<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>e-7517.txt
<DESCRIPTION>ANNUAL REPORT FOR THE YEAR ENDED 6/30/01
<TEXT>
================================================================================

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

                                    FORM 10-K

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d)of the Securities
    Exchange Act of 1934 For the fiscal year ended June 30, 2001

                                       OR

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934

    For the transition period from _______________ to _______________

                        Commission File Number 000-19462


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


           Delaware                                              86-0446453
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)


                     5 Cambridge Center Cambridge, MA 02142
               (Address of principal executive offices, Zip Code)


        Registrant's telephone number, including area code (617) 354-0600


        Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $.01 par value                             The Nasdaq Stock Market

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

Indicate by check mark 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 registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant  was  approximately  $27,855,672  based on the closing  sale price as
reported by The Nasdaq Stock Market on September 27, 2001.

The number of shares  outstanding of each of the registrant's  classes of common
stock, as of September 27, 2001 was 15,737,668  shares of Common Stock, $.01 par
value.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions of the Proxy  Statement for the Annual Meeting of  Shareholders to
     be held on or about November 15, 2001, are  incorporated  by reference into
     Part III.
================================================================================
<PAGE>
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I
  Item 1.     Business....................................................   3-7

  Item 2.     Properties..................................................     8

  Item 3.     Legal Proceedings...........................................     8

  Item 4.     Submission of Matters to a Vote of Security Holders.........     8

PART II
  Item 5.     Market for Registrant's Common Equity and Related
              Stockholder Matters.........................................     9

  Item 6.     Selected Financial Data.....................................  9-10

  Item 7.     Management's Discussion and Analysis of Financial
              Condition and Results of Operation.......................... 11-21

  Item 7(a).  Quantitative and Qualitative Disclosures about Market
              Risk........................................................    21

  Item 8.     Financial Statements and Supplementary Data................. 22-40

  Item 9.     Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.........................    40

PART III
  Item 10.    Directors and Executive Officers of the Registrant..........    40

  Item 11.    Executive Compensation......................................    40

  Item 12.    Security Ownership of Certain Beneficial Owners
              and Management.............................................. 40-41

  Item 13.    Certain Relationships and Related Transactions..............    41

PART IV
  Item 14.    Exhibits and Reports on Form 8-K............................ 42-43

SIGNATURES................................................................    44

                                       2
<PAGE>
                                     PART I

ITEM 1. BUSINESS.

INTRODUCTION

     Artisoft,  Inc. ("Artisoft",  the "Company" or the "Registrant")  develops,
markets  and  sells  computer  telephony  software   application   products  and
associated services.

     The  Company's  principal  executive  offices  are  located at 5  Cambridge
Center, Cambridge,  Massachusetts 02142. The telephone number at that address is
(617)  354-0600.  The Company was  incorporated  in Arizona in November 1982 and
reincorporated by merger in Delaware in July 1991.

BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS

     During fiscal year 2001, the Company  strengthened its position in the open
systems  communications  market  by  investing  most  of  its  resources  in the
Company's TeleVantage product. TeleVantage is a software-based phone system that
runs on the Windows NT platform  and is primarily  sold to mid-sized  businesses
and corporate branch offices. TeleVantage has the functionality of a stand-alone
PBX plus additional call management  features.  These features include graphical
voice  mail,  multi-line  call  control,   "follow-me"  call  forwarding,  email
integration,  call/message  screening,  personalized call handling,  call center
capabilities,  web browser  interface  and support for  Internet  Protocol  (IP)
telephony.

     In fiscal year 2001, the Company announced two new major product releases -
TeleVantage  4.0, which is being  re-branded and  distributed by Toshiba America
Information Systems (TAIS), and TeleVantage CTM Suite, which is being pre-loaded
on certain configurations of the Intel Converged Communications Platform (ICCP).
In addition,  the Company expanded its sales and marketing agreements to over 20
companies.

     In September 2001,  Artisoft began to ship  TeleVantage 4.0, which includes
the new  TeleVantage  Call Center,  an add-on module that addresses the needs of
the mid-size call center  market.  TeleVantage  Call Center offers a feature set
that was  previously  out of reach for most small- to  medium-sized  businesses,
including  advanced  queue  routing,   comprehensive  trend  reports,  real-time
statistics tracking, remote IP agent support, and agent monitoring, coaching and
recording.

     TeleVantage 4.0 also represents the results of a joint-engineering  project
with TAIS to  integrate  TeleVantage  with TAIS  digital  handsets.  Through  an
Original  Equipment  Manufacturer  (OEM)  arrangement  with  Artisoft,  TAIS  is
marketing  TeleVantage 4.0 under the Strata CS brand, which is being distributed
and supported through TAIS's established dealer channel.

     In May 2001, Artisoft announced the first release of TeleVantage CTM Suite,
which  delivers on the  Company's  joint  engineering  relationship  with Intel.
TeleVantage CTM Suite is being pre-loaded on certain configurations of the Intel
Converged Communications Platform, an open,  standards-based,  application-ready
platform  that  supports a broad  range of  compatible  telephony  and  business
applications,  peripherals,  and  services  from  multiple  vendors  on a single
system.  The Company  delivered a final  version of this product to Intel in May
2001 and has completed its  development  obligations  under the initial phase of
this  agreement.  Although  TeleVantage CTM Suite began shipping in August 2001,
due to  changes  in Intel  release  schedules,  the  Company  now  expects  that
significant  revenues  from the CTM Suite will be deferred  until  calendar year
2002.

     During  the course of fiscal  year  2001,  Artisoft  also  forged  numerous
marketing  and  distribution  alliances  with other  leading  industry  vendors,
including  IBM,  Hewlett  Packard,   and  CDW.  Membership  in  Artisoft's  Open
Communications  Alliance,  launched in December 2000, grew to over 20 technology
vendors  offering  complementary  solutions,   including  customer  relationship
management,   call  center,   voice-over-IP,   unified  messaging,   and  speech
recognition.

                                       3
<PAGE>
     For the fiscal year ended June 30,  2001,  Artisoft  reported  net sales of
$7.5 million, as compared to net sales of $15.7 million in fiscal year 2000. The
decline  in  revenue  for  fiscal  year 2001 is  attributable  primarily  to the
discontinuation  of the company's  Visual Voice software product line. Also, the
results for fiscal year 2000 include  one-time  revenue of $2.7 million from the
sale of the Visual Voice  source code and $1.5  million of related  professional
service fees from Intel Corporation.  However, revenue from TeleVantage products
and  services  increased in fiscal year 2001  compared to fiscal year 2000.  The
increase is  attributable  to higher revenue from Toshiba and an increase in end
user software sales. The increase was partially offset by the Company's decision
to discontinue  selling add-on Dialogic  hardware and a decrease in distribution
channel inventories.

     During fiscal year 2000,  the Company grew its revenues in the  TeleVantage
product line,  established  alliances with technology and distribution  vendors,
and minimized its investment in non-strategic  product lines. Net sales from the
Company's  computer telephony products increased 120% to $15.7 million from $7.1
million in fiscal year 1999.

     The Company signed several strategic alliances, marketing, distribution and
OEM agreements  during fiscal year 2000. The Company entered into  relationships
with  Intel,  to port  TeleVantage  to Intel's  open,  standards-based  CT Media
platform,   and  TAIS  to  deliver  an  integrated   communications  server  and
software-PBX solution, as well as agreements with Microsoft Corporation, Teleco,
Goldmine,  Getronics  Solutions Italia S.p.A., ALR AG, Midia Ltd. and Commlogik,
among others.

     During fiscal year 2000, the Company  significantly  reduced its investment
in products marketed by its Communications  Software Group (CSG), which resulted
in higher profits from these products during the first half of fiscal year 2000.
Revenues  from CSG  product  decreased  substantially  in the third  and  fourth
quarters of fiscal year 2000,  and the Company sold its CSG division to Prologue
Software  for  $3.0  million  (which  included  $1.1  million  in  CSG  accounts
receivable)  effective June 30, 2000. Operating income from the CSG division was
$.9 million for fiscal year 2000.

     In December 1999, the Company announced the sale of its Visual Voice source
code to Intel for $2.7  million and $1.5  million in Visual  Voice  professional
services fees. The agreement  allowed the Company to continue to sell the Visual
Voice  product line until June 30,  2000.  Effective  July 1, 2000,  the Company
formally discontinued selling the Visual Voice product line.

     As a result of the Company's decision to sell its CSG business, the Company
reclassified  its CSG assets and  operations as a  discontinued  operation.  The
Company's  financial  statements for fiscal years 2001,  2000 and 1999 have been
prepared to reflect this  reclassification.  See Item 6. Selected Financial Data
for disclosure of net sales and net loss in fiscal year 1999 and prior years.

RAW MATERIALS, MANUFACTURING AND SUPPLIERS

     The Company does not manufacture  any of the hardware  necessary to be used
in  conjunction  with its  software-based  phone  system.  The  Company  and its
distributors   purchase  Intel  voice  processing   boards  for  sale  with  its
TeleVantage  product.  TeleVantage  is  designed  to operate on PCs of  multiple
manufacturers  in conjunction  with the Intel boards.  The  functionality of the
Company's telephony software products is dependent on the continued availability
of hardware  assemblies from Intel. To date,  customer  returns of the Company's
products for defective workmanship have not been material.

MARKETING, SALES AND DISTRIBUTION

     The  Company's  principal  marketing  strategy  is to create  reseller  and
customer  demand for the Company's  products and to use  distributors to fulfill
this demand.  The Company's  authorized  resellers and distributors are selected
for  their  sales  ability,   technical  expertise,   reputation  and  financial
resources.  The  Company  also  sells  direct to TAIS as an  Original  Equipment
Manufacturer  (OEM). The Company's selling efforts have been assisted by product
reviews, awards and recognition earned from computer telephony publications.

                                       4
<PAGE>
     The Company's  marketing  programs have three objectives:  first, to create
brand name  recognition  of the Company and its  products;  second,  to generate
sales leads for its resellers and distributors;  and third, to support the sales
efforts of its resellers and distributors  through market  development  funding,
sales  tools and  training.  Marketing  activities  that  address  the first two
objectives include frequent  participation in industry trade shows and seminars,
direct mail, advertising in major trade publications, executive participation in
press  briefings and industry  seminars,  sponsorship of seminars by the Company
and on-going  communication  with the Company's end users.  To train and support
resellers and distributors,  the Company provides electronic mailings of product
and technical  updates,  seminar material,  presentations,  and promotions.  The
Company also  conducts  marketing and sales  training to assist its  TeleVantage
resellers  and  distributors  with growing  their  business,  and offers  market
development funding to assist them in generating leads for TeleVantage systems.

     The Company is exposed to the risk of product  returns and  rotations  from
its distributors and volume  purchasers,  which are recorded by the Company as a
reduction  to sales.  Although  the  Company  attempts to monitor and manage the
volume of its sales to distributors and volume  purchasers,  overstocking by its
distributors  and volume  purchasers or changes in inventory  level  policies or
practices  by  distributors  and volume  purchasers  may  require the Company to
accept returns above historical levels. In addition, the risk of product returns
may increase if the demand for new products  introduced  by the Company is lower
than the Company  anticipates at the time of introduction.  Although the Company
believes that it provides an adequate allowance for sales returns,  there can be
no assurance that actual sales returns will not exceed the Company's  allowance.
Any product returns in excess of recorded  allowances could result in a material
adverse  effect on net sales and operating  results.  As the Company  introduces
more products, timing of sales to end users and returns to the Company of unsold
products by distributors and volume  purchasers become more difficult to predict
and could result in material fluctuations in quarterly operating results.

     Substantially  all of the Company's  revenue in each fiscal quarter results
from orders  booked in that quarter.  A significant  percentage of the Company's
bookings and sales to major  customers  on a quarterly  basis  historically  has
occurred during the last month of the quarter and is usually concentrated in the
latter half of that month.  Orders placed by major customers are typically based
upon the customers'  forecasted  sales level for Company  products and inventory
levels of Company  products  desired to be maintained by the major  customers at
the time of the orders.  Major  distribution  customers  may receive  negotiated
rebates applied against their account balance or market  development  funds from
the Company  for  purchasing  Company  products,  in  accordance  with  industry
practice.  Changes in purchasing  patterns by one or more of the Company's major
customers  related to customer  forecasts of future  sales of Company  products,
customer  policies  pertaining to desired  inventory levels of Company products,
negotiations  of market  development  funds or in the  ability of the Company to
anticipate  the mix of customer  orders or to ship large  quantities of products
near the end of a fiscal  quarter  could  result  in  material  fluctuations  in
quarterly  operating  results.  The  timing  of new  product  announcements  and
introductions  by the Company or significant  product returns by major customers
to the Company could also result in material fluctuations in quarterly operating
results.

     The Company  supports  its products  through  non-fee-based  phone  support
provided to TeleVantage  resellers and a web site. The resellers attend training
sessions  provided  by the  Company  prior to  being  certified  as  TeleVantage
resellers.

     The Company's ability to compete is dependent upon the timely  introduction
of new  products  to the  marketplace  and the timely  enhancement  of  existing
products.  Product development expenses totaled  approximately $3.7 million, 3.1
million, and $2.6 million in fiscal year 2001, 2000 and 1999, respectively.  The
Company  entered  into  joint  development  agreements  with  TAIS and  Intel in
December 1999 and January 2000, respectively. These development obligations were
substantially  completed in fiscal year 2001. See  "Management's  Discussion and
Analysis  of  Financial   Condition  and  Results  of  Operations"  for  further
discussion on these arrangements.

     The Company  utilizes a sales,  marketing  and  distribution  strategy with
regard to its TeleVantage product line as follows:  The Company employs regional
sales  managers  to  recruit  and  support  qualified   TeleVantage   resellers.
TeleVantage  software  is sold to  certain  national  distributors,  principally
Catalyst Telecom,  Cygcom,  Alliance and Tech Data. These distributors then sell
the  TeleVantage  software  and  associated  Intel  hardware  to  the  qualified
TeleVantage resellers as warranted by end user demand.

                                       5
<PAGE>
SEASONALITY

     Typically,   the   telecommunications  and  computer  telephony  industries
experience  some seasonal  variations  in demand,  with weaker sales in July and
August because of customers' vacations and planned international shutdowns. This
seasonality is especially notable in Europe.  Sales of phone systems can also be
weak in the months of January and February following typically stronger sales in
the November-December time frame.

COMPETITION

     The Company's TeleVantage  software-based phone system principally competes
with  proprietary  PBXs offered by companies such as Nortel,  Siemens and Avaya,
IP-PBX  products  offered  by Cisco and 3Com,  and  PC-PBX  products  offered by
Altigen.  Interactive  Intelligence offers a software-based phone system that is
targeted at high-end call center  environments.  While the Company believes that
its  TeleVantage  software offers  superior  functionality  and value than these
products, there can be no assurances that the Company's products will be able to
compete effectively against these proprietary PBX products.

INTERNATIONAL BUSINESS

     The Company  markets and sells its  products  in  international  as well as
domestic  markets.  In fiscal year 2001,  2000,  and 1999,  international  sales
accounted for 9%, 8%, and 12%,  respectively,  of the Company's net sales.  Less
than  1% of  the  Company's  assets  were  deployed  to  support  the  Company's
international business at the end of fiscal year 2001 and 2000.

     The Company's major international  distribution  relationships  include the
following   partners:   Icon  PLC  (United   Kingdom),   Midia  (Ireland),   ALR
(Switzerland),  Commlogik (Latin  America),  Boport  Tele-Communication  BV (The
Netherlands), ICG (Hong Kong) and Logic Phone (Spain).

     Sales to non-U.S.  customers  may be affected by  fluctuations  in exchange
rates and government  regulations.  To date, the Company's  operations  have not
been affected materially by currency fluctuations.

SIGNIFICANT CUSTOMERS

     The  Company   sells  its  products   through  a  variety  of  channels  of
distribution,  including distributors,  resellers and OEMs. In fiscal year 2001,
TAIS accounted for  approximately  21% of net sales,  Catalyst Telecom accounted
for  approximately  18% of net sales,  and Intel accounted for 15% of net sales,
respectively.  In fiscal year 2000,  Intel  accounted  for 20% of the  Company's
annual  net sales as a result of its  acquisition  of the Visual  Voice  product
line.  In fiscal  year  1999,  no  customer  accounted  for more than 10% of the
Company's annual net sales.

     At June 30, 2001,  TAIS  accounted  for  approximately  41%of the Company's
outstanding  trade  receivables and Catalyst Telecom accounted for approximately
16% of the Company's  outstanding trade receivables.  At June 30, 2000, Dialogic
(Intel)  accounted  for  approximately  23% of the Company's  outstanding  trade
accounts  receivable  and  Globaltron  accounted  for  approximately  10% of the
outstanding trade accounts  receivable.  No customer accounted for more than 10%
of the Company's  outstanding trade accounts receivable in fiscal year 1999. The
loss of any of the major distributors,  resellers,  OEMs or their failure to pay
the Company for products purchased from the Company could have an adverse effect
on the Company's operating results.  The Company's standard credit terms are net
30 days.

BACKLOG

     Substantially  all of the  Company's  revenue in each quarter  results from
orders  booked in that quarter.  Accordingly,  the Company does not believe that
its backlog at any particular point is indicative of future sales. The Company's
backlog  of orders at June 30,  2001 was  approximately  $7,000,  compared  with
approximately $48,000 at June 30, 2000.

                                       6
<PAGE>
PROPRIETARY RIGHTS AND LICENSES

     The Company  currently relies on a combination of copyright,  trademark and
patent laws,  nondisclosure and other contractual agreements and other technical
measures to establish and protect its proprietary  rights in its products and to
protect  its  technologies   from   appropriation   by  others.   Despite  these
precautions,  unauthorized  parties may attempt to copy aspects of the Company's
products or to obtain and use information the Company regards as proprietary. In
addition,  it may be possible for others to develop products using  technologies
similar  to  the  Company's  but  which  do  not  infringe  upon  the  Company's
proprietary rights.

     While the Company's  success will depend to a certain degree on its ability
to protect its  technologies,  the Company  believes that,  because of the rapid
pace of  technological  change in the industries in which the Company  competes,
the legal  protections  for its  products  are less  significant  factors in the
Company's  success than the  knowledge,  ability and experience of the Company's
employees,  the nature and frequency of product  enhancements and the timeliness
and quality of support services provided by the Company.

     From time to time,  the Company has received and may in the future  receive
communications  from third parties  asserting that the Company's  trade names or
features,  content,  or trademarks of certain of the Company's products infringe
upon intellectual  property rights held by such third parties.  As the number of
trademarks,  patents,  copyrights and other intellectual  property rights in the
Company's  industry  increases,  and as the coverage of these patents and rights
and the  functionality  of products in the market further  overlap,  the Company
believes that  products  based on its  technology  may  increasingly  become the
subject of infringement  claims. Such claims could have an adverse affect on the
Company and may also  require the  Company to obtain one or more  licenses  from
third  parties.  There can be no  assurance  that the  Company  would be able to
obtain any such required  licenses  upon  reasonable  terms,  if at all, and the
failure by the Company to obtain such licenses  could have an adverse  effect on
its business, results of operations and financial condition. If the Company were
able to obtain such licenses,  the licensing costs could  materially  affect the
Company's future financial results. In addition, the Company licenses technology
on a  non-exclusive  basis from several  companies for inclusion in its products
and anticipates  that it will continue to do so in the future.  The inability of
the  Company to  continue  to license  these  technologies  or to license  other
necessary  technologies for inclusion in its products,  or substantial increases
in royalty  payments  under these third  party  licenses,  could have an adverse
effect on its business, results of operations and financial condition.

     Litigation or threatened  litigation in the software  development  industry
has increasingly been used as a competitive tactic both by established companies
seeking to  protect  their  existing  position  in the  market  and by  emerging
companies attempting to gain access to the market. If the Company is required to
defend itself against a claim, whether or not meritorious,  the Company could be
forced to incur substantial expense and diversion of management  attention,  and
may  encounter  market  confusion  and  reluctance  of customers to purchase the
Company's software  products.  Such litigation,  if determined  adversely to the
Company, could have an adverse effect on its business, results of operations and
financial condition.

     In the course of its product development  efforts, the Company periodically
identifies  certain  technologies owned by others that either would be useful to
incorporate into its products or are necessary in order to remain competitive in
light of industry  trends.  In these cases the Company has in the past sought to
obtain licenses of such  third-party  technologies.  The Company expects that it
will continue to find it desirable or necessary to obtain additional  technology
licenses from others,  but there can be no assurance that any particular license
will be  available  at all, or on  acceptable  terms,  at any future  time.  The
royalties  paid on  future  licensing  arrangements  may  adversely  impact  the
Company's operating results.

     The Company paid  royalties to Lucent  Technologies  for its use of certain
licensed  technologies  in fiscal  year 2000.  The  Company is  required  to pay
additional  royalties to Lucent Technologies  should TeleVantage  software sales
reach certain  levels.  The licensing by this entity of their  products or brand
name  to  competitors  of the  Company,  or the  withdrawal  or  termination  of
licensing rights to the Company's technologies,  could have an adverse affect on
the  Company's  sale of products  incorporating  such licensed  technologies  to
original  equipment  manufacturers  and the Company's results of operations as a
whole.

                                       7
<PAGE>
EMPLOYEES

     As of June 30, 2001,  the Company had 105  full-time  employees,  including
approximately 41 in sales, marketing and customer support, 45 in engineering and
product development,  five in operations and 14 in administration.  In September
2001, the Company terminated the employment of 34 full-time employees due to the
completion of certain  development  projects and to reduce costs. The reductions
included 21 development  personnel,  nine sales, marketing and support personnel
and four administrative personnel.  Future success of the Company will depend in
large part on its  continued  ability to retain  highly  skilled  and  qualified
personnel. None of the Company's employees are represented by a labor union. The
Company has  experienced  no work stoppages and believes that its relations with
its employees are good.

RIGHTS PLAN

     On December 6, 1994,  the Board of Directors of the Company  authorized and
declared a dividend of one preferred  share purchase right for each common share
of the Company outstanding as of the close of business on December 27, 1994. The
Rights  Agreement  is  designed  to  protect  and  maximize  the  value  of  the
outstanding  equity  interests  in the  Company  in the event of an  unsolicited
attempt  by an  acquirer  to take over the  Company  in a manner or on terms not
approved by the Board of Directors. Each right, under certain circumstances, may
be exercised to purchase one one-thousandth of a share of the Company's Series A
Participating  Preferred  Stock at a price  of  $50.00  per  share  (subject  to
adjustment).  Under certain circumstances,  following (i) the acquisition of 25%
or more of the Company's outstanding common stock by an acquiring person or (ii)
the  commencement  of a tender  offer or exchange  offer which would result in a
person or group owning 25% or more of the  Company's  outstanding  common stock,
each  right may be  exercised  to  purchase  common  stock of the  Company  or a
successor  company with a market value of twice the $50.00  exercise  price.  On
July 18,  2001,  the  Company's  Board of  Directors  approved a  resolution  to
terminate the Rights Agreement effective December 31, 2001.

ITEM 2. PROPERTIES.

     The Company leases property as detailed in the following table.

<TABLE>
<CAPTION>
                                                      Owned or                             Lease
           Location              Approximate Size      Leased      Expiration Date      Intended Use
           --------              ----------------      ------      ---------------      ------------
<S>                             <C>                <C>           <C>                  <C>
     Tucson, Arizona               14,928 sq. ft.      Leased        March 2003           Operations
     Cambridge, Massachusetts      23,013 sq. ft.      Leased        September 2005       Office
     Cambridge, Massachusetts       8,313 sq. ft.      Leased        July 2002            Office
</TABLE>

     Aggregate  monthly  rental  payments  for  the  Company's   facilities  are
approximately  $139,000. The Company's current facilities are generally adequate
for  anticipated  needs over the next 12 to 24 months.  The Company does not own
any real property.

ITEM 3. LEGAL PROCEEDINGS

     The  Company  is a party to a number of legal  proceedings  arising  in the
ordinary  course  of its  business.  The  Company  believes  that  the  ultimate
resolution of these  proceedings  will not have a material adverse effect on its
financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

                                       8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT

     The  following  table  sets  forth  information  concerning  the  executive
officers of the Company as of September 15, 2001:

     Name                        Age                 Position
     ----                        ---                 --------
     Steven G. Manson             42       President and Chief Executive Officer

     Christopher H. Brookins      37       Vice President of Development and
                                           Chief Technology Officer

     Paul Gregory Burningham      44       Vice President of Sales

     Michael J. O'Donnell         58       Chief Financial Officer

     Kirk D. Mayes                33       Corporate Controller

     Mr.  Manson  joined  Artisoft in October 1996 as Vice  President of Product
Management - Computer Telephony Division.  In October 1997, Mr. Manson was named
Vice President and General Manager of the Computer  Telephony Products Group. In
October 1998, Mr. Manson was named Senior Vice President and General  Manager of
the Computer  Telephony Products Group. Mr. Manson was named President and Chief
Executive  Officer of the Company in July 2000. Mr. Manson joined  Artisoft from
Gensym  Corporation  where he was Director of Corporate  Marketing  from October
1995 to October 1996.

     Mr.  Brookins  joined  Artisoft  in  February  1996  as Vice  President  of
Development  -  Computer  Telephony  Division  upon the  acquisition  of  Stylus
Innovation by Artisoft.  In June 1999, Mr.  Brookins was named Chief  Technology
Officer  and Vice  President  of  Development  of  Artisoft.  Prior  to  joining
Artisoft,  Mr.  Brookins  served  as Vice  President  of  Development  at Stylus
Innovation from March 1993 to February 1996. Mr. Brookins has also held a senior
management  position  at Easel  Corporation  (a  manufacturer  of  client/server
development tools) from March 1989 to March 1993.

     Mr.  Burningham  joined  Artisoft in  February  2000 as Vice  President  of
Business  Development.  Mr.  Burningham  was named  Vice  President  of Sales in
September 2001. Mr. Burningham previously served as a management consultant from
September 1997 to February 2000 for a privately held computer telephony company.
Mr.    Burningham   served   as   President   of   AI/FOCS   (a   computer   and
data-communications  contract-manufacturing  company)  from  1995 to  1997.  Mr.
Burningham  also served as Vice President of Sales and Marketing at Molex,  Inc.
(a provider of voice and data premise cabling  equipment and services) from 1992
to 1995.

     Mr. O'Donnell  joined Artisoft in January 2001 as Chief Financial  Officer.
Prior to joining  Artisoft,  Mr.  O'Donnell  served as Vice  President and Chief
Financial Officer at Lily Transportation  Company (a truck leasing and logistics
support services  provider) from April 1999 to November 2000. Mr. O'Donnell also
served  as  Vice  President  and  Chief  Financial   Officer  at   SilverPlatter
International (a developer of search and retreival  software  applications) from
April  1995 to  April  1999  and  was  Chief  Financial  Officer  at  ChemDesign
Corporation (a designer and  manufacturer of chemical  products) from March 1992
to  March  1995.  Mr.  O'Donnell  is  a  Certified  Public   Accountant  in  the
Commonwealth of Massachusetts.

     Mr. Mayes joined  Artisoft in November  1994. In April 1996,  Mr. Mayes was
named Assistant Corporate Controller and in June 1997 Corporate Controller.  Mr.
Mayes has served as the Principal  Accounting Officer since June 1997. Mr. Mayes
held an  accounting  position  at Arthur  Andersen  LLP from  September  1991 to
November 1994.

                                       9
<PAGE>
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The principal  market for Artisoft common stock is the Nasdaq Stock Market.
The Company's common stock is traded on the Nasdaq Market under the symbol ASFT.

     The following table presents the high and low sales prices of the Company's
common stock for each  calendar  quarter of the fiscal years ended June 30, 2000
and 2001.

                                        2001                     2000
                                 -----------------       ------------------
                                   High       Low          High       Low
                                 -------    ------       -------    -------
     First Quarter               $ 12.00    $ 7.38       $  7.13    $  4.13
     Second Quarter                 7.75      2.63         19.25       5.75
     Third Quarter                  4.78      2.50         24.19      11.50
     Fourth Quarter                 4.60      1.75         15.44       8.56

     There were 279 record  holders of the  Company's  common  stock at June 30,
2001.

     The Company  paid no  dividends  in fiscal  year 2001 or 2000.  The Company
currently  intends to retain future  earnings to fund the development and growth
of its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA.

     Selected financial data for the last five years appear below (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                    Years Ended June 30,
                                              ----------------------------------------------------------------
                                                2001          2000          1999          1998          1997
                                              --------      --------      --------      --------      --------
<S>                                           <C>           <C>           <C>           <C>           <C>
STATEMENTS OF OPERATIONS DATA
Net revenue:
  Product                                     $  5,041      $ 13,283      $  7,144      $  4,771      $  4,734
  Services                                       2,423         2,406            --            --            --
Total net revenue                                7,464        15,689         7,144         4,771         4,734
Loss from operations                           (13,286)       (6,180)       (6,835)       (3,103)       (1,396)
Net loss from continuing operations            (12,756)       (5,265)       (6,011)       (1,376)         (745)
Net loss                                       (12,756)       (4,486)       (1,762)       (2,913)      (28,425)
Net loss per common share from continuing
 operations-basic and diluted                 $   (.82)     $   (.35)     $   (.41)     $   (.09)     $   (.05)
Net loss per common share-basic and diluted   $   (.82)     $   (.30)     $   (.12)     $   (.20)     $  (1.96)
Weighted average common shares outstanding      15,476        15,171        14,720        14,554        14,529

                                                                       AS OF JUNE 30,
                                              ----------------------------------------------------------------
                                                2001          2000          1999          1998          1997
                                              --------      --------      --------      --------      --------
BALANCE SHEET DATA
Working capital                               $  5,216      $  7,535      $ 15,870      $ 18,016      $ 18,700
Total assets                                     9,065        21,494        20,751        21,445        24,773
Shareholders' equity                             6,791        18,588        18,574        19,952        22,605
</TABLE>

                                       10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

OVERVIEW

     For the fiscal year ended June 30,  2001,  Artisoft  reported  net sales of
$7.5 million, as compared to net sales of $15.7 million in fiscal year 2000. The
decline  in  revenue  for  fiscal  year 2001 is  attributable  primarily  to the
discontinuation  of sales of the company's  Visual Voice software  product line.
Also, the fiscal year 2000 results include one-time revenue of $2.7 million from
the  sale  of  the  Visual  Voice  source  code  and  $1.5  million  of  related
professional  service  fees  from  Intel  Corporation.   However,  revenue  from
TeleVantage  products  and services  increased  in fiscal year 2001  compared to
fiscal year 2000.  The increase is  attributable  to higher revenue from Toshiba
America  Information  Systems (TAIS) and an increase in end user software sales.
The increase  was  partially  offset by the  Company's  decision to  discontinue
selling  add-on  Dialogic  hardware  and  a  decrease  in  distribution  channel
inventories.

     The Company sold its Communication  Software Group on June 30, 2000 and the
Company  reclassified its CSG assets and operations as discontinued  operations.
The  Company's  financial  statements  for fiscal  years 2000 and 1999 have been
prepared to reflect this reclassification.

     The Company sold its Visual  Voice  source code to Intel in December  1999.
The terms of the asset sale agreement included  provisions  allowing the Company
to  continue  to sell the  Visual  Voice  software  until June 30,  2000.  Intel
announced  the  discontinuation  of the  product in late June 2000.  The Company
recognized  $2.7 million in revenue from the sale of the software  code and $1.5
million in professional  services revenue associated with Visual Voice. The $2.7
million is classified  as Product  Revenue and the $1.5 million is classified as
Services  Revenue on the  Consolidated  Statement of Operations.  These revenues
were  recognized  ratably  over a 9-month  period from October 1999 through June
2000.

NEW PRODUCTS

     As of June 30, 2001,  the  Company's  products  included  TeleVantage  3.5,
TeleVantage  Call  Center  Reporter,   and  several  add-on  modules   including
TeleVantage Call Classifier, TeleVantage Smart Dialer and TeleVantage Persistent
Pager.

     In June 2000,  Artisoft released  TeleVantage 3.5 which, in addition to the
features  offered in TeleVantage 3.0,  offers:  BRI ISDN support,  international
language  capabilities,   IP  gateway  enhancements  and  increased  application
programability.  In addition to supporting Microsoft Windows NT, TeleVantage 3.5
supports  Windows  2000.  Other  features  included  in  TeleVantage  3.5  are a
localization toolkit that allows users to make adjustments to their voice-guided
interfaces and choose the appropriate  language for their phone system,  support
for a  low-cost  four-port  Voice  over  IP  (VoIP)  card  and  new  IP  Gateway
administration,  a  TeleVantage  Software  Development  Kit  (SDK)  that  allows
developers  and resellers to customize and add  functionality  to TeleVantage to
meet the needs of specific customers and vertical markets, and an E-911 solution
for small to medium-sized businesses that allows compliance with 911 regulations
set forth by many state and local agencies in the United States.

     On September 7, 2001,  Artisoft began shipping  TeleVantage  4.0, which, in
addition to the features  offered in TeleVantage  3.5,  includes new call center
capabilities,  such as queue routing,  comprehensive  trend  reports,  real-time
statistic tracking, remote IP agent support, and agent monitoring,  coaching and
recording.  In  addition  to these call  center  capabilities,  TeleVantage  4.0
provides  desktop  call  control  and  management,  rules-based  call  handling,
graphical voice mail, comprehensive messaging,  automated attendant, Web browser
access,  and  IP  telephony.   Industry-standard  APIs  enables  development  of
customized  applications  and tight  integration  with database  systems such as
customer relationship management applications.

     TeleVantage  4.0  includes the  introduction  of the new  TeleVantage  Call
Center,  an add-on  module that  addresses the needs of the mid-size call center
market.  TeleVantage Call Center offers a feature set that was previously out of
reach for most  small- to  medium-sized  businesses,  including  advanced  queue
routing,  comprehensive trend reports,  real-time statistics tracking, remote IP
agent support, and agent monitoring, coaching and recording.

                                       11
<PAGE>
     TeleVantage 4.0 also represents the results of a joint-engineering  project
with TAIS to  integrate  TeleVantage  with TAIS  digital  handsets.  Through  an
Original  Equipment  Manufacturer  "OEM"  arrangement  with  Artisoft,  TAIS  is
marketing  TeleVantage 4.0 under the Strata CS brand, which is being distributed
and supported through TAIS's established dealer channel.

NET REVENUES

     PRODUCT. Net product revenues decreased 62% to $5.0 million for fiscal year
2001 from $13.3 million for fiscal year 2000. Net product revenues increased 86%
for fiscal year 2000 from $7.1 million for fiscal year 1999. The decrease in net
product  revenues  for the fiscal  year ended June 30,  2001 as  compared to the
fiscal year ended June 30, 2000 was due primarily to the  discontinuation of the
Company's  Visual  Voice  software  product line and the  Company's  decision to
discontinue  selling add-on Dialogic  hardware to its value added resellers late
in fiscal year 2000.  However,  the decrease was partially offset by an increase
in  TeleVantage  end user  software  revenue.  Reflected in the revenues for the
fourth  quarter of fiscal year 2001 is a reduction in revenues of  approximately
$500,000 to reserve for channel  inventory  rotations.  With the introduction of
TeleVantage  4.0  distributors  are  expected  to  rotate  the  TeleVantage  3.5
inventory they will have on hand in September  2001.  This $500,000  reserve for
stock rotation is expected to be offset by a corresponding  amount in revenue to
be recorded in fiscal year 2002 upon the delivery of  TeleVantage  4.0. Also, in
the fourth quarter of fiscal year 2001,  revenues were increased $400,000 by the
reversal of a previously  established  returns reserve relating to the Company's
discontinued  product line,  which the Company  concluded was no longer  needed.
Additionally,  the Company recognized $ 2.7 million in revenues from the sale of
the Visual Voice  software code to Intel during  fiscal year 2000.  This revenue
was recognized  ratably as product  revenue  between October 1 1999 and June 30,
2000.

     The  increase  in net product  revenues  for the fiscal year ended June 30,
2000 as compared to the fiscal year ended June 30, 1999 was due to two  factors:
First,  an  increase  in sales of the  Company's  TeleVantage  product  line and
secondly, the sale of the Company's Visual Voice source code to Intel during the
quarter ended  December 31, 1999.  During the quarter  ended  December 31, 1999,
Intel  purchased the Company's  Visual Voice source code for $2.7 million.  This
revenue was recognized  ratably as product  revenue  between October 1, 1999 and
June 30, 2000.

     SERVICES.  Net service revenue  remained  unchanged at $2.4 million for the
fiscal years ended June 30, 2001 and 2000. The following factors  contributed to
the amount of net service revenues recognized during the fiscal years ended June
30, 2001 and 2000. The Company recognized $1.5 million in professional  services
fees from Intel upon the sale of the Visual Voice source code in December  1999.
Under the terms of this  arrangement,  the Company  provided  certain  sales and
support  services  for the Visual Voice  product line to Intel  through June 30,
2000.  An increase in service  revenues  recognized  from TAIS and Intel  during
fiscal year 2001  offset the loss of the $1.5  million in Visual  Voice  service
revenues in fiscal year 2001.  The Company  recognized an  immaterial  amount of
TeleVantage  consulting and training revenues in the fiscal years ended June 30,
1999, 2000 and 2001.

     In December 1999, the Company executed a strategic  partnership with Intel.
Under the terms of the agreement, the Company was required to provide Intel with
a  software-based  phone switch that is compatible with Intel  Corporation's  CT
Media Platform. In May 2001, Artisoft announced the first release of TeleVantage
CTM Suite,  which delivered on this joint  engineering  relationship with Intel.
TeleVantage CTM Suite is being pre-loaded on certain configurations of the Intel
Converged Communications Platform, an open,  standards-based,  application-ready
platform  that  supports a broad  range of  compatible  telephony  and  business
applications,  peripherals,  and  services  from  multiple  vendors  on a single
system.  The Company  delivered a final  version of this product to Intel in May
2001 and has completed its  development  obligations  under the initial phase of
this agreement. The Company has recognized service revenues associated with this
development  arrangement  of $823,000  and $495,000 for the years ended June 30,
2001 and 2000, respectively. The Company substantially completed the recognition
of this  revenue  upon  satisfying  its  development  obligations  in May  2001.
Although  TeleVantage CTM Suite began shipping in August 2001, due to changes in
Intel release schedules,  the Company now expects that significant revenues from
the CTM Suite will be deferred until calendar year 2002.

     In January 2000,  the Company  executed a strategic  partnership  agreement
with TAIS  intended  to allow the  Company  and TAIS to  deliver  an  integrated
communications   server  and  software-PBX   solution  for  small  and  midsized
businesses.  TeleVantage  4.0  represents  the  results  of a  joint-engineering
project with TAIS to integrate  TeleVantage with TAIS digital handsets.  Through
an Original Equipment Manufacturer "OEM" development  arrangement with Artisoft,
TAIS is  marketing  TeleVantage  4.0 under the  Strata CS brand,  which is being

                                       12
<PAGE>
distributed and supported through TAIS's established  dealer channel.  Under the
terms  of  the  agreement,  TAIS  will  purchase  licenses  of  TeleVantage  for
customized  versions of the software  product to be integrated  with its digital
handsets and communications server product offerings.  The costs associated with
this customization have been  substantially  incurred.  For the years ended June
30, 2001 and 2000,  the Company  recognized  service  revenues of $1,600,000 and
$411,000, respectively, under this arrangement.

     The Company  distributes its products  internationally  and tracks sales by
major geographic area.  Non-U.S.  sales  represented 9%, 8% and 12% of net sales
for fiscal 2001, 2000 and 1999, respectively.  International sales decreased 42%
to $.7 million in fiscal 2001 from $1.2 million in fiscal 2000,  which reflected
an  increase  of  33%  from  $.9  million  in  fiscal  1999.  The  decreases  in
international  sales in fiscal  year 2001 as  compared to fiscal year 2000 are a
result of decreased  sales of the  Company's  TeleVantage  software-based  phone
system in Europe  due to overall  decrease  in  capital  spending  in the global
telecommunications industry. The decrease in international sales as a percentage
of total net sales between  fiscal year 1999 and fiscal year 2000 is principally
the result of the recognition of $4.2 million in domestic revenue on the sale of
the Company's Visual Voice source code to Intel in December 1999.

GROSS PROFIT

     PRODUCT.  The  Company's  gross  profit from net  product  revenue was $3.5
million,  $8.0  million  and $3.9  million in fiscal  year 2001,  2000 and 1999,
respectively,  or 69%,  61% and 55% of net product  revenue,  respectively.  The
increase in gross profit  percentage  from net product  revenues for fiscal year
2001 as compared  to fiscal  year 2000 was due to an  increase in higher  margin
TeleVantage software sales and the Company's decision to discontinue selling low
margin add-on  Dialogic  hardware in April 2000.  In addition,  fiscal year 2000
gross  profit  margins were  favorably  impacted by the sale of the Visual Voice
source code.  The net decrease in aggregate  dollars of gross profit margin from
product  revenues  for  fiscal  year 2001 as  compared  to fiscal  year 2000 was
principally  due to the recognition of $2.7 million in revenues from the sale of
the Company's Visual Voice source code as net product revenue between October 1,
1999 and June 30, 2000 and the  discontinuation of Visual Voice product sales in
fiscal year 2001.  The net increase in aggregate  dollars of gross profit margin
from  product  revenues  for fiscal year 2000 as compared to fiscal year 1999 is
also due to the Visual  Voice  software  code sale in fiscal  year  2000.  Lower
overall net sales from the  Company's  add-on  Dialogic  hardware in fiscal year
2001 as compared to fiscal year 2000 also contributed to the aggregate  decrease
for fiscal year 2001. Gross profit may fluctuate on a quarterly and yearly basis
because of product  mix,  pricing  actions  and  changes in sales and  inventory
allowances.

     SERVICES.  The Company's  gross profit from net services  revenues was $ .7
million and $1.7 million in fiscal year 2001 and 2000, respectively,  or 30% and
72% of net  services  revenues,  respectively.  The  decrease in both  aggregate
dollars of gross profit from net services  revenues and gross profit  percentage
for fiscal year 2001 as compared to fiscal year 2000 was  principally the result
of the  inclusion  of $1.5  million in  professional  service  fees earned as an
element of the Visual Voice  software  code sale and  recognized  in fiscal year
2000.  Upon the sale of its Visual  Voice  source code in fiscal year 2000,  the
Company  agreed to provide  service and sales  support to Intel from  October 1,
1999 to June 30, 2000.

SALES AND MARKETING

     Sales and  marketing  expenses  were $8.9  million,  $10.0 million and $4.8
million for fiscal year 2001, 2000 and 1999,  respectively,  representing  119%,
64% and 67% of net revenue,  respectively.  The decreases in sales and marketing
expenses  in  aggregate  dollars for fiscal year 2001 as compared to fiscal year
2000 was due principally to the recognition of a non-cash charge of $2.3 million
during the quarter ended March 31, 2000  associated  with Artisoft  common stock
and a warrant issued to TAIS. This decrease was partially  offset by an increase
in sales,  support and marketing  personnel  costs between  fiscal year 2000 and
2001 to support anticipated revenue streams from the release of TeleVantage 4.0,
and the TAIS and Intel  arrangements.  In January 2000,  TAIS  acquired  100,000
shares of Artisoft common stock at a price of $6.994 per share and has the right
to acquire an additional 50,000 shares pursuant to a warrant agreement at a

                                       13
<PAGE>
strike price of $6.994.  The fair market  value of the Artisoft  common stock on
the date of execution of the  definitive  agreement was $21.50.  The  difference
between the issuance  price and fair market value of the Artisoft  common stock,
and the fair value of the warrants (which were priced based on the Black Scholes
Options Pricing Model) was charged to selling expense in the quarter ended March
31,  2000.  The  Company  received  proceeds  from  TAIS of  $700,000  from this
transaction  and a total of $2.3  million was charged to selling  expense.  $3.0
million was recorded as an addition to paid-in-capital.

     Higher sales and marketing  staffing  levels and higher  program  marketing
expenses  contributed  significantly  to the  increases  in sales and  marketing
expenses in aggregate  dollars for fiscal 2000 as compared to fiscal 1999. Sales
and marketing  expenses as a percentage of total  revenues  increased to 119% in
fiscal 2001 from 64% in fiscal 2000 and 67% in fiscal year 1999. The increase in
sales and marketing  expenses as a percentage of total  revenues for fiscal 2001
as  compared  to  fiscal  year 2000 is  principally  the  result of the  overall
decrease in net sales during fiscal year 2001 and the aforementioned increase in
sales and marketing  costs.  The decrease in sales and  marketing  expenses as a
percentage  of total  revenues  for fiscal  year 2000 as compared to fiscal year
1999 is attributable to increased  revenues  partially  offset by higher program
marketing expenses and higher personnel costs due to an expanded sales force.

PRODUCT DEVELOPMENT

     Product  development  expenses  were $3.7  million,  $3.1  million and $2.6
million for fiscal year 2001, 2000 and 1999, respectively, representing 49%, 20%
and  36% of  net  revenue,  respectively.  The  increase  in  aggregate  product
development expenses in fiscal year 2001 as compared to fiscal year 2000 and for
fiscal year 1999 is  principally  attributable  to the  addition of resources to
work  on the  development  of  TeleVantage.  The  addition  of  new  development
personnel  during the  fiscal  year ended  June 30,  2001 was  required  to meet
product  introduction  timetables.  The  increase in  development  expenses as a
percentage  of total net sales in fiscal  year 2001 as  compared  to fiscal year
2000 is  principally  the result of the overall  decrease in Visual  Voice sales
during these periods and the  aforementioned  additional  development  personnel
costs. The decrease in development expenses as a percentage of total net revenue
in fiscal year 2000 as compared to fiscal year 1999 is  primarily  the result of
the  recognition  of $2.7  million  in  revenues  from  Intel on the sale of the
Company's  Visual  Voice  source  code and the  recognition  of $1.5  million in
professional services fees from Intel associated with the Visual Voice sale. The
Company  believes the  introduction of new versions of TeleVantage to the market
in a timely manner is critical to its future success.

GENERAL AND ADMINISTRATIVE

     General and  administrative  expenses were $4.9  million,  $2.9 million and
$3.5 million for fiscal 2001, 2000 and 1999 respectively,  representing 66%, 18%
and 48% of net revenue, respectively. The increase in general and administrative
expenses  in  aggregate  dollars in fiscal  year 2001 as compared to fiscal year
2000 is  principally  the result of  additional  occupancy  cost incurred as the
result  of  the  expansion  of  the  Company's  Cambridge,   Massachusetts-based
headquarters and increased  depreciation  expense on the Company's fixed assets.
The  decrease in general and  administrative  expenses in  aggregate  dollars in
fiscal 2000 as compared to fiscal 1999 is primarily the result of reduced senior
administrative personnel costs in the later half of fiscal year 2000 as compared
to fiscal year 1999.  The increase in general and  administrative  expenses as a
percentage  of total net sales in fiscal year 2001  compared to fiscal year 2000
is principally attributable to the overall decrease in net sales of Visual Voice
products  between  fiscal year 2001 and fiscal year 2000 and the  aforementioned
increase in  occupancy  and  depreciation  expense.  The decrease in general and
administrative  expenses  as a  percentage  of net  revenue  in  fiscal  2000 as
compared to fiscal 1999 is primarily  the result of the revenues  recognized  on
the Visual Voice software code sale and associated  professional service fees in
fiscal year 2000.

OTHER INCOME (EXPENSE)

     Other income (expense),  net, was $.5 million,  $.9 million and $.8 million
for fiscal year 2001, 2000 and 1999, respectively.  The decrease in other income
between fiscal year 2001 and fiscal year 2000 was the result of a lower level of
interest rates combined with lower cash and investment balances.

                                       14
<PAGE>
INCOME TAX EXPENSE

     The effective  tax rates for the Company were 0% for fiscal 2001,  2000 and
1999. No income tax benefit was recognized for fiscal 2001, 2000 or 1999, as the
Company has fully utilized all federal net operating loss carryback potential.

FUTURE RESULTS

     The  Company  intends to continue  investing  in the sales,  marketing  and
development of its software-based phone system, TeleVantage. The Company expects
operating  expenditures for fiscal year 2002 to be lower than operating expenses
incurred in fiscal year 2001 due to headcount  reductions  implemented  in April
2001 and September 2001. In particular, the Company anticipates reduced research
and  development  expenses  primarily  as the  result  of  headcount  reductions
implemented  in September  2001  following  completion  of the  Company's  joint
development project with Intel and TAIS.

     The  Company  believes  that future  TeleVantage  revenues  will  gradually
increase and thereby,  in  conjunction  with  reductions in operating  expenses,
reduce  future  operating  losses.  However,  the rate at which  these  revenues
increase and future  operating  losses decrease will be highly  dependent on the
overall  telecom  industry  capital  spending  environment,  the rate of  market
acceptance  of  TeleVantage  4.0  and the  success  of the  Company's  strategic
relationships with TAIS and Intel.

     Specifically, through an OEM development arrangement with Artisoft, TAIS is
marketing  TeleVantage 4.0 under the Strata CS brand, which is being distributed
and supported through TAIS' established  dealer channel.  Under the terms of the
agreement, TAIS will purchase licenses of TeleVantage for customized versions of
the  software   product  to  be  integrated   with  its  digital   handsets  and
communications server product offerings. Any significant delay, cancellation, or
termination of this arrangement with TAIS will have a material adverse affect on
the  Company's   future  results  of  operations.   However,   any  such  events
aforementioned will be mitigated due to minimum revenue guarantees over the life
of the Company's OEM agreement with TAIS.

     In May 2001, Artisoft announced the first release of TeleVantage CTM Suite,
which  delivers on the  Company's  joint  engineering  relationship  with Intel.
TeleVantage CTM Suite is being pre-loaded on certain configurations of the Intel
Converged Communications Platform, an open,  standards-based,  application-ready
platform  that  supports a broad  range of  compatible  telephony  and  business
applications,  peripherals,  and  services  from  multiple  vendors  on a single
system.  The Company  delivered a final  version of this product to Intel in May
2001 and has completed its  development  obligations  under the initial phase of
this  agreement.  Although  TeleVantage CTM Suite began shipping in August 2001,
due to  changes  in Intel  release  schedules,  the  Company  now  expects  that
significant  revenues  from the CTM Suite will be deferred  until  calendar year
2002. Any significant  delay,  cancellation,  or termination of this arrangement
with Intel will have a material  adverse affect on the Company's  future results
of operations.

     Although the Company  believes  that the $3.9 million in proceeds  from its
August 8, 2001 equity  financing  will be sufficient to fund  operations for the
next twelve months,  it is seeking  additional equity financing of $3.1 million.
The  Company  has  signed a  definitive  agreement  to  secure  this  additional
financing subject to shareholder  approval.  In order to better pursue strategic
business opportunities, the Company may seek additional debt or equity financing
in excess of the $3.1 million  regardless of future operating losses incurred or
cash and investment levels.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had cash and cash  equivalents of $5.8 million at June 30, 2001
compared to $5.1 million at June 30, 2000 and working capital of $5.2 million at
June 30, 2001  compared to $7.5 million at June 30,  2000.  The increase in cash
and cash  equivalents  of $.7 million was the result of the  liquidation  of all
short  and  long-term  investments  and the  conversion  of a  portion  of these
proceeds into cash and cash equivalents less cash used in operations.

                                       15
<PAGE>
     The Company used $9.6 million in cash balances to fund operating activities
during  the  fiscal  year  ended  June  30,  2001.  The cash  used in  operating
activities was principally the result of the operating losses incurred offset by
the cash received from discontinued operations of $1.9 million. Cash provided by
investing  activities  was $9.3  million  during the fiscal  year ended June 30,
2001.  This was  principally  the  result  of the sale of  short  and  long-term
investments  offset by  purchases of property and  equipment.  Cash  provided by
financing  activities  of $1.0  million  resulted  from  employee  stock  option
exercises.

     The increase in the Company's cash and cash equivalents at June 30, 2001 as
compared to June 30, 2000 should be viewed  together  with the  decreases in the
Company's short and long-term investments at June 30, 2001, discussed below. The
total amount of the Company's  cash,  cash  equivalents  and short and long-term
investments  was $5.8 million at June 30, 2001 compared to $15.4 million at June
30, 2000, a decrease of $9.6 million,  or 62%. The cash  reduction was offset by
the receipt of proceeds of $1.9  million  (excluding  the  retention of accounts
receivable of $1.1 million) on the sale of the Company's  Communication Software
Group to Prologue  Software and the proceeds received upon the exercise of stock
options to purchase common stock. The Company expects its cash, cash equivalents
to decrease in the future as it incurs additional operating losses.

     On August 8, 2001 the Company entered into a definitive  agreement for a $7
million  private  placement  financing  to be conducted  in two  closings.  $3.9
million of the  financing  has been  funded and the  remaining  $3.1  million of
funding is subject to certain conditions,  including shareholder approval, which
the Company is currently seeking. Under terms of the agreement,  the Company has
issued 1,560,000  shares of Series B Convertible  Preferred Stock at a per share
price of $2.50. The Preferred Stock, which carries no dividend, can initially be
converted into a like number of shares of the Company's Common Stock, subject to
adjustment in certain events. Under certain  circumstances,  the Company has the
right to effect the  automatic  conversion  of the Series B  Preferred  Stock to
Common Stock when the market price of the Common  exceeds $5.00 per share for 30
consecutive  trading days. The holders of the Preferred  Stock, as a class,  are
entitled to elect two directors of the Company.

     In  addition,  the Company  issued to the holders of the  Preferred  Stock,
warrants to purchase up to 1,560,000  shares of the Company's  Common Stock. The
warrants  expire on September 30, 2006 and are  exercisable at a per share price
of $3.75.  The warrants have a call  provision  that provides that if the market
price of the Common Stock  exceeds  $7.50 per share for 30  consecutive  trading
days and other conditions are met, the Company has the right require the warrant
holders to convert their  warrants to Common Stock.  Both the per share exercise
price and the  number of shares  issuable  upon  exercise  of the  warrants  are
subject to adjustment in certain  events.  The fair market value of the warrants
and the beneficial  conversion  feature  embedded in the Preferred Stock will be
recorded  as  immediate   dividends  to  the  Preferred   Stockholders   with  a
corresponding credit to additional paid-in-capital.

     The  purchase  agreement  provides  for a second  closing  and,  subject to
shareholder approval and other conditions,  the Company will issue an additional
1,240,000  shares of  Series B  Convertible  Preferred  Stock  and  warrants  to
purchase  an  additional  1,240,000  shares  of  Common  Stock,  all  under  the
respective terms described above.

     The Company  anticipates  that its cash  balances at June 30, 2001 combined
with the  proceeds of $3.9  million  received  by the  Company in the  financing
completed on August 8, 2001 will be adequate to meet the  Company's  current and
expected cash requirements for the next year

SHORT-TERM AND LONG-TERM INVESTMENTS

     The Company had short and  long-term  investment  balances of $0 million at
June 30, 2001 compared to $10.3 million at June 30, 2000. The Company liquidated
all of these short- and long-term  investments  prior to maturity in fiscal year
2001 to fund operations.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141,  Business  Combinations  ("FAS  141")  and SFAS  142,  Goodwill  and  Other
Intangible  Assets ("FAS 142").  FAS 141  requires  that the purchase  method of
accounting be used for all business combinations  initiated after June 30, 2001.
FAS 141 also  specifies  the  criteria  that  intangible  assets  acquired  in a
purchase  method  business  combination  must meet to be recognized and reported
apart from goodwill.  FAS 142 requires that goodwill and intangible  assets with

                                       16
<PAGE>
indefinite  useful lives will no longer be amortized,  but instead be tested for
impairment, at least annually, in accordance with the provisions of FAS 142. FAS
142 will also  require  that  intangible  assets with  definite  useful lives be
amortized  over  their  respective  estimated  useful  lives to their  estimated
residual  values,  and  reviewed for  impairment  in  accordance  with SFAS 121,
Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets to be
Disposed Of.

     The provisions of FAS 141 are effective immediately,  except with regard to
business  combinations  initiated  prior  to June  30,  2001.  FAS  142  will be
effective as of January 1, 2002. Goodwill and other intangible assets determined
to have an  indefinite  useful life that are acquired in a business  combination
completed  after July 1, 2001 will not be  amortized,  but will  continue  to be
evaluated for impairment in accordance with  appropriate  pre-FAS 142 accounting
literature.   Goodwill  and  other   intangible   assets  acquired  in  business
combinations  completed before July 30, 2001 will continue to be amortized prior
to the  adoption  of FAS 142.  The  Company  does not  believe  there  will be a
material effect from the adoption of these new standards.

"SAFE HARBOR"  STATEMENT UNDER THE PRIVATE  SECURITIES  LITIGATION REFORM ACT OF
1995

     This  Annual  Report  on Form  10-K  contains  forward-looking  statements.
Forward-looking statements include those regarding the Company's goals, beliefs,
plans or current  expectations and other statements  regarding  matters that are
not  historical  facts.  For  example,   words  such  as  "project,"  "believe,"
"anticipate," "plan," "expect," "estimate," "intend," "should," "would," "will,"
"could," or "may," or other words that convey  uncertainty  of future  events or
outcome, are intended to identify forward-looking statements.  While the Company
may elect to update  forward-looking  statements in the future,  it specifically
disclaims  any  obligation  to do so, even if its  estimates  change,  and these
forward-looking  statements  should  not be  relied  upon  as  representing  the
Company's  views as of any date  subsequent to the date of this Annual Report on
Form 10-K. There are a number of important factors and uncertainties  that could
cause the Company's  actual results to differ  materially from those describe in
these forward-looking statements. These factors and uncertainties,  include, but
are not limited to, dependence on a single product, history of operating losses,
highly competitive market for our product, rapid technological changes, hardware
supplier dependencies and availability,  dependence on key personnel, volatility
of stock price and intellectual property infringement claims.

RISK FACTORS

OUR REVENUES ARE DEPENDENT UPON SALES OF A SINGLE PRODUCT.

     Our  revenues  are  derived  from sales of a single  product,  TeleVantage.
TeleVantage   is  a  relatively   new  product  in  the   emerging   market  for
software-based  phone systems and it is difficult to predict when or if sales of
TeleVantage  will increase  substantially  or at all. We face a substantial risk
that our sales will not cover our  operating  expenses and that we will continue
to  incur  operating  losses.  Our  business  will  fail  if we  are  unable  to
substantially  increase our  revenues  from sales of  TeleVantage,  whether as a
result of competition, technological change, price pressures or other factors.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES.

     We had operating losses for the year ended June 30, 2001 and in each of the
last five years, and negative cash flow from operating activities in four out of
the last five fiscal years  including  the fiscal year ended June 30, 2001.  The
Company intends to continue investing in the sales, marketing and development of
its  software-based  phone system,  TeleVantage.  The Company expects  operating
expenditures for fiscal year 2002 to be lower than operating  expenses  incurred
in fiscal year 2001 due to headcount  reductions  implemented  in April 2001 and
September  2001. In particular,  the Company  anticipates  reduced  research and
development expenses primarily as the result of headcount reductions implemented
in September  2001  following  completion  of the  Company's  joint  development

                                       17
<PAGE>
project  with  Intel and TAIS.  However,  we still  expect to incur  significant
future operating losses and negative cash flows. If our revenues do not increase
significantly  or the  reduction  in our  expenses  is  not  as  significant  as
expected, we may not achieve  profitability,  on a sustained basis or at all, or
generate  positive  cash flow in the future and as a result  our  business  will
fail.

OUR OPERATING RESULTS VARY, MAKING FUTURE OPERATING RESULTS DIFFICULT TO
PREDICT.

     Our operating  results have in the past  fluctuated,  and may in the future
fluctuate,  from  quarter  to  quarter,  as a  result  of a  number  of  factors
including, but not limited to:

     **   the extent and timing of sales and  operating  expense  increases  and
          decreases;

     **   changes  in  pricing  policies  or  price  reductions  by  us  or  our
          competitors;

     **   variations in our sales channels or the mix of product sales;

     **   the timing of new product announcements and introductions by us or our
          competitors;

     **   the availability and cost of supplies;

     **   the financial stability of major customers;

     **   market acceptance of new products and product enhancements;

     **   our  ability  to   develop,   introduce   and  market  new   products,
          applications and product enhancements;

     **   our ability to control costs;

     **   possible delays in the shipment of new products;

     **   our success in expanding our sales and marketing programs;

     **   deferrals of customer orders in anticipation of new products,  product
          enhancements or operating systems;

     **   changes in our strategy;

     **   personnel changes; and

     **   general economic factors.

     Our  software  products  are  generally  shipped as orders are received and
accordingly,  we have  historically  operated with little backlog.  As a result,
sales in any quarter are  dependent  primarily  on orders  booked and shipped in
that quarter and are not  predictable  with any degree of  certainty.  Sales may
also be affected by the level of returns beyond those estimated and provided for
at any point in time. In addition, our expense levels are based, in part, on our
expectations as to future  revenues.  If revenue levels are below  expectations,
operating  results  are  likely to be  adversely  affected.  Our net loss may be
disproportionately  affected by a reduction  in revenues  because of fixed costs
related  to  generating  our  revenues.  These or other  factors  may  influence
quarterly  results  in the future  and,  accordingly,  there may be  significant
variations in our quarterly operating results.  Our historical operating results
are not necessarily  indicative of future performance for any particular period.
Due to all of the foregoing factors,  it is possible that in some future quarter
our operating  results may be below the  expectations  of public market analysts
and investors.  In such event,  the price of our common stock could be adversely
affected.

                                       18
<PAGE>
     The Company  delivered a final version of TeleVantage CTM Suite to Intel in
May 2001 and has completed its development  obligations  under the initial phase
of our agreement  with them.  Although  TeleVantage  CTM Suite began shipping in
August 2001, due to changes in Intel release schedules, the Company expects that
significant  revenues  from the CTM Suite will be deferred  until  calendar year
2002. In addition,  the Company's  pricing of TeleVantage CTM Suite varies based
on  configuration.  There can be no  guarantee  that sales of Intel's  Converged
Communication  Platform will ship in sufficient  volume or produce revenues that
meet  the  Company's  expectations.  Any  significant  delay,  cancellation,  or
termination of this  arrangement  with Intel will have a material adverse affect
on the Company's future results of operations.

RECENT  TERRORIST  ACTIVITIES  AND  RESULTING  MILITARY AND OTHER  ACTIONS COULD
ADVERSELY EFFECT OUR BUSINESS.

Terrorist  attacks in New York and  Washington,  D.C. in  September of 2001 have
disrupted commerce throughout the United States and Europe. The continued threat
of terrorism  within the United States and Europe and the potential for military
action and  heightened  security  measures  in response to such threat may cause
significant disruption to commerce throughout the world. To the extent that such
disruptions  result in delays or  cancellations  of customer  orders,  a general
decrease in corporate  spending on information  technology,  or our inability to
effectively market and ship our products, our business and results of operations
could be materially and adversely affected. We are unable to predict whether the
threat  of  terrorism  or the  responses  thereto  will  result in any long term
commercial  disruptions or if such activities or responses will have a long term
material  adverse  effect on our  business,  results of  operations or financial
condition.

     WE MAY  HAVE A NEED  TO  PROCURE  ADDITIONAL  THIRD  PARTY  FINANCING,  BUT
FINANCING MAY NOT BE AVAILABLE WHEN NEEDED OR UPON TERMS  ACCEPTABLE TO US. IF A
FINANCING  IS  CONSUMMATED,  CURRENT  STOCKHOLDERS  MAY  EXPERIENCE  SUBSTANTIAL
DILUTION OF THEIR OWNERSHIP IN ARTISOFT.

     In the past, we have funded our continuing  operations and working  capital
requirements  primarily  through  cash  from  operations  and  the  sale  of our
securities. In order to obtain the funds to continue our operations and meet our
working capital requirements, we may require additional equity financing or debt
financing.  On August 8, 2001, the Company  entered into a definitive  agreement
for a $7 million  private  placement  financing to be conducted in two closings.
$3.9 million of the financing  closed on August 8, 2001 and the  remaining  $3.1
million of  financing  is  scheduled  to close on or before  December  31, 2001,
assuming stockholder approval of the closing. We may also from time to time seek
additional  equity  financing or debt  financing in order to fund other business
initiatives, including the acquisition of other businesses. Additional financing
may place significant limits on our financial and operating flexibility, and any
future financing could result in substantial dilution to our stockholders. There
can be no assurance that any such additional  equity financing or debt financing
will be available to us when needed or on terms  acceptable to us. If we are not
able to successfully  obtain additional  equity financing or debt financing,  if
needed, the business,  financial condition and results of operations of Artisoft
will likely be materially and adversely affected.

OUR MARKET IS HIGHLY  COMPETITIVE,  AND WE MAY NOT HAVE THE RESOURCES TO COMPETE
ADEQUATELY.

     The computer  telephony industry is highly competitive and is characterized
by  rapidly  evolving  industry   standards.   We  believe  that  the  principal
competitive factors affecting the markets we serve include:

     **   vendor and product reputation;

     **   product architecture, functionality and features;

     **   scalability, ease of use and performance;

     **   quality of product and support;

     **   price;

     **   Brand name recognition; and

     **   Effectiveness of sales and marketing efforts.

     We  compete  with  other  phone  system  companies,   many  of  which  have
substantially greater financial, technological,  production, sales and marketing
and other  resources,  as well as greater name  recognition  and larger customer
bases, than does Artisoft. As a result, these competitors may be able to respond
more quickly and effectively  than can Artisoft to new or emerging  technologies
and changes in customer  requirements  or to devote  greater  resources than can
Artisoft to the development,  promotion, sales and support of their products. In
addition,  our  competitors  could develop  products  compatible  with the Intel
SoftSwitch  Framework that could displace  TeleVantage CTM Suite.  Also, any new
product  introductions  by  Artisoft  may be subject  to severe  price and other
competitive  pressures.  Given the greater  financial  resources  of many of our
competitors,  there can be no assurance  that our products will be successful or
even  accepted.  There can be no  assurance  that our  products  will be able to
compete  successfully  with other products offered presently or in the future by
other vendors.

                                       19
<PAGE>
IF SOFTWARE-BASED PHONE SYSTEMS DO NOT ACHIEVE WIDESPREAD ACCEPTANCE, WE MAY NOT
BE ABLE TO CONTINUE OUR OPERATIONS.

     Our  sole   product,   TeleVantage,   competes   in  the   newly   emerging
software-based  phone system  market.  Software-based  phone systems  operate in
conjunction  with and are affected by developments in other related  industries.
These  industries  include highly developed  product  markets,  such as personal
computers,  personal computer operating systems and servers, proprietary private
branch  exchanges  and related  telephone  hardware and software  products,  and
telephone, data and cable transmission systems, as well as new emerging products
and industries, such as Internet communications and Internet Protocol telephony.
These  industries and product  markets are currently  undergoing  rapid changes,
market evolution and  consolidation.  The manner,  in which these industries and
products evolve,  including the engineering- and market-based decisions that are
made regarding the  interconnection of the products and industries,  will affect
the opportunities and prospects for TeleVantage.  TeleVantage  competes directly
with  other   software-based   phone  system   solutions  as  well  as  existing
traditional,  proprietary  hardware solutions offered by companies such as Avaya
Communications,  Nortel Networks Corporation and Siemens Corporation.  There can
be no assurance that the markets will migrate toward software-based phone system
solutions. If software-based phone systems do not achieve widespread acceptance,
sales of  TeleVantage  will not increase  and may decline and our revenues  will
suffer.

WE SELL OUR PRODUCTS THROUGH DISTRIBUTORS AND VALUE-ADDED RESELLERS, WHICH LIMIT
OUR ABILITY TO CONTROL THE TIMING OF OUR SALES,  AND THIS MAKES IT  DIFFICULT TO
PREDICT OUR REVENUE.

     We are exposed to the risk of product  returns  from our  distributors  and
value-added resellers,  which are estimated and recorded by us as a reduction in
sales.  In  addition,  we are exposed to the risk of  fluctuations  in quarterly
sales if  resellers  and  distributors  purchase and hold  excessive  amounts of
inventory at any time or otherwise change there purchasing patterns. Although we
monitor our  reseller  and  distributor  inventories  and current and  projected
levels of sales,  localized  overstocking may occur with TeleVantage  because of
rapidly evolving market conditions. In addition, the risk of product returns may
increase if the demand for  TeleVantage  were to rapidly decline due to regional
economic troubles or increased  competition.  All of these risks are exacerbated
as  TeleVantage is our sole product and the market for  TeleVantage  and similar
products  is newly  emerging.  There can be no  assurance  that  actual  product
returns will not exceed our allowances for these returns.  Any  overstocking  by
resellers  or  distributors  or  any  product  returns  in  excess  of  recorded
allowances  could  adversely  affect our revenues.  To the extent we may, in the
future,  introduce new products,  the  predictability and timing of sales to end
users and the management of returns to us of unsold products by distributors and
volume  purchasers  may  become  more  complex  and  could  result  in  material
fluctuations in quarterly sales and operating results.

OUR MARKET IS SUBJECT TO CHANGING PREFERENCES AND TECHNOLOGICAL CHANGE;  FAILURE
TO KEEP UP WITH THESE CHANGES WOULD RESULT IN OUR LOSING MARKET SHARE.

     The markets for computer  telephony  solutions are  characterized  by rapid
technological  change,  changing customer needs,  frequent product introductions
and evolving industry standards.  The introduction of products incorporating new
technologies  and the  emergence  of new  industry  standards  could  render our
existing products obsolete and unmarketable. Our future success will depend upon
our ability to develop and introduce new computer telephony products  (including
new  releases  and   enhancements)  on  a  timely  basis  that  keep  pace  with
technological  developments  and  emerging  industry  standards  and address the
increasingly  sophisticated  needs of our  customers.  There can be no assurance
that we will be successful in  developing  and marketing new computer  telephony
products that respond to technological  changes or evolving industry  standards,
that we will  not  experience  difficulties  that  could  delay or  prevent  the
successful  development,  introduction  and marketing of these new products,  or
that our new products will adequately  meet the  requirements of the marketplace
and achieve market  acceptance.  If we were unable,  for  technological or other
reasons,  to develop and introduce new computer  telephony  products in a timely
manner in response to changing market conditions or customer  requirements,  our
market share would likely be reduced.

                                       20
<PAGE>
SOFTWARE  ERRORS MAY  SERIOUSLY  HARM OUR  BUSINESS  AND DAMAGE OUR  REPUTATION,
CAUSING LOSS OF CUSTOMERS AND REVENUES.

     Software  products  as complex as those  offered by the Company may contain
undetected  errors.  There can be no  assurance  that,  despite  testing  by the
Company and by current and potential customers,  errors will not be found in new
or existing products,  including  TeleVantage,  after commencement of commercial
shipments,  resulting in loss of or delay in market  acceptance or the recall of
such products.  We provide customer support for most of our products.  We may in
the  future  offer new  products.  If these  products  are  flawed,  or are more
difficult  to use  than  TeleVantage,  customer  support  costs  could  rise and
customer satisfaction levels could fall.

WE RELY ON THIRD-PARTY  TECHNOLOGY AND HARDWARE PRODUCTS;  IF THIS TECHNOLOGY IS
NOT AVAILABLE OR CONTAINS UNDETECTED ERRORS, OUR BUSINESS MAY SUFFER.

     Our  computer  telephony  software  requires  the  availability  of certain
hardware.  Specifically, the TeleVantage software-based phone system operates on
voice processing  boards  manufactured by Intel. To the extent that these boards
become  unavailable  or in short supply we could  experience  delays in shipping
software-based phone systems to our customers, which may have a material adverse
affect on our future  operating  results.  In addition,  we are dependent on the
reliability  of this hardware and to the extent the hardware has defects it will
affect the performance of our own  software-based  phone system. If the hardware
becomes  unreliable  or does not perform in a manner that is  acceptable  to our
customers,  sales of TeleVantage  could fall. Such delays or quality problems if
encountered  could also  cause  damage to our  reputation  for  delivering  high
quality,  reliable computer telephony solutions.

     TeleVantage  currently  runs  only on  Microsoft  Windows  NT  servers.  In
addition, our products use other Microsoft Corporation  technologies,  including
the Microsoft Data Engine (MSDE).  A decline in market  acceptance for Microsoft
technologies  or the  increased  acceptance of other server  technologies  could
cause us to incur  significant  development  costs  and  could  have a  material
adverse  effect on our ability to market our current  products.  There can be no
assurance that businesses  will adopt  Microsoft  technologies as anticipated or
will not migrate to other competing  technologies that our telephony products do
not currently support.  Additionally,  since the operation of our software-based
phone system solution is dependent upon Microsoft technologies,  there can be no
assurances that, in the event of a price increase by Microsoft,  we will be able
to sell and market our software-based phone system.

     Our TeleVantage CTM Suite software  operates on voice processing  hardware,
computer  hardware,  CT  Media  software,   and  SoftSwitch  Framework  software
manufactured by Intel. To the extent that these technologies  become unavailable
or in short supply we could experience delays in shipping  TeleVantage CTM Suite
to our  customers,  which  may have a  material  adverse  affect  on our  future
operating  results.  In addition,  we are dependent on the  reliability of these
technologies  and to the extent they have defects it will affect the performance
of our own  software.  If the Intel  technologies  become  unreliable  or do not
perform in a manner that is acceptable to our  customers,  sales of  TeleVantage
CTM Suite could fall. Such delays or quality problems if encountered  could also
cause damage to our reputation for delivering  high quality,  reliable  computer
telephony solutions. Additionally, there can be no assurances that, in the event
of a  price  increase  by  Intel,  we  will be  able  to  sell  and  market  our
software-based phone system.

ANY FAILURE BY US TO PROTECT OUR  INTELLECTUAL  PROPERTY COULD HARM OUR BUSINESS
AND COMPETITIVE POSITION.

     Our success is  dependent  upon our  software  code base,  our  programming
methodologies  and other  intellectual  properties.  To protect our  proprietary
technology,  we rely  primarily  on a  combination  of  trade  secret  laws  and
nondisclosure,  confidentiality, and other agreements and procedures, as well as
copyright  and  trademark  laws.  These laws and actions may afford only limited
protection.  There  can be no  assurance  that  the  steps  taken  by us will be
adequate to deter misappropriation of our proprietary information, or to prevent
the successful assertion of an adverse claim to software utilized by us, or that

                                       21
<PAGE>
we will be able to detect  unauthorized  use and take effective steps to enforce
our  intellectual  property rights.  We own United States and foreign  trademark
registrations  for certain of our trademarks.  In selling our products,  we rely
primarily  on  "shrink  wrap"  licenses  that are not signed by  licensees  and,
therefore,  may be  unenforceable  under  the  laws  of some  jurisdictions.  In
addition,  the  laws  of  some  foreign  countries  provide  substantially  less
protection  to our  proprietary  rights  than do the laws of the United  States.
Trademark or patent  challenges in these foreign countries could, if successful,
materially  disrupt or even  terminate our ability to sell our products in those
markets.  There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not  independently  develop
similar  technology.  Although we believe  that our services and products do not
infringe on the  intellectual  property rights of others,  claims to that effect
have been and in the future may be asserted  against us. The failure of Artisoft
to protect its  proprietary  property,  or the  infringement  of its proprietary
property  on the  rights of  others,  could harm its  business  and  competitive
position.

WE NEED QUALIFIED PERSONNEL TO MAINTAIN AND EXPAND OUR BUSINESS.

     Our future  performance  depends in significant part upon key technical and
senior management personnel. We are dependent on our ability to identify,  hire,
train,  retain and motivate high quality  personnel,  especially  highly skilled
engineers  involved in the ongoing research and development  required to develop
and enhance our software products and introduce enhanced future products. A high
level of  employee  mobility  and  aggressive  recruiting  of skilled  personnel
characterize our industry.  There can be no assurance that our current employees
will  continue  to work  for us or  that  we  will  be  able to hire  additional
employees  on a timely  basis or at all.  We  expect to grant  additional  stock
options and provide other forms of incentive  compensation to attract and retain
key technical and executive personnel.  These additional incentives will lead to
higher  compensation  costs in the  future and may  adversely  affect our future
results of  operations.  These  difficulties  could lead to higher  compensation
costs and may adversely affect our future results of operations.

POSSIBLE ACQUISITIONS OR DIVESTITURES BY US INVOLVE RISKS THAT MAY HARM OUR
BUSINESS.

     From time to time, we may consider  acquisitions of or alliances with other
companies that could complement our existing business, including acquisitions of
complementary  product lines.  Although we may  periodically  discuss  potential
transactions with a number of companies, there can be no assurance that suitable
acquisition,  alliance or purchase  candidates  can be  identified,  or that, if
identified,  acceptable  terms can be agreed  upon or  adequate  and  acceptable
sources will be available to finance these transactions.  Even if an acquisition
or alliance is  consummated,  there can be no assurance  that we will be able to
integrate  successfully  acquired  companies or product  lines into our existing
operations,  which could  increase  our  operating  expenses in the  short-term.
Moreover,   acquisitions  by  Artisoft  could  result  in  potentially  dilutive
issuances  of  equity   securities,   the  incurrence  of  additional  debt  and
amortization of expenses related to goodwill and intangible assets, all of which
could  adversely  affect our  ability to  achieve  profitability.  Acquisitions,
alliances and divestitures  involve numerous risks, such as the diversion of the
attention  of our  management  from other  business  concerns,  the  entrance of
Artisoft  into  markets  in  which  it has  had no or only  limited  experience,
unforeseen  consequences  of exiting from product markets and the potential loss
of key employees of the acquired company.

ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     MARKET  RISK.  During the normal  course of business  Artisoft is routinely
subjected to a variety of market risks,  examples of which include,  but are not
limited to, interest rate movements and  collectibility of accounts  receivable.
Artisoft  currently  assesses  these  risks  and has  established  policies  and
practices to protect  against the adverse  effects of these and other  potential
exposures.  Although  Artisoft does not anticipate any material  losses in these
risk areas,  no assurances can be made that material losses will not be incurred
in these areas in the future.

     INTEREST  RATE  RISK.  Artisoft  may be exposed  to  interest  rate risk on
certain  of its  cash  equivalents.  The  value  of  certain  of  the  Company's
investments  may be  adversely  impacted in a rising  interest  rate  investment
environment. Although Artisoft does not anticipate any material losses from such
a movement in interest  rates,  no assurances  can be made that material  losses
will not be incurred in the future.

                                       22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                                 ARTISOFT, INC.
                          INDEX TO FINANCIAL STATEMENTS
                                  (ITEM 14(a))

                                                                  Page Reference
                                                                     Form 10-K
                                                                     ---------

Independent Auditors' Report                                            23

Consolidated Financial Statements:

  Consolidated Balance Sheets as of June 30, 2001 and 2000              24

  Consolidated Statements of Operations for the years ended
   June 30, 2001, 2000 and 1999                                         25

  Consolidated Statements of Changes in Shareholders' Equity
   for the years ended June 30, 2001, 2000 and 1999                     26

  Consolidated Statements of Cash Flows for the years ended
   June 30, 2001, 2000 and 1999                                         27

  Notes to Consolidated Financial Statements                           28-40


All schedules are omitted because they are not required, are not applicable,  or
the information is included in the financial statements or notes thereto.

                                       23
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Artisoft, Inc.:

We have audited the accompanying  consolidated balance sheets of Artisoft,  Inc.
and  subsidiaries  as of June 30,  2001 and  2000 and the  related  consolidated
statements of  operations,  changes in  shareholders'  equity and cash flows for
each  of the  years  in  the  three-year  period  ended  June  30,  2001.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  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.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Artisoft,  Inc. and
subsidiaries  as of June 30, 2001 and 2000 and the  results of their  operations
and their cash flows for each of the years in the  three-year  period ended June
30, 2001 in conformity  with  accounting  principles  generally  accepted in the
United States of America.

/s/ KPMG LLP

Boston, Massachusetts
August 9, 2001

                                       24
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                        June 30,       June 30,
                                                          2001           2000
                                                       ---------      ---------
ASSETS
Current assets:
  Cash and cash equivalents                            $   5,801      $   5,120
  Short-term investments                                      --          2,490
  Receivables:
    Trade accounts, net of allowances of $733 and
     $1,084 in 2001 and 2000, respectively                   488          1,511
    Other receivables                                         27            146
  Inventories                                                674            808
  Prepaid expenses                                           500            366
                                                       ---------      ---------
          Total current assets                             7,490         10,441
                                                       ---------      ---------

Long-term investments                                         --          7,797

Property and equipment                                     3,331          2,353
  Less accumulated depreciation and amortization          (1,943)        (1,140)
                                                       ---------      ---------
          Net property and equipment                       1,388          1,213
                                                       ---------      ---------

Other assets                                                 187            179

Net assets from discontinued operations                       --          1,864
                                                       ---------      ---------

                                                       $   9,065      $  21,494
                                                       =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                     $     682      $     928
  Accrued liabilities                                      1,424          1,937
  Deferred revenue                                           168             41
                                                       ---------      ---------
          Total current liabilities                        2,274          2,906
                                                       ---------      ---------

Commitments and contingencies                                 --             --

Shareholders' equity:
  Preferred stock, $1.00  par value. Authorized
   11,433,600 shares; none issued at June 30, 2001            --             --
  Common stock, $.01 par value.  Authorized 50,000,000
   shares; issued 29,051,168 shares at June 30, 2001
   and 28,742,744 shares at June 30, 2000                    291            287
  Additional paid-in capital                             102,318        101,363
  Accumulated deficit                                    (26,034)       (13,278)
  Less treasury stock, at cost, 13,320,500 shares at
   June 30, 2001 and June 30, 2000                       (69,784)       (69,784)
                                                       ---------      ---------
          Net shareholders' equity                         6,791         18,588
                                                       ---------      ---------
                                                       $   9,065      $  21,494
                                                       =========      =========

          See accompanying notes to consolidated financial statements.

                                       25
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                    Years Ended June 30,
                                                           --------------------------------------
                                                             2001           2000           1999
                                                           --------       --------       --------
<S>                                                        <C>            <C>            <C>
Net revenue:
  Product                                                  $  5,041       $ 13,283       $  7,144
  Services                                                    2,423          2,406             --
                                                           --------       --------       --------
       Total net revenue                                      7,464         15,689          7,144

Cost of sales:
  Product                                                     1,558          5,242          3,214
  Services                                                    1,695            665             --
                                                           --------       --------       --------
       Total cost of sales                                    3,253          5,907          3,214

Gross profit:
  Product                                                     3,483          8,041          3,930
  Services                                                      728          1,741             --
                                                           --------       --------       --------
       Total gross profit                                     4,211          9,782          3,930

Operating expenses:
  Sales and marketing                                         8,884         10,014          4,760
  Product development                                         3,691          3,078          2,555
  General and administrative                                  4,922          2,870          3,450
                                                           --------       --------       --------
       Total operating expenses                              17,497         15,962         10,765
                                                           --------       --------       --------

Loss from operations                                        (13,286)        (6,180)        (6,835)
                                                           --------       --------       --------
Other income (expense):
  Interest income                                               507            919            910
  Interest expense                                               --            (12)           (50)
  Gain on disposition of property and equipment                  --             --             10
  Other                                                          23              8            (46)
                                                           --------       --------       --------
       Total other income                                       530            915            824
                                                           --------       --------       --------

       Net loss from continuing operations                  (12,756)        (5,265)        (6,011)

Income from discontinued operations, net of tax                  --            880          4,249

Loss on sale of discontinued operations                          --           (101)            --
                                                           --------       --------       --------

       Net loss                                            $(12,756)      $ (4,486)      $ (1,762)
                                                           ========       ========       ========
Net loss per common share from continuing operations -
 Basic and Diluted                                         $   (.82)      $   (.35)      $   (.41)
                                                           --------       --------       --------

Net loss per common share - Basic and Diluted              $   (.82)      $   (.30)      $   (.12)
                                                           ========       ========       ========
Weighted average common shares outstanding -
 Basic and Diluted                                           15,476         15,171         14,720
                                                           ========       ========       ========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       26
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                   Common Stock           Additional                                   Net
                                              -------------------------    Paid-in     Accumulated     Treasury    Shareholders'
                                              Shares     $.01 Par Value    Capital       Deficit        Stock         Equity
                                              ------     --------------    -------       -------        -----         ------
<S>                                        <C>            <C>           <C>           <C>           <C>           <C>
Balances at June 30, 1998                   27,980,602       $   279      $  96,486    $   (7,030)   $  (69,784)    $  19,951

Exercise of common stock options               116,065             1            250            --            --           251
Issuance of common stock under employee
 stock purchase plan                            47,810             1            106            --            --           107
Tax benefit of disqualifying dispositions           --            --             27            --            --            27
Net loss                                            --            --             --        (1,762)           --        (1,762)
                                            ----------       -------      ---------    ----------    ----------     ---------
Balances at June 30, 1999                   28,144,477           281         96,869        (8,792)      (69,784)       18,574

Issuance of common stock to a third party
 for services                                  100,000             1          2,988            --            --         2,989
Exercise of common stock options               459,111             5          1,269            --            --         1,274
Issuance of common stock under
 employee stock purchase plan                   39,156            --            237            --            --           237
Net loss                                            --            --             --        (4,486)           --        (4,486)
                                            ----------       -------      ---------    ----------    ----------     ---------
Balances at June 30, 2000                   28,742,744           287        101,363       (13,278)      (69,784)       18,588

Exercise of common stock options               272,039             4            843            --            --           847
Issuance of common stock under
  employee stock purchase plan                  36,385            --            112            --            --           112
Net loss                                            --            --             --       (12,756)           --       (12,756)
                                            ----------       -------      ---------    ----------    ----------     ---------

Balances at June 30, 2001                   29,051,168       $   291      $ 102,318    $  (26,034)   $  (69,784)    $   6,791
                                            ==========       =======      =========    ==========    ==========     =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   Years Ended June 30,
                                                                        ----------------------------------------
                                                                          2001            2000            1999
                                                                        --------        --------        --------
<S>                                                                     <C>             <C>             <C>
Cash flows from operating activities:
  Net loss                                                              $(12,756)       $ (4,486)       $ (1,762)
                                                                        --------        --------        --------
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
    Depreciation and amortization                                            803             617             465
    Loss from disposition of property and equipment, net                      --              32              --
    Non-cash changes in accounts receivable and inventory allowances:
      Additions                                                              569             259             299
      Reductions                                                            (425)            (20)             --
    Common stock issued for services                                          --           2,989              --
    Tax benefit of disqualifying dispositions                                 --              --              27
  Changes in assets and liabilities:
    Receivables -
      Trade accounts                                                         911            (501)           (916)
      Other receivables                                                      119             (99)            (11)
    Inventories                                                              102            (506)           (191)
    Prepaid expenses                                                        (134)            (65)            (85)
    Accounts payable                                                        (246)             (3)            111
    Accrued liabilities                                                     (513)            700            (785)
    Deferred revenue                                                         127              32              --
    Net (increase) decrease in assets from discontinued operations         1,864            (348)          1,066
    Other assets                                                              (8)             --             (34)
                                                                        --------        --------        --------
          Net cash used in operating activities                           (9,587)         (1,399)         (1,816)
                                                                        --------        --------        --------
Cash flows from investing activities:
  Proceeds on sales of investments prior to maturity                      10,287              --              --
  Purchases of investment securities                                          --         (10,287)             --
  Purchases of property and equipment                                       (978)           (853)           (908)
                                                                        --------        --------        --------
          Net cash provided by (used in) investing activities              9,309         (11,140)           (908)
                                                                        --------        --------        --------
Cash flows from financing activities:
  Proceeds from issuance of common stock                                     959           1,511             358
                                                                        --------        --------        --------
          Net cash provided by financing activities                          959           1,511             358
                                                                        --------        --------        --------

Net increase (decrease) in cash and cash equivalents                         681         (11,028)         (2,366)
Cash and cash equivalents, beginning of year                               5,120          16,148          18,514
                                                                        --------        --------        --------
Cash and cash equivalents, end of year                                  $  5,801        $  5,120        $ 16,148
                                                                        ========        ========        ========
Supplemental cash flow information:
  Cash paid during the year for:
    Interest                                                            $     --        $     12        $     50
                                                                        ========        ========        ========
    Income taxes                                                        $      3        $     17        $     11
                                                                        ========        ========        ========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       28
<PAGE>
                        ARTISOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        (IN THOUSANDS, EXCEPT PERCENTAGES, SHARES AND PER SHARE AMOUNTS)


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

     Artisoft,  Inc. ("Artisoft",  the "Company" or the "Registrant")  develops,
markets  and  sells  computer  telephony  software   application   products  and
associated services.

     The  Company's  principal  executive  offices  are  located at 5  Cambridge
Center, Cambridge,  Massachusetts 02142. The telephone number at that address is
(617) 354-0600. The Company was incorporated in November 1982 and reincorporated
by merger in Delaware in July 1991.

BASIS OF CONSOLIDATION

     The  consolidated  financial  statements  include the accounts of Artisoft,
Inc.  and its three  wholly-owned  subsidiaries.  All  significant  intercompany
balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES

     The  Company's   preparation  of  consolidated   financial   statements  in
conformity with accounting principles generally accepted in the United States of
America  requires  management to make estimates and assumptions  that affect the
reported  amounts of assets and  liabilities  and the  disclosure  of contingent
assets and liabilities during the reported periods.  Actual results could differ
from those estimates.

CASH EQUIVALENTS

     The Company considers all highly liquid securities with original maturities
of three  months or less to be cash  equivalents.  As of June 30, 2001 and 2000,
the  Company  has  classified  securities  of $3.0  million  and  $4.1  million,
respectively,  with a  maturity  of less  than  three  months  as cash  and cash
equivalents.  The Company  intends to hold these  securities to maturity and has
presented them at their carrying value, which approximates fair value.

CLASSIFICATION AND PRESENTATION OF INVESTMENTS

     At June 30,  2000,  the  Company had $10.3  million in long and  short-term
investments.  Prior to June 30, 2000, the Company classified these securities as
"held to maturity" and accordingly,  presented the securities at cost,  adjusted
for the  amortization or accretion of premiums or discounts.  Subsequent to June
30, 2000, the company  reclassified  these securities as "available for sale" as
they were needed to fund operations and accordingly,  recorded the securities at
the current market value,  which  approximated  the carrying value at that time.
During the fiscal year ended June 30, 2001, the Company  liquidated all of these
securities prior to maturity to fund current operations.

CONCENTRATION OF CREDIT RISK, PRODUCT REVENUE AND MAJOR CUSTOMERS

     Financial   instruments,   which   potentially   subject   the  Company  to
concentrations of credit risk, consist  principally of cash and cash equivalents
and trade  receivables.  The Company  also places its cash and cash  equivalents
with  high-credit-quality  financial  institutions.  Credit risk with respect to
trade  receivables is generally  diversified due to the large number of entities
comprising  the  Company's  customer  base  and  their  dispersion  across  many
different customer groups and geographies.  The Company often sells its products
through  third-party  customers,  and, as a result,  may  maintain  individually
significant receivable balances with major customers.  The Company believes that
its credit evaluation,  approval and monitoring processes substantially mitigate
potential credit risks.

                                       29
<PAGE>
     The  Company   sells  its  products   through  a  variety  of  channels  of
distribution,  including distributors, resellers and OEMs. In fiscal 2001, three
customers   accounted  for  approximately  21%,  18%,  and  15%  of  net  sales,
respectively.  In fiscal 2000 one customer  accounted  for 20% of the  Company's
annual net sales as a result of that  customer's  acquisition  of the  Company's
Visual Voice product  line.  In fiscal 1999 no customer  accounted for more than
10% of the Company's annual net sales.

      At June 30, 2001, two customers  accounted for  approximately 41% and 16%,
respectively,  of the Company's outstanding trade receivables. At June 30, 2000,
one customer accounted for approximately 23% of the Company's  outstanding trade
accounts  receivable  and one customer  accounted for  approximately  10% of the
outstanding trade accounts receivable. At June 30, 1999, two customers accounted
for approximately 8% and 7%,  respectively,  of the Company's  outstanding trade
accounts  receivable.  The loss of any of the major  distributors,  resellers or
OEMs,  or their  failure to pay the  Company  for  products  purchased  from the
Company,  could have an adverse effect on the Company's  operating results.  The
Company's  standard  credit  terms are net 30 days,  although  longer  terms are
provided to various major customers on a negotiated basis from time to time.

DISCONTINUED OPERATIONS

     In September  1999, the Company  announced its intention to investigate the
potential separation of its then two existing business units: the Communications
Software Group (CSG) and the Computer  Telephony  Group (CTG).  On June 2, 2000,
the Company  signed a  definitive  agreement  to sell the CSG assets to Prologue
Software Group for approximately $1.9 million in cash proceeds and approximately
$1.1  million in CSG accounts  receivable  (approximate  gross  proceeds of $3.0
million).  The Company subsequently  collected on substantially all of these CSG
accounts  receivable.  The sale was closed in July 2000 effective June 30, 2000.
Thus the Company has reclassified the accompanying  consolidated balance sheets,
statements of  operations  and  statements of cash flows of CSG to  Discontinued
Operations.

     The components of Net Assets of Discontinued Operations as of June 30, 2001
and June 30, 2000 are as follows (in thousands):

                                                        YEARS ENDED JUNE 30,
                                                      -----------------------
                                                        2001            2000
                                                      -------         -------
     Accounts receivable                               $  --          $ 1,025
     Inventories                                          --              467
     Prepaid expenses                                     --               39
     Property and equipment, net                          --              269
     Other assets                                         --              360
     Accounts payable
                                                          --              (58)
     Accrued liabilities
                                                          --             (238)
     Current portion of capital lease obligation          --               --
                                                       -----          -------
     Net Assets of Discontinued Operations             $  --          $ 1,864
                                                       =====          =======

     The  following is a summary of the  operating  results of the  Discontinued
Operations for the fiscal years ended June 30, 2000 and 1999 (in thousands):

                                                       YEARS ENDED JUNE 30,
                                                     -----------------------
                                                       2000            1999
                                                     -------         -------
     Net sales                                       $ 9,862         $15,160
     Cost of sales                                     2,382           3,641
                                                     -------         -------
     Gross profit                                      7,480          11,519
                                                     -------         -------
     Operating expenses                                6,600           7,270
                                                     -------         -------
     Net income                                      $   880         $ 4,249
                                                     =======         =======

                                       30
<PAGE>
INVENTORIES

     Inventories  are stated at the lower of cost or market and consist of Intel
hardware,  manuals,   diskettes,   CD-ROMs  and  packaging  materials.  Cost  is
determined using the first-in, first-out method.

PROPERTY AND EQUIPMENT

     Property  and  equipment  are  stated  at cost  and  depreciated  over  the
estimated useful lives of one to three years for computer software,  of three to
five years for computer  hardware and other  equipment,  of three to seven years
for furniture and fixtures, and the shorter of the asset life or the life of the
lease in the case of leasehold improvements.

OTHER ASSETS

     Other assets are stated at cost and are  comprised of purchased  technology
and recoverable  deposits.  Amortization  of purchased  technology is calculated
using the straight-line  method over a five-year life.  Purchased technology was
fully amortized as of June 30, 2001.

INCOME TAXES

     Income taxes have been accounted for under the asset and liability  method.
Under the asset and liability  method,  deferred tax assets and  liabilities are
recognized for the future tax consequences  attributable to differences  between
the financial  statement carrying amounts of existing assets and liabilities and
their  respective  tax bases and  operating  loss and tax  credit  carryforward.
Deferred  tax  assets and  liabilities  are  measured  using  enacted  tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation  allowance against deferred
tax assets is recorded if, based upon the weight of all available  evidence,  it
is more likely than not that some or all of the  deferred  tax asset will not be
realized.

REVENUE RECOGNITION

     The  Company  follows  the  provisions  of  SOP  97-2,   SOFTWARE   REVENUE
RECOGNITION as amended by SOP 98-9,  Modification  of SOP 97-2 Software  Revenue
Recognition,  with  Respect  to Certain  Transactions.  Generally,  the  Company
recognizes  revenue when it is realized or  realizable  and earned.  The Company
considers revenue realized or realizable and earned when persuasive  evidence of
an  arrangement  exists,  the product has been shipped or the services have been
provided  to the  customer,  the  sales  price  is  fixed  or  determinable  and
collectibility is reasonably assured.  The Company reduces revenue for estimated
customer  returns,  rotations and sales rebates.  Revenue from software  license
agreements that have significant customizations and modification of the software
product is deferred and recognized in a manner that  approximates the percentage
of completion  method.  In addition to the  aforementioned  general policy,  the
following are the specific revenue recognition  policies for each major category
of revenue.

     SERVICES. Revenue from time and material service contracts is recognized as
the  services are  provided.  Revenue  from fixed  price,  long-term  service or
development  contracts  is  recognized  over  the  contract  term  based  on the
percentage  of services  that are provided  during the period  compared with the
total  estimated  services to be provided  over the entire  contract.  Losses on
fixed price  contracts are recognized  during the period in which the loss first
becomes apparent.

     PRODUCTS-SOFTWARE,  NOT-FOR-RESALE KITS (NFR'S) AND HARDWARE.  Revenue from
delivered  elements of one-time  charge  licensed  software is recognized at the
inception  of  the  license  term,  provided  the  Company  has  vendor-specific
objective  evidence of the fair value of each  undelivered  element.  Revenue is
deferred  for  undelivered  elements.  Revenue is also  deferred  for the entire
arrangement if  vendor-specific  evidence  objective evidence does not exist for
each undelivered contract element. Examples of undelivered elements in which the
timing of delivery is uncertain include contractual elements that give customers

                                       31
<PAGE>
rights to any future upgrades at no additional charge or future maintenance that
is provided  within the overall  price.  The  revenue  that is deferred  for any
contract element is recognized when all of the revenue recognition criteria have
been  met for  that  element.  Revenue  for  annual  software  subscriptions  is
recognized ratably over the length of the software subscription.

     In December 1999, the Company executed a strategic  partnership with Intel.
Under the terms of the agreement,  the Company is required to provide Intel with
a software-based phone switch,  voice mail and auto attendant  applications that
are compatible with Intel's softswitch  framework and CT Media platform.  In May
2001, Artisoft announced the release of these  applications,  called TeleVantage
CTM Suite.  TeleVantage CTM Suite is being loaded on certain  configurations  of
the  Intel  Converged   Communications   Platform,   an  open   standards-based,
application-ready  platform  that  will  support  a broad  range  of  compatible
telephone  and  business  applications,  peripherals,  and  services  from multi
vendors on a single system.  The Company  delivered this product to Intel in May
2001, and Intel began shipping the  applications in August 2001. The Company has
recognized revenues associated with this fixed price development  arrangement of
$821,000  and  $495,000  for the  fiscal  years  ended  June 30,  2001 and 2000,
respectively.  The  Company  substantially  completed  the  recognition  of this
revenue upon satisfying its development obligations in May 2001.

     In January 2000,  the Company  executed a strategic  partnership  agreement
with Toshiba  America  Information  Systems (TAIS) intended to allow the Company
and  TAIS to  deliver  an  integrated  communications  server  and  software-PBX
solution for small and  midsized  businesses.  TeleVantage  4.0  represents  the
results  of a 1-1/2  year  joint-engineering  project  with  TAIS  to  integrate
TeleVantage  with  TAIS  digital   handsets.   Through  an  Original   Equipment
Manufacturer "OEM" arrangement with Artisoft,  TAIS is marketing TeleVantage 4.0
under the Strata CS brand,  which is being  distributed  and  supported  through
TAIS's established dealer channel.  Under the terms of the agreement,  TAIS will
purchase licenses of TeleVantage for customized versions of the software product
to be integrated  with its digital  handsets and  communications  server product
offerings.  The costs associated with this customization have been substantially
incurred and reported as an element of cost of sales as part of this development
agreement.  For the years ended June 30, 2001 and 2000,  the Company  recognized
revenue of $1,600,000 and $411,000, respectively, under this arrangement.

PRODUCT DEVELOPMENT

     Development of new software  products and enhancements to existing software
products  are  expensed as incurred  until  technological  feasibility  has been
established.  After  technological  feasibility  is  established  and  until the
products are available for sale,  software  development  costs incurred would be
capitalized  and  amortized  over the life of the  product.  Because the Company
believes its current  process for developing  software is essentially  completed
concurrently  with the  establishment of technological  feasibility,  no product
development  costs have been  capitalized  to date as these  costs have not been
material.

COMPREHENSIVE INCOME (LOSS)

     In June 1997, the FASB issued Statement of Financial  Accounting  Standards
No. 130,  "Reporting  Comprehensive  Income"  (SFAS No.  130) which  established
standards for reporting and display of  comprehensive  income and its components
in the financial statements. The impact of unrealized gains/losses on marketable
securities  and cumulative  translation  adjustments  from the foreign  currency
translation are reported in accumulated other comprehensive  income (loss), as a
separate component of stockholders' equity. To date, the Company has not had any
transactions recorded in comprehensive income (loss).

COMPUTATION OF NET LOSS PER SHARE

     Net Loss per  share-basic  is based  upon the  weighted  average  number of
common shares outstanding. Net loss per diluted share is based upon the weighted
average  number of common  and common  equivalent  shares  outstanding  assuming
dilution. Common equivalent shares, consisting of outstanding stock options, are
included in the per share calculations where the effect of their inclusion would
be dilutive.

                                       32
<PAGE>
     A  reconciliation  of basic  weighted  average  common shares with weighted
average shares assuming dilution is as follows (in thousands):

                                                          Years Ended June 30,
                                                     ---------------------------
                                                      2001       2000      1999
                                                     ------     ------    ------
     Weighted average shares--basic                  15,476     15,171    14,720

     Net effect of dilutive potential common
      shares outstanding based on the Treasury
      stock method using the average market price       --         --        --

     Weighted average common shares assuming
      dilution                                       15,476     15,171    14,720

     Antidilutive potential common shares excluded
      from the computation above                        290      1,171       204

STOCK BASED COMPENSATION

     The Company  accounts for stock options  granted under its stock  incentive
plans in accordance with the provisions of Accounting  Principles  Board ("APB")
Opinion  No.  25,  Accounting  for  Stock  Issued  to  Employees,   and  related
interpretations.  Accordingly,  compensation  cost, for stock options granted to
employees and directors is measured as the excess, if any, of the current market
price of the underlying  stock over the exercise price.  The Company follows the
disclosure requirements for statement of Financial Accounting Standards No. 123,
"Accounting  for  Stock-Based  Compensation"  ("SFAS No. 123").  All stock-based
awards to non-employees are accounted for at their fair value in accordance with
SFAS 123 and related interpretations.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141,  Business  Combinations  ("SFAS  141")  and SFAS  142,  Goodwill  and Other
Intangible  Assets  ("SFAS 142").  FAS 141 requires that the purchase  method of
accounting be used for all business combinations  initiated after June 30, 2001.
FAS 141 also  specifies  the  criteria  that  intangible  assets  acquired  in a
purchase  method  business  combination  must meet to be recognized and reported
apart from goodwill.  FAS 142 requires that goodwill and intangible  assets with
indefinite  useful lives will no longer be amortized,  but instead be tested for
impairment, at least annually, in accordance with the provisions of FAS 142. FAS
142 will also  require  that  intangible  assets with  definite  useful lives be
amortized  over  their  respective  estimated  useful  lives to their  estimated
residual  values,  and  reviewed for  impairment  in  accordance  with SFAS 121,
Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets to be
Disposed Of.

     The provisions of FAS 141 are effective immediately,  except with regard to
business  combinations  initiated  prior  to June  30,  2001.  FAS  142  will be
effective as of January 1, 2002. Goodwill and other intangible assets determined
to have an  indefinite  useful life that are acquired in a business  combination
completed  after July 1, 2001 will not be  amortized,  but will  continue  to be
evaluated for impairment in accordance with  appropriate  pre-FAS 142 accounting
literature.   Goodwill  and  other   intangible   assets  acquired  in  business
combinations  completed  before July 1, 2001 will continue to be amortized prior
to the  adoption  of FAS 142.  The  Company  does not  believe  there  will be a
material effect from the adoption of these new standards.

IMPAIRMENT OF LONG-LIVED ASSETS

     The Company reviews long-lived assets and certain identifiable  intangibles
for impairment  whenever  events or changes in  circumstances  indicate that the
carrying amount of an asset may not be recoverable.  Recoverability of assets to
be held and used is measured by a comparison of the carrying  amount of an asset
to future  undiscounted net cash flows expected to be generated by the asset. If
such assets are  considered to be impaired,  the  impairment to be recognized is
measured by the amount by which the  carrying  amounts of the assets  exceed the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount or net realizable value (fair value less costs to sell).

                                       33
<PAGE>
SEGMENTATION OF FINANCIAL RESULTS

     The Company has presented its financial  results as a single segment due to
the sale of the Communications Software Group (CSG) effective June 30, 2000.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of cash and cash  equivalents,  receivables,  accounts
payable, accrued liabilities and deferred revenue approximate fair value because
of the short  maturity of these  instruments.  The carrying value of investments
approximate the fair values at June 30, 2000.

RECLASSIFICATIONS

     Certain  reclassifications,  including  the  reclassification  of  customer
product  development costs to cost of sales, have been made to the 2000 and 1999
consolidated  financial  statements  to  conform  to the 2001  presentation.  In
addition,   the  reclassifications  were  applied  to  the  quarterly  financial
information  presented in Note 12. Therefore,  the information is different than
that presented in our historical Forms 10-Q.

(2) INVENTORIES

     Inventories at June 30, 2001 and 2000 consist of the following:

                                                        2001             2000
                                                      -------          -------
     Raw materials                                    $    12          $   487
     Finished goods                                       795              550
                                                      -------          -------
                                                          807            1,037
     Inventory obsolescence reserve                      (133)            (229)
                                                      -------          -------
                                                      $   674          $   808
                                                      =======          =======

     Raw materials consist of packaging materials,  CD-ROMs, disks, and manuals.
Finished  goods  consist of packaged  software,  Not-For-Resale  kits (with both
software and hardware content) and stand alone hardware.

(3) PROPERTY AND EQUIPMENT

     Property and equipment at June 30, 2001 and 2000 consist of the following:

                                                       2001             2000
                                                      -------          -------
     Furniture and fixtures                           $    78          $    39
     Computers, software and other equipment            2,921            2,035
     Leasehold improvements                               332              279
                                                      -------          -------
                                                        3,331            2,353
     Accumulated depreciation and amortization         (1,943)          (1,140)
                                                      -------          -------
                                                      $ 1,388          $ 1,213
                                                      =======          =======

                                       34
<PAGE>
(4) OTHER ASSETS

     Other assets at June 30, 2001 and 2000 consist of the following:

                                                       2001             2000
                                                      ------           ------
     Purchased technology, net of accumulated
      amortization of $438 and $374                   $   --           $   63
     Recoverable deposits                                187              116
                                                      ------           ------
                                                      $  187           $  179
                                                      ======           ======

(5) ACCRUED LIABILITIES

     Accrued liabilities at June 30, 2001 and 2000 consist of the following:

                                                       2001             2000
                                                      ------           ------
     Compensation and benefits                        $  699           $1,032
     Payroll, sales and property taxes                    77               33
     Marketing                                           274              374
     Royalties                                             4              334
     Other taxes payable                                 160               --
     Other                                               210              164
                                                      ------           ------
                                                      $1,424           $1,937
                                                      ======           ======

(6) SHAREHOLDERS' EQUITY

PREFERRED STOCK

     The Company has authorized  20,000,000  shares of preferred stock par value
$1.00 per share,  of which no shares  have been issued as of June 30,  2001.  On
December  6,  1994,  the  Board  of  Directors  of the  Company  authorized  the
designation  and  reservation  of 50,000 shares of preferred  stock as "Series A
Participating  Preferred Stock" subject to a Rights Agreement dated December 23,
1994 (see  Rights  Plan).  The  reserved  shares are  automatically  adjusted to
reserve  such  number  of  shares  as may be  required  in  accordance  with the
provisions  of the  Series  A  Participating  Preferred  Stock  and  the  Rights
Agreement.  See Note 14 "Subsequent Events" for discussion on Series B Preferred
Stock issued subsequent to June 30, 2001.

COMMON STOCK

     In January 2000, TAIS acquired 100,000 shares of Artisoft common stock at a
price of $6.994  per share and has the right to  acquire  an  additional  50,000
shares  pursuant to a warrant  agreement at a strike  price of $6.994.  The fair
market  value of the  Artisoft  common  stock on the  date of  execution  of the
definitive  agreement was $21.50.  The difference between the issuance price and
fair  market  value of the  Artisoft  common  stock,  and the fair  value of the
warrants  (which were priced based on the Black Scholes  Options  Pricing Model)
was charged to selling  expense in the quarter ended March 31, 2000. The Company
received  proceeds  from TAIS of $700,000 from this  transaction  and a total of
$2.3  million was charged to selling  expense.  $3.0  million was recorded as an
addition to paid-in-capital.

RIGHTS PLAN

     On December 6, 1994,  the Board of Directors of the Company  authorized and
declared a dividend of one preferred  share  purchase right (a "Right") for each
common share of the Company  outstanding as of the close of business on December
27, 1994. The Rights  Agreement is designed to protect and maximize the value of
the outstanding  equity  interests in the Company in the event of an unsolicited
attempt  by an  acquirer  to take over the  Company  in a manner or on terms not
approved by the Board of Directors. Each Right, under certain circumstances, may
be exercised to purchase one one-thousandth of a share of the Company's Series A
Participating  Preferred  Stock at a price  of  $50.00  per  share  (subject  to

                                       35
<PAGE>
adjustment).  Under certain circumstances,  following (i) the acquisition of 25%
or more of the  Company's  outstanding  common stock by an Acquiring  Person (as
defined in the Rights  Agreement) or (ii) the  commencement of a tender offer or
exchange offer which would result in a person or group owning 25% or more of the
Company's  outstanding  common  stock,  each Right may be  exercised to purchase
common stock of the Company or a successor  company with a market value of twice
the $50.00  exercise price.  The Rights,  which are redeemable by the Company at
$.001 per Right,  expire in December  2004.  Subsequent  to June 30,  2001,  the
Company's  Board of  Directors  approved a resolution  to  terminate  the Rights
Agreement effective December 31, 2001.

STOCK INCENTIVE PLANS

     On October 20, 1994,  the  shareholders  approved the Company's  1994 Stock
Incentive  Plan  (the  "1994  Plan").  The 1994 Plan  provides  for the grant of
Incentive Stock Options,  Nonqualified Stock Options,  Stock Appreciation Rights
(Tandem and Free-standing),  Restricted Stock, Deferred Stock, Performance Units
and Performance Shares to officers,  key employees,  non-employee  directors and
certain consultants of the Company.

     The 1994 Plan  provides  that the  maximum  number of  options  that can be
granted shall be 2,000,000  shares,  plus 1.5% of the number of shares of common
stock issued and  outstanding as of January 1 of each year commencing on January
1, 1995. The maximum number of shares available for grant each year shall be all
previously  ungranted  options  plus all expired and  cancelled  options.  Stock
options are  generally  granted at a price not less than 100% of the fair market
value of the  common  shares at the date of  grant.  Generally,  options  become
exercisable over a four-year period  commencing on the date of grant and options
vest 25% at the first  anniversary  of the date of grant with the  remaining 75%
vest in equal monthly  increments  over the remaining three years of the vesting
period.  No 1994 Plan options may be exercised more than ten years from the date
of grant.  The 1994 Plan will  terminate on the earlier of June 15, 2004, or the
date upon which all awards available for issuance have been issued or cancelled.

     The 1994 Plan contains an automatic  option grant program  limited to those
persons who serve as non-employee  members of the Board of Directors,  including
any non-employee Chairman of the Board ("Eligible Directors"). After October 20,
1994, each individual who first becomes an Eligible Director shall automatically
be granted a Nonqualified  Option to purchase  15,000 shares of common stock. At
the date of each annual  shareholders'  meeting,  beginning with the 1995 annual
shareholders'  meeting,  each person who is at that time  serving as an Eligible
Director will  automatically be granted a Nonqualified  Option to purchase 5,000
shares of  Common  Stock  (and an  additional  10,000  shares  for the  Eligible
Director serving as Chairman of the Board), provided that such person has served
as a member of the Board of Directors for at least six months. There is no limit
on the number of  automatic  option  grants that any one  eligible  director may
receive.  All  grants to an  Eligible  Director  under the 1994 Plan will have a
maximum term of ten years from the automatic  grant date.  Each automatic  grant
will vest in three equal and successive annual  installments.  At June 30, 2001,
there were 712,345 remaining shares available for grant under the 1994 Plan.

     The per share weighted  average fair value of stock options  granted during
the fiscal years ended June 30, 2001, 2000 and 1999 was $4.61, $11.25, and $2.42
on the date of grant  using  the Black  Scholes  option-pricing  model  with the
following weighted average assumptions.

                                      2001            2000            1999
                                      ----            ----            ----
     Expected Dividend Yield          0%              0%              0%
     Volatility Factor                76%             69%             63%
     Risk Free Interest Rate          5.2%            6.3%            5.9%
     Expected Life                    6 years         6 years         6 years

     The Black Scholes  option-pricing model was developed for use in estimating
the fair value of traded  options,  which have no vesting  restrictions  and are
fully  transferable.  In addition,  option valuation models require the input of
highly  subjective  assumptions  including the expected stock price  volatility.
Because the Company's employee stock options have characteristics  significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

                                       36
<PAGE>
     The  Company  applies  APB  Opinion  No.  25 in  accounting  for its  stock
incentive plan and accordingly, no compensation cost has been recognized for its
stock  options  in  the  financial   statements.   Had  the  Company  determined
compensation  cost  based on the  fair  value at the  grant  date for its  stock
options  under  SFAS No.  123,  the  Company's  net loss and net loss per common
equivalent  share for the fiscal years ended June 30, 2001,  2000 and 1999 would
have been increased to the pro forma amounts indicated below:

                                              2001          2000         1999
                                           ---------      --------     --------
     Net loss              As reported     $ (12,756)     $ (4,486)    $ (1,762)
                           Pro forma       $ (14,346)     $ (5,315)    $ (2,179)

     Basic and diluted     As reported     $   (0.82)     $  (0.30)    $   (.12)
     Net loss per share    Pro forma       $   (0.93)     $  (0.35)    $   (.15)

     Pro forma net loss  reflects only options  granted  during the fiscal years
ended June 30, 2001,  2000 and 1999.  Therefore,  the full impact of calculating
compensation  cost for stock  options under SFAS No. 123 is not reflected in the
pro  forma  net  loss  amounts  presented  above  because  compensation  cost is
reflected  over  the  options'  vesting  period  of  three  to  four  years  and
compensation  cost for options  granted prior to July 1, 1997 is not considered.
Stock option activity during the periods indicated is as follows:

                                                                Weighted Average
                                         Number of Shares        Exercise Price
                                         ----------------        --------------
     Balance at June 30, 1998               1,632,312               $ 4.72
     Granted                                  838,050                 3.83
     Exercised                               (116,065)                2.17
     Forfeited                               (441,497)                3.71
                                           ----------               ------

     Balance at June 30, 1999               1,912,700                 4.54
     Granted                                  984,250                16.75
     Exercised                               (459,111)                2.78
     Forfeited                               (944,231)               12.05
                                           ----------               ------

     Balance at June 30, 2000               1,493,608                 4.39
     Granted                                1,253,809                 6.59
     Exercised                               (272,039)                3.11
     Forfeited                               (348,167)                9.96
                                           ----------               ------
     Balance at June 30, 2001               2,127,211               $ 6.25
                                           ==========               ======

                                       37
<PAGE>
     The  following  table  summarizes   information  about  the  stock  options
outstanding at June 30, 2001:

                                   Weighted
                                   Average     Weighted                 Weighted
                                  Remaining    Average                  Average
    Range of          Options    Contractual   Exercise     Options     Exercise
Exercise Prices     Outstanding     Life        Price     Exercisable     Price
---------------      ---------     ------       ------     ---------     ------
$ 2.00 - $ 2.50         51,754       6.57       $ 2.08        40,234     $ 2.09
$ 2.51 - $ 3.00        221,489       6.82         2.67       127,148       2.68
$ 3.01 - $ 5.00        651,060       8.87         3.97       129,885       4.00
$ 5.01 - $10.00        726,749       8.87         7.69        82,517       5.76
$10.01 - $15.00        358,659       8.58        11.42       108,711      11.85
$15.01 - $21.50        117,500       8.59        18.67        39,742      18.71
---------------      ---------     ------       ------     ---------     ------
$ 2.00 - $21.50      2,127,211       8.54       $ 7.13       578,591     $ 6.25
===============      =========     ======       ======     =========     ======

     At June 30,  2001,  2000 and 1999 the  number of  options  exercisable  was
578,591,  613,675 and 563,506  respectively,  and the weighted  average exercise
price of those options was $6.25, $4.39 and $4.54, respectively.

     Common stock  received  through the exercise of  incentive  stock  options,
which  are  sold by the  optionee  within  two  years  of  grant  or one year of
exercise,  result in a tax deduction  for the Company  equivalent to the taxable
gain  recognized by the  optionee.  For financial  reporting  purposes,  the tax
effect of this  deduction is  accounted  for as a credit to  additional  paid in
capital rather than as a reduction of income tax expense.

EMPLOYEE STOCK PURCHASE PLAN

     On October 20, 1994,  the  shareholders  approved the  establishment  of an
Employee  Stock  Purchase Plan and  authorized  for issuance  200,000  shares of
common stock. On November 2, 1999, the  shareholders  authorized the issuance of
an additional  200,000 shares of common stock, thus increasing the total for the
plan to 400,000  shares of common stock.  During the fiscal years ended June 30,
2001,  2000, and 1999,  36,385,  39,156,  and 47,810 shares of common stock were
purchased,  respectively,  at prices ranging from $1.70 to $10.31 per share.  At
June 30, 2001,  197,212 shares of common stock were available for issuance under
the plan. The plan provides for eligible  participants  to purchase common stock
semi-annually at the lower of 85% of the market price at the beginning or end of
the semi-annual period.

(7) EMPLOYEE BENEFIT PLANS

     The  Company  has  a  qualified   401(k)   profit-sharing   plan   (defined
contribution  plan)  which  became  effective  July 1,  1991.  The  plan  covers
substantially all employees having at least six months of service.  Participants
may  voluntarily  contribute  to the plan up to the  maximum  limits  imposed by
Internal  Revenue Service  regulations.  The Company will match up to 50% of the
participants' annual  contributions up to 3% of the participants'  compensation.
Participants are immediately vested in the amount of their direct  contributions
and vest over a five-year  period,  as defined by the plan,  with respect to the
Company's contribution.

     The  Company's  profit-sharing  plan expense for these plans was  $171,000,
$113,000 and  $121,000 for the fiscal years ended June 30, 2001,  2000 and 1999,
respectively.

                                       38
<PAGE>
(8) INCOME TAXES

     No income tax expense  (benefit) was recorded in fiscal years  1999-2001 as
the  Company  incurred  net losses  for all  periods.  The  income  tax  expense
(benefit)  differs from the amount  computed by applying the  statutory  federal
income tax rate to the loss before income taxes are as follows:

                                               2001         2000          1999
                                             -------      -------      -------
     Computed "expected" tax benefit         $(4,337)     $(1,525)     $  (599)
     Allowance for current net operating
      losses                                   4,337        1,525          599
                                             -------      -------      -------
     Total income tax expense                $    --      $    --      $    --
                                             =======      =======      =======

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and  deferred  tax  liabilities  at June 30,
2001 and 2000 are presented below:

                                                          2001           2000
                                                        --------       --------
     Deferred tax assets:
       Purchased technology                             $    363       $    398
       Allowances for doubtful accounts and returns          293            434
       Allowances for inventory obsolescence                  76            119
       Accrued compensation and benefits                     234            234
       Other accrued liabilities                             325            449
       Depreciation and amortization                         130             88
       Federal and state net operating loss and credit
        carryforwards                                     19,436         13,139
                                                        --------       --------
            Total gross deferred tax assets             $ 20,857       $ 14,861
            Less valuation allowance                     (20,793)       (14,732)
                                                        --------       --------
            Deferred tax assets                               64            129
     Deferred tax liabilities:
       Prepaid expenses                                      (64)          (129)
                                                        --------       --------
            Net deferred tax assets                     $     --       $     --
                                                        ========       ========

     Total  valuation  allowance  increased  by $6,061  and $1,815 for the years
ended June 30,  2001 and 2000,  respectively.  The  Company  has  evaluated  the
realizability  of its deferred tax assets and based on an  evaluation  of all of
the  evidence,  both  objective  and  subjective,  including  the  existence  of
operating  losses in recent years,  it has concluded that it is more likely than
not that the deferred tax assets will not be realized.

     As  of  June  30,  2001,   the  Company  had  federal  net  operating  loss
carryforwards of approximately $44.4 million, which will expire from fiscal year
2013 through  fiscal year 2021.  The Company also has state net  operating  loss
carryforwards of approximately $75.5 million, which will expire from fiscal year
2003  through  fiscal  year 2006.  The  Company's  ability  to  utilize  its net
operating  loss and  credit  carryforwards  may be  limited in the future if the
Company experiences an ownership change as a result of future  transactions.  An
ownership  change  occurs  when  the  ownership  percentage  of  5%  or  greater
stockholders increases by more than 50% over a three-year period.

(9) LEASE COMMITMENTS

OPERATING LEASES

     The Company leases office,  product packaging,  storage space and equipment
under  noncancelable  operating lease  agreements  expiring  through 2003. These
leases  contain  renewal  options  and the  Company is  responsible  for certain
executory costs, including insurance,  maintenance,  taxes and utilities.  Total
rent expense for these operating leases was approximately $1,364, $773, and $566
for the fiscal years ended June 30, 2001, 2000 and 1999, respectively.

                                       39
<PAGE>
     The approximate  minimum rental commitments under  noncancelable  operating
leases that have  remaining  noncancelable  lease terms in excess of one year at
June 30, 2001 were as follows:

         Years Ending                         Future Minimum
           June 30,                           Lease Payments
           -------                            --------------
            2002                                 $ 1,476
            2003                                   1,218
            2004                                   1,151
            2005                                   1,151
            2006                                     236
                                                 -------
            Total                                $ 5,232
                                                 =======

(10) CONTINGENCIES

     The Company is subject to lawsuits and other claims arising in the ordinary
course of its  operations.  In the opinion of management,  based on consultation
with legal counsel,  the effect of such matters will not have a material adverse
effect on the Company's financial position.

(11) DOMESTIC AND INTERNATIONAL OPERATIONS

     A summary of domestic and international net sales and international  assets
for the fiscal years ended June 30 follows:

                                             2001           2000           1999
                                           -------        -------        -------
     Domestic                              $ 6,771        $14,495        $ 6,282
     International (1)                         693          1,194            862
                                           -------        -------        -------
        Net sales                          $ 7,464        $15,689        $ 7,144
                                           =======        =======        =======

     International assets                  $     2        $     2        $     2
                                           =======        =======        =======

(1)  International revenue consists solely of product revenue.

                                       40
<PAGE>
(12) QUARTERLY RESULTS (UNAUDITED)

     The following tables present selected unaudited quarterly operating results
for the  Company's  eight  quarters  ended  June  30,  2001 for  continuing  and
discontinued  operations.  The Company  believes that all necessary  adjustments
have  been  made to  present  fairly  the  related  quarterly  results.  Certain
reclassifications  were  applied  to  the  quarterly  financial  information  as
presented below. Therefore,  this information is different than presented in our
historical Forms 10-Q.

<TABLE>
<CAPTION>
                                                  First      Second       Third      Fourth
     Fiscal 2001                                 Quarter     Quarter     Quarter     Quarter      Total
                                                 -------     -------     -------     -------      -----
     <S>                                         <C>         <C>         <C>         <C>           <C>
     Net product revenue                         $ 1,659     $ 1,286     $ 1,179     $   917       5,041
     Net service revenue                             562         736         510         615       2,424
     Total revenue                                 2,221       2,022       1,689       1,532       7,464
     Gross profit-product                          1,160         813         848         661       3,482
     Gross profit-services                           136         271          47         274         729
     Total gross profit                            1,296       1,085         895         936       4,211
     Operating loss                               (3,238)     (3,909)     (3,517)     (2,622)    (13,286)
     Net loss                                     (3,048)     (3,773)     (3,389)     (2,546)    (12,756)
     Basic and diluted net loss per common share    (.20)       (.24)       (.22)       (.16)       (.82)

     Fiscal 2000

     Net product revenue                         $ 2,721       3,153       3,460       3,949      13,283
     Net service revenue                              --         500         849       1,057       2,406
     Total revenue                                 2,721       3,653     $ 4,309     $ 5,006      15,689
     Gross profit-product                          1,453       1,914       1,999       2,685       8,051
     Gross profit-services                            --         477         553         701       1,731
     Total gross profit                            1,453       2,391       2,552       3,386       9,782
     Operating loss                               (1,656)       (932)     (3,331)       (261)     (6,180)
     Net income (loss) from continuing
      operations                                  (1,469)       (669)     (3,147)         20      (5,265)
     Net income (loss)                              (483)        111      (3,467)       (647)     (4,486)
     Basic and diluted net income (loss) per
      common share from continuing operations       (.10)       (.04)       (.21)        .00        (.35)
     Basic and diluted net income (loss) per
      common share                                (.04)        .01        (.23)       (.04)       (.30)
</TABLE>

                                       41
<PAGE>
(13) SUPPLEMENTAL FINANCIAL INFORMATION

     A summary  of  additions  and  deductions  related  to the  allowances  for
accounts  receivable and  inventories  for the fiscal years ended June 30, 2001,
2000 and 1999 follows:

                               Balance at
                               Beginning                  Usage/      Balance at
                                of Year    Additions   Adjustments   End of Year
                                -------    ---------   -----------   -----------
     Allowances for doubtful
     accounts and returns:

     Year ended June 30, 2001   $ 1,084     $ 1,465 (2)  $(1,816) (1)  $   733
                                -------     -------      -------       -------
     Year ended June 30, 2000   $ 1,356     $ 2,184      $(2,456)      $ 1,084
                                -------     -------      -------       -------
     Year ended June 30, 1999   $ 1,592     $ 1,757      $(1,993)      $ 1,356
                                -------     -------      -------       -------

(1)  Includes a $425,000  reduction  of excess  channel  inventory  reserves and
     $201,000 of excess bad debt  reserves in the fourth  quarter ended June 30,
     2001.
(2)  Includes provisions for channel rotation reserves of $484,000 in the fourth
     quarter ended June 30, 2001.

                               Balance at
                               Beginning                  Usage/      Balance at
                                of Year    Additions   Adjustments   End of Year
                                -------    ---------   -----------   -----------
     Allowances for inventory
     obsolescence:

     Year ended June 30, 2001   $ 229        $  32        $(128)        $ 133
                                -----        -----        -----         -----
     Year ended June 30, 2000   $ 143        $ 307        $(221)        $ 229
                                -----        -----        -----         -----
     Year ended June 30, 1999   $ 335        $  87        $(279)        $ 143
                                -----        -----        -----         -----

(14) SUBSEQUENT FINANCING AND LIQUIDITY

     On August 8, 2001 the Company entered into a definitive  agreement for a $7
million  private  placement  financing  to be conducted  in two  closings.  $3.9
million of the  financing  was funded on August 8, 2001 and the  remaining  $3.1
million of funding is  subject  to  certain  conditions,  including  shareholder
approval,  which the Company is currently seeking. Under terms of the agreement,
the Company has issued 1,560,000 shares of Series B Convertible  Preferred Stock
at a per share price of $2.50. The Preferred  Stock,  which carries no dividend,
can initially be converted into a like number of shares of the Company's  Common
Stock, subject to adjustment in certain events. Under certain circumstances, the
Company  has the  right to  effect  the  automatic  conversion  of the  Series B
Preferred  Stock to Common  Stock  when the market  price of the Common  exceeds
$5.00 per share for 30  consecutive  trading days.  The holders of the Preferred
Stock, as a class, are entitled to elect two directors of the Company.

     In  addition,  the Company  issued to the holders of the  Preferred  Stock,
warrants to purchase up to 1,560,000  shares of the Company's  Common Stock. The
warrants  expire on September 30, 2006 and are  exercisable at a per share price
of $3.75.  The warrants have a call  provision  that provides that if the market
price of the Common Stock  exceeds  $7.50 per share for 30  consecutive  trading
days and other  conditions  are met,  the  Company  has the right to require the
warrant  holders to convert their  warrants to Common Stock.  Both the per share
exercise  price and the number of shares  issuable upon exercise of the warrants
are  subject to  adjustment  in certain  events.  The fair  market  value of the
warrants and the beneficial  conversion  feature embedded in the Preferred Stock
will be recorded as immediate  dividends to the  Preferred  Stockholders  with a
corresponding credit to additional paid-in-capital.

     The  purchase  agreement  provides  for a second  closing  and,  subject to
shareholder approval and other conditions,  the Company will issue an additional
1,240,000  shares of  Series B  Convertible  Preferred  Stock  and  warrants  to
purchase  an  additional  1,240,000  shares  of  Common  Stock,  all  under  the
respective terms described above.

     The Company is required to register for resale by the investors, the Common
Stock issuable upon the conversion of the Preferred  Stock and upon the exercise
of the warrants under the Securities Act of 1933, as amended.

                                       42
<PAGE>
     The Company  anticipates  that its cash  balances at June 30, 2001 combined
with the  proceeds of $3.9  million  received  by the  Company in the  financing
completed on August 8, 2001 will be adequate to meet the  Company's  current and
expected cash requirements for the next year.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not applicable

                                    PART III

     Certain  information  required  by Part III is omitted  from this Report by
virtue of the fact that the Company has filed with the  Securities  and Exchange
Commission,  pursuant to  Regulation  14A,  within 120 days after the end of the
fiscal year covered by this Report, a definitive proxy statement (the "2001Proxy
Statement") relating to the Company's Annual Shareholders' Meeting to be held on
or about  November  15,  2001.  Certain  information  included in the 2001 Proxy
Statement is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information concerning the Company's directors required by this item is
contained  in  "Election  of  Directors",  "Board and  Committee  Meetings"  and
"Section  16(a)  Beneficial  Ownership"  in the  2001  Proxy  Statement,  and is
incorporated  herein by  reference.  The  information  concerning  the Company's
executive  officers required by this item is contained in Part I, Item 4 of this
Report  under  the  caption  "Executive  Officers  of  the  Registrant,"  and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The   information   required  by  this  item  is  contained  in  "Executive
Compensation",   "Director  Compensation",  "Change  in  Control  and  Severance
Agreements",  "Compensation  Committee  Interlocks  and Insider  Participation",
"Report of the Compensation Committee", and "Comparison of Stock Performance" in
the 2001 Proxy Statement, and is incorporated herein by reference.

     Notwithstanding  anything to the contrary set forth in any of the Company's
previous  filings under the Securities Act of 1933, as amended,  or the Exchange
Act that might incorporate future filings,  including this Annual Report on Form
10-K,  "Independence of Audit Committee  Members",  "Report of Audit Committee",
the "Report of the Compensation Committee" and "Comparison of Stock Performance"
and Annex A in the 2001 Proxy  Statement  shall not be incorporated by reference
into any such filings,  and such  information  shall be entitled to the benefits
provided in Item 306(c) and Item 402(a)(9) of Regulation S-K and Item 7(e)(3)(r)
of Schedule 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  required by this item is contained in "Security  Ownership
of Certain Beneficial Owners and Management" in the 2001 Proxy Statement, and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None

                                       43
<PAGE>
                                    PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Financial Statements and Financial Statement Schedules.

          An Index to financial  statements and financial statement schedules is
          located on page 23 hereof.

     (b)  Reports on Form 8-K.

          None.

     (c)  Exhibits.

 Designation                 Description
 -----------                 -----------

    3.01       Certificate of Incorporation (1)

    3.02       Bylaws (2)

    4.01       Specimen Common Stock Certificate (3)

    4.02       Rights  Agreement,  dated as of December  23,  1994,
               between Artisoft,  Inc. and Bank One,  Arizona,  NA,
               including the  Certificate  of Designation of Rights
               Preferences and Privileges of Series A Participating
               Preferred Stock, the Form of Rights  Certificate and
               the Summary of Rights  attached  thereto as Exhibits
               A, B and C, respectively (4)

    10.01      Amended 1990 Stock Incentive Plan of the Registrant (5)

    10.02      1991 Director Option Plan of the Registrant (6)

    10.03      Artisoft, Inc. 1994 Stock Incentive Plan (7)

    10.04      Artisoft, Inc. Employee Stock Purchase Plan (8)

    10.06      Stock  Purchase  Agreement  dated  December 21, 1995
               among  Artisoft,  Inc. and David J.  Saphier,  Floyd
               Roberts and Peter Byer regarding the purchase of all
               of  the   outstanding   common   stock   of   Triton
               Technologies, Inc (9)

    10.07      Asset  Purchase  Agreement  dated  February 13, 1996
               between   Artisoft,   Inc.  and  Stylus   Innovation
               Incorporated  and Michael  Cassidy,  John W. Barrus,
               Laura  Macfarlane,  Robert H.  Rines  and  Krisztina
               Holly (the Stylus Shareholders) (10)

    10.08      Amendment  to  the  1994  Preferred   Shares  Rights
               Agreement (11)

    10.09      Asset Purchase  Agreement dated June 2, 2000 between
               Artisoft,   In.,  Triton   Technologies,   SpartaCom
               Technologies  and  Spartacom  Inc.  (For Purposes of
               Articles IV, VI, XI and XIII Thereof) (12)

                                       44
<PAGE>
    10.10      First Amendment to Asset Purchase  Agreement between
               Artisoft,   Inc.,  Triton  Technologies,   SpartaCom
               Technologies and SpartaCom, Inc.(13)

    10.11*     OEM/Reseller Agreement, dated January 18, 2000, between Artisoft,
               Inc., and Toshiba America Information Systems, Inc.

    22.01      Subsidiaries of the Registrant

    23.01      Consent of KPMG LLP

    24.01      Powers of Attorney.


----------
*    Confidential materials omitted and filed separately with the Commission.

(1)  Incorporated by reference to the Company's  Registration  Statement on Form
     S-1 (No.  33-42046) or amendments  thereto,  filed with the  Securities and
     Exchange Commission on August 5, 1991.
(2)  Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     fiscal 1992 ended June 30, 1992.
(3)  Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     fiscal 1993 ended June 30, 1993.
(4)  Incorporated by reference to the Company's Form 8-K dated January 4, 1994.
(5)  Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     fiscal 1994 ended June 30, 1994.
(6)  Incorporated  by reference  to the  Company's  Form 8-K dated  December 22,
     1994.
(7)  Incorporated  by reference  to the  Company's  Form 8-K dated  February 10,
     1995.
(8)  Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     fiscal 1995 ended June 30, 1995.
(9)  Incorporated  by reference  to the  Company's  Form 8-K dated  December 21,
     1995.
(10) Incorporated  by reference  to the  Company's  Form 8-K dated  February 13,
     1996.
(11) Incorporated by reference to the Company's Form 8-K dated August 28, 1998.
(12) Incorporated  by reference to the Company's Form 10-K for fiscal 2000 ended
     June 30, 2000.
(13) Incorporated  by reference to the Company's Form 10-K for fiscal 2000 ended
     June 30, 2000.

                                       45
<PAGE>
                                   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.

                                        ARTISOFT, INC.


Date: September 27, 2001                By /s/ Steven G. Manson
                                          --------------------------------------
                                          Steven G. Manson, President
                                          and Chief Executive Officer
                                          (Principal Executive Officer)

                            SPECIAL POWER OF ATTORNEY

     The  undersigned  hereby  constitutes  and  appoints  STEVEN G.  MANSON and
MICHAEL J. O'DONNELL, and each of them, his true and lawful attorney-in-fact and
agent with full power of  substitution  and  resubstitution,  for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including  post-effective  amendments) to this Form 10-K Annual Report,  and to
file the  same  with all  exhibits  thereto,  and all  documents  in  connection
therewith,   with  the  Securities  and  Exchange   Commission,   granting  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
and about the premises,  as fully and to all intents and purposes as he might or
could  do  in  person,   hereby   ratifying   and   confirming   all  that  such
attorneys-in-fact  and agents,  or each of them,  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.

<TABLE>
<CAPTION>
        NAME                            TITLE                                 DATE
        ----                            -----                                 ----
<S>                           <C>                                        <C>

/s/ Steven G. Manson
-------------------------     President and Chief Executive Officer,     September 27, 2001
Steven G. Manson              Director (Principal Executive Officer)


/s/ Michael J. O'Donnell
-------------------------     Chief Financial Officer (Principal         September 27, 2001
Michael J. O'Donnell          Financial Officer)


/s/ Michael P. Downey
-------------------------     Chairman of the Board                      September 27, 2001
Michael P. Downey


/s/ Kathryn B. Lewis
-------------------------     Director                                   September 27, 2001
Kathryn B. Lewis


/s/ Francis E. Girard
-------------------------     Director                                   September 27, 2001
Francis E. Girard


/s/ Robert H. Goon
-------------------------     Director                                   September 27, 2001
Robert H. Goon
</TABLE>

                                       44

</TEXT>
</DOCUMENT>
