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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 000-23305

First Virtual Communications, Inc.

(650) 801-6500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

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

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

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

      As of June 30, 2003 there were 8,100,682 shares of the registrant’s Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing sale price of $4.44 for such shares on The Nasdaq SmallCap Market on June 30, 2003) was approximately $23.6 million. Shares of the registrant’s Common Stock held by each executive officer, director and holder of five percent or more of the registrant’s Common Stock outstanding as of June 30, 2003 have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      The number of shares of Common Stock outstanding as of March 15, 2004 was 14,564,271.

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I

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

Overview

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

      In June 2001, the Company acquired CUseeMe Networks, a company that specialized in delivering innovative software-based solutions to enable voice, video, and data collaboration over IP-based enabling large-scale deployments of real-time rich media collaboration to enterprise desktops. Following the merger, the Company began to transition from its hardware-based product line of specialty networking equipment to being a completely software-based solution for real-time, rich media communications. First Virtual Communications now provides a broad range of integrated real-time rich media communications software solutions to enterprise customers, government agencies and service providers worldwide.

      The Company is leveraging its real-time audio and video technology as well as web-based collaboration to capitalize on the rapidly emerging opportunity to provide real-time rich media software solutions to enterprise, government and education markets, either as systems sold through channels or services delivered through service providers. Our web-based Click to Meet^TM products provide a framework for real-time rich media communication that is simple to use, fully integrated and effectively manages all of the components of an end to end solution while hiding traditional complexities from the end user.

      Our Click to Meet products have been well received by the market and are gaining recognition as a robust and versatile real-time rich media communications software solution. Click to Meet Express, our web conferencing application, received positive recognition in a number of publications including, Internet Telephony Magazine, Network World, Learning & Leading with Technology, Home Office Magazine, and Vision and Packet Magazine. Click to Meet also won the Editor’s Choice award and an overall A-grade rating from Internet Telephony Magazine, while Click to Meet Express was named Product of the Year by that publication. Click to Meet rich media conferencing solution was also named “Best Innovative Use of Technology” at the Cisco Systems’ Innovation Through Convergence Exposition, held in Dallas, Texas in April of 2002.

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

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

      The Company markets its solutions to enterprise customers, including business customers, government users, education and healthcare providers. The Company’s products have been certified as part of the Defense Collaboration Tool Suite within the United States Department of Defense and, as a result, the Company has achieved substantial traction within the United States military. The Company also sells its products to service providers, including AT&T, Verizon, NTT, China Telecom and Chunghwa Telecom, all of which are deploying broadband rich media conferencing services using the Company’s products and solutions. Our rich media communications solutions enable telecommunications carriers to deliver a comprehensive set of rich media applications over the carrier’s existing broadband networks into conference rooms, as well as to the users’ desktops.

      For the year ended December 31, 2003, 91% of the Company’s revenue was from enterprise customers and 9% was from service providers, while for the year ended December 31, 2002, 80% of the Company’s revenue was from enterprise customers and 20% was from service providers.

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

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

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

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

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

      The Company applies the provisions of Statement of Position 97-2, Software Revenue Recognition to all transactions involving the sale of software products and hardware transactions where the software is not

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

Industry Background

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

      This widespread need for an alternative to meetings in which participants are physically in the same room was first addressed by audio conferencing and later by video conferencing solutions. Audio conferencing allowed participants to enter a meeting from any location equipped with a telephone but did not allow meeting participants to see each other nor have real-time access to the data of the participants. Video conferencing in the past was notorious for its low quality, high costs and the complexities of the technology, often requiring a dedicated administrator to set-up a video conferencing session. It required all participants to be in rooms that were equipped with video conferencing technology and also did not allow for real-time access to the data of the participants.

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

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

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

First Virtual Communications’ Strategy

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

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

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

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

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

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

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

Leverage Strong Technology Foundation

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

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

Our Products and Technology

      First Virtual Communications provides solutions that enable groups of people to meet online and effectively imitate actual face-to-face meetings. Our products leverage increased PC performance, multimedia capability, broadband internet, instant messaging, groupware and e-mail infrastructure to provide an easy-to-use next generation real-time rich media communications solution.

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

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	•	Click to Meet Conference Server is engineered from the ground-up as an IP-based solution and was the first to support: Continuous Presence, mixed speed endpoints in multipoint conferences, Unicast and Multicast linking, and Session Initiation Protocol (SIP) for connectivity. It also contains a browser-based plug-in for real-time rich media communications that includes advanced audio technology, such as wideband audio, echo cancellation, automatic voice detection and gain control. Its video features include full screen video, advanced compression algorithms including H.263+, video noise reduction and automatic bandwidth detection.
	•	Click to Meet Express enables dispersed groups to meet online and conduct collaborative meetings. Click to Meet Express delivers ad-hoc real-time rich media communications to virtually anyone with an Internet connection and a PC. With Click to Meet Express, users can maintain the expressive and interactive communications of a traditional face-to-face meeting, through integrated audio, multipoint video, and document collaboration tools.
	•	Click to Meet Express delivers an on-demand real-time rich media environment where users can create conferences on-the-fly and invite participants by e-mail, instant messaging, or clicking on a link in a web page.

Advantages of Our Innovative Approach

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

	•	Fully Integrated — First Virtual Communications provides a complete rich media real-time communications solution that allows multiple users to participate in an on-line meeting with audio, video, data and text chat all integrated into a single application and single-window environment.
	•	Ad Hoc — First Virtual Communications believes in a true ad hoc meeting environment, enabling virtually anyone with a PC to easily establish, participate or be invited into a meeting without requiring any administrative support or having to be pre-registered in a directory.
	•	Reach — First Virtual Communications’ client server approach provides unlimited free clients through a simple download and meeting invitations that can be sent by e-mail or instant messaging, thus making virtually anyone with a personal computer and an internet connection a potential participant in a meeting.
	•	Return On Investment and Security — First Virtual Communications’ installed premise-based software model allows organizations to realize a faster return on investment and maximizes security. Customers can install the First Virtual Communications’ solution on their own network with unlimited usage, versus an ASP-hosted service that operates on an open network and charges on usage basis.
	•	View Everyone — First Virtual Communications believes that for video to have real value in an on-line meeting all participants must be able to see everyone else’s expressions to effectively gauge all reactions, in contrast to other solutions that only allow for a view of the active speaker.
	•	Choice and Control — First Virtual Communications believes individuals should have more choice and control in their conferencing experience at the desktop. Each participant should have the flexibility to select how they display the data, video and text.
	•	Leverage Existing Workflow — First Virtual Communications believes that an effective on-line conferencing solution should be easy to use by integrating into, not recreating, the application solutions that organizations are currently using today, such as calendaring, scheduling, directory services, instant messaging and e-mail.
	•	Industry Standard Platforms — First Virtual Communications’ approach leverages an organization’s existing IT infrastructure investments while minimizing incremental capital costs, by running on industry standard hardware, software and network infrastructure. Additionally, the support of industry

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

The Benefits of Our Products

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

	•	Better communications between co-workers, suppliers, partners and customers.
	•	Faster decision making; faster time to market.
	•	Reduced downtime — people can join meetings right from their desks.
	•	Improved access to data.
	•	Improved continuity of operations in the event of disaster.

      In addition, the Company’s solutions:

	•	Leverage existing investments in PCs, servers, applications and network infrastructure.
	•	Extend investments in existing videoconferencing infrastructure to real-time rich media communications.
	•	Provide unlimited use of concurrent ports, with no usage-based charges, resulting in lower total cost of ownership than ASP hosted solutions, which charge per-minute, per-participant fees and require external audio conferencing costs.
	•	Provide free client software, extending web conferencing to more potential participants.
	•	Deliver increased security, allowing an organization to keep sensitive data inside its firewall.

Product Categories

      For the years ended December 31, 2003, 2002 and 2001, the Company recorded revenues in the amount of $21.3, $24.4 and $27.7 million, respectively. The Company’s revenue is of three types: Software, Product and Support services. Software revenue primarily consists of revenue from the sale of the Click to Meet family of software products. Product revenue consists of revenue from the sale of ATM legacy hardware products, including hardware products sourced from third parties and sold by the Company. Support services revenue consists of software license subscriptions, hardware maintenance, training, installation and consulting revenue. For the years ended December 31, 2003, 2002 and 2001, Software revenues were $13.0, $11.4 and $4.2 million, respectively. For the years ended December 31, 2003, 2002 and 2001, Product revenues were $1.9, $8.5 and $18.0 million, respectively. In 2003, the Company formally announced that it had exited from the legacy ATM hardware market that had been the principal contributor to the Company’s Product revenues. For the years ended December 31, 2003, 2002 and 2001, Support services revenues were $6.5, $4.6 and $5.5 million, respectively.

Customer Support and Services

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

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Marketing and Sales

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

      For the years ended December 31, 2003, 2002, and 2001, approximately 38%, 32% and 21%, respectively, of our revenue was generated from customers outside of the United States.

Research and Development

      We recognize that a strong technical base is essential to our long-term success, and we have made a substantial investment in research and development. We intend to continue to make substantial investments in product development and to participate in the development of industry standards. The Company monitors changing customer needs and works closely with its partners, end-user customers and market research organizations to track changes in the marketplace, including emerging industry standards. The Company intends to maintain its product development focus on software products for the real-time rich media communications market. The focus of the development efforts will include continued integration with other infrastructure and desktop products, increased scalability, support of emerging standards and creation of additional tools for developers and partners.

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

Competition

      The market for real-time rich media solutions and infrastructure is very competitive. Since the barriers to entry in this market space are relatively low and the potential market is large, First Virtual Communications expects continued growth in the industry and the entrance of new competitors in the future.

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

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

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

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

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

Manufacturing

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

Employees

      As of March 15, 2004, the Company employed 140 individuals full-time. In addition, the Company employs a number of temporary, contract employees. The Company’s employees are not represented by a collective bargaining agreement and the Company believes its relationships with its employees are good.

Available Information

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

Risk Factors

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

      The Company has incurred operating losses in each quarter since it commenced operations in 1993. The Company expects to continue to devote substantial resources to its research and development and sales and marketing activities. As a result, the Company expects that it will continue to incur operating losses for the foreseeable future. The Company’s revenue decreased from $24.4 million for the year ended December 31, 2002 to $21.3 million for the year ended December 31, 2003. The Company incurred net losses of $24.3 million and $9.9 million for the years ended December 31, 2002 and 2003, respectively. At December 31, 2003, the Company had an accumulated deficit of $121.6 million.

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

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

      Additionally, the Company’s operating results may vary significantly depending on a number of factors that are outside of its control. Further, a significant portion of the Company’s expenses are fixed. To the extent that operating expenses are not reduced and to the extent that revenue or gross margin cannot be increased, the Company’s business, financial condition and results of operations would be materially adversely affected. Due to all the foregoing factors, it is likely that in some future quarter, as at times in past quarters, the Company’s results of operations will be below the expectations of public market analysts and investors, resulting in a negative impact on the Company’s common stock price.

      The Company’s success depends in part on the market’s acceptance of real-time rich media communications products, including Click to Meet and Conference Server. Potential end-users must accept video applications as a viable alternative to face-to-face meeting, conventional classroom-based learning as well as relatively new applications, such as the use of real-time rich media communications in marketing, selling and manufacturing. The market for many of these applications is still small and in the early development stage. If real-time, rich media, Web conferencing and broadband video services fail to achieve broad commercial acceptance or if such acceptance is delayed, the Company’s business, financial condition and results of operations will be materially adversely affected. The Company anticipates that significant revenue and growth in the foreseeable future will come from the sale of its Click to Meet and Conference Server products and services. Broad market acceptance of these products and services is therefore critical to the Company’s operating success.

      Software developed by the Company or developed by others and incorporated by the Company into its products may contain significant undetected errors or errors that have been detected but are more significant and costly to address than anticipated, especially when first released or as new versions are released. Although the Company’s software products are tested before commercial release, errors in the products may be found after customers begin to use the software. Any defects in the Company’s current or future products may result in significant decreases in revenue or increases in expenses because of adverse publicity, reduced orders,

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

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

      One or more of these factors could significantly harm the Company’s business and decrease the price of our common stock in the public market. Severe price fluctuations in a company’s stock, including the Company’s stock, have frequently been followed by securities litigation. Litigation can result in substantial costs and a diversion of management’s attention and resources and therefore could have a material adverse effect on the Company’s business, financial condition and results of operations.

      We believe the Company has adequate cash and access to cash to meet its anticipated working capital and capital expenditure requirements for the next 12 months. However, the Company may need to raise additional funds through debt sources and/or the issuance of equity securities in the future. If additional funds are raised through the issuance of equity securities, the percentage ownership of existing stockholders of the Company will be reduced, stockholders may experience additional dilution, and the new equity securities may have rights, preferences or privileges senior to those of the holders of the Company’s common stock. Additional financing may not be available when needed or on terms favorable to the Company, or at all. Additionally, if delisting from Nasdaq occurs, it will be more difficult to raise additional funds. If adequate funds are not available or are not available on acceptable terms, it could have a material adverse effect on the Company’s business, financial condition and operating results. The Company may be required to delay, scale back or eliminate some or all of its development programs for its products and may be unable to take advantage of future opportunities or respond to competitive pressures.

      The Company’s common stock currently is listed on The Nasdaq SmallCap Market. Pursuant to its rules, The Nasdaq National Market de-listed the Company’s shares from The Nasdaq National Market based on the shares trading below $1.00 per share on The Nasdaq National Market for a period of 30 consecutive trading days. On September 9, 2002, the Company’s shares began trading on The Nasdaq SmallCap Market. In October 2002, the Company received a letter from Nasdaq advising it that the Company’s common stock must have a closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days by March 26, 2003 in order to continue trading on the Nasdaq SmallCap Market, subject to appeal by the

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

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

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

      The Company depends on a limited number of large end-user projects for a majority of its revenue which has resulted in, and may in the future result in, significant fluctuations in quarterly revenue. The Company expects that revenue from the sale of products through large resellers to account for a significant percentage of

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

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

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

      The market for real-time rich media communications products, including Web conferencing products and services, is extremely competitive. Because the barriers to entry in the market are relatively low and the potential market is large, the Company expects continued growth in existing competitors and the entrance of

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

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

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

      The commercial success of the Company will depend, in part, on the Company not breaching third-party intellectual property rights. The Company licenses certain third-party technology for use in its products, but is subject to claims and the risk of litigation alleging infringement of other third-party intellectual property

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

      Certain events or changes in circumstances would require the Company to assess the recoverability of the carrying amount of long-lived assets. Although no adjustments of the carrying value of its long-lived assets was required in the year ending December 31, 2003, the Company recorded impairment charges of $3.3 million in the year ending December 31, 2002 relating to technology acquired in a prior acquisition and $6.6 million relating to goodwill. In addition, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS No. 142, in July 2001, whereby goodwill must be evaluated annually and whenever events or circumstances occur which indicate goodwill might be impaired. The Company adopted SFAS No. 142 on January 1, 2002. The Company will continue to evaluate the recoverability of the carrying amount of our long-lived assets, and may incur substantial impairment charges that could adversely affect the Company’s financial results in the future.

      The Company’s international business involves a number of risks that could adversely affect its operating results or contribute to fluctuations in those results. The Company’s revenue from international sales represented 38%, 32% and 21%, respectively, of its total revenue in the fiscal years ended December 31, 2003, 2002 and 2001, respectively. The Company intends to seek opportunities to expand its product and service offerings into additional international markets, although the Company may not succeed in developing localized versions of its products for new international markets or in marketing or distributing products and services in those markets.

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

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

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

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

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

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

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

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      As of March 15, 2004, the Company’s executive officers, directors and their affiliates beneficially owned approximately 1.1 million shares, or approximately 8%, of the then outstanding shares of the Company’s common stock. As a result, these persons may have the ability to influence control over the Company and direct its affairs and business, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying, deferring or preventing a change in control of the Company, and making certain transactions more difficult or impossible absent the support of these stockholders, including proxy contests, mergers involving the Company, tender offers, open-market purchase programs or other purchases of common stock that could give stockholders of the Company the opportunity to realize a premium over the then prevailing market price for shares of common stock.

      The Company is headquartered in Redwood City, California, where it leases approximately 19,700 square feet of space that houses administrative, sales, marketing, engineering, customer service and operations. The space is occupied pursuant to an operating lease that expires in 2013. The Company also leases approximately 27,225 square feet of space in Nashua, New Hampshire that houses product development, sales, marketing, customer service and related support functions. The space is occupied pursuant to an operating lease that expires in July of 2005. Additionally, the Company has rental agreements for small sales offices in the United States, Europe and Asia. Aggregate rental expense under these facility leases for the year ended December 31, 2003 was approximately $1.3 million. The Company believes that its existing facilities are adequate to meet current needs.

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

      Not applicable.

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PART II

      The Company’s Common Stock is traded on The Nasdaq SmallCap Market under the symbol “FVCX.”

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

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

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

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

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      The following table presents summary selected historical data of the Company as of and for each of the five years in the period ended December 31, 2003.

(1)	Operating expenses included non-cash employee stock compensation charges of $32,000, $26,000, $114,000, $267,000, and $493,000, for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively.
(2)	See Note 1 to the consolidated financial statements for an explanation of the computation of net loss per share.

      The following discussion of the financial condition and results of operations of the company should be read in conjunction with the financial statements and the notes thereto included in Part IV, Item 15 of this report on Form 10-K. In addition to the historical information contained in this item, this item contains forward looking statements within the meaning of Section 27(a) of the Securities Act and Section 21(e) of the Exchange Act that involve risks and uncertainties. These forward looking statements include, without limitation, statements containing the words “believe,” “anticipates,” “expects,” and words of similar import. Such forward looking statements will have known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievement of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, the risk factors set forth above in “Business/Overview,” “Business/Risk Factors,” the risk factors set forth in this item and elsewhere in this Form 10-K. The Company assumes no obligation to update any forward looking statements contained herein.

Overview

      The Company delivers integrated, software technologies for real-time rich media Web conferencing and communications solutions. The Company combines its expertise in networking systems, real-time audio and video technology, and Web-based collaboration to provide integrated voice, video, data, text and streaming media solutions for a wide range of real-time rich media applications, including Web conferences, broadcasts, video-on-demand, videoconferences and video calls over converged multi-service networks. The Company was

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

      In the year ended December 31, 2003, the Company recorded $21.3 million in revenue, a decrease of 13% compared to the previous year. The Company derived its revenue in 2003 from the sale of real-time rich media communications software and services, and to a relatively minor extent, specialized networking hardware equipment. These products were sold to enterprise customers, which include business customers, government agencies, educational institutions and healthcare providers, primarily through indirect sales channels and to telecommunications service providers.

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

      The Company’s internal sales force qualifies and stimulates end-user demand, and manages the Company’s strategic relationships with its distribution partners, including OEMs, VARs and systems integrators. At December 31, 2003 CompView, Inc. represented 18% of total accounts receivable. At December 31, 2002, CEWinc.com represented 20% of total accounts receivable.

      The Company maintains sales offices in the United Kingdom, France, Germany, Italy, Japan, Korea and China and distributes its products in both Europe and Asia through resellers and distributors in more than 25 countries. For the years ended December 31, 2003, 2002 and 2001, approximately 38%, 32% and 21%, respectively, of the Company’s sales were generated from customers outside of the United States. The Company expects that revenue from shipments to customers outside of the United States will continue to represent a significant portion of its future revenue. In addition, the Company believes that a small portion of its sales through OEMs, resellers and integrators are ultimately sold to international end-users. Revenue from the Company’s international operations are subject to various risks, including seasonality, longer payment cycles, changes in regulatory requirements and tariffs, reduced protection of intellectual property rights, political and economic restraints, and currency risks, among others. To date, the Company has not engaged in any foreign currency hedging activity.

Critical Accounting Policies and Estimates

      We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K, beginning on page F-6. Note that our preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

      Revenue recognition. We derive our revenue from primarily three sources (i) Software, the sale of software licenses, (ii) Products, the sale of hardware, and (iii) Support services, including software license

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      The Company licenses its software products under perpetual licenses. The Company sells its products and services via its direct sales force and through domestic and foreign resellers and distributors. The Company delivers some of its Software and Support services, primarily updates to software, via the Internet.

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

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

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

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

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

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

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

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      Sales returns and other allowances, allowance for doubtful accounts and litigation. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Specifically, management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales return and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales return and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. The provision for sales returns and other allowances amounted to $204,000 at December 31, 2003, compared to $548,000 at December 31, 2002. Similarly, management must estimate the extent to which outstanding accounts receivable are collectible. Management specifically analyzes accounts receivable, including historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. As of December 31, 2003, our accounts receivable balance was $2.4 million, net of allowance for doubtful accounts of $378,000. At December 31, 2002, our accounts receivable balance was $4.1 million, net of allowance for doubtful accounts of $1.0 million.

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

      Valuation of Inventories. The Company writes down its inventory for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. During the years ended December 31, 2003, 2002 and 2001, the Company recorded inventory related charges of $24,000, $1.4 million and $7.3 million, respectively, to reduce the value of inventories for certain excess and obsolete products. During 2003, the Company completed its transition from selling hardware products to selling software products. The Company had only fully-reserved inventory related to its legacy hardware products as of December 31, 2003. The production costs of software are immaterial, with media, packaging materials and other direct product costs charged to cost of revenues in the period incurred.

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

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

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

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      On January 1, 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, we reclassified workforce related intangibles of $1.4 million to goodwill and ceased to amortize approximately $6.9 million of goodwill and $1.4 million related to the assembled workforce, in connection with our acquisition of CUseeMe in 2001. In 2002 and 2003, we recorded approximately $619,000 and $1.6 million, respectively, of amortization on intangible assets related to technology and licenses acquired in the CUseeMe acquisition. We performed an impairment review of our property and equipment, goodwill and intangible assets in 2002 and an annual impairment review in 2003. We recorded no impairment charges related to goodwill during 2003 and $6.6 million of impairment charges related to goodwill during the year ended December 31, 2002 in connection with our annual impairment review, based on an impairment analysis prepared by management using valuations completed by an outside appraiser.

      On January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 supercedes Statement of Financial Accounting Standard No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (SFAS 121). SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30. SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company recorded no impairment charges related to intangible assets in 2003 and $3.3 million of impairment charges related to intangible assets in 2002, which is included in the $9.9 million impairment charge noted above.

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

      Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $74.3 million as of December 31, 2003, due to uncertainties related to our ability to utilize all of the deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

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Results of Operations

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

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

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

      Software revenues primarily consisted of revenue from the sale of licenses for the Click to Meet (“CTM”) family of software products including CTM Express, CTM Select, CTM Premier and CTM Conference Server. Software revenues increased $1.6 million to $13.0 million in 2003, an increase of 14% from $11.4 million in 2002. This increase resulted from the Company’s focus on marketing and selling software-based products and the expansion of its customer base worldwide, offset in part by a decrease in licensing fees from a reseller in Japan pursuant to an agreement which expired in September 2002. Software revenues increased $7.2 million to $11.4 million in 2002, an increase of 171% from $4.2 million in 2001. This increase reflected the impact of new product introductions and the fact that 2002 was the first full calendar year following the merger with CUseeMe in June 2001.

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

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

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

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

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

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

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

      Sales and marketing. Sales and marketing expense includes personnel and related overhead costs for sales and marketing, costs of outside contractors, advertising, trade shows and other marketing and promotional expenses. Sales and marketing expense increased $1.6 million to $11.2 million in 2003, an increase of 17% compared to the $9.6 million in 2002. Expenses in 2003 increased $518,000, primarily due to expansion of our Asia sales office with higher personnel and other expenses and higher compensation expense resulting from our acquisition of our FVC.Com (Asia) distributor offset in part by lower facilities costs. In 2002, the Company recorded a reduction in sales and marketing expense of $359,000, reflecting collection of a customer receivable that had previously been deemed uncollectible. Sales and marketing expenses decreased by $2.0 million to $9.6 million in 2002, a decrease of 17% from $11.6 million in 2001. The decrease in absolute dollars was principally due to a $1.0 million reduction in trade show and marketing activities, a $184,000 decrease in expense associated with demonstration equipment and supplies, a $130,000 decrease in personnel-related expenses, and a $327,000 decrease in other expenses. These reductions occurred after the Company implemented cost cutting measures throughout the organization. Additionally, in 2002, the Company recorded a $359,000 benefit from the recovery of a customer receivable which had previously been deemed uncollectible. As a percentage of total revenues, sales and marketing expense was 52% in 2003, compared to 39% in 2002 and 42% in 2001. The increase in sales and marketing expense as a percentage of revenue in 2003 compared to 2002 was due to lower revenue and higher sales and marketing expense in 2003, while the decrease in sales and marketing expense as a percentage of revenue in 2002 compared to 2001 was due to lower spending in 2002. The Company expects sales and marketing expense, as expressed in absolute dollars, to increase slightly in 2004 compared to 2003.

      General and administrative. General and administrative expense includes personnel and related overhead costs for finance, human resources, information technology, product operations and general management. General and administrative also includes the cost of the Company’s Directors and Officers liability insurance, and the amortization of the costs of intangible assets. General and administrative expense declined by $4.3 million to $6.7 million in 2003, a 39% decrease from the $11.0 million in 2002. The decrease in 2003 primarily was due to a reduction of $785,000 in bad debt expense resulting from the Company’s improved credit procedures, a reduction of $513,000 in personnel expenses, $900,000 in professional fees, $2.2 million in amortization expense resulting from the write-down of intangibles at December 31, 2002, reduced facilities costs and other expenses. General and administrative expenses declined by $2.0 million or 15% in 2002, to $11.0 million, from $13.0 million in 2001. The decrease was mainly due to a decrease of $942,000 in personal-related expenses, a $257,000 decrease in equipment and maintenance expense and a $206,000 decrease in other expenses after the Company implemented cost cutting measures throughout the organization. A further reduction of $595,000 in amortization expense was realized after the Company ceased to amortize goodwill. As a percentage of total revenue, general and administrative expense was 31% in 2003, 45% in 2002 and 47% in 2001. The decrease in general and administrative expense as a percentage of revenue in 2003 compared to 2002 and 2001 was due to lower spending in 2003. The Company expects general and administrative expenses, as expressed in absolute dollars, to be lower for 2004 compared to 2003.

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      Acquisition and other non-recurring costs, net. Non-recurring charges of $838,000 in 2003 included $678,000 due to the relocation of the Company’s California office from Santa Clara to Redwood City and $160,000 for costs related to the discontinuation of the Company’s India operations, both in May 2003. The cost of the office relocation includes $350,000 of loss from retirement of fixed assets, $259,000 of refurbishment cost and $69,000 of moving cost. The $9.9 million of non-recurring charges in 2002 included a $6.6 million impairment charge related to goodwill and a $3.3 million impairment charge related to intangible assets associated with the acquisition of CUseeME in 2001. Non-recurring charges of $2.5 million in 2001 included $276,000 of in-process research and development costs as a result of our acquisition of CUseeMe Networks, $1.1 million of impairment of goodwill associated with the Company’s 1998 acquisition of ICAST Corporation and $1.1 million of costs associated with the reductions in our workforce during the year ended December 31, 2001.

      Other income (expense), net. Other income (expense), net consists primarily of interest expense relating to the Company’s credit facilities and long-term debt, offset in part by interest income earned on short term investments and cash balances. Other expense totaled $92,000 in 2003, compared to other income of $115,000 and $665,000 in 2002 and 2001, respectively. The decline in other income (expense), net in 2003 from 2002 primarily was due to the financing costs related to our term loan with Silicon Valley Bank during 2003 and a decline in interest income as a result of lower market interest rates and lower cash balances. The decrease in other income in 2002 from 2001 was primarily the result of lower interest rates and a lower average cash balance in 2002 compared to 2001.

      Minority Interest in Consolidated Subsidiary. Minority interest reflects the interest of minority stockholders in the operating results of the Company’s consolidated subsidiary in the United Kingdom. The Company acquired a controlling interest in this entity in May 1999 and acquired the remaining 48% interest on July 31, 2002 for aggregate consideration of $570,000. In 2001, the amount primarily reflects the portion of losses in this subsidiary that were attributable to minority stockholders.

      Income taxes. As of December 31, 2003, the Company had net operating loss carry forwards of approximately $152 million and $35 million for federal and state tax purposes, respectively, available to reduce future taxable income. These carry-forwards, if not utilized to offset future taxable income, will expire at various dates beginning in 2013. In addition, the Tax Reform Act of 1986 and similar California legislation impose substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, the Company’s ability to utilize net operating losses and credit carry forwards may be limited as the result of such an “ownership change” as defined in this legislation. No benefit has been recorded for income taxes for any of the periods presented as the Company believes that, based on the history of such losses and other factors, the weight of available evidence indicates that it will not be able to realize the benefit of these net operating losses. Thus, a full valuation reserve has been recorded as set forth in Note 8 of notes to consolidated financial statements.

Liquidity and Capital Resources

      Since inception, the Company has financed its operations primarily through private and public placements of equity securities, revenue from sales of the Company’s products and services and to a lesser extent through certain credit facilities. As of December 31, 2003, the Company had cash, cash equivalents and short-term investments of $12.2 million and working capital of $5.0 million.

      In April 2003, the Company executed an agreement with Silicon Valley Bank for a $3 million credit facility that could be used by the Company at any time prior to December 31, 2003. The interest rate was equal to the bank’s prime rate plus 2.25% with a floor at 6.5%. The Company paid a $22,500 commitment fee at the closing and is subject to a commitment fee of 0.25% per annum on any unused borrowings, with this fee paid quarterly. The term loan is secured by all of the Company’s assets, including intellectual property rights, and contains certain financial covenants, including the maintenance of cash deposits at the bank of not less than $2.9 million and a liquidity covenant. The liquidity covenant requires that the sum of (i) the amount of the Company’s unrestricted cash on deposit in the bank, plus (ii) the Company’s eligible accounts receivable, divided by (iii) the amount outstanding under the loan agreement be at all times equal to 2.0 or higher. The

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      In April 2003 the Company entered into a private equity line financing agreement with Ralph Ungermann, Executive Chairman of the Company’s Board of Directors, under which the Company may require Mr. Ungermann to purchase up to $1 million of our common stock at a purchase price of $1.55 per share during the period from April 14, 2003 through April 13, 2004. The Company may draw down funds under the private equity line financing agreement up to four times during the 12 month term of the agreement, with each draw for a minimum of $250,000. Following completion of the private equity financing in November 2003 the Company determined that use of this line of financing will not be required and it is expected that the line will expire unused on April 13, 2004.

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

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

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

      Management believes that the Company’s existing cash and investments, together with the funds provided pursuant to its credit facility with its bank are adequate to fund the Company’s operations through the first quarter of 2005. However, the Company’s cash requirements depend on several factors, including the rate of market acceptance of its products and services, the ability to expand and retain its customer base and other factors. If the Company fails to achieve its planned revenue or expense targets, management believes that it has the plans, intent and ability to curtail capital and operating spending to ensure that cash and investments will be sufficient to meet the Company’s cash requirements through March 31, 2005.

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

      Cash used in operating activities totaled $7.8 million in 2003 and was comprised primarily of a $9.9 million net loss and reductions of accrued liabilities ($882,000), deferred revenue ($810,000) and accounts payable ($292,000), partially offset by non-cash charges of $2.0 million representing depreciation and amortization and reductions in accounts receivable ($1.4 million). Cash used in operating activities totaled $4.9 million in 2002, comprised primarily of a $24.3 million net loss and a decrease of $2.1 million in accounts payable, partially offset by non-cash charges totaling $14.7 million, an increase of $3.7 million in deferred revenue, a decrease of $2.1 million in accounts receivable, and a reduction of $1.1 million in inventory.

      Cash used in investment activities totaled $613,000 in 2003, principally consisting of capital expenditures ($476,000) and disbursements related to the 2002 acquisition of our UK-based subsidiary. In 2002, cash provided in investment activities totaled $1.3, primarily from sales of short-term investments, totaling $2.3 million, offset in part by capital expenditures of $566,000 and cash paid to acquire FVC.com UK of $437,000. Capital expenditures in both years were comprised primarily of computers, computer peripherals and computer-based equipment used in the Company’s software development activities.

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

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

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

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

      As of December 31, 2003, the Company held a total of $12.2 million of cash, cash equivalents and short-term investments. Of the $12.2 million, only $89,000 represented short-term investments. These securities, which consist primarily of corporate medium term notes and other corporate debt, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by ten percent from levels as of December 31, 2003, the decline in fair value of the portfolio would not be material.

      The Company transacts substantially all of its operations in United States dollars and therefore is not subject to fluctuations in foreign exchange rates. Accordingly, the Company currently does not use derivative financial instruments. The Company has no fixed rate obligations. To the extent that the Company utilizes its line of credit from the bank or other sources, it will be exposed to short term interest rate risk. As of March 15, 2004, the Company had $1 million of short term debt and $1.3 million of long term debt representing the amount owed to its bank under a term loan. The quarterly rate of interest on this loan is the lower of the bank’s prime rate plus 2.25 percentage points but in no event less than 6.5%. Although changes in interest rates would increase the Company’s interest expense, it is not expected that such increases would result in an adverse material impact on its financial condition.

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

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

      An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-1(e) promulgated under the Exchange Act) were effective.

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

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

PART III

      Certain information required in Part III of this Report is incorporated by reference to the Company’s proxy statement (the “Proxy Statement”) for the Company’s 2004 Annual Meeting of Stockholders. The Proxy Statement will be filed with the SEC in accordance with Regulation 14A under the Exchange Act no later than April 30, 2004.

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

      (b) Identification of Executive Officers: The information concerning the Company’s Executive Officers is incorporated by reference from the section entitled “Executive Officers” in the Proxy Statement.

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

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

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

      The information required by this item is incorporated by reference from the sections entitled “Compensation of Executive Officers” and “Other Matters” in the Proxy Statement.

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

      The information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, is incorporated by reference from the section entitled “Proposal 2 — Approval of the Amendment to the 1997 Equity Incentive Plan, As Amended” in the Proxy Statement.

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

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

PART IV

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

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

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

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

      (b) Reports on Form 8-K.

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

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

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

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on the 26th day of March 2004.

	FIRST VIRTUAL COMMUNICATIONS, INC.,

	By:	/s/ JONATHAN MORGAN

	Jonathan Morgan
	President and Chief Executive Officer

POWER OF ATTORNEY

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

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

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

      In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 31, present fairly, in all material respects, the financial position of First Virtual Communications, Inc., and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

/S/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

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FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

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

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

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FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

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FIRST VIRTUAL COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY