 million
from a net loss adjusted for non-cash items, an increase of $3.7 million in
inventory, $806,000 in prepaid expenses and other assets, a decrease of $2.1
million in accounts payable and $2.1 million in accrued liabilities, offset in
part by a decrease of $3.6 million in accounts receivable and an increase of
$1.1 million in deferred revenue.

Cash provided from investment activities totaled $921,000 for the nine
months ended September 30, 2002, compared to $18.3 million for the nine months
ended September 30, 2001. Cash provided by investment activities for the nine
months ended June 30, 2002, primarily consisted of $1.9 million of net sales of
short-term investments, offset by $494,000 of cash used in the acquisition of
property and equipment and $437,000 of cash paid in the acquisition of FVC.COM
(UK) Ltd. Cash provided in

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investment activities for the nine month ended September 30, 2001,
primarily consisted of net sales of short-term investments of $12.1 million and
$6.6 million in cash acquired from the acquisition of CuseeMe Networks.

Cash provided by financing activities was $5.0 million for the nine months
ended September 30, 2002, principally from the issuance of stock. Cash provided
by financing activities was $1.3 million for the nine months ended September
30, 2001, principally from the issuance of stock.

New Accounting Pronouncements. On October 3, 2001, the FASB issued
Statement of Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supercedes
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of. SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30. SFAS 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower
of book value or fair value less cost to sell. Additionally, SFAS 144 expands
the scope of discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for the Company for all financial statements
issued in fiscal 2002.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which is effective for transactions occurring after May 15, 2002.
SFAS 145 rescinds SFAS 4 and FAS 64, which addressed the accounting for gains
and losses from extinguishment of debt. SFAS 44 set forth industry-specific
transitional guidance that did not apply to the Company. SFAS 145 amends SFAS
13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS 145 also makes technical corrections to
certain existing pronouncements that are not substantive in nature. The
Company does not expect the adoption of SFAS 145 to have a significant impact
on its financial position or results of operations.

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring). SFAS 146
is effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company is currently
evaluating the provisions of SFAS 146 but does not believe that the adoption
will have a material impact on its results of operations, financial position,
or cash flows.

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 $40 million for the year ended December 31, 2000 to $27.7 million for the
year ended December 31, 2001, while its net loss increased from $18.8 million
for the year ended December 31, 2000 to $31.6 million for the year ended
December 31, 2001. At September 30, 2002, the Company had an accumulated
deficit of $97 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, including the Companys:

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

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

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, 2001, the Company recorded impairment charges of
$1.1 million relating to technology acquired in a prior
acquisition. 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
that goodwill might be impaired. For acquisitions consummated prior
to July 1, 2001, 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.

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, 2001, the Company recorded impairment
charges of $1.1 million relating to technology acquired in a prior
acquisition. 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. For acquisitions consummated prior to
July 1, 2001, 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.

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

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

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

The Companys common stock currently is listed on The Nasdaq SmallCap
Market. Pursuant to its rules, The Nasdaq National Market delisted the
Companys shares from the Nasdaq National Market based on the shares trading
below $1.00 per share on The Nasdaq National Market for a period of 30
consecutive trading days. On September 9, 2002, the Companys shares began
trading on the Nasdaq SmallCap Market. 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. On November 8, 2002, the last sale reported on the Nasdaq SmallCap Market for the Companys stock was at $0.40.

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.

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The Companys software products may contain undetected defects.

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

The Company's common stock price
is volatile.

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



| |  |  | fluctuations in the Companys financial results;                                                 
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | technological innovations or new commercial products developed by the Company or its competitors;
|
| |  |  | establishment of and success of corporate partnerships or licensing arrangements;                
|
| |  |  | announcements 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 the
SEC enforcement proceedings or other pending 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 its 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.

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

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

Due to the way that many customers in the Companys target markets
allocate and spend their budgeted funds for acquisition of the Companys
products and other products, a large percentage of the Companys business is
booked at the end of each quarterly accounting period. Because of this, the
Company may not be able to reliably predict order volumes or prepare orders for
shipment on time. If the Company is unable to ship its customer orders on time,
there could be a material adverse effect on the Companys results of
operations.

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

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

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

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

Sales of some of the Companys products have required and will continue to
require an extended sales effort. For some projects, the period from an initial
sales call to an end-user agreement can range from six to twelve months and can
be longer. Therefore, the timing of revenue booking and recognition may be
unpredictable as well as related cash flows. 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.

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

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development or products developed in the future. The failure of the
Company to successfully introduce new products, product enhancements or
services on schedule or in time to meet market opportunities, or customer
delays in purchasing products in anticipation of new product introductions or
because of changes in industry standards, could have a material adverse effect
on the Companys business, financial condition and results of operations.

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

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



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

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

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

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

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

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Claims by third parties that the Company infringes their proprietary technology
could prevent the Company from offering its products or otherwise hurt 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, the Company, its customers and
end-users may be required to obtain one or more licenses from third parties.
The Company, or its customers, may not be able to obtain necessary licenses
from third parties at a reasonable cost, or at all. The defense of any lawsuit
could result in time-consuming and expensive litigation, damages, license fees,
royalty payments and restrictions on the Companys ability to sell its
products, any of which could have a material adverse effect on the Companys
business, financial condition, and results of operations.

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

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

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 30.4% of
its total revenue in the nine months ended September 30, 2002, 21% of its total
revenue in 2001 and 12% of its total revenue in 2000. 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;               

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| |  |  | 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 November 1, 2002, the Companys executive officers, directors and
their affiliates beneficially owned approximately 9,300,260 shares, or
approximately 20%, of the outstanding shares of the Companys common stock, on
an as-converted to common stock basis. As a result, these persons may have the
ability to effectively control the Company and direct its affairs and business,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying, deferring or preventing a change in control of the Company, and
making certain transactions more difficult or impossible absent the support of
these stockholders, including proxy contests, mergers involving the Company,
tender offers, open-market purchase programs or other purchases of common stock
that could give stockholders of the Company the opportunity to realize a
premium over the then prevailing market price for shares of common stock.




Item 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/A for the year ended December 31, 2001, 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 control s 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 judgements 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

On April 23, 2001, the Company received notice of a stockholders
derivative action filed in California Superior Court in the County of Santa
Clara, alleging that, among other things, certain directors and officers of the
Company sold shares of the Companys common stock between January 21, 1999 and
April 6, 1999, while in possession of material non-public information
pertaining to the Company. The Company and the individual defendants demurred
to the complaint, and moved to dismiss the action, or in the alternative to
stay the action pending the outcome of the appeal in the related federal court
class action or, if necessary, the investigation of the claims by the Company.
The court granted the demurrer in part and denied it in part, granting
plaintiff leave to file an amended complaint, and stayed the action pending the
outcome of the appeal in the federal court class action. The court also ordered
that certain limited discovery of documents could take place with respect to
the filing of the amended complaint. In December 2001, the plaintiff moved for
leave to take certain third-party discovery. The motion was denied by the
court. Plaintiff filed an amended complaint on February 22, 2002. A hearing on
the defendants demurrer to the amended complaint was scheduled to take place
on May 21, 2002. The parties agreed to a continuance of the hearing in order to
permit them to engage in settlement discussions with a third-party mediator.
On July 25, 2002, the parties reached a tentative settlement of the derivative
action, subject to a number of conditions, including approval of the settlement
by a special committee of independent directors appointed by the Companys
Board of Directors and empowered to act on behalf of the

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Company with respect to the action. Under the terms of the tentative
settlement, the Company would not pay any money to any party in connection with
the settlement, nor would it pay any money as indemnification to present or
former officers and directors in the event of a settlement of the SEC
enforcement action described in the following paragraph.

On April 25, 2002, the Company was informed by the staff of the SEC that
the staff intends to recommend that the SEC commence an enforcement action
against the Company, Ralph Ungermann and two former officers of the Company in
connection with the Companys January 1999 announcement of unaudited financial
results for the quarter and year ended December 31, 1998, which were revised by
the Company prior to the release of the Companys Form 10-K in April 1999. The
staff indicated that the basis for such an action would be allegations that the
January 1999 announcement was misleading and/or the result of inadequate
financial controls. The staff did not state what remedies it would seek in
such an action, but noted that the remedies it might seek could include an
injunction against future violations, disgorgement, civil penalties and an
officer and director bar against the individuals. The Company expresses no
opinion as to the likely outcome of this matter. While no assurances can be
provided, the Company does not believe that the investigation will have a
material adverse effect on its business, financial condition or results of
operations. However, our evaluation of the likely impact of these actions could
change in the future and an unfavorable outcome, depending upon the amount and
timing, could have a material effect on our results of operations or cash flows
of a future period.

On August 28, 2002, the Company was served with a Complaint filed by Eric
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. The Company intends to vigorously defend itself against these
claims.

On May 1, 2002, the Company received notice that Clover Technologies, Inc.
(Clover) submitted a claim to the American Arbitration Association initiating
an arbitration proceeding claiming that Clover is entitled to compensation from
the Company for allegedly defective video access nodes (VANS) supplied by the
Company to Clover. The Company filed an answer to Clovers demand for
arbitration, denying all material allegations and claims, on May 30, 2002.
Since filing a demand for arbitration against the Company, Clover has specified
that its claim is for damages totaling in excess of $2.7 million, based on
claims that certain of the VANS which Clover purchased for resale to its
customers were defective. The purchase arises out of a written agreement
between the Company and Clover, dated June 22, 1998. Clover seeks damages
based on claims for alleged breach of express and implied warranties, in the
amount purportedly paid for replacement products, plus unspecified incidental
and consequential damages. The Company has responded to the arbitration demand
by denying all material allegations, and it intends to vigorously defend
itself. An arbitration hearing before the American Arbitration Association is
scheduled for March 10, 2003 through March 17, 2003 in Santa Clara, California.

23



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##### Table of Contents






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



|(a) |  | Exhibits
|--- |  | --------

|         |  |                                                                                                                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                               
|Number   |  | Description                                                                                                                                                                                   
|         |  |                                                                                                                                                                                               
|3.1      |  | Amended and Restated Certificate of Incorporation (1)                                                                                                                                         
|        
|        
|        
|        
|3.1(i)   |  | Certificate of Ownership and Merger, effective August 3, 1998 (2)                                                                                                                             
|        
|        
|        
|        
|3.1(ii)  |  | Certificate of Designation of Series A Convertible Preferred Stock (3)                                                                                                                        
|        
|        
|        
|        
|3.1(iii) |  | Certificate of Ownership and Merger, effective February 5, 2001 (4)                                                                                                                           
|        
|        
|        
|        
|3.1(iv)  |  | Certificate of Amendment of Restated Certificate of Incorporation filed on June 19, 2001 (4)                                                                                                  
|        
|        
|        
|        
|3.2      |  | Amended Bylaws of the Company (5) (Exhibit 3.3)                                                                                                                                               
|        
|        
|        
|        
|4.1      |  | Specimen Common Stock Certificate (6)                                                                                                                                                         
|        
|        
|        
|        
|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 (7)                                                     
|        
|        
|        
|        
|4.4      |  | Warrant to purchase 850,000 shares of the Companys Common Stock, dated June 8, 2000 issued
by the Company to Vulcan Ventures Incorporated (5) (Exhibit 10.5)                                 
|        
|        
|        
|        
|4.5      |  | Warrant to purchase 18,750 shares of the Companys Common Stock, dated April 11, 1997
issued by the Company to Silicon Valley Bank (1) (Exhibit 10.18)                                        
|        
|        
|        
|        
|4.6      |  | Warrant to purchase the Companys Common Stock, dated April 12, 2002, issued by the Company
to the purchasers and in the amounts as set forth on Schedule A attached thereto (8)
(Exhibit 4.3)
|        
|        
|        
|        
|4.7      |  | Registration Rights Agreement, dated April 12, 2002, by and among the Company and each of
the purchasers listed therein (8) (Exhibit 4.2)                                                     
|        
|        
|        
|        
|10.1     |  | 1997 Equity Incentive Plan, as amended                                                                                                                                                        
|        
|        
|        
|        
|10.2     |  | 1997 Employee Stock Purchase Plan, as amended                                                                                                                                                 
|        
|        
|        
|        
|10.3     |  | Form of 1997 Employee Stock Purchase Plan Offering                                                                                                                                            
|        
|        
|        
|        
|10.4     |  | 1997 Non-Employee Directors Stock Option Plan, as amended                                                                                                                                    
|        
|        
|        
|        
|10.5     |  | 1999 Equity Incentive Plan, as amended                                                                                                                                                        
|        
|        
|        
|        
|99.1     |  | Certification, dated November 14, 2002, required by Section 906 of the Public Company
Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted)                    



---

|(1) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Registration Statement on Form S-1 (File No. 333-38755), as
filed on October 24, 1997.                                    
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended June 30,
1998, as filed on August 11, 1998 (File No. 000-23305).       
|   
|   
|   
|   
|(3) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2000, as filed on August 14, 2000 (File No. 333-72533).       
|   
|   
|   
|   
|(4) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2001, as filed on August 15, 2001 (File No. 000-23305).       
|   
|   
|   
|   
|(5) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Annual Report on Form 10-K 405/A for the period ended
December 31, 1999, as filed on April 15, 2000 (File No. 333-72533). 
|   
|   
|   
|   
|(6) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Registration Statement on Form S-1/A (File No. 333-38755),
as filed on December 4, 1997.                                  
|   
|   
|   
|   
|(7) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended September
30, 2001, as filed on November 14, 2001 (File No. 000-23305).
|   
|   
|   
|   
|(8) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Registration Statement on Form S-3 (File No. 333-88058), as
filed on May 10, 2002.                                        

24



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##### Table of Contents





|(b) |  | Reports on Form 8-K.
|--- |  | --------------------
|   
|    |  | None.               

25



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##### 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: November 14, 2002 |  | FIRST VIRTUAL COMMUNICATIONS, INC.               
|                       
|                       
|                       
|                       
|                        |  |                                                  
|                       
|                       
|                       
|                       
|                        |  | By:    /s/ Timothy A. Rogers                     
|                        |  |                                                  
|                        |  | Timothy A. Rogers                                
|                        |  | Chief Financial Officer and Senior Vice President
|                        |  | (Duly Authorized Officer and Principal Financial 
|                        |  | and Accounting Officer)                          

26



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##### 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: November 14, 2002

| |  |                               
| |  | ------------------------------
| |  | /S/ Jonathan Morgan           
| |  |                               
| |  | Jonathan Morgan               
| |  | Acting Chief Executive Officer

27



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##### Table of Contents



I, Timothy A. Rogers, 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: November 14, 2002

| |  |                        
| |  | -----------------------
| |  | /S/ Timothy A. Rogers  
| |  |                        
| |  | Timothy A. Rogers      
| |  | Chief Financial Officer

28



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##### Table of Contents






Exhibit Index

|         |  |                                                                                                                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                               
|Number   |  | Description                                                                                                                                                                                   
|         |  |                                                                                                                                                                                               
|3.1      |  | Amended and Restated Certificate of Incorporation (1)                                                                                                                                         
|        
|        
|        
|        
|3.1(i)   |  | Certificate of Ownership and Merger, effective August 3, 1998 (2)                                                                                                                             
|        
|        
|        
|        
|3.1(ii)  |  | Certificate of Designation of Series A Convertible Preferred Stock (3)                                                                                                                        
|        
|        
|        
|        
|3.1(iii) |  | Certificate of Ownership and Merger, effective February 5, 2001 (4)                                                                                                                           
|        
|        
|        
|        
|3.1(iv)  |  | Certificate of Amendment of Restated Certificate of Incorporation filed on June 19, 2001 (4)                                                                                                  
|        
|        
|        
|        
|3.2      |  | Amended Bylaws of the Company (5) (Exhibit 3.3)                                                                                                                                               
|        
|        
|        
|        
|4.1      |  | Specimen Common Stock Certificate (6)                                                                                                                                                         
|        
|        
|        
|        
|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 (7)                                                     
|        
|        
|        
|        
|4.4      |  | Warrant to purchase 850,000 shares of the Companys Common Stock, dated June 8, 2000 issued
by the Company to Vulcan Ventures Incorporated (5) (Exhibit 10.5)                                 
|        
|        
|        
|        
|4.5      |  | Warrant to purchase 18,750 shares of the Companys Common Stock, dated April 11, 1997
issued by the Company to Silicon Valley Bank (1) (Exhibit 10.18)                                        
|        
|        
|        
|        
|4.6      |  | Warrant to purchase the Companys Common Stock, dated April 12, 2002, issued by the Company
to the purchasers and in the amounts as set forth on Schedule A attached thereto (8)
(Exhibit 4.3)
|        
|        
|        
|        
|4.7      |  | Registration Rights Agreement, dated April 12, 2002, by and among the Company and each of
the purchasers listed therein (8) (Exhibit 4.2)                                                     
|        
|        
|        
|        
|10.1     |  | 1997 Equity Incentive Plan, as amended                                                                                                                                                        
|        
|        
|        
|        
|10.2     |  | 1997 Employee Stock Purchase Plan, as amended                                                                                                                                                 
|        
|        
|        
|        
|10.3     |  | Form of 1997 Employee Stock Purchase Plan Offering                                                                                                                                            
|        
|        
|        
|        
|10.4     |  | 1997 Non-Employee Directors Stock Option Plan, as amended                                                                                                                                    
|        
|        
|        
|        
|10.5     |  | 1999 Equity Incentive Plan, as amended                                                                                                                                                        
|        
|        
|        
|        
|99.1     |  | Certification, dated November 14, 2002, required by Section 906 of the Public Company
Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted)                    



---

|(1) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Registration Statement on Form S-1 (File No. 333-38755), as
filed on October 24, 1997.                                    
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended June 30,
1998, as filed on August 11, 1998 (File No. 000-23305).       
|   
|   
|   
|   
|(3) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2000, as filed on August 14, 2000 (File No. 333-72533).       
|   
|   
|   
|   
|(4) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2001, as filed on August 15, 2001 (File No. 000-23305).       
|   
|   
|   
|   
|(5) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Annual Report on Form 10-K 405/A for the period ended
December 31, 1999, as filed on April 15, 2000 (File No. 333-72533). 
|   
|   
|   
|   
|(6) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Registration Statement on Form S-1/A (File No. 333-38755),
as filed on December 4, 1997.                                  
|   
|   
|   
|   
|(7) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Quarterly Report on Form 10-Q for the period ended September
30, 2001, as filed on November 14, 2001 (File No. 000-23305).
|   
|   
|   
|   
|(8) |  | Incorporated by reference to the corresponding or indicated exhibit to
the Companys Registration Statement on Form S-3 (File No. 333-88058), as
filed on May 10, 2002.                                        

29