Prepared by MerrillDirect

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10–Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2001

Commission file number 000–25475

LATITUDE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

Delaware	94–3177392
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2121 Tasman Drive, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)

(408) 988–7200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

As of April 30, 2001, there were 19,414,000 shares of the registrant’s Common Stock outstanding.

INDEX

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed consolidated balance sheets at March 31, 2001 and December 31, 2000

		Condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2001 and 2000

		Condensed consolidated statements of cash flows for the three months ended March 31, 2001 and 2000

		Notes to condensed consolidated financial statements

	Item 2.	Management’s Discussion and Analysis of Financial Conditionand Results of Operations

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings

	Item 2.	Changes in Securities and Use of Proceeds

	Item 3.	Defaults Upon Senior Securities

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

	Item 5.	Other Information

	Item 6.	Exhibits and Reports on Form 8–K

SIGNATURE

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

LATITUDE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)

	March 31, 2001	December 31, 2000
ASSETS
Current assets:
Cash and cash equivalents	$18,761	$23,993
Short–term investments	12,327	14,203
Accounts receivable, net	13,031	10,044
Inventory	1,506	1,662
Prepaids and other assets	2,550	2,790
Deferred tax asset	2,779	2,779
Total current assets	50,954	55,471
Property and equipment, net	4,250	4,062
Long–term investments	6,462	2,301
Deferred tax asset	1,287	794
Deposits and other long–term assets	537	530
Total assets	$63,490	$63,158

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$631	$875
Accrued liabilities	3,978	3,565
Deferred revenue	7,423	6,434
Current portion of long–term debt	362	362
Total current liabilities	12,394	11,236
Long–term debt	12	106
Total liabilities	12,406	11,342

Stockholders’ equity:
Preferred stock, $0.001 par value
Authorized: 5,000 shares at March 31, 2001 and 2000 Issued and outstanding: No shares at March 31, 2001 and 2000	—	—
Common stock, $0.001 par value
Authorized: 75,000 shares at March 31, 2001 and 2000 Issued and outstanding: 19,303 and 18,989 shares at March 31, 2001 and 2000, respectively	19	19
Additional paid–in capital	57,698	57,675
Notes receivable from common stockholders	(10)	(10)
Deferred stock compensation	(509)	(620)
Accumulated other comprehensive income	55	46
Accumulated deficit	(6,169)	(5,294)
Total stockholders’ equity	51,084	51,816
Total liabilities and stockholders’ equity	$63,490	$63,158

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

LATITUDE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
(Unaudited)

	Three Months Ended March 31,
	2001	2000
Revenue:
Product	$6,156	$7,388
Service	4,060	2,977
Total revenue	10,216	10,365

Cost of revenue:
Product	1,016	1,226
Service (includes non-cash stock compensation of $2 and $19 in 2001 and 2000, respectively)	2,512	1,521
Total cost of revenue	3,528	2,747
Gross profit	6,688	7,618
Operating expenses:
Research and development (includes non-cash stock compensation of $18 and $20 in 2001 and 2000, respectively)	1,758	1,552
Marketing and sales (includes non-cash stock compensation of $11 and $25 in 2001 and 2000, respectively)	5,616	4,385
General and administrative (includes non-cash stock compensation of $65 and $63 in 2001 and 2000, respectively)	1,246	828
Total operating expenses	8,620	6,765
Income (loss) from operations	(1,932)	853
Interest income, net	565	587
Income (loss) before benefit from (provision for) income taxes	(1,367)	1,440
Benefit from (provision for) income taxes	492	(596)
Net income (loss)	$(875)	$844
Other comprehensive income (loss), net of tax—
Unrealized gain (loss) on securities	24	(156)
Cumulative translation adjustment	(15)	—
Comprehensive income (loss)	$(866)	$688

Net income (loss) per share—basic	$(0.05)	$0.05
Shares used in per share calculation—basic	18,746	18,662
Net income (loss) per share—diluted	$(0.05)	$0.04
Shares used in per share calculation—diluted	18,746	20,059

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

LATITUDE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except per share amounts)
(Unaudited)

	Three Months Ended March 31,
	2001	2000
Cash flows from operating activities:
Net income (loss)	$(875)	$844
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	554	370
Amortization of capitalized software	97	26
Provision for excess and obsolete inventory	—	97
Provision for doubtful accounts	—	74
Amortization of deferred stock compensation	96	127
Deferred income taxes	(493)	—
Changes in operating assets and liabilities
Accounts receivable	(2,987)	419
Inventory	156	(102)
Prepaids and other assets	143	(238)
Accounts payable	(244)	695
Accrued liabilities	413	(256)
Deferred revenue	989	(787)
Net cash provided by (used in) operating activities	(2,151)	1,269
Cash flows from investing activities:
Purchases of property and equipment	(742)	(1,080)
Purchases of available for sale securities	(16,461)	(13,375)
Maturities of available for sale securities	14,200	10,139
Increase in deposits and other long-term assets	(7)	(9)
Net cash used in investing activities	(3,010)	(4,325)
Cash flows from financing activities:
Proceeds from issuance of common stock	38	107
Repayment of notes payable and capital lease obligations	(94)	(159)
Other	(15)	33
Net cash used in financing activities	(71)	(19)
Net decrease in cash and cash equivalents	(5,232)	(3,075)
Cash and cash equivalents, beginning of period	23,993	10,847
Cash and cash equivalents, end of period	$18,761	$7,772

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

LATITUDE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—The Company and Basis of Presentation

Latitude Communications, Inc. (the “Company”) is a leading provider of enterprise e-conferencing solutions. The Company develops, markets and supports its MeetingPlace system, which allows companies to conduct virtual meetings and thereby extend decision making processes across the disparate geographic locations of participants. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers. The Company has distributed its product through distributors and a direct sales force to companies across many industries in the United States, Europe and Asia

The accompanying unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The balance sheet at December 31, 2000 was derived from audited financial statements, however, it does not include all disclosures required by generally accepted accounting principles in the United States of America.

The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

Note 2—Inventory

	March 31, 2001	December 31, 2000

Raw materials	$1,046	$1,216
Finished goods	460	446
	$1,506	$1,662

Note 3—Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at their fair market value and the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to any derivatives. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivatives Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date until fiscal years commencing after June 30, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133." SFAS 138 amends the accounting and reporting standards for certain derivatives and hedging activities such as net settlement contracts, foreign currency transactions and intercompany derivatives. Adoption of SFAS No. 133 did not have a material impact on the Company's financial condition or results of operations as currently conducted.

Note 4—Net Income Per Share

Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of vested common shares outstanding for the period. Diluted net income (loss) per share is computed giving effect to all dilutive potential common shares, including options, warrants and preferred stock.

A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts).

	Three Months Ended March 31,
	2001	2000
	(Unaudited)
Net income (loss) per share, basic and diluted:
Numerator for net income (loss), basic and diluted	$(875)	$844
Denominator for basic net income (loss) per share:
Weighted average vested common shares outstanding	18,746	18,662
Net income (loss) per share basic	$(0.05)	$0.05
Denominator for diluted earnings per share:
Weighted average vested common shares outstanding	18,746	18,662
Effect of dilutive securities:
Nonvested common shares	—	314
Common stock options	—	1,042
Warrants	—	41
Weighted average common and common equivalent shares	18,746	20,059
Net income (loss) per share diluted	$(0.05)	$0.04
Antidilutive securities not included in the calculation of diluted EPS because the Company incurred a net loss:
Nonvested common shares	523	—
Common stock options	193	—
	716	—

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10–Q include a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as "anticipates," "believes," "expects," "future," and "intends," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. These risks are described in " Factors Affecting Future Operating Results " and elsewhere in this Form 10–Q. Readers are cautioned not to place undue reliance on these forward–looking statements, which reflect management’s analysis only as of the date hereof. The Company assumes no obligation to update these forward–looking statements to reflect actual results or changes in factors or assumptions affecting such forward–looking statements.

Overview

We are a leading provider of enterprise e-conferencing solutions that enable geographically dispersed organizations to collaborate in real time. The Company's award-winning MeetingPlace system is designed for enterprise-wide deployment to improve the ability of employees, partners, and customers to meet and work. With MeetingPlace, participants can schedule and attend a meeting, view, share and edit documents, and capture and retrieve meeting content. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers.

We generate revenue from sales of our MeetingPlace products and from customer support and consulting services. Revenue derived from product sales constituted 60% of total revenue in the first quarter of 2001 and 71% during the corresponding period of 2000. Product revenue is generally recognized upon shipment if a signed contract exists, the fee is fixed and determinable, collection of the resulting receivable is reasonably assured, product returns are reasonably estimable and, if applicable, acceptance has been obtained. We calculate an allowance for returns based on historical rates. Service revenue includes revenue from implementation and integration services, system management services, warranty coverage and customer support. Revenue from implementation and system integration services is recognized as the services are performed, while revenue from system management services, warranty coverage and customer support is recognized ratably over the period of the contract. Beginning in 2001, we expect to expand our service offerings by providing hosted services to our customers. Accordingly, future revenue from this new service offering will increase the proportion of total revenue derived from services. To the extent that prospective customers elect to purchase the hosted service rather than an on-premises MeetingPlace system, our product revenue could be adversely affected.

We sell our MeetingPlace products primarily through our direct sales force and, to a lesser extent, through indirect distribution channels. The majority of our revenue is derived from Fortune 1000 companies, many of which initially purchase MeetingPlace servers and later expand deployment of our products as they require additional capacity for voice and web conferencing. In 1997, we expanded into international markets by opening a sales and support office in the United Kingdom and establishing distributor relationships in Hong Kong and Singapore, and in 1998, we established a distributor relationship in Australia. While we intend to increase sales through indirect channels and internationally, we cannot assure you that we will be successful. In 1998, we expanded the breadth of our support services by establishing a consulting services group to provide expanded implementation services, system management services and customized project consulting. In 1999, we opened a sales and support office in Singapore. In addition, in 1999 and 2000, we increased our distribution partners to include global partnerships, application service providers and partners focused on the U.S. federal government.

Total cost of revenue consists of component and materials costs, direct labor costs, warranty costs, royalties and overhead related to manufacturing of our products, as well as materials, travel and labor costs related to personnel engaged in our service operations. Product gross margin is impacted by the proportion of product revenue derived from software sales, which typically carry higher margins than hardware sales, and from indirect distribution channels, which typically carry lower margins than direct sales. Service gross margin is impacted by the mix of services we provide, which have different levels of profitability, and the efficiency with which we provide support to our customers. We record an allowance for excess and obsolete inventory by identifying inventory components either considered excess based on estimates of future usage or obsolete due to changes in our products. As a result of technological changes, our products may become obsolete or we could be required to redesign our products.

Results Of Operations

The following table lists, for the periods indicated, the percentage of total revenue of each line item from our condensed consolidated statement of operations to total revenues:

	Three Months Ended March 31,
	2001	2000
Revenue:
Product	60.3%	71.3%
Service	39.7%	28.7%
Total revenue	100.0%	100.0%
Cost of revenue:
ProductF	9.9%	11.8%
Service	24.6%	14.7%
Total cost of revenue	34.5%	26.5%
Gross profit	65.5%	73.5%
Operating expenses:
Research and development	17.2%	15.0%
Marketing and sales	55.0%	42.3%
General and administrative	12.2%	8.0%
Total operating expenses	84.4%	65.3%
Income (loss) from operations	(18.9)%	8.2%
Interest income, net	5.5%	5.7%
Income (loss) before benefit from (provision for) income taxes	(13.4)%	13.9%
Benefit from (provision for) income taxes	4.8%	(5.8)%
Net income (loss)	(8.6)%	8.1%

Product Revenue

Product revenue was $6.2 million for the first quarter of 2001, which represented a decrease of 17% when compared to the corresponding period of 2000. The decrease was due primarily to fewer MeetingPlace system sales in an environment of reduced capital spending by our existing and target customers. International sales represented approximately 17% and 13% of product revenue in the three months ended March 31, 2001 and 2000.

Service Revenue

Service revenue was $4.1 million for the first quarter of 2001, which represented an increase of 36% when compared to the corresponding period of 2000. The increase was attributable primarily to growth in our customer base during this period, which led to increased sales of support services to new and existing customers, as well as the introduction of additional consulting services such as managed services and expanded implementation and integration services.

Total Cost of Revenue

Total cost of revenue was $3.5 million for the first quarter of 2001, which represented an increase of 28% when compared to the corresponding period of 2000. The increase in total cost of revenue was attributable primarily to the increased size of our services staff and the costs of providing services to support an increasingly geographically dispersed customer base, partially offset by lower product cost of revenue as a result of shipping fewer MeetingPlace systems.

Gross profit was $6.7 million for the first quarter of 2001, as compared to $7.6 million in the corresponding period of 2000. Gross margin was 66% as a percentage of revenue, for the first quarter of 2001, as compared to 74% for the corresponding period of 2000.

Product gross margin remained constant at 83% as a percentage of product revenue for the first quarter of 2001 and for the corresponding period of 2000. We expect that product gross margin may decrease in the future due in part to potential pricing pressure and an expected increase in the proportion of revenue derived from indirect distribution channels.

Service gross margin was 38% as a percentage of service revenue for the first quarter of 2001 as compared to 49% for the corresponding period in 2000. We expect that service gross margins will increase over the first quarter of 2001 but will remain below prior year levels as a result of the addition of support personnel, potential pricing pressure and an increase in the mix of lower margin service offerings.

Research and Development Expenses

Research and development expenses consist primarily of compensation and related costs for research and development personnel, facilities expenses for testing space and equipment and royalty payments. Research and development expenses were $1.8 million for the first quarter of 2001, which represented an increase of 13% when compared to corresponding period in 2000. As a percentage of total revenues, research and development expenses rose from 15% in the first quarter of 2000 to 17% in the first quarter of 2001. The increase was attributable primarily to the addition of personnel in our research and development organization associated with product development. We expect to continue to make substantial investments in research and development and anticipate that research expenses will continue to increase in absolute dollars.

Marketing and Sales Expenses

Marketing and sales expenses consist primarily of promotional expenditures and compensation and related costs for marketing and sales personnel. Marketing and sales expenses were $5.6 million for the first quarter of 2001, which represented an increase of 28% when compared to corresponding period in 2000. As a percentage of total revenues, marketing and sales expenses increased from 42% in the first quarter of 2000 to 55% in the first quarter of 2001. The increase in marketing and sales expenses as a percentage of revenue was due primarily to spending in advance of anticipated revenue. The increase in absolute dollars of $1.2 million for the first quarter year over year, reflected the addition of personnel in our sales and marketing organizations, as well as costs associated with increased selling efforts to develop market awareness of our products and services.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel expenses, legal and accounting expenses and other general corporate expenses. General and administrative expenses were $1.2 million for the first quarter of 2001, which represented an increase of 50% when compared to the corresponding period in 2000. As a percentage of total revenues, general and administrative expenses increased from 8% in 2000 to 12% in 2001. The increase in absolute dollars was attributable primarily to the addition of personnel in our general and administrative organization. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs related to the anticipated growth of our business.

Amortization of Deferred Stock Compensation

In connection with the completion of our initial public offering in May 1999, options granted in the last quarter of 1997, 1998 and the first quarter of 1999 have been considered to be compensatory. Total remaining deferred stock compensation associated with these options as of March 31, 2001 amounted to $509,000. This amount is being amortized based on the remaining vesting period of these options, and we expect amortization of approximately $284,000 over the remainder of 2001 and $225,000 in 2002 related to the options presently outstanding.

Interest Income, Net

Interest income, net of interest expense, was $565,000 for the first quarter of 2001, compared to interest income, net of interest expense, of $587,000 for the corresponding period in 2000. Interest expense was related to obligations under capital leases and equipment loans. The decrease in net interest income was attributable primarily to lower market interest rates.

Benefit from (Provision for) Income Taxes

For the quarter ended March 31, 2001, the benefit from income taxes was $492,000, compared to a provision of $596,000 in the quarter ended March 31, 2000. Our effective tax rate was approximately 36% for the first quarter of 2001 and approximately 41% for the same period in 2000. The decline in the effective rate was due to certain minimum taxes which offset the benefit from income taxes on a net loss in 2001.

Liquidity and Capital Resources

In May 1999, we completed an initial public offering of common stock, resulting in net proceeds to us of approximately $33.8 million. As of March 31, 2001, we had $37.6 million of cash, cash equivalents and investments, which represented 59% of total assets.

Cash used in operating activities was $2.2 million during the first three months of 2001, compared to cash provided by operating activities of $1.3 million in the same period of 2000. Cash used in operating activities increased in 2001 due to a net loss and an increase in accounts receivable, partially offset by an increase in deferred revenue and adjustments for non–cash items.

Cash used in investing activities in the first three months of 2001 was $3.0 million, which consisted primarily of the purchase of marketable securities of $16.5 million and purchase of property and equipment of $742,000, partially offset by maturities of marketable securities. For the first three months in 2000, cash used in investing activities was $4.3 million which consisted primarily of the purchase of marketable securities of $13.4 million and purchase of property and equipment of $1.1 million, partially offset by maturities of marketable securities.

Cash used in financing activities in the first three months of 2001 of $71,000 consisted primarily of payments on obligations under capital leases and notes payable of $94,000 partially offset by the proceeds from issuance of common stock under employee benefit plans. For the first three months of 2000, cash used in financing activities of $19,000 primarily consisted of payments on obligations under capital leases and notes payable of $159,000, partially offset by the proceeds from issuance of common stock under employee benefit plans.

We believe that our current cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Impact of Recently Issued Accounting Standards

Factors That May Affect Future Results

In addition to the other information in this report, the following factors should be considered carefully in evaluating the Company’s business and prospects:

Our future profitability is uncertain due to our limited operating history. We have a limited operating history and cannot assure you that our revenue will continue to grow or that we will return to profitability in the future. Our financial statements must be considered in light of the risks and uncertainties encountered by companies in the early stages of development. We rely substantially on sales of our MeetingPlace products, which have limited market acceptance.

Recent economic developments have caused many companies to reduce headcount and overhead expenses and to reconsider or delay capital expenditures. This may have an adverse effect on our ability to continue to grow revenue.

In addition, we are unable to predict our future product development, sales and marketing, and administrative expenses. To the extent that these expenses increase, we will need to increase revenue to sustain profitability. Our ability to increase revenue and sustain profitability also depends on the other risk factors described in this section.

Our operating results may fluctuate significantly. Our operating results are difficult to predict. Our future quarterly operating results may fluctuate and may not meet the expectations of securities analysts or investors. If this occurs, the price of our common stock would likely decline. The factors that may cause fluctuations of our operating results include the following:

• changes in our mix of revenues generated from product sales and services;

• changes by existing customers in their levels of purchases of our products and services;

• changes in our mix of sales channels through which our products and services are sold; and

• changes in our mix of domestic and international sales.

Additionally, we expect to expand our service offerings by providing hosted services to our customers. Accordingly, future revenue from this new service offering will increase the proportion of total revenue derived from services. To the extent that prospective customers elect to purchase the hosted service rather than an on-premises MeetingPlace system, our product revenue could be adversely affected.

Orders at the beginning of each quarter typically do not equal expected revenue for that quarter. In addition, a significant portion of our orders is received in the last month of each fiscal quarter. If we fail to ship products by the end of a quarter in which the order is received, or if our prospective customers delay their orders or delivery schedules until the following quarter, we may fail to meet our revenue objectives.

Our market is highly competitive. Because of intense market competition, we may not be successful. Currently, our principal competitors include:

• major telecommunications carriers that operate service bureaus for voice conferencing, such as AT&T Corp., MCI Worldcom, Inc. and Sprint Corporation;

• private branch exchange, or PBX, vendors that sell systems with voice conferencing capabilities, such as Lucent Technologies Inc. and Nortel Networks; and

• companies that offer web–based voice and data conferencing products.

Many of these companies have longer operating histories, stronger brand names and significantly greater financial, technical, marketing and other resources than we do. These companies also may have existing relationships with many of our prospective customers. In addition, these companies may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements.

In addition, we expect competition to persist and intensify in the future, which could adversely affect our ability to increase sales, penetrate new markets and maintain average selling prices. In the future, we may experience competition from potential competitors that include:

• networking companies, such as Cisco Systems, Inc., 3Com Corporation, Lucent Technologies Inc. and Nortel Networks that are focusing on enabling the transmission of voice over the Internet and that may offer voice and data conferencing functionality; and

• collaborative software providers, such as Microsoft Corporation and Lotus Development Corporation, that are focusing on data conferencing products and that may in the future incorporate voice conferencing functionality into their products.

Our market is in an early stage of development, and our products may not be adopted. If the market for our integrated voice and web conferencing products fails to grow or grows more slowly than we anticipate, we may not be able to increase revenues or return to profitability. The market for integrated real–time voice and web conferencing is relatively new and rapidly evolving. Our ability to remain profitable depends in large part on the widespread adoption by end users of real–time voice and web conferencing.

We will have to devote substantial resources to educate prospective customers about the uses and benefits of our products. In addition, businesses that have invested substantial resources in other conferencing products may be reluctant or slow to adopt our products, which might replace or compete with their existing systems. Our efforts to educate potential customers may not result in our products achieving market acceptance.

Rapid technological changes could cause our products to become obsolete or require us to redesign our products. The market in which we compete is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and emerging industry standards. In particular, we expect that the growth of the Internet and Internet–based telephony applications, as well as general technology trends such as migrations to new operating systems, will require us to adapt our product to remain competitive. This adaptation could be costly and time–consuming. Our products could become obsolete and unmarketable if products using new technologies are introduced and new industry standards emerge. For example, the widespread acceptance of competing technologies, such as video conferencing and the transmission of voice over the Internet, could diminish demand for our current products. As a result, the life cycle of our products is difficult to estimate.

To be successful, we will need to develop and introduce new products and product enhancements that respond to technological changes or evolving industry standards, such as the transmission of voice over the Internet, in a timely manner and on a cost effective basis. We cannot assure you that we will successfully develop these types of products and product enhancements or that our products will achieve broad market acceptance.

Our sales cycle is lengthy and unpredictable. Any delay in sales of our products could cause our quarterly revenue and operating results to fluctuate. The typical sales cycle of our products is lengthy, generally between six to nine months, unpredictable, and involves significant investment decisions by prospective customers, as well as our education of potential customers regarding the use and benefits of our products. Furthermore, many of our prospective customers have neither budgeted expenses for voice and web conferencing systems nor have personnel specifically dedicated to procurement and implementation of these conferencing systems. As a result, our customers spend a substantial amount of time before purchasing our products in performing internal reviews and obtaining capital expenditure approvals. We cannot be certain that this cycle will not lengthen in the future. The emerging and evolving nature of the real–time voice and web conferencing market may lead to confusion in the market, which may cause prospective customers to postpone their purchase decisions.

If we fail to expand our sales and distribution channels, our business could suffer. If we are unable to expand our sales and distribution channels, we may not be able to increase revenue or achieve market acceptance of our MeetingPlace product. We have recently expanded our direct sales force and plan to recruit additional sales personnel. New sales personnel will require training and take time to achieve full productivity, and there is strong competition for qualified sales personnel in our business. In addition, we believe that our future success is dependent upon establishing successful relationships with a variety of distribution partners. To date, we have entered into agreements with only a small number of these distribution partners. We cannot be certain that we will be able to reach agreement with additional distribution partners on a timely basis or at all, or that these distribution partners will devote adequate resources to selling our products. Furthermore, if our distribution partners fail to adequately market or support our products, the reputation of our products in the market may suffer. In addition, we will need to manage potential conflicts between our direct sales force and third–party reselling efforts.

Our ability to expand into international markets is uncertain. We intend to continue to expand our operations into new international markets. In addition to general risks associated with international expansion, such as foreign currency fluctuations and political and economic instability, we face the following risks and uncertainties any of which could prevent us from selling our products in a particular country or harm our business operations once we have established operations in that country:

• the difficulties and costs of localizing products for foreign markets, including the development of multilingual capabilities in our MeetingPlace system;

• the need to modify our products to comply with local telecommunications certification requirements in each country; and

• our lack of a direct sales presence in other countries, our need to establish relationships with distribution partners to sell our products in these markets and our reliance on the capabilities and performance of these distribution partners.

If we fail to integrate our products with third–party technology, our sales could suffer. Our products are designed to integrate with our customers’ data and voice networks, as well as with enterprise applications such as browsers and collaborative software applications. If we are unable to integrate our products with these networks and systems, sales of our products could suffer.

In addition, we may be required to engage in costly and time–consuming redesigns of our products because of technology enhancements or upgrades of these systems. We may not be able to redesign our products or be certain that any of these redesigns will achieve market acceptance. In addition, we will need to continually modify our products as newer versions of the enterprise applications with which our products integrate are introduced. Our ability to do so largely depends on our ability to gain access to the advanced programming interfaces for these applications, and we cannot assure you that we will have access to necessary advanced programming interfaces in the future.

We may experience difficulties managing our expected growth. Our recent growth has strained, and we expect that any future growth will continue to strain, our management systems and resources, which could hinder our ability to continue to grow in the future. We may also experience difficulties meeting the demand for our products and services. If we are unable to provide training and support for our products, the implementation process will be longer and customer satisfaction may be lower.

We may not be able to install management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. Competition for qualified personnel in the San Francisco Bay area, as well as other markets in which we recruit, is extremely intense and characterized by rapidly increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates.

Our business could suffer if we lose the services of our current management team. Our future success depends on the ability of our management to operate effectively, both individually and as a group. If we were to lose the services of any of these key employees we may encounter difficulties finding qualified personnel to replace them.

The loss of our right to use technology licensed to us by third parties could harm our business. We license technology that is incorporated into our products from third parties, including digital signal processing algorithms and the MeetingPlace server’s operating system and relational database. Any interruption in the supply or support of any licensed software could disrupt our operations and delay our sales, unless and until we can replace the functionality provided by this licensed software. Because our products incorporate software developed and maintained by third parties, we depend on these third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost–effective basis and respond to emerging industry standards and other technological changes.

Any interruption in supply of components from outside manufacturers and suppliers could hinder our ability to ship products in a timely manner. We rely on third parties to obtain most of the components of the MeetingPlace server and integrate them with other standard components, such as the central processing unit and disk drives. If these third parties are no longer able to supply and assemble these components or are unable to do so in a timely manner, we may experience delays in shipping our products and have to invest resources in finding an alternative manufacturer or manufacture our products internally.

In addition, we obtain key hardware components, including the processors and digital signal processing devices used in the MeetingPlace server, from sole source suppliers. In the past, we have experienced problems in obtaining some of these components in a timely manner from these sources, and we cannot be certain that we will be able to continue to obtain an adequate supply of these components in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components or to locate alternative sources of supply, we may experience delays in shipping our products and incur additional costs to find an alternative manufacturer or manufacture our products internally.

Our products may suffer from defects, errors or breaches of security. Software and hardware products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Any errors or defects that are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our customer relationships or reputation, and increased service and warranty cost. Our products may not be free from errors or defects after commercial shipments have begun, and we are aware of instances in which some of our customers have experienced product failures or errors.

Many of our customers conduct confidential conferences, and transmit confidential data, using MeetingPlace. Concerns over the security of information sent over the Internet and the privacy of its users may inhibit the market acceptance of our products. In addition, unauthorized users in the past have gained, and in the future may be able to gain, access to our customers’ MeetingPlace systems. Any compromise of security could deter people from using MeetingPlace and could harm our reputation and business and result in claims against us.

We may be unable to adequately protect our proprietary rights, and we may be subject to infringement claims. Unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary, which could cause our business to suffer. Furthermore, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States.

In the future, we may be subject to legal proceedings and claims for alleged infringement of third party proprietary rights. Any of these claims, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require us to enter into royalty or license agreements which are not advantageous to us. Parties making these claims may be able to obtain injunctive or other equitable relief, which could prevent us from selling our products.

Dell Computer Corporation has registered the “Latitude” mark for computers in the United States and in other countries. Dell’s United States trademark registration and Canadian application have blocked our ability to register the “Latitude Communications” and “Latitude” with logo marks in the United States and the “Latitude Communications” mark in Canada. Since we believe that we have priority of trade name usage in the United States, we have petitioned to cancel Dell’s United States registration and opposed its Canadian application. The outcome of these proceedings is uncertain. If Dell’s registration for the “Latitude” mark is not canceled or if we are unable to obtain consent from Dell for our registration of our marks, we may not be able to register our marks and would have to rely solely on common law protection for these marks. We cannot assure you that we will be free from challenges of or obstacles to our use or registration of our marks.

We are subject to government regulation, and our failure to comply with these regulations could harm our business. Our products are subject to a wide variety of safety, emissions and compatibility regulations imposed by governmental authorities in the United States or in other countries in which we sell our products. If we are unable to obtain necessary approvals or maintain compliance with the regulations of any particular jurisdiction, we may be prohibited from selling our products in that territory. In addition, to sell our products in many international markets, we are required to obtain certifications that are specific to the local telephony infrastructure.

Our stock price may be volatile. We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology–intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to:

• announcements of technological or competitive developments;

• acquisitions or strategic alliances by us or our competitors; or

• the gain or loss by us of significant orders.

Our executive officers and directors and their affiliates own a large percentage of our voting stock and could control the voting power of the common stock. Our executive officers and directors and their affiliates beneficially own, in the aggregate, a large percentage of our outstanding common stock. As a result, these stockholders are able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, deter or prevent transactions that would result in the change of control, which in turn could reduce the market price of our common stock.

Future sales of our common stock may depress our stock price.

If our stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market, the market price of our common stock could fall.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer. The portfolio includes only marketable securities with maturities of three to 24 months and with active secondary or resale markets to ensure portfolio liquidity. We have no investments denominated in foreign currencies and therefore are not subject to foreign currency risk on such investments.

The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio at March 31, 2001 (in thousands).

	2001	2002	Total

Mutual fund	$107	$—	$107
Average interest rate	5.06%	—	5.06%
Certificates of deposit	$3,000	$—	$3,000
Average interest rate	6.72%	—	6.72%
Corporate notes and bonds	$9,220	$6,462	$15,682
Average interest rate	6.94%	5.50%	6.35%

Currently, the majority of our sales and expenses are denominated in U.S. dollars and, as a result, we have not experienced significant foreign exchange gains and losses to date. While we do expect to effect some transactions in foreign currencies in the next 12 months, we do not anticipate that foreign exchange gains and losses will be significant. We have not engaged in foreign currency hedging activities to date.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings—Not Applicable.

Item 2. Changes in Securities and Use of Proceeds.

On May 6, 1999, in connection with the Company’s initial public offering, a Registration Statement on Form S–1 (No. 333–72935) was declared effective by the Securities and Exchange Commission, pursuant to which 3,125,000 shares of the Company’s Common Stock were offered and sold for the account of the Company at a price of $12.00 per share, generating gross offering proceeds of $37.5 million. The managing underwriters were Credit Suisse First Boston Corporation, Hambrecht & Quist LLC and Dain Rauscher Wessels. After deducting approximately $2.6 million in underwriting discounts and $1.1 million in other related expenses, the net proceeds of the offering were approximately $33.8 million. The Company has not yet used any of the funds from the initial public offering, and the $33.8 million has been invested in investment grade, interest bearing securities. The Company intends to use such remaining proceeds for capital expenditures, including the acquisition of redundant computer and communication systems, and for general corporate purposes, including working capital to fund increased accounts receivable and inventory levels.

Item 3. Defaults Upon Senior Securities—Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders—Not Applicable.

Item 5. Other Information—Not Applicable.

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

(a) Reports on Form 8–K—None
_____________

SIGNATURE

Pursuant to the requirements 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.

	Latitude Communications, Inc.


	By:	/s/ RICK M. MCCONNELL
		Rick M. McConnell Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)
Date: May 15, 2001