UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM 10-K
 
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
  For
the fiscal year ended December 31, 2009
  OR
  o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
  For
the transition period from
                       
to
                       .
  Commission
File Number: 000-31121
 
 AVISTAR
COMMUNICATIONS CORPORATION
 (Exact
name of registrant as specified in its charter)
  Delaware
              
              88-0463156(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      Number)1875
      South Grant Street, 10th
      Floor, San Mateo California
              
              94402(Address
      of Principal Executive Offices)
              
              (Zip
      Code)
 
  Registrant’s
telephone number, including area code: (650) 525-3300
  Securities
registered pursuant to Section 12(b) of the Act: None
  Securities
Registered pursuant to Section 12(g) of the Act:
  Title of each classCommon
      Stock, $0.001 par value
  
  Indicate
by check mark if the registrant is a well known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o  No x
  Indicate
by check mark if the registrant is not required to file the reports pursuant to
Section 13 or 15(d) of the Act. Yes o  No x
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x  No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting company. See
definitions of “large accelerated filer,”
“accelerated filer” and “small reporting company” in Rule 12b-2 of
the Exchange Act.
  Large
accelerated filer o                                                                                  Accelerated
filer o
  Non-accelerated
filer o(Do
not check if a smaller reporting company) Smaller
reporting companyx
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o  No x
  Aggregate
market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the closing price  of $0.91 per share for
shares of the Registrant’s Common Stock on June 30, 2009 (the last business day
of the Registrant’s most recently completed second fiscal quarter as reported by
the Pink Sheets) was $12,321,838. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.  The Registrant’s Common
Stock is currently quoted and traded on the Pink Sheets, an over-the-counter
securities market.
  As of
March 3, 2010, the registrant had outstanding 39,022,344 shares of Common
Stock.
  DOCUMENTS
INCORPORATED BY REFERENCE
  The
Registrant incorporates by reference into Part III of this Annual Report on
Form 10-K specific portions of its Proxy Statement for its 2010 Annual
Meeting of Stockholders.
   1
  AVISTAR
COMMUNICATIONS CORPORATION
  ANNUAL
REPORT ON FORM 10-K
  YEAR
ENDED DECEMBER 31, 2009
  TABLE
OF CONTENTS
 PagePART IItem 1. Business
              
              
              3Item 1a. Risk Factors
              
              
              15Item 1b. Unresolved Staff Comments
              
              
              23Item 2. Properties
              
              
              23Item 3. Legal Proceedings
              
              
              23Item 4. Reserved
              
              
              23PART IIItem 5. Market for Registrant’s Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity
      Securities
              
              
              24Item 6. Omitted
              
              
              24Item 7. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
              
              
              24Item 7a. Omitted
              
              
              36Item 8. Financial
      Statements and Supplementary Data
              
              
              36Item 9. Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure
              
              
              36Item 9a. Controls and
      Procedures
              
              
              36Item 9b. Other
      Information
              
              
              36PART IIIItem 10. Directors, Executive Officers and
      Corporate Governance
              
              
              37Item 11. Executive Compensation
              
              
              37Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related StockholderMatters
              
              
              38Item 13. Certain
      Relationships and Related Transactions and Director Independence
              
              
              38Item 14. Principal
      Accountant Fees and Services
              
              
              38PART IVItem 15. Exhibits, Financial Statement
      Schedules
              
              
              39Signatures
              
              
              43Index to Financial
      Statements
              
              
              F-1
 
  
   2
  Forward
Looking Statements
  This
Annual Report on Form 10-K, the exhibits hereto and the information
incorporated by reference herein contain “forward looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), and such forward looking statements involve
risks and uncertainties. When used in this Annual Report, the words “expects,”
“anticipates,” “believes,” “plans,” “intends” and “estimates” and similar
expressions are intended to identify forward looking statements. These forward
looking statements include predictions, among others, regarding our future
revenues and profits, income from settlement and patent licensing, customer
concentration, customer buying patterns, research and development expenses,
sales and marketing expenses, general and administrative expenses, litigation
and legal fees, income tax provision and effective tax rate, realization of
deferred tax assets, liquidity and sufficiency of existing cash, cash
equivalents, and investments for near-term requirements, sufficiency of leased
facilities, purchase commitments, product development and transitions, expansion
and licensing of our patent portfolio, competition and competing technologies,
and financial condition and results of operations as a result of recent
accounting pronouncements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include those discussed below and those
discussed in “Item 1a. Risk Factors” as well as others incorporated by reference
herein. Avistar Communications Corporation (the “Company,” “we,” or “us”)
undertakes no obligation to publicly release any revisions to these forward
looking statements to reflect events or circumstances after the date this Annual
Report is filed with the Securities and Exchange Commission or to reflect the
occurrence of unanticipated events.
  PART I
  Item
1.Business
  Avistar
Communications Corporation (“Avistar”, the “Company”, “us”, “our”, or “we”) was
founded as a Nevada limited partnership in 1993. We filed our articles of
incorporation in Nevada in December 1997 under the name Avistar Systems
Corporation. We reincorporated in Delaware in March 2000 and changed our name to
Avistar Communications Corporation in April 2000. The operating assets and
liabilities of the business were then contributed to our wholly owned
subsidiary, Avistar Systems Corporation, a Delaware corporation. In July 2001,
our Board of Directors and the Board of Directors of Avistar Systems approved
the merger of Avistar Systems with and into Avistar Communications Corporation.
The merger was completed in July 2001.   In October 2007, we
merged Collaboration Properties, Inc., the Company's wholly-owned subsidiary,
with and into the Company, with Avistar being the surviving
corporation.  Avistar has one wholly-owned subsidiary, Avistar Systems
U.K. Limited (ASUK).
  Our
principal executive offices are located at 1875 South Grant Street, 10th Floor,
San Mateo, California, 94402. Our telephone number is (650) 525-3300. Our
trademarks include Avistar and the Avistar logo, AvistarVOS, Shareboard, vBrief
and The Enterprise Video Company. This Annual Report on Form 10-K also includes
Avistar and other organizations’ product names, trade names and trademarks. Our
corporate website is www.avistar.com.
  Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are
available free of charge on our website when such reports are available on the
U.S. Securities and Exchange Commission (“SEC”) website (see “Company—Investor
Relations—SEC Information”). The public may read and copy any materials filed by
Avistar with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC at http://www.sec.gov. The contents of these websites are not
incorporated into this filing.
  Overview
  Avistar
creates technology that provides the missing critical element in unified
communications: bringing people in organizations face-to-face, through enhanced
communications for true collaboration anytime, anyplace. Our latest platform,
Avistar C3TM, draws on over a decade of market experience to deliver a
single-click desktop videoconferencing and collaboration experience that moves
business communications into a new era. Available as a stand-alone solution, or
integrated with existing unified communications software from other vendors,
Avistar C3TM users gain an instant messaging-style ability to initiate video
communications across and outside the enterprise. Patented bandwidth management
enables thousands of users to access desktop videoconferencing, Voice over IP
(VoIP) and streaming media without requiring substantial new network investment
or impairing network performance.  By integrating Avistar C3TM tightly
into the way they work, our customers can use our solutions to help reduce costs
and improve productivity and communications within their enterprise and between
enterprises and, to enhance their relationships with customers, suppliers and
partners. Using Avistar C3TM software and leveraging video, telephony and
Internet networking standards, Avistar solutions are designed to be scalable,
reliable, cost effective, easy to use, and capable of evolving with
communications networks as bandwidth increases and as new standards and
protocols emerge. We currently sell our system indirectly
to the small and medium sized business, or SMB, and globally distributed
organizations, or Enterprise markets comprising the Global 5000. Our objective
is to establish our technology as the standard for networked visual unified
communications and collaboration through limited direct sales, indirect channel
sales/partnerships and the licensing of our technology to others. We also seek
to license our broad portfolio of patents covering, among other areas, video and
rich media collaboration technologies, networked real-time text and non-text
communications and desktop workstation echo cancellation.
   3
  We have
three go-to-market strategies. Product and Technology Sales involves direct and
channel sales of video and unified communications and collaboration solutions
and associated support services to the Global 5000. Partner and Technology
Licensing involves co-marketing, sales and development, embedding, integration
and interoperability to enterprises, and  IP Licensing involves the
prosecution, maintenance, support and licensing of the intellectual property
that we have developed, some of which is used in our products.
  Since
inception, we have recognized the innovative value of our research and
development efforts, and have invested in securing protection for these
innovations through domestic and foreign patent applications and issuance. As of
December 31, 2009, we held 99 U.S. and foreign patents, which we look to
license to others in the collaboration technology marketplace. See the section
captioned “Patent Licensing” below for information regarding the sale of our
patent and patent application portfolio, which was completed in January
2010.
  Industry
Background
  Globalization,
supported by the near ubiquity of communications networks such as the Internet,
has allowed companies to lower costs, reach new markets, change business
processes (e.g., eBusiness) and distribute and outsource operations. It also has
meant increased competition, a faster business pace and less differentiation.
These factors, coupled with the difficulty and cost of travel, increased risks
due to socio-political uncertainties and pandemic concerns and the desire to
reduce carbon emissions and environmental impact, are causing businesses to look
for new tools that will help them increase productivity, reduce budgetary
expenses, take advantage of revenue opportunities, and minimize business
continuity risks. Enterprises of all sizes stand to benefit from new and
advanced communication and collaboration tools that enable their employees,
partners, suppliers and customers to collaborate more effectively and form
tighter relationships within and across buildings and over disparate geographies
and time zones. Communications tools that speed decision-making, build
trust-based relationships, especially across cultures, and are
software-presence-aware are becoming even more critical in today’s increasingly
complex business environment.
  The
emergence of the Internet has accelerated the adoption of network-based
collaboration applications including email, instant messaging, and web
conferencing. The increasing availability and affordability of bandwidth on
communication networks is further driving businesses to utilize new
communication tools, such as voice and video over IP, and are enabling users to
connect from more places, including home offices and WiFi hot spots such as
airports and hotels. This is enabling more distributed, mobile and global
operations while maintaining communications.
 
 Limitations
of Current Means of Communication and Collaboration
  As
technology advances become more affordable and modes of communication expand,
enterprises are seeking widely deployable and cost effective technology to
replicate, at the desktop, the impact of visual communication and collaboration
that occurs in a face-to-face meeting. Individuals generally prefer face-to-face
encounters to less personal forms of communication because they can see one
another and benefit from the non-verbal cues that speed communication and deepen
understanding. This is particularly true for more complex interactions such as
negotiations, sales, product development, project and crises management and
decision making across geography/functions/cultures. However, in today’s
globalized, fast-paced business environment, face-to-face interactions are often
forgone due to the difficulty and time required for travel, and the need to act
quickly. These time and distance challenges become increasingly difficult to
deal with as the number of potential participants increase. Beyond traditional
teleconferencing, attempts to conduct virtual meetings as an alternative to
face-to-face meetings have generally been limited to conference room-based video
conferencing and web-based data teleconferences.
  To
address the growing need for collaboration across distance and time,
organizations have resorted to using a patchwork of discrete technologies,
including video conferencing and teleconferencing, fax, email, instant
messaging, Internet audio and video delivery and data sharing applications. Many
of these technologies have been widely adopted, and collectively indicate the
need for collaboration tools including visual unified communications solutions.
However, these discrete technologies are not good substitutes by themselves for
face-to-face meetings and presentations because they do not provide an
integrated communications solution that fosters team interaction and delivers
critical, time-sensitive information quickly and reliably. By providing
face-to-face collaboration in an integrated communications solution, video can
speed problem resolution and motivate action, trust and understanding.
Additionally, users want to leverage knowledge and expertise by being able to
create and publish video content from their desktop, either spontaneously, as
with email or voicemail, or in a more formal manner for broader distribution
through the Internet or corporate data network.
   4
  Although
IP communications technologies are already in use at many enterprises,
businesses and other organizations require increasingly comprehensive,
integrated and scalable visual unified communication capabilities. For example,
video conferencing is often limited to scheduled point-to-point communication
from designated rooms or through the use of “roll-about” products, where call
set-up procedures, lack of networking, bandwidth requirements and room
availability greatly constrain functionality, spontaneity, usability,
reliability and efficiency. Most individuals do not have immediate access to
these video technologies, and the reservation and set-up time make them unlikely
to be used on a spontaneous basis. Few of these video solutions are deployed
widely to individuals to support them where and how they normally work—at their
desks, integrated into the business applications they use. Usage and adoption of
these systems is thus often limited.
  Elements
of a Complete Communications and Collaboration Solution
  To become
a critical tool in the enterprise, a communications solution must first and
foremost provide application functionality that boosts worker productivity. It
also has to be “self service” and provide high quality at scale, high
reliability, low total cost of ownership, and be available to people where and
when they do most of their work, which typically means at their desks, but
increasingly means from home or while traveling. It must also effectively
utilize existing and evolving network infrastructure. We believe a complete
communications and collaboration solution must provide the
following:
  Applications
      and Functionality
  ·
              Support
      or integrate into the applications people use, in the way they use them,
      to deliver real-time and non-real-time self service personnel for
      collaboration and visual
communication;
  ·
              Do
      so in an intuitive, “easy” manner in order to foster expanding
      usage;
  Quality
  ·
              Approximate
      the video and audio quality of television for natural and easy
      interaction;
  ·
              make
      interactions as realistic as possible by minimizing visual artifacts when
      transmitting and receiving video calls such as latency, jitter,
      freeze-frame, stutter and small frame
size;
  ·
              Seamlessly
      integrate all forms of audio, video and data
    communications;
  Scalability
  ·
              like
      the Internet and public telephone networks, the communications solution
      must be designed for size independence and should scale cost-effectively
      to support a very large numbers of
users;
  Reliability
  ·
              Operate
      dependably and reliably to avoid user frustration, while minimizing
      support costs;
  ·
              Provide
      visual unified communications with the ease of use, speed, quality,
      functionality, flexibility and global access of the telephone, while
      easily supporting more complex applications and
  situations;
  Adaptability
  ·
              Offer
      an upgradeable architecture that can evolve as bandwidth availability,
      protocols, standards and compression technologies
  change;
  ·
              Include
      powerful software to manage an integrated suite of collaborative
      applications, relying on networked
  infrastructure;
  ·
              Leverage
      current and future business investments in local and wide area networks,
      Internet protocol and standards-based
  infrastructures;
  ·
              Reduce
      reliance on hardware components through a shift to software-based
      integrated communications
functionality;
  Affordability
  ·
              Operate
      and scale cost effectively;
  ·
              Utilize
      standard, low cost and widely available hardware components, such as
      “web-cams”;
  ·
              Be
      cost-effective compared to other pervasive forms of enterprise
      communication, such as email; and
  ·
              Deliver
      cost savings through innovations in support, network and resource
      management.
  We
believe high quality visual unified communications allow businesses to improve
collaboration and thereby offer them the opportunity to increase productivity,
enhance customer service and revenue generation, and facilitate
business-to-business interactions that reduce costs, all on an accelerated
basis. We also believe that, just as every organization now relies on a
telephone network, and most businesses increasingly rely on the Internet, a
market is emerging in which businesses and other organizations will choose to
rely on fully integrated video, audio and data collaboration, regardless of
networks, to make their business applications more effective.
   5
 
  The
Avistar Solution
  Avistar
delivers a suite of video, audio and collaboration solutions which are designed
to support users in the office, via the conference room or on-the-go. It is
through an intelligent coupling of various forms of communication and
collaboration into daily work processes that we believe the benefits described
above can be realized. To fulfill this, we deliver a communication and
collaboration platform known as Avistar C3TM. The Avistar C3TM platform provides a
comprehensive and integrated suite of video, audio and collaboration
applications that include on-demand access to interactive video calling and
conferencing, content creation and publishing, broadcast origination and video
distribution, and video-on-demand, as well as data sharing, presence-based
directory services and network management. Our Avistar C3TM platform architecture
is open and flexible in order to embrace continued technological innovation and
standardization. It is designed to use existing and emerging communication and
video standards such as session initiation protocol, or SIP. It also provides
customers choice and flexibility in designing and implementing network
topologies to best deliver high-quality video, audio and collaboration
applications to desktops, conference rooms and individuals
on-the-go.
  We have
built a complete collaboration solution that is delivering business-quality
video, audio and collaboration solutions to thousands of desktops across
hundreds of locations. Each of our applications can be used, integrated and
managed in conjunction with one another. Our platform also joins users in a
high-quality video network to improve their ability to solve complex problems,
connect to co-workers, customers and suppliers, manage large projects and
quickly act together on opportunities. Our system does this cost effectively and
reliably, and is designed to be able to serve the wide range of businesses from
a single office operation to global corporations with branch offices and/or
geographically dispersed operations.
  Interactive video
calling.Our
system allows users to participate in spontaneous interactive video
collaborations from their desktops. Users can simultaneously see multiple
participants in windows on their workstations or an external monitor.
Additionally, our system provides full duplex audio, which allows multiple users
to speak and hear each other clearly at the same time. The desktop window can be
divided into four quadrants, to permit up to three other video sources. These
sources can include other participants in real-time, broadcast content or
recorded video. The participants can include individual users or conference-room
groups located at multiple sites and/or various enterprises, all without
requiring advance reservations or conferencing services. Each participant has
the full ability to utilize all the call functions of the system, such as adding
or removing participants, focusing the view on one participant, putting anyone
or the entire call on hold, and transferring the call. Advanced telephony
features such as Caller ID, Do Not Disturb, Leave Message and Multiline Calling
are also provided. The system supports the communications needs of users by
allowing them to add a third or fourth participant into a call spontaneously for
a quick conference, and then revert back to a two or three party call. This
ability helps speed decision-making and leverages the knowledge of experts. As
an example, a sales trader can be on a video call with a client portfolio
manager and spontaneously add a research analyst to the call for added insight
on a particular security, then drop the analyst and add a trader to review
execution strategy, instantaneously with a series of mouse clicks.
  Interactive broadcasts and
presentations.Interactive broadcasts allow
moderated presentations to an audience of viewers, who have the ability to send
questions to the presenters. Moderators can dynamically control who is
presenting, bring audience members into the broadcast, select what views are
broadcast, and monitor questions. Sales meetings, training seminars, analyst
reports, management presentations and live news broadcasts can be delivered
real-time to every user’s workstation and streamed to browser-based users. For
example, a customer employed its Avistar video network to maximize the reach and
impact of an educational seminar. The customer broadcasted the seminar to an
estimated 300 desktops and meeting rooms, with more than 2,000 employees and
clients watching in the United States and Europe. As another example, one
customer has shifted its international sales meetings to broadcasts and recorded
presentations on its Avistar system, thereby saving travel time and costs, while
expanding the broadcast to a wider audience. Additionally, video feeds from
broadcast TV channels or other video sources can be distributed to users through
the Avistar system.
  Video-on-demand.Users
anywhere on the Avistar network can easily retrieve stored videos. For example,
a corporation has used our system to record its sales training seminars.
Salespeople who are unable to attend these face-to-face presentations are now
able to watch the seminars by retrieving and playing the stored videos on their
desktops when it is convenient for them. Another customer uses our system to
record and broadcast their daily morning meetings so colleagues in other time
zones around the world can be updated on the issues of the day when they report
to work. The ability to both archive and retrieve stored content can facilitate
the establishment of a visual “institutional memory” and support training
efforts.
  Integrated collaboration & data
sharing.In
addition to viewing the four quadrants of our video window, multiple users can
simultaneously create and annotate a shared document using text or drawing tools
color-coded specifically for each user. All participants can access the contents
of any shared window and save the marked changes for later reference. Our system
can also be utilized in conjunction with other application-sharing programs that
utilize data networks or the Internet, including popular web-based data
collaboration solutions. As one example, while participating in an interactive
video call, users can access Microsoft NetMeeting’s application sharing
capabilities through a button on our tool bar, and jointly view and edit a
document. Multiple design engineers, for example, can share a technical drawing
in order to resolve an issue with a defective part.
   6
  Our
system has the following key features necessary to make integrated video
collaboration effective:
  ·
              Easy to use
      interface.Our
      applications combine the rich interaction of a face-to-face meeting with a
      self-service interface that’s intuitive and easy to
  use.
  ·
              Click-to-connect
      simplicity.To
      initiate calls or add another user to a call already underway, a user
      simply clicks on either a “direct connect” button or a name in the
      directory. Standard telephone-like features such as hold, hang-up,
      forward, “leave message” or “begin another call” are all completed with
      the click of a mouse, or keyboard shortcuts. Additionally, anyone on an
      Avistar network can initiate a video call to the desktop of colleagues,
      customers, suppliers and others on other Avistar networks. If the person
      being called is logged-in but unavailable, users can leave a personalized
      call back message that allows the person to automatically return the video
      call without having to look up the
address.
  ·
              “Find Me, Follow
      Me.”Avistar
      video calling is built on directories and presence-based features referred
      to as “Find Me, Follow Me.” Using this feature, our system is able to
      determine the presence and location of any user on an Avistar network at
      any time. To call any user in the Avistar network, it is not necessary to
      know their number or current location. As long as the Avistar user is
      logged into his or her Avistar application, the Find Me, Follow Me
      application automatically registers where that user is logged in,
      regardless of site or geography, and routes all calls to the user’s
      location. Using this Find Me, Follow Me technology, Avistar’s system makes
      video calling a one-click process and enables what we call “Video Instant
      Messaging.”
  ·
              Comprehensive
      directory.The
      presence-based Avistar network directory is a comprehensive list of
      Avistar numbers that can be called with a click. All users currently
      logged into an enterprise’s Avistar network will be shown, providing
      immediate ‘presence’ information as to availability. The global directory
      can be tailored to include only a subset of a more specific business’
      community of users. In addition, a private directory feature allows users
      to create their own directory and reach frequently called parties with a
      one-click “direct connect” tool. Both global and private directories can
      also include other non-Avistar sites that use standards-based video
      conferencing systems. Through the Avistar Community Exchange and Avistar
      C3TM Proxy products, presence information can be shared across
      participating enterprises. The result is one-click, presence-based,
      cross-enterprise calling network which helps form a community of
      users.
  ·
              Consistency across
      locations.The
      Avistar user interface is consistent across desktops and conference rooms.
      Thus, a user who is familiar with the functionality at the desktop
      requires no additional training or set-up to utilize an Avistar system in
      a conference room setting. This allows conference room systems to be
      “self-service,” thereby avoiding the support logistics and expense of
      traditional room-based systems.
  ·
              Seamless integration of system
      applications.All
      of our applications are seamlessly integrated with one user interface. As
      a user adds an additional video source during an ongoing video call—such
      as an additional live participant, a one-way broadcast or a stored video
      clip—there is virtually no delay in launching another application or
      downloading data. In addition, each application is synchronized with the
      others so that all participants in a video call see and hear the same
      content simultaneously. Thus, recorded or broadcast video can be added to
      a live session and shown to all participants. The entire session can also
      be recorded. Our system enables common network and application management,
      so the same directory can be used for two-way calls, one-way broadcasts
      and data sharing in the same session. Usage can be determined with our
      integrated call-reporting tool that provides summary data for analysis and
      cost management.
  ·
              Network Bandwidth
      Management.Our
      network architecture provides system administrators with the ability to
      flexibly and proactively manage each of the various components of the
      network. Within our system, the most costly and complex equipment and
      software applications are shared as networked resources. This arrangement
      allows for redundancy and dynamic allocation of these resources to users
      who need them, and ensures that users experience the best video quality
      possible at the highest reliability and lowest cost of use. Servers and
      switches can be maintained, installed and repaired centrally, and many
      network support functions can be performed remotely over the data network,
      assisted by System Central, thereby limiting the disruption of service to
      an individual user. Similarly, additional desktops and meeting rooms can
      be easily and inexpensively added to the Avistar network, with those new
      users concurrently added to the Avistar directory. Additionally, our
      software makes call routing decisions to minimize communications costs and
      control bandwidth utilization. This functionality is protected under
      certain patents held by Avistar.
  We
believe our solution includes the following benefits to our
customers:
  ·
              Speed business
      processes.We
      provide a fully integrated Internet protocol-based video collaboration
      solution that seamlessly allows individuals to make video calls, view
      broadcasts and create, store and access video content or other forms
      of data from the desktop making visual communications widely and easily
      available which can speed business processes by enhancing collaboration
      and communication.
   7
  
 ·
              Increased availability of
      knowledge within the enterprise.At
      many businesses, individuals who possess valuable knowledge often cannot
      effectively distribute their knowledge to the rest of the organization.
      Our system enables these businesses to access these individuals and
      disseminate their knowledge more efficiently and effectively by offering
      them the ability to call, broadcast or record from their desktops, and
      offering other users the ability to receive this information real-time, or
      access video recordings at a convenient time and location. The ability to
      spontaneously add additional participants to a call encourages personal
      communications between individuals who otherwise might not enjoy this
      access. In addition, our system gives every desktop the ability to create
      and publish valuable visual content, which can be distributed inside and
      outside the organization to support employee and customer needs
      worldwide.
  ·
              Improved productivity and
      revenue generation.Our
      system helps companies increase the productivity of their employees and
      accelerate time critical decision-making. By creating a network of Avistar
      users, our customers can have face-to-face meetings within the enterprise
      and with customers and partners, without the costs and time delays of
      travel. Negotiations, crises management, sales, advisory services,
      decision-making and other persuasive communications are more effective
      when done face-to-face. Our solution allows interactions to happen in
      real-time, speeding up the manner in which business is done, freeing up
      time for employees, enhancing business-to-business communications, and
      potentially increasing revenue
generation.
  ·
              Enhanced customer and partner
      relationships.Our
      system helps companies to be more responsive to and develop stronger
      business relationships with their customers, partners and suppliers. An
      Avistar call is generally as easy and reliable as a telephone call or
      “instant message”, while being more personal. One of our customers has
      provided Avistar networks to their clients and business partners,
      including offshore outsource partners, in order to facilitate interactions
      and improve relationships.
  ·
              Opportunity to leverage
      existing and future communication infrastructures.We
      provide an open architecture that uses existing standards and is designed
      to take advantage of emerging standards. Our system integrates into our
      customers’ existing network communications infrastructure, and supports
      the protocols a company may choose to use for video broadcasts, data
      sharing and the transport of information. However, video quality varies
      depending on the protocol selected. Our system utilizes existing data
      networks for transporting video, and is designed to support real time
      digital networking and video transmission. We have designed our system to
      continue to work with Internet protocol-based technologies as standards
      evolve and quality of service improves. We expect this flexibility,
      together with simplified software and hardware at the desktop, to allow
      companies to make effective use of their existing local area and wide area
      networks, as well as their next generation
  networks.
  ·
              Better communication to face
      new business challenges such as globalization, business continuity
      planning, and distributed locations.Within
      global corporations, professionals collaborate daily with customers,
      partners and associates who are often located in different offices and/or
      different time zones. This has increasingly become the case as firms, due
      to economic and security concerns, have restricted travel, begun
      decentralizing their personnel across a more distributed set of locations,
      taking advantage of lower costs of real estate and increased business
      resiliency through distributed operations, and shifted more operations to
      outsourcing providers. In this context, critical information must be
      delivered on a timely basis and without confusion, as smoothly as if
      colleagues were working together in person. Avistar’s video product suite
      enables companies that are reducing travel and/or distributing their
      operations to easily and quickly connect small, remote offices as well as
      at-home workers to the central organization and still benefit from
      face-to-face interaction. Based on our experience in helping existing
      customers choose their optimal configurations, we are able to advise new
      customers on setups and configurations that will be most effective for a
      large central office, a small branch office, an outsourcing provider, or
      other remote locations.
  System
Architecture and Technology
  Our
visual unified communications solutions are based on our 10th major release of
our open architecture, which enables users to communicate using various
networking protocols and transport media, including IP networks and the
Internet. We developed our architecture to address the necessary elements of a
complete video-enabled collaboration solution.
  We
believe that the following technical factors will transform and consolidate the
existing video collaboration applications marketplace, creating a strong need
for a software platform that will support this consolidation and
evolution:
  ·
              Improved
      compression technologies;
  ·
              Widespread
      proliferation of broadband infrastructure and virtual private networks, or
      VPNs (with enhanced tools to optimize bandwidth for video transmission
      (QOS; quality of service));
   8
  ·
              Developing
      availability of converged audio, video and data
  networks;
  ·
              Improved
      computer processing speeds; and
  ·
              Adoption
      of critical digital video and multimedia
  standards.
  Our
Avistar C3TM platform supports this consolidation and evolution by integrating
industry standards for audio, video and data transport, but separating them from
application functionality and system management. This allows our software
application platform to manage the interoperation and transcoding of various
standards to seamlessly integrate video, audio and data into complex
applications, and not be limited by the functionality built into one particular,
application-specific standard. It also allows the system to accommodate new and
evolving standards with minimal disruption. Current industry and widely accepted
proprietary standards supported include H.263, H.264, H.320, H.323, SIP, NTSC,
PAL, MPEG, Microsoft Windows Media Video and Real Networks RealMedia. Our system
uses TCP/IP, the standard Internet protocol, for providing video and audio
calls, scheduling and starting broadcast presentations, and managing the
creation of materials. In addition, we use TCP/IP for overall systems and
network management throughout our Avistar C3TM software platform. This approach
allows us to deliver connectivity throughout an enterprise and allows us to
leverage existing Internet infrastructure. For delivery of high-quality video
streams in the local area network, including wireless, we primarily utilize
video over IP technology but offer a choice of IP or traditional circuit
switched technologies, including the ability to mix and match network types.
Thus, Avistar customers can successfully deploy desktop video across the
enterprise, even if portions of their network, in older buildings for example,
aren’t capable of supporting real-time video on their data networks. We use our
gateways to translate between the various network technologies used in our
system. These gateways are managed and controlled by our systems software with
TCP/IP-based protocols.
  Each
Avistar endpoint functions as a node on the network, like personal computers,
printers or file servers on a local area network. Just as color printers and
file servers are often shared network resources on the local area network, the
more costly equipment in an Avistar system, such as servers, media servers,
switches, and gateways, are centralized and made available to multiple users.
Network nodes and resources, like those of a data network, are managed through
centralized, Internet protocol-based applications and administration tools, such
as web-based reports of video call activity.
  We
believe our video software platform positions us to lead the transformation
described above. Further, we provide a suite of collaboration applications that
seamlessly operate with the standards based systems allowing users to access
this functionality in an easy and intuitive manner. We expect to make this
platform more accessible to developers and to allow integration with other
applications and network hardware.
  Because
of the intelligent integration of various video network components, all Avistar
products are controlled by the Avistar C3TM platform, our architecture has the
following key features:
  ·
              Network management:Avistar
      C3TM utilizes open protocols for call set-up, call control and directory
      services. It also complies with standards and interfaces and connects with
      video networks through shared Avistar gateways, which are further
      connected via private or public telephony or TCP/IP networks. Servers
      communicate through our signaling system for video protocol, SSV, which is
      based on TCP/IP, the standard Internet protocol. Through this signaling
      system, servers exchange configuration information and allocate call
      resources during call set-up, and exchange network status information. The
      signaling system selects the optimal route for all video calls, helping to
      minimize call costs and performance demands on wide area network
      resources. Most videoconferencing equipment using industry standard
      compression technologies also can communicate with an Avistar
      network.
  ·
              Transport standard
      independence:Our
      system selects the appropriate transport standards for transmitting
      information over networks to help deliver the highest quality video
      possible and full duplex audio in the most efficient manner. For example,
      the Avistar C3TM software automatically exchanges information among servers
      and switches to determine the best network route for video calls. For the
      transport of video over a local area network, our system uses either data
      networks with our IP endpoints, or existing spare Ethernet wires for our
      legacy product to deliver standards-compliant high quality signals. This
      allows customers to choose the transport type to best fit their network
      capabilities in the local area. In a wide area network, we use industry
      video compression standards across a customer’s private IP network, or
      VPN’s, or the Internet, or the public telephony network. Recent product
      releases have enhanced our ability to support mobile and home workers who
      may have lower bandwidth connections. For the transmission of recorded
      content on corporate data networks or via the Internet, our system uses
      standard digital storage formats and transport
    technologies.
  ·
              Expandable to thousands of
      users:Because
      shared resources, such as servers, are attached to the Avistar switch and
      are managed through the data network, new users and new capabilities can
      be added without replacing existing infrastructure, but rather, by simply
      adding video software and a web-camera at each desktop. Just as local area
      network switches and public telephony networks can be linked together
      without the use of routers, Avistar switches can be similarly linked
      without the use of video network gateways. As a result, customers can
      easily add capacity as their needs
grow.
   9
  
  System
Products and Applications
  Infrastructure,
Server and Software Products
  The
Avistar C3TM platform is comprised of the following components:
 
 ·
              Avistar
      C3 DesktopTM – a SIP-based desktop videoconferencing solution that includes
      centralized user and system management, data conferencing, 1-click video
      calling, integrated network / bandwidth management capabilities, and
      click-to-call with IBM Sametime and Microsoft Office Smart Tags. The
      Avistar C3 DesktopTM solution includes the Avistar C3 Desktop Software
      (installed on user’s PCs / notebooks) and the Avistar C3 Server Software
      (to be installed on a client-provided standard Windows
      server).
 
 ·
              Avistar
      C3 ConferenceTM – a software-based video bridge / MCU designed to operate
      with the Avistar C3 DesktopTM solution. Key features include support for up
      to 12 simultaneous video calls per server (each with up to 4 sites),
      interoperability with H.323 videoconferencing systems, integrated
      bandwidth management, and web-based monitoring and
    management.
 
 ·
              Avistar
      C3 Tunnel ServerTM – a software-based firewall traversal solution that
      supports a wide variety of standards including STUN, TURN, ICE, and HTTPS
      tunneling. Additional features include support for both H.323 and SIP
      environments and up to 20 traversal calls per server (at speeds up to 1
      Mbps per call).
 
 ·
              Avistar
      C3 CommandTM – a dynamic bandwidth management solution that provides three
      key features: i) control over the amount of bandwidth used for audio and
      video calls on a per-user basis, ii) control over the amount of bandwidth
      used by UC solutions, and iii) protection of bandwidth allocated to UC to
      ensure an appropriate user quality of experience
  (QoE).
 
 ·
              Avistar
      C3 ConnectTM – a software-based SIP to H.323 gateway that allows Avistar
      users to communicate with H.323 video systems and MCUs. Avistar C3
      ConnectTM supports up to 100 concurrent video calls, translates address
      books between SIP and H.323 environments, and supports H.239 and SIP dual
      video.
 
 ·
              Avistar
      C3 Media EngineTM – a software applet designed to be embedded within other
      applications that video- and audio-enables any software application. Key
      features include support for up HD720p video, integrated NAT / firewall
      traversal capabilities, and full AES
encryption.
 
 ·
              Avistar
      C3 UnifiedTM Microsoft OCS Edition – a software plug-in that integrates
      Avistar’s conferencing capabilities with the Microsoft OCS
      platform.
 
 ·
              Avistar
      C3 IntegratorTM Citrix Edition – an add-on to the Unified Microsoft OCS
      Edition that enables the Avistar platform to operate in a Citrix ICA
      protocol and thin client
environment.
 
 In
addition, we offer an IBM Lotus Sametime module that adds dynamic bandwidth
management capabilities, including bandwidth limiting / call admission control,
to IBM Lotus Sametime environments.
 
 Patent
Licensing
  Historically,
we have derived a significant portion of our annual revenues by licensing our
broad portfolio of patents covering, among other areas, video and rich media
collaboration technologies, networked real-time text and non-text communications
and desktop workstation echo cancellation. This broad suite of patents enables
much of the functionality of the Avistar C3TM platform. Licenses to third parties
cover part of or all of our patent portfolio. End-to-end rich media
collaborative application companies that have licensed Avistar patents include
Polycom, Inc., Tandberg ASA, Sony Corporation and Sony Computer
Entertainment Inc. (SCEI), Emblaze-VCON Ltd., Radvision, LifeSize
Communications, Inc., Logitech, and International Business Machines Corp.
(IBM).
  On
December 18, 2009, we entered into a definitive agreement to sell substantially
all of our patent portfolio and associated patent applications to Intellectual
Ventures Fund 61 LLC, pending the fulfillment of certain requirements for
closing. As of December 31, 2009, we had 99 U.S. and foreign patents
covering various aspects of our technology, with expiration dates ranging from
2013 to 2018, and 26 pending patent applications.
  On
January 19, 2010, and prior to completing the Intellectual Ventures transaction,
we concluded an agreement with Springboard Group S.A.R.L. granting to Skype a
non-exclusive license to Avistar’s patent portfolio under Avistar’s standard
terms and
conditions. Then on January 21, 2010, we completed and closed the patent
purchase transaction with Intellectual Ventures referenced above. As a result,
associated rights, obligations, risks and costs for the sold patents and patent
applications, including the patents in reexamination related to Microsoft
petitions, are now the responsibility of Intellectual Ventures. As part of the
transaction with Intellectual Ventures, we received a license-back to the
transferred patents and patent applications for our future products covered by
the portfolio.  Following
this transaction, we retained a small forward-looking patent portfolio
comprising one Canadian patent, one European application and four U.S.
applications. We also retained continuing royalty income from existing patent
licenses. We continue an active program to grow, license, and protect our
intellectual property portfolio, primarily through the filing of patent
applications.
   10
  
 Segment
Information
  We
operate through two segments:
  ·
              Our
      products division engages in the design, development, manufacture, sale
      and marketing of networked video communications
  products.
  ·
              Our
      intellectual property division engages in the development, prosecution,
      maintenance, support and licensing of the intellectual property and
      technology used in our video communications
  system.
  Financial
information regarding these segments is provided in Note 10 to our consolidated
financial statements included in this Annual Report on
Form 10-K.  Financial information relating to revenues and other
operating income, net loss, operating expenses and total assets for the three
years ended December 31, 2009, can be found in our Consolidated Financial
Statements attached hereto.
  Customers
  Video
Communications Products
  As of
December 31, 2009, we have licensed and recognized revenue with respect to
over 20,000 end-users at over 400 customer sites in approximately 151 cities in
over 40 countries. Because many of our customers operate on a decentralized
basis, decisions to purchase our systems are often made independently by
individual business units. As such, a single company may represent several
separate accounts, and multiple customer sites may relate to the same
company.
  For the
year ended December 31, 2009, IBM, City Information Services and Deutsche Bank
AG and its affiliates accounted for 35%, 19% and 14% of our total revenues,
respectively. For the year ended December 31, 2008, Deutsche Bank AG and its
affiliates, UBS Warburg LLC and its affiliates, IBM and Sony Corporation
accounted for 40%, 19%, 18% and 11% of our total revenues, respectively. For the
year ended December 31, 2007, Radvision Ltd., Deutsche Bank AG and its
affiliates, and UBS Warburg LLC and its affiliates accounted for 33%, 24% and
18% of our total revenues, respectively. The level of sales to any customer may
vary from quarter to quarter, and while we continue to expand our indirect sales
channel, we expect that significant customer concentration will continue for the
foreseeable future. The loss of, or a decrease in the level of sales to, or a
change in the ordering pattern of, any one of these customers could have a
material adverse impact on our financial condition or results of
operations.
  International
revenue, which consists of sales to customers with operations principally in
Western Europe and Asia comprised 44%, 51%, and 72% of total revenue for 2009,
2008, and 2007, respectively. For 2009, 2008 and 2007, revenues to customers in
the United Kingdom accounted for 34%, 22%, and 12% of total revenue,
respectively.
  Licensing
Activities
  We
derived approximately 10% or $853,000, 11% or $954,000, and 42% or $5.0 million,
of our annual revenues in 2009, 2008 and 2007, respectively, by licensing our
broad portfolio of patents to third parties covering video and rich media
collaboration technologies, networked real-time text and non-text communications
and desktop workstation echo cancellation. Our license revenue in 2009 and 2008
was primarily generated by licenses granted to Sony Corporation and its
subsidiaries.  License revenue in 2007 was primarily generated by
licenses granted to Radvision Ltd. and Sony Corporation and its subsidiaries,
including SCEI. Radvision agreed to make an up-front license payment of $4.0
million in the three months ended June 30, 2007.
  Sales
and Marketing
  Direct Sales.We
have a direct sales force in the United States and Europe consisting of sales
managers located in New York and London. Sales managers have direct
responsibility for selling and account management of our technology at customer
sites.
   11
  Indirect Sales.Through
our partnership organization, we have established a set of relationships with
strategic partners and value added resellers, in order to establish and expand
an indirect channel of sales for our products.
  Marketing.Our
marketing efforts are directed towards Global 5000 companies with targeted
solutions for the SMB and Enterprise markets, focused on the specific
collaboration needs of each. We also work with our existing customers to
demonstrate how our solutions can further satisfy their needs, thereby growing
our footprint within our installed base. We emphasize initiatives to develop
market awareness of our solutions and services, as well as increase usage of our
installed systems.
  We also
use marketing programs to build recognition of our corporate brand, foster
partnerships, and promote our technology in regards to licensing
opportunities.
  Installation,
Maintenance, Training and Support Services
  We
provide a wide variety of services for installation, design and adoption of our
video communications products. This may include the analysis of workflows in
order to identify patterns of collaboration between workgroups, so that the best
configuration of networked resources can be designed and implemented for the
enterprise. We generally install our systems for new customers. In an increasing
number of cases, our customers’ information technology group or services partner
install follow-on orders. In the future, we expect our customers or their
services partners will increasingly perform the installation
process.
  The
installation that we offer to our customers as a separately-priced service
relates to the physical set up and configuration of desktop and infrastructure
components of our solution. To accomplish this activity, our staff frequently
interfaces with the customer’s internal information technology, or IT, staff and
external suppliers, in order to provide for connectivity to the customer’s local
and wide area networks, and for the physical placement (arranging for rack space
and appropriate environmental conditions) and connections between the various
components purchased. The effective operation of software and hardware is
checked by our staff during this installation process. Although the “work time”
of this activity at a single location may be only one or two days, the
coordination necessary for accommodating the equipment and establishing
connectivity frequently creates cycle times of between two and six weeks from
product shipment to installation at the customer’s site.
  Our
maintenance services ensure that customers benefit from the latest networked
video technology through software upgrades and expedited repair and replacement
services. Our customer support center provides voice and video call assistance
to Avistar users and administrators throughout the world. On-site support is
also available from each of our major regional offices for a separate fee. In
addition, training for users is available on-site or at an Avistar facility, and
for system administrators at an Avistar facility, on a for-fee
basis.
  Backlog
  We do not
believe that backlog is a meaningful indicator of future business prospects.
Therefore, we believe that backlog information is not material to an
understanding of our overall business.
  Research
and Development
  We
believe that strong system development capabilities are essential to our
strategy. Our research and development efforts focus on enhancing our core
technology, developing additional applications, addressing emerging
technologies, standards and protocols, and engaging in patent generation
activities. Our system development team consists of engineers and software
developers with experience in video and data networking, voice communications,
video and data compression, email, collaboration and Internet technologies. We
believe that our diverse technical expertise contributes to the highly
integrated functionality of our system. We devote a significant amount of our
resources to research and development as this is core to our business strategy
and ongoing success.  Our research and development expense for the
years ended December 31, 2009, 2008 and 2007 was $3.9 million, $5.2 million and
$7.7 million, respectively.
  Intellectual
Property and Proprietary Rights
  Our
ability to compete and continue our long history of fundamental innovation
depends substantially upon internally developed technology. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
licensing, non-disclosure and other agreements with our consultants, suppliers,
customers, and employees to protect our internally developed
technology.
  We
typically enter into confidentiality, license and nondisclosure agreements with
our employees, consultants, prospective customers, licensees, and partners which
seek to limit the use and distribution of our proprietary materials and prohibit
reverse-engineering of our proprietary technologies. In addition, we control
access to and distribution of our software, documentation and other proprietary
information. Several of our license agreements with our customers require us to
place our software source code into escrow. In such cases, these agreements
provide that these customers may be entitled to retain copies of the software,
and have a limited non-exclusive right to use and/or reproduce, maintain,
update, enhance and produce derivative works of the software source code under
the terms of the agreements if we fail to cure a contractual breach by us on a
timely basis, or if we become the subject of a bankruptcy or similar proceeding.
Additionally, we maintain a strong working relationship with vendors whom we
identify as key suppliers, and assign preferred provider status to these vendors
under agreements that secure ordering and extended warranty rights for
us.
   12
  We have
pursued registration of our key trademarks and service marks in the United
States, the United Kingdom and certain other European countries, and intend to
pursue additional registrations in more countries where we plan to establish a
significant business presence. We own several United States, Canadian and United
Kingdom trademarks, including Avistar and the Avistar logo, Avistar C3TM, Avistar C3
UnifiedTM,
Avistar C3 IntegratorTM, Avistar C3
ConferenceTM,
Avistar C3 DesktopTM, Shareboard and
vBrief.
  Competition
  The
market for video collaboration products and solutions is highly competitive. As
a result of advances in technology, increases in communications capability and
reductions in communications costs in the past several years, the market is now
characterized by many competitors, rapidly changing technology, evolving user
needs, developing industry standards and protocols and the frequent introduction
of new products and services. Within the market for video collaboration products
and solutions, we compete primarily with Polycom, Inc., Cisco Systems,
Inc., Radvision, Ltd., and Emblaze-VCON Ltd.
  With
increasing interest in the power of video collaboration, unified communications
and the establishment of communities of users, we face increasing competition
from alternative communications solutions that employ new technologies or new
combinations of technologies from companies such as Cisco Systems, Inc.,
Avaya, Inc., Nortel Networks Corporation, Microsoft Corporation, and IBM
Corporation that enable web-based or network-based video and unified
communications with low-cost digital camera systems.
  We
believe that the principal factors affecting competition in our markets
include:
  ·
              Product
      features, functionality and
scalability;
  ·
              Product
      quality and performance;
  ·
              Product
      reliability and ease of use;
  ·
              Use
      of open standards;
  ·
              Quality
      of service and support;
  ·
              Company
      reputation, size and financial
stability;
  ·
              Price
      and overall cost of ownership;
  ·
              Integration
      with other desktop collaboration products;
and
  ·
              Document
      sharing, including internet-based
collaboration.
  Currently,
our principal competitors are companies that provide products and services in
specific areas where we offer our integrated system, such as:
  ·
              Room-based
      point-to-point and multi-point video communications
    products;
  ·
              Desktop
      video communications products;
  ·
              Broadcast
      video products;
  ·
              Video
      retrieval and viewing products;
  ·
              Desktop
      content creation products; and
  ·
              Web-based
      data collaboration products.
  While a
number of companies have marketed applications that enable users to use
individual features similar to our solutions, we do not believe that any single
competitor currently offers as comprehensive a set of functionality as our
solution provides. We believe these companies in many cases can also represent
complementary opportunities to extend the reach of our solutions by potentially
expanding the market for video and unified communications and
collaboration.
  We expect
competition to increase significantly in the future from existing providers of
specialized video and unified communications products, VOIP solution providers
and other companies as they enter our existing or future markets, possibly
including major telephone companies or communications equipment providers. These
companies may develop similar or substitute solutions, which may be less costly
or provide better performance or functionality than our systems. A number of our
existing and potential competitors have longer operating histories,
significantly greater financial, marketing, service, support, technical and
other resources, significantly greater name recognition and a larger installed
base of customers than we do. In addition, many of our current or potential
competitors have well-established relationships with our current and potential
customers, and have extensive knowledge of our industry. It is possible that new
competitors or alliances among competitors may emerge and acquire significant
market share. To be successful, we must continue to respond promptly and
effectively to the challenges of developing customer requirements, technological
change and competitors’ innovations. Accordingly, we cannot predict what our
relative competitive position will be as the market evolves for video
collaboration and unified communications products and services.
   13
  Employees
  As of
December 31, 2009, we had 49 employees, including personnel dedicated to
research and development, customer service, including installation and support
services, sales and marketing, and finance and administration. Our future
performance depends in significant part upon the continued service of our key
technical, sales and marketing, and senior management personnel, most of whom
are not obligated to remain with us by an employment agreement. The loss of the
services of one or more of our key employees could harm our
business.
  Executive
Officers of the Registrant
  Our
officers and their ages as of December 31, 2009 were as
follows:
  Name
              
              
              Age
              
              PositionRobert
      F. Kirk
              
              55
              Chief
      Executive OfficerElias
      MurrayMetzger
              
              39
              Chief
      Financial Officer and Corporate SecretaryJ.
      Chris Lauwers
              
              49
              Chief
      Technology and Product OfficerAnton
      F. Rodde
              
              67
              President,
      Intellectual Property DivisionStephen
      Epstein
              
              44
              Chief
      Marketing OfficerSteve
      Westmoreland
              
              54
              Chief
      Information Officer
  Robert F. Kirk joined Avistar
in July 2009 as our Chief Executive Officer. He previously served as Chief
Executive Officer of ChoicePay, Inc., a payment services company, from August
2008 to its sale to Tier Technologies, Inc. in January 2009.  Mr. Kirk
served as Chief Executive Officer of VICOR, Inc., a provider of image-enabled
receivables processing and management solutions, from August 2005 to its sale to
Metavante Corporation in August 2007. Prior to his appointment as Chief
Executive Officer of VICOR, Inc., in August 2005, Mr. Kirk served continuously
in various management positions at VICOR, Inc. beginning in January
1999.  Mr. Kirk holds a Master's and Bachelor's degree in Business
Administration from West Virginia University.
  Elias
MurrayMetzger was promoted to the position of Chief Financial Officer and
Corporate Secretary in April 2009, after serving as our Acting Chief Financial
Officer and Corporate Secretary from January to April 2009.  From
January 2006 to January 2009, Mr. MurrayMetzger served as our worldwide
Corporate Controller, playing a key role in the Company’s financial reporting
and compliance functions. From April 2004 to January 2006, Mr. MurrayMetzger
served as Assistant Controller of Centra Software, Inc., a provider of software
solutions for online business communication, collaboration and learning. During
his tenure at Centra, Mr. MurrayMetzger successfully navigated Centra’s
Sarbanes-Oxley compliance effort and SEC reporting functions. Mr.
MurrayMetzger worked in the technology audit practice of
PricewaterhouseCoopers from February 2000 to March 2004. He is a Certified
Public Accountant (inactive) and has a Bachelors of Science in Agribusiness with
a concentration in finance from California Polytechnic State University, San
Luis Obispo.
  J. Chris Lauwershas been our Chief
Technology and Product Officer since August 2005. He served as Chief Technology
Officer from March 2001 to August 2005. He was our Vice President of Engineering
from 1996 to 2001 and Director of Engineering from 1994 to 1996. He previously
served as Principal Software Architect at VICOR, Inc. from 1990 to 1994, and as
a research associate at Olivetti Research Center from 1987 to 1990.
Dr. Lauwers holds a B.S. in electrical engineering from the Katholieke
Universiteit Leuven of Belgium. Dr. Lauwers also holds an M.S. and a Ph.D.
in electrical engineering and computer science from Stanford
University.
  Anton F. Roddehas been the President
of the Intellectual Properties Division since December 2003. Prior to
joining Avistar, he served as President and CEO of Western Data Systems, an ERP
software company, from 1991 to 2002, as Group Vice President at Manugistics from
2002 to 2003, the company which acquired Western Data Systems, as President and
General Manager of several subsidiaries of Teknekron Corporation, a technology
incubator, from 1984 to 1991, as founder and President of Control Automation, a
robotics company, from 1980 to 1984, and held a variety of technical and
management positions at AT&T from 1970 to 1980. Dr. Rodde holds a B.S.
in physics from Benedictine University and an M.S. and Ph.D. in physics from the
Illinois Institute of Technology.
   14
 Stephen Epstein joined
Avistar in January 2008. Prior to Avistar he was Vice President, Head of Product
Management at Mantas, Inc. from July 2003 to January 2008, where he was
responsible for global product strategy, managing product requirements, defining
go to market plans and marketing strategy, while evaluating the financial
services market. Prior to joining Mantas, Mr. Epstein was Head of Product &
Business Development at Bang Networks from May 2002 to July 2003 where he
spearheaded product and business development efforts, focusing on delivering
real-time information distribution products. Mr. Epstein held senior-level
management and product development positions including Head of Global Foreign
Exchange Sales Technology and Group CTO at Deutsche Bank from March 1995 to May
2002.
  Steve Westmoreland joined
Avistar as Chief Information Officer in October 2009 and he is responsible for
our development, quality assurance, information technology and customer support
functions.  From December 2003 to October 2009, he was Senior Vice
President of Support Operations for VICOR, Inc., where he helped to
significantly grow the company and played a leading role as part of Metavante’s
successful acquisition of VICOR, Inc. Prior to that, Mr. Westmoreland held Chief
Information Officer positions at Damage Studios and VALinux Systems. Mr.
Westmoreland holds a BS degree in Computer Science from Louisiana Tech
University.
  Item
1a. Risk Factors
  Before
you invest in our securities, you should be aware that our business faces
numerous financial and market risks, including those described below, as well as
general economic and business risks.  The following discussion
provides information concerning the material risks and uncertainties that we
have identified and believe may adversely affect our business, our financial
condition and our results of operations.  Before you decide whether to
invest in our securities, you should carefully consider these risks and
uncertainties, together with all of the other information included in this
Annual Report on Form 10-K for the year ended December 31, 2009 and in our other
public filings.
  Risks
Relating to Our Common Stock
  Our
Stock is quoted on the Pink Sheets, which may decrease the liquidity of our
common stock.
  On June
24, 2009, the NASDAQ Stock Market, Inc. suspended our common stock from trading
on NASDAQ because we did not evidence a market value of listed securities above
$35.0 million for ten consecutive trading days, or otherwise demonstrate
compliance with alternative continued listing standards, during the period from
April 2, 2009 and June 22, 2009.  Since that time our common stock has
been quoted on the Pink Sheets under the symbol AVSR.PK.  On August 6,
2009, we withdrew our appeal to the NASDAQ Listing and Hearing Review Council.
On August 31, 2009, the NASDAQ Stock Market, Inc. officially delisted our common
stock.
  Broker-dealers
often decline to trade in Pink Sheet stocks given that the market for such
securities is often limited, the stocks are more volatile, and the risk to
investors is greater than with stocks listed on other national securities
exchanges. Consequently, selling our common stock can be difficult because
smaller quantities of shares can be bought and sold, transactions can be delayed
and news media coverage of our Company may be reduced. These factors could
result in lower prices and larger spreads in the bid and ask prices for shares
of our common stock as well as lower trading volume. Investors should realize
that they may be unable to sell shares of our common stock that they purchase.
Accordingly, investors must be able to bear the financial risks associated with
losing their entire investment in our common stock.
  Our
common stock may be subject to penny stock rules, which may make it more
difficult for our stockholders to sell their common stock.
  Our
common stock may be considered a “penny stock” pursuant to Rule 3a51-1 of the
Exchange Act. Broker-dealer practices in connection with transactions in penny
stocks are regulated by certain penny stock rules adopted by the SEC. Penny
stocks generally are defined as equity securities with a price of less than
$5.00 per share. The penny stock rules require a broker-dealer, prior to
purchase or sale of a penny stock not otherwise exempt from the rules, to
deliver to the customer a standardized risk disclosure document that provides
information about penny stocks and the risks associated with the penny stock
market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer account. In addition, the
penny stock rules generally require that, prior to a transaction in a penny
stock, the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market of a
stock that becomes subject to the penny stock rules.
   15
 Our
common stock has been and will likely continue to be subject to substantial
price and volume fluctuations due to a number of factors, many of which will be
beyond our control, which may prevent our stockholders from reselling our common
stock at a profit.
  The
trading price of our common stock has in the past been and could in the future
be subject to significant fluctuations in response to:
  •
              General
      trends in the equities market, and/or trends in the technology
      sector;
  •
              Quarterly
      variations in our results of
operations;
  •
              Announcements
      regarding our product developments;
  •
              The
      size and timing of agreements to license our remaining and future patent
      portfolio or enter into technology or distribution
      partnerships;
  •
              Developments
      in the examination of our patent applications by the U.S. Patent and
      Trademark Office;
  •
              Announcements
      of technological innovations or new products by us, our customers or
      competitors;
  •
              Announcements
      of competitive product introductions by our
  competitors;
  •
              Limited
      trading volume of shares; and,
  •
              Developments
      or disputes concerning patents or proprietary rights, or other
      events.
  If our
revenue and results of operations are below the expectations of public market
securities analysts or investors, then significant fluctuations in the market
price of our common stock could occur. In addition, the securities markets have
recently experienced significant price and volume fluctuations, which have
particularly affected the market prices for high technology and micro-cap
companies, and which often are unrelated and disproportionate to the operating
performance of specific companies. These broad market fluctuations, as well as
general economic, political and market conditions, may negatively affect the
market price of our common stock.
  Provisions
of our certificate of incorporation, our bylaws and Delaware law may make it
difficult for a third party to acquire us, despite the possible benefits to our
stockholders.
  Our
certificate of incorporation, our bylaws, and Delaware law contain provisions
that may inhibit changes in our control that are not approved by our Board of
Directors. For example, the Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the terms of this
preferred stock, without any further vote or action on the part of the
stockholders.
  These
provisions may have the effect of delaying, deferring or preventing a change in
the control of Avistar despite possible benefits to our stockholders, may
discourage bids at a premium over the market price of our common stock, and may
adversely affect the market price of our common stock and the voting and other
rights of our stockholders.
  Our
principal stockholders can exercise a controlling influence over our business
affairs and they may make business decisions with which you disagree and which
may affect the value of your investment.
  Our
executive officers, directors and entities affiliated with them, in the
aggregate, beneficially owned approximately 63% of our common stock as of
December 31, 2009. If they were to act together, these stockholders would be
able to exercise control over most matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. These actions may be taken even if they are opposed by
other investors. This concentration of ownership may also have the effect of
delaying or preventing a change in control of Avistar, which could cause the
market price of our common stock to decline.
  If
our share price is volatile, we may be the target of securities litigation,
which is costly and time-consuming to defend.
  In the
past, following periods of market volatility in the price of a company’s
securities, security holders have often instituted class action litigation. Many
technology companies have been subject to this type of litigation. Our share
price has, in the past, experienced price volatility, and may continue to do so
in the future. If the market value of our common stock experiences adverse
fluctuations and we become involved in this type of litigation, regardless of
the merits or outcome, we could incur substantial legal costs and our
management’s attention could be diverted, causing our business, financial
condition and operating results to suffer.
   16
  Risks
Related to Our Business
  We have incurred substantial losses in the past and may
not be profitable in the future.
 
 We recorded net losses of $4.0 million for 2009, $6.4
million for 2008 and $2.9 million for 2007.  As of December 31, 2009,
our accumulated deficit was $116 million.  Our revenue and income from
settlement and patent licensing may not increase, or even remain at its current
level.  In addition, our operating expenses, which have been reduced
recently, may increase as we continue to develop our business and pursue
licensing opportunities.  As a result, to become profitable, we will
need to increase our revenue and income from settlement and patent licensing by
increasing sales to existing customers and by attracting additional new
customers, distribution partners and licensees.  If our revenue does
not increase adequately, we may not become profitable.  Due to the
volatility of our product and licensing revenue and our income from settlement
and patent licensing activities, we may not be able to achieve, sustain or
increase profitability on a quarterly or annual basis.  If we fail to
achieve or to maintain profitability or to sustain or grow our profits within
the time frame expected by investors, the market price of our common stock may
be adversely impacted .
  Our
expected future working capital needs may require that we seek additional debt
or equity funding which, if not available on acceptable terms, could cause our
business to suffer.
  We may
need to arrange for the availability of additional funding in order to meet our
future business requirements. We have a
revolving credit facility that matures on December 21, 2010, which provided us
with a maximum line of credit amount of $11.25 million as of December 31, 2009.
The maximum facility amount was reduced to $5.0 million in March 2010 for the
remainder of the period through the maturity date. If we are unable
to obtain additional funding when needed on acceptable terms, we may not be able
to develop or enhance our products, take advantage of opportunities, respond to
competitive pressures or unanticipated requirements, or finance our efforts to
protect and enforce our intellectual property rights, which could seriously harm
our business, financial condition, results of operations and ability to continue
operations.  We have in the past, and may in the future, reduce our
expenditures by reducing our employee headcount in order to better align our
expenditures with our available resources.  Any such reductions may
adversely affect our ability to maintain or grow our business.
  We
have implemented significant changes in our organizational structure, sales,
marketing and distribution strategies, licensing efforts and strategic
direction, which, if unsuccessful, could adversely affect our business and
results of operations.
  We have
experienced significant changes in our management structure and
composition.  In September 2007, William Campbell resigned from the
position of Chief Operating Officer.  Simon Moss was appointed as
President of our products division in July 2007 and was appointed as our Chief
Executive Officer in January 2008 when Gerald Burnett resigned from his position
as our Chief Executive Officer.  In January 2009, Bob Habig resigned
from the position of Chief Financial Officer and he was replaced in that
position by Elias MurrayMetzger, our Corporate Controller.  In July
2009, Simon Moss resigned from his positions as Chief Executive Officer and
board member.  Shortly thereafter, Robert Kirk was appointed to
replace Simon Moss as our Chief Executive Officer.  In August 2009,
Darren Innes resigned from the position of General Manager and Vice President,
Global Sales. In addition, during the second half of 2007 and in 2008, we
implemented a number of other management changes along with an intensive set of
corporate initiatives aimed at increasing our product sales, expanding our
customer deployments and support, improving our corporate efficiency and
increasing our development capacity.  The components of this
initiative included:
  •
              Supplementing
      our position in the financial services vertical by expanding our market
      focus to additional verticals through indirect distribution partners,
      where our collaboration products can help global organizations speed
      business processes, save costs and reduce their carbon
      footprints;
  •
              Implementing
      aggressive cost control measures structured to effectively align
      operations  with predictable revenues and to address Microsoft's
      requests for reexamination of our U.S. Patents, while still allowing us to
      continue to invest in our product line and to license our intellectual
      property and technology;
  •      A
reduction in our employees from an average of 88 in 2007 to 49 at December 31,
2009; and
  •      Pursuing
multiple distribution, services and technology licensing partners.
  These and
other changes in our business are aimed at reducing our structural costs,
increasing our organizational and partner-driven capacity, leveraging our
reputation for innovation and intellectual property leadership, and growing and
expanding our business.  However, these organizational changes and
initiatives involve transitional costs and expenses and result in uncertainty in
terms of their implementation and their impact on our business. For example, our
efforts to expand our market focus to additional verticals through the use of
distribution partners has proven challenging as such distribution partners work
to better understand our product and service offerings and integrate them into
their own marketing and sales strategies.   As with any
significant organizational change, our initiatives will take time to implement,
and the results of these initiatives may not be fully apparent in the near
term.  If our initiatives are unsuccessful in achieving our stated
objectives, our business could be harmed and our results of operations and
financial condition could be adversely affected.
   17
 Our
market is in the early stages of development, and our system may not be widely
accepted.
  Our
ability to achieve profitability depends in part on the widespread adoption of
networked video communications systems and the sale and adoption of our video
system in particular, either as a separate solution or as a technology
integrated into a unified communications platform. If the market for our system
and technology fails to grow or grows more slowly than we anticipate, we may not
be able to increase revenue or achieve profitability. The market for our system
is relatively new and evolving. We have to devote substantial resources to
educating prospective customers, distributors and technology partners about the
uses and benefits of our system and the value added through the adoption of our
technology. Our efforts to educate potential customers and partners may not
result in our system achieving broad market acceptance. In addition, businesses
that have invested or may invest substantial resources in other video products
may be reluctant or slow to adopt our system or technology. Consequently, the
conversion from traditional methods of communication to the extensive use of
networked video and unified communications may not occur as rapidly as we
wish.
  Our
lengthy sales cycle to acquire new customers, large follow-on orders,
distributors and technology partners may cause our operating results to vary
significantly and make it more difficult to forecast our revenue.
  We have
generally experienced a product sales cycle of four to nine months for new
customers or large follow-on orders from existing customers through direct
sales.   This sales cycle is due to the time needed to educate
customers about the uses and benefits of our system, and the time needed to
process the investment decisions that our prospective customers must make when
they decide to buy our system. Many of our prospective customers have neither
budgeted expenses for networked video communications systems, nor for personnel
specifically dedicated to the procurement, installation or support of these
systems. As a result, our customers spend a substantial amount of time before
purchasing our system in performing internal reviews and obtaining capital
expenditure approvals. Economic conditions over the last several years have
contributed to additional deliberation and an associated delay in the sales
cycle.
  Our
lengthy sales cycle is one of the factors that has caused, and may continue to
cause our operating results to vary significantly from quarter-to-quarter and
year-to-year in the future. This makes it difficult for us to forecast revenue,
and could cause volatility in the market price of our common
stock.  Our shift to indirect distribution partners further limits the
visibility we have on the progress and timing of large initial or follow-on
orders. A lost or delayed order could result in lower than expected revenue in a
particular quarter or year. There is also a tendency in the technology industry
to close business deals at the end of a quarter, thereby increasing the
likelihood that a possible material deal would not be concluded in a current
quarter, but slip into a subsequent reporting period. This kind of delay may
result in a given quarter’s performance being below shareholder
expectations.
  Because
we still depend on a few customers for a majority of our product revenue,
services revenue, and income from settlement and patent licensing, the loss of
one or more of them could cause a significant decrease in our operating
results.
  To date,
a significant portion of our revenue and income from settlement and patent
licensing has resulted from sales or licenses to a limited number of customers,
particularly Deutsche Bank AG, UBS AG, Polycom, Inc., IBM, Sony and their
affiliates, and City Information Services.  Collectively, Deutsche Bank AG,
UBS AG, Polycom, Inc., IBM, Sony and their affiliates, and City Information
Services accounted for approximately 90% of combined revenues and income from
settlement and patent licensing for the year 2009. As of December 31, 2009,
approximately 87% of our gross accounts receivable was concentrated with four
customers, each of whom represented more than 10% of our gross accounts
receivable. As of December 31, 2008, approximately 98% of our gross
accounts receivable was concentrated with four customers, each of whom
represented more than 10% of our gross accounts receivable.
  The loss
of a major customer or the reduction, delay or cancellation of orders from one
or more of our significant customers could cause our revenue to decline and our
losses to increase.  Additionally, we completed the amortization of
the Polycom, Inc. proceeds in 2009. If we are unable to license our current and
future patent portfolio to additional parties on terms equal to or better than
our agreements with Polycom, Inc. and Tandberg, our licensing revenue and our
income from settlement and licensing will decline, which could cause our losses
to increase. We currently depend on a limited number of customers with lengthy
budgeting cycles and unpredictable buying patterns, and as a result, our revenue
from quarter-to-quarter or year-to-year may be volatile. Adverse changes in our
revenue or operating results as a result of these budgeting cycles or any other
reduction in capital expenditures by our large customers could substantially
reduce the trading price of our common stock.
   18
  We
may not be able to modify and improve our products in a timely and cost
effective manner to respond to technological change and customer
demands.
  Future
hardware and software platforms embodying new technologies and the emergence of
new industry standards and customer requirements could render our system
non-competitive or even obsolete.  Additionally, communication and
collaboration products and technologies are moving towards integrated platforms
characterized as unified communications. The market for our system
reflects:
  •      Rapid
technological change;
  •      The
emergence of new competitors;
  •      Significant
development costs;
  •      Changes
in the requirements of our customers and their communities of
users;
  •      Integration
of joint solutions in collaboration platforms;
  •      Evolving
industry standards;
  •      Transition
from hardware appliances and infrastructure to software; and
  •
              Transition
      to Internet protocol connectivity for video at the desktop, with
      increasing availability of bandwidth and quality of
    service.
  Our
system is designed to work with a variety of hardware and software
configurations, and be integrated with commoditized components (example: “web
cams”) of data networking infrastructures used by our customers. The majority of
these customer networks rely on Microsoft Windows servers. However, our software
may not operate correctly on other hardware and software platforms or with other
programming languages, database environments and systems that our customers use.
Also, we must constantly modify and improve our system to keep pace with changes
made to our customers’ platforms, data networking infrastructures, and their
evolving ability to integrate video with other applications. This may result in
uncertainty relating to the timing and nature of our new release announcements,
introductions or modifications, which in turn may cause confusion in the market,
with a potentially harmful effect on our business. If we fail to promptly
modify, integrate, or improve our system in response to evolving industry
standards or customers’ demands, our system could become less competitive, which
would harm our financial condition and reputation.
  Difficulties
or delays in integrating our products with technology partner’s products could
harm our revenue and margins.
  We
generally recognize initial product and installation revenue upon the
installation of our system in those cases where we are responsible for
installation, which often entails working with sophisticated software and
computing and communications systems. Under certain circumstances initial
product and installation revenue is recognized under the percentage of
completion method. The estimate of current period percentage of completion
requires significant management judgment and is subject to updates in future
periods until the project is complete. If we experience difficulties with
installations or do not meet deadlines due to delays caused by our customers or
ourselves, we could be required to devote more customer support, technical,
engineering and other resources to a particular installation, modification or
enhancement project, and revenue may be delayed.
  Competition
could reduce our market share and decrease our revenue.
  The
market in which we operate is highly competitive. In addition, because our
industry is relatively new and is characterized by rapid technological change,
evolving user needs, developing industry standards and protocols and the
introduction of new products and services, it is difficult for us to predict
whether or when new competing technologies or new competitors will enter our
market. Currently, our competition comes from many other kinds of companies,
including communication equipment, integrated solution, broadcast video and
stand-alone “point solution” providers. Within the video-enabled network
communications market, we compete primarily against Polycom, Inc., Cisco
Systems, Inc., Sony Corporation, Apple Inc., Radvision Ltd. and Emblaze-VCON
Ltd.  Many of these companies, including Polycom, Inc., Tandberg,
Sony, Radvision and Emblaze-VCON have acquired rights to use our patented
technology through licensing agreements with us, which, in some cases, include
rights to use future patents filed by us.  With increasing interest in
the power of video collaboration and the establishment of communities of users,
we believe we face increasing competition from alternative video communications
solutions that employ new technologies or new combinations of technologies from
companies such as Cisco Systems, Inc., Avaya, Inc., Microsoft Corporation and
Nortel Networks Corporation that enable web-based or network-based video
communications with low-cost digital camera systems.
  We
expect competition to increase in the future from existing competitors,
partnerships of competitors, and from new market entrants with products that may
be less expensive than ours, or that may provide better performance or
additional features not currently provided by our products. Many of our current
and potential competitors have substantially greater financial, technical,
manufacturing, marketing, distribution and other resources, greater name
recognition and market presence, longer operating histories, lower cost
structures and larger customer bases than we do. As a result, they may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements.
   19
  We may be
required to reduce prices or increase spending in response to competition in
order to retain or attract customers, pursue new market opportunities or invest
in additional research and development efforts. As a result, our revenue,
margins and market share may be harmed. We cannot assure you that we will be
able to compete successfully against current and future competitors and
partnerships of our competitors, or that competitive pressures faced by us will
not harm our business, financial condition and results of
operations.
  General
economic conditions may impact our revenues and harm our business in the future,
as they have in the past.
  The U.S.
and global economy has entered a recession and our customers and potential
customers, partners and distributors may delay or forego ordering our products,
and we could fall short of our revenue expectations for 2010 and beyond. Slower
growth among our customers, tightening of customers’ operating budgets,
retrenchment in the capital markets and other general economic factors all have
had, and could in the future have, a materially adverse effect on our revenue,
capital resources, financial condition and results of operations.
  The sale of substantially all of our patents and patent
applications in January 2010 is expected to affect our cash, expenses, revenues
and income in future periods.
 
 In prior periods, we have relied on patent licensing
revenues and income from settlement and licensing activities to provide
significant funding for our operations.  We recognized a total of $4.5
million, $5.2 million, and $21.2 million in licensing revenues and income from
settlement and licensing activities for the years ended December 31, 2009, 2008
and 2007, respectively.  On January 19, 2010, we licensed our patents
to Springboard Group S.A.R.L. ("SKYPE") for an upfront license payment of $3.0
million. On January 21, 2010, we sold substantially all of our patent portfolio
and associated patent applications to Intellectual Ventures Fund 61 LLC for a
one time cash payment of $11 million.  We did retain royalty rights
under our existing patent license agreements as well as a grant back license to
the patents and patent applications for our current and future
products.  As a result of this sale, we expect our efforts and
expenditures on patent prosecution, licensing and settlement activities in
future periods to be substantially reduced and our prospects for revenues from
the licensing of patents and patent applications and our prospects for
generating new income from settlement and licensing activities to also be
substantially reduced.  Accordingly, our ongoing operations will have
to be funded directly from operations and from debt and equity financing
activities.  Failure to generate cash from operations or from debt or
equity financing activities would have a substantial and adverse affect on our
business, operations and prospects.
  Future
revenues and income from settlement and licensing activities are difficult to
predict for several reasons, including our lengthy and costly licensing cycle.
Our failure to predict revenues and income accurately may cause us to miss
analysts’ estimates and result in our stock price declining.
  Because
our licensing cycle is a lengthy process, the accurate prediction of future
revenues and income from settlement and patent licensing from new licensees is
difficult. The process of persuading companies to adopt our technologies can be
lengthy, and other challenges to our patent portfolio may further complicate and
delay our patent licensing efforts.  There is also a tendency in the
technology industry to close business deals at the end of a quarter, thereby
increasing the likelihood that a possible material deal would not be concluded
in a current quarter, but slip into a subsequent reporting period. This kind of
delay may result in a given quarter’s performance being below analyst or
shareholder expectations. The proceeds of our intellectual property licensing
efforts tend to be sporadic and difficult to predict. Recognition of those
proceeds as revenue or income from settlement and licensing activities depends
on the terms of the license agreement involved, and the circumstances
surrounding the agreement. To finance litigation to defend or enforce our
intellectual property rights, we may enter into contingency arrangements and
other strategic transactions with investors, legal counsel or other advisors
that would give such parties a significant portion of any future licensing and
settlement amounts derived from our patent portfolio. As a result, our licensing
and enforcement efforts are expected to result in significant volatility in our
quarterly and annual financial condition and results of operations, which may
result in us missing investor expectations, which may cause our stock price to
decline.
  Infringement of our proprietary
rights could affect our competitive position, harm our reputation or cost us
money.
  We regard
our system as open but proprietary. In an effort to protect our proprietary
rights, we rely primarily on a combination of patent, copyright, trademark and
trade secret laws, as well as licensing, non-disclosure and other agreements
with our consultants, suppliers, customers, partners and employees. However,
these laws and agreements provide only limited protection of our proprietary
rights. In addition, we may not have signed agreements in every case, and the
contractual provisions that are in place and the protection they produce may not
provide us with adequate protection in all circumstances. Although we hold
patents and have filed patent applications covering some of the inventions
embodied in our systems, our means of protecting our proprietary rights may not
be adequate. It is possible that a third party could copy or otherwise obtain
and use our technology without authorization and without our detection. In the
event that we believe a third party is infringing our intellectual property
rights, an infringement claim brought by us could, regardless of the outcome,
result in substantial cost to us, divert our management’s attention and
resources, be time consuming to prosecute and result in unpredictable damage
awards. A third party may also develop similar technology independently, without
infringing upon our patents and copyrights. In addition, the laws of some
countries in which we sell our system may not protect our software and
intellectual property rights to the same extent as the laws of the United States
or other countries where we hold patents. As we move to more of a software based
system, inadequate licensing controls, unauthorized copying, and use, or reverse
engineering of our system could harm our business, financial condition or
results of operations.
   20
 Others
may bring infringement claims against us or challenge the legitimacy of our
patents, which could be time-consuming and expensive to defend.
  In recent
years, there has been significant litigation in the United States involving
patents and other intellectual property rights. We have been party to such
litigation in the past and may be again in the future. The prosecution and
defense of such lawsuits would require us to expend significant financial and
managerial resources, and therefore may have a material negative impact on our
financial position and results of operations. The duration and ultimate outcome
of these proceedings are uncertain. We may be a party to additional litigation
in the future to protect our intellectual property, or as a result of an alleged
infringement of the intellectual property of others. These claims and any
resulting lawsuit could subject us to significant liability for damages and
invalidation of our proprietary rights. In addition, the validity of our patents
has been challenged in the past and may be challenged in the future through
reexamination requests or other means. These lawsuits or challenges of our
patents legitimacy in the US or foreign patent offices, regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management’s time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
  •      Stop
selling, incorporating or using products or services that use the challenged
intellectual property;
  •
              Obtain
      from the owner of the infringed intellectual property a license to the
      relevant intellectual property, which may require us to license our
      intellectual property to such owner, or may not be available on reasonable
      terms or at all; and
  •      Redesign
those products or services that use technology that is the subject of an
infringement claim.
  If we are
forced to take any of the foregoing actions, we may be unable to manufacture,
use, sell, import and export our products, which would reduce our
revenues.
  Our
Compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls may be time-consuming, difficult and costly for us.
  It may be
time consuming, difficult and costly for us to fully implement internal controls
and reporting procedures required by the Sarbanes-Oxley Act which relate to
auditor attestation.  We may need to hire additional financial
reporting, internal control and other finance staff in order to support the
auditor attestation of appropriate internal controls and reporting
procedures.  If we are unable to comply with these additional
requirements of the Sarbanes-Oxley Act, we may not be able to obtain the
independent accountant certifications/attestations that the Sarbanes-Oxley Act
requires of smaller reporting companies effective for issuers with fiscal years
ending on or after June 15, 2010.
  If
our customers do not perceive our system or services to be effective or of high
quality, our brand and name recognition would suffer.
  We
believe that establishing and maintaining brand and name recognition is critical
for attracting and expanding our targeted customer base. We also believe that
the importance of reputation and name recognition will increase as competition
in our market increases. Promotion and enhancement of our name will depend on
the success of our marketing efforts, and on our ability to continue to provide
high quality systems and services, neither of which can be assured. If our
customers do not perceive our system or services to be effective or of high
quality, our brand and name recognition will suffer, which would harm our
business.
  Our
system could have defects for which we could be held liable for, and which could
result in lost revenue, increased costs, and loss of our credibility or delay in
the further acceptance of our system in the market.
  Our
system may contain errors or defects, especially when new products are
introduced or when new versions are released. Despite internal system testing,
we have in the past discovered software errors in some of the versions of our
system after their introduction. Errors in new systems or versions could be
found after commencement of commercial shipments, and this could result in
additional development costs, diversion of technical and other resources from
our other development efforts or the loss of credibility with current or future
customers. Any of these events could result in a loss of revenue or a delay in
market acceptance of our system, and could harm our reputation.
   21
 In
addition, we have warranted to some of our customers that our software is free
of viruses. If a virus infects a customer’s computer software, the customer
could assert claims against us, which, regardless of their merits, could be
costly to defend and could require us to pay damages and potentially harm our
reputation.
  Our
license agreements with our customers typically contain provisions designed to
limit our exposure to potential product liability and certain contract claims.
Our license agreements also typically limit a customer’s entire remedy to either
a refund of the price paid or modification of our system to satisfy our
warranty. However, these provisions vary as to their terms and may not be
effective under the laws of some jurisdictions. Although we maintain product
liability (“errors and omissions”) insurance coverage, we cannot assure you that
such coverage will be adequate. A product liability, warranty or other claim
could harm our business, financial condition and/or results of operations.
Performance interruptions at a customer’s site could negatively affect the
demand for our system or give rise to claims against us.
  The third
party software we license with our system may also contain errors or defects for
which we do not maintain insurance. Typically, our license agreements transfer
any warranty from the third party to our customers to the extent permitted.
Product liability, warranty or other claims brought against us with respect to
such warranties could, regardless of their merits, harm our business, financial
condition or results of operations.
  If
we are unable to expand our indirect distribution channel, our business will
suffer.
  To
increase our revenue, we must increase our indirect distribution channels, such
as systems integrators, product partners and/or value-added resellers, which is
a focus of our go-to market strategy, and/or effect sales through our customers.
If we are unable to increase our indirect distribution channel due to our own
cost constraints, limited availability of qualified partners or other reasons,
our future revenue growth may be limited and our future operating results may
suffer. We cannot assure you that we will be successful in attracting,
integrating, motivating and retaining sales personnel and channel partners.
Furthermore, it can take several months before a new hire or channel partner
becomes a productive member of our sales force effort. The loss of existing
salespeople, or the failure of new salespeople and/or indirect sales partners to
develop the necessary skills in a timely manner, could impact our revenue
growth.
  We
may not be able to retain our existing key personnel, or hire and retain the
additional personnel that we need to sustain and grow our business.
  We depend
on the continued services of our executive officers and other key personnel. We
do not have long-term employment agreements with our executive officers or other
key personnel and we do not carry any “key man” life insurance. The loss of the
services of any of our executive officers or key personnel could harm our
business, financial condition and results of operations.
  Our
products and technologies are complex, and to successfully implement our
business strategy and manage our business, an in-depth understanding of video
communication and collaboration technologies and their potential uses is
required. We need to attract and retain highly skilled technical and managerial
personnel for whom there is intense competition. If we are unable to attract and
retain qualified technical and managerial personnel due to our own cost
constraints, limited availability of qualified personnel or other reasons, our
results of operations could suffer and we may never achieve profitability. The
failure of new personnel to develop the necessary skills in a timely manner
could harm our business.
  Our
plans call for growth in our business, and our inability to achieve or manage
growth could harm our business.
  Failure
to achieve or effectively manage growth will harm our business, financial
condition and operating results. Furthermore, in order to remain competitive or
to expand our business, we may find it desirable in the future to acquire other
businesses, products or technologies. If we identify an appropriate acquisition
candidate, we may not be able to negotiate the terms of the acquisition
successfully, to finance the acquisition or to integrate the acquired
businesses, products or technologies into our existing business and operations.
In addition, completing a potential acquisition and integrating an acquired
business may strain our resources and require significant management
time.
  Our
international operations expose us to potential tariffs and other trade
barriers, unexpected changes in foreign regulatory requirements and laws and
economic and political instability, as well as other risks that could adversely
affect our results of operations.
  International
revenue, which consists of sales to customers with operations principally in
Western Europe and Asia, comprised 44%, 51% and 72% of total revenues for the
twelve months ended December 31, 2009, 2008 and 2007, respectively. Some of the
risks we may encounter in conducting international business activities include
the following:
  •      Tariffs
and other trade barriers;
   22
  •      Unexpected
changes in foreign regulatory requirements and laws;
  •      Economic
and political instability;
  •      Increased
risk of infringement claims;
  •      Protection
of our intellectual property;
  •      Restrictions
on the repatriation of funds;
  •      Potentially
adverse tax consequences;
  •
              Timing,
      cost and potential difficulty of adapting our system to the local language
      standards in those foreign countries that do not use the English
      language;
  •      Fluctuations
in foreign currencies; and
  •      Limitations
in communications infrastructures in some foreign countries.
  Some
of our products are subject to various federal, state and international laws
governing substances and materials in products, including those restricting the
presence of certain substances in electronics products. We could incur
substantial costs, including fines and sanctions, or our products could be
enjoined from entering certain jurisdictions, if we were to violate
environmental laws or if our products become non-compliant with environmental
laws. We also face increasing complexity in our product design and procurement
operations as we adjust to new and future requirements relating to the materials
composition of our products, including the restrictions on lead and certain
other substances that apply to specified electronics products sold in the
European Union (Restriction of Hazardous Substances Directive). The ultimate
costs under environmental laws and the timing of these costs are difficult to
predict. Similar legislation has been or may be enacted in other regions,
including in the United States, the cumulative impact of which could be
significant.
 
 International
political instability may increase our cost of doing business and disrupt our
business.
  Increased
international political instability, evidenced by the threat or occurrence of
terrorist attacks, enhanced national security measures and/or sustained military
action may halt or hinder our ability to do business, may increase our costs and
may adversely affect our stock price. This increased instability has had and may
continue to have negative effects on financial markets, including significant
price and volume fluctuations in securities markets. If this international
political instability continues or escalates, our business and results of
operations could be harmed and the market price of our common stock could
decline.
 
 Item
1b. Unresolved Staff
Comments
  None.
  Item
2. Properties
  We lease
approximately 29,600 square feet of office space in San Mateo, California as our
corporate headquarters and technology licensing activities, of which we occupy
approximately 19,311 square feet and sublease approximately 10,289 square
feet.  In addition, we lease approximately 7,000 square feet of office
space in New York for sales and marketing functions, of which we sublease
substantially all of the office space to third parties.  The above
leases expire in March 2012 and 2017 respectively.  We believe that
our existing facilities are adequate to meet our current requirements, and
foresee no difficulties in meeting any future space requirements.
  Item
3. Legal
Proceedings
  From time
to time we are subject to legal proceedings and claims in the normal course of
business that are not expected to have a material effect on our business. We
make a provision for a liability when it is both probable that a liability has
been incurred and the amount of the loss can be reasonably
estimated.  These provisions are reviewed at least quarterly and
adjusted to reflect the impact of negotiations, settlements, ruling, advice of
legal counsel and other information and events pertaining to a particular case.
However, dispute resolution is inherently unpredictable, and the costs and other
effects of pending or future claims, litigation, legal and administrative cases
and proceedings, and changes in any such matters, and developments or assertions
by or against us relating to intellectual property rights and intellectual
property licenses, could have a material adverse effect on our business,
financial condition and operating results.
  Item
4. Reserved
   23
  PART II
  Item
5.Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities
  Our
common stock was traded on the NASDAQ National Market from August 17, 2000
until October 29, 2002 and was traded on the NASDAQ Capital Market from
October 30, 2002 until June 23, 2009 under the symbol
“AVSR.”  Our common stock is currently quoted and traded on the Pink
Sheets, whichis an over-the-counter securities
market, under the symbol “AVSR.PK”.Prior to August 17, 2000,
there was no public market for our common stock.
  On June
12, 2009, we received a letter from The NASDAQ Stock Market, or NASDAQ,
indicating that the NASDAQ Hearings Panel, or the Panel, had determined to
delist our Company’s shares from NASDAQ and would suspend our common stock from
trading on NASDAQ effective at the open of trading on June 24,
2009.  The Panel's decision to suspend our common stock was the result
of us not evidencing a market value of listed securities above $35.0 million for
ten consecutive trading days, or otherwise demonstrating compliance with
alternative continued listing standards, during the period from April 2, 2009
and June 22, 2009.  Trading of our common stock on NASDAQ was
suspended on June 24, 2009. Since that time, our common stock has been quoted on
the Pink Sheets. On June 17, 2009, we requested a review by the NASDAQ Listing
and Hearing Review Council, or the Council, of the Panel’s decision. The Council
granted our request for a review and requested us to submit additional
information from the Company by August 7, 2009.  On August 6, 2009, we
withdrew our appeal to the Council. On August 31, 2009, NASDAQ officially
delisted our common stock.
  The
following table sets forth for the period indicated the high and low sale prices
for our common stock, as reported by the NASDAQ Capital Market and the Pink
Sheets.
  Year Ended
                December 31, 2009
              
              
              Year Ended
                December 31, 2008High
              
              
              Low
              
              
              High
              
              
              LowFirst
      Quarter
              
              $
              1.45
              
              
              $
              0.78
              
              
              $
              1.30
              
              
              $
              0.33Second
      Quarter
              
              $
              1.13
              
              
              $
              0.80
              
              
              $
              1.53
              
              
              $
              0.81Third
      Quarter
              
              $
              0.90
              
              
              $
              0.40
              
              
              $
              1.70
              
              
              $
              0.65Fourth
      Quarter
              
              $
              0.75
              
              
              $
              0.25
              
              
              $
              1.45
              
              
              $
              0.52
  On
December 31, 2009, the last reported sale price of our common stock on the
Pink Sheets was $0.45 per share. According to the records of our transfer agent,
as of December 31, 2009, there were 71 holders of record of our common
stock and we believe there are a substantially greater number of beneficial
holders.
  Dividend
Policy
  We have
never paid cash dividends on our common stock, and we do not anticipate paying
cash dividends in the foreseeable future.
  Equity
Compensation Plan Information
  The
information required by this Item is included under Item 12 of Part III of
this Annual Report on Form 10-K.
  Item
6.Omitted
  Item
7.Management’s Discussion and Analysis
of Financial Condition and Results of Operations
  The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K. Certain statements in this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” are forward looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry’s actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward looking statements. These risks and other factors include those listed
under “Risk Factors” elsewhere in this Annual Report on Form 10-K. In some
cases, you can identify forward looking statements by terminology such as “may”,
“will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”,
“estimates”, “predicts”, “potential”, “continue” or the negative of these terms,
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
“Risk Factors.” These factors may cause our actual results to differ materially
from any forward-looking statement.
   24
  Although
we believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are under no duty to update any of the forward-looking
statements after the date of this Annual Report on Form 10-K to conform our
prior statements to actual results.
  Overview
  Avistar
creates technology that provides the missing critical element in unified
communications: bringing people in organizations face-to-face, through enhanced
communications for true collaboration anytime, anyplace. Our latest product,
Avistar C3TM, draws on over a decade of market experience to deliver a
single-click desktop videoconferencing and collaboration experience that moves
business communications into a new era. Available as a stand-alone solution, or
integrated with existing unified communications software from other vendors,
Avistar C3TM users gain an instant messaging-style ability to initiate video
communications across and outside the enterprise. Patented bandwidth management
enables thousands of users to access desktop videoconferencing, Voice over IP
(VoIP) and streaming media without requiring substantial new network investment
or impairing network performance.  By integrating Avistar C3TM tightly
into the way they work, our customers can use our solutions to help reduce costs
and improve productivity and communications within their enterprise and between
enterprises, and to enhance their relationships with customers, suppliers and
partners. Using Avistar C3TM software and leveraging video, telephony and
Internet networking standards, Avistar solutions are designed to be scalable,
reliable, cost effective, easy to use, and capable of evolving with
communications networks as bandwidth increases and as new standards and
protocols emerge. We currently sell our system directly and indirectly to the
small and medium sized business, or SMB, and globally distributed organizations,
or Enterprise, markets comprising the Global 5000. Our objective is to establish
our technology as the standard for networked visual unified communications and
collaboration through limited direct sales, indirect channel sales/partnerships,
and the licensing of our technology and patents to others.
  We have
three go-to-market strategies. Product and Technology Sales involves direct and
channel sales of video and unified communications and collaboration solutions
and associated support services to the Global 5000. Partner and Technology
Licensing involves co-marketing, sales and development, embedding, integration
and interoperability to enterprises. IP Licensing involves the prosecution,
maintenance, support and licensing of the intellectual property that we have
developed, some of which is used in our products.
  Since
inception, we have recognized the innovative value of our research and
development efforts, and have invested in securing protection for these
innovations through domestic and foreign patent applications and issuance. As of
December 31, 2009, we held 99 U.S. and foreign patents, which we look to license
to others in the collaboration technology marketplace. In prior periods, we have
relied on patent licensing revenues and income from settlement and licensing
activities to provide significant funding for our operations.We recognized a total of $4.5 million, $5.2
million, and $21.2 million in licensing revenues and income from settlement and
licensing activities for the years ended December 31, 2009, 2008 and 2007,
respectively.  On January 19, 2010, we licensed our patents to
Springboard Group S.A.R.L. ("SKYPE") for an upfront license payment of $3.0
million. On January 21, 2010, we sold substantially all of our patent portfolio
and associated patent applications to Intellectual Ventures Fund 61 LLC for a
one time cash payment of $11.0 million.  We did retain royalty rights
under our existing patent license agreements as well as a grant back license to
the patents and patent applicationsfor our current and
future products.  As a result of this sale, we expect our efforts and
expenditures on patent prosecution, licensing and settlement activities in
future periods to be substantially reduced and our prospects for revenues from
the licensing of patents and patent applications and our prospects for
generating new income from settlement and licensing activities to also be
substantially reduced.  Accordingly, our ongoing operations will have
to be funded directly from operations and from debt and equity financing
activities.  Failure to generate cash from operations or from debt or
equity financing activities would have a substantial and adverse affect on our
business, operations and prospects.
  In 2007
and 2008, we implemented an intensive set of corporate initiatives aimed at
increasing our product sales, expanding our customer deployments and support,
improving our corporate efficiency and increasing our development
capacity.  The components of this initiative included:
  •
              Supplementing
      our position in the financial services vertical by expanding our market
      focus to additional verticals through indirect distribution partners,
      where our collaboration products can help global organizations speed
      business processes, save costs and reduce their carbon
      footprints;
  •
              Implementing
      aggressive cost control measures structured to effectively align
      operations  with predictable revenues and to address Microsoft's
      requests for reexamination of our U.S. Patents, while still allowing us to
      continue to invest in our product line and to license our intellectual
      property and technology;
  •      A
reduction in our employees from an average of 88 in 2007 to 49 at December 31,
2009; and
  •      Pursuing
multiple distribution, services and technology licensing partners.
   25
  These and
other changes in our business are aimed at reducing our structural costs,
increasing our organizational and partner-driven capacity, leveraging our
reputation for innovation and intellectual property leadership, and growing and
expanding our business.
  Critical
Accounting Policies
  The
preparation of our Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates.
  We
believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
Consolidated Financial Statements:
  ·
              Revenue
      recognition;
  ·
              Income
      from settlement and patent
licensing;
  ·
              Stock
      based compensation; and
  ·
              Valuation
      of accounts receivable
  Revenue
Recognitionand Deferred
Revenue
  We derive
product revenue from the sale and licensing of our video-enabled networked
communications system, consisting of a suite of Avistar-designed software and
hardware products, including third party components. We also derive revenue from
fees for installation, maintenance, support, training services and software
development. In addition, we derive revenue from the licensing of our
intellectual property portfolio. Product revenue as a percentage of total
revenue was 45%, 45% and 29% for 2009, 2008 and 2007, respectively.
  We
recognize product and services revenue in accordance with ASC 985-605, Revenue Recognition - Software,or ASC 605-25, Revenue Recognition –
Multiple-Element Arrangements. We derive product revenue from the sale
and licensing of a set of desktop (endpoint) products (hardware and software)
and infrastructure products (hardware and software) that combine to form an
Avistar video-enabled collaboration solution. Services revenue includes revenue
from post-contract customer support, training and software development. The fair
value of all product, post-contract customer support and training offered to
customers is determined based on the price charged when such products or
services are sold separately.
 
 Arrangements
that include multiple product and service elements may include software and
hardware products, as well as post-contract customer support and training.
Pursuant to ASC 985-605, we recognize revenue when all of the following criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is
probable. We apply these criteria as discussed below:
 
 ·
              Persuasive evidence of an
      arrangement exists. We require a written contract, signed by both
      the customer and Avistar, or a purchase order from those customers that
      have previously negotiated a standard end-user license arrangement or
      volume purchase agreement, prior to recognizing revenue on an
      arrangement.
  ·
              Delivery has
      occurred.  We deliver software and hardware to customers
      either electronically or physically and we have no further obligations
      with respect to the agreement. The standard delivery terms are FOB
      shipping point.
  ·
              The fee is fixed or
      determinable. Our determination that an arrangement fee is fixed or
      determinable depends principally on the arrangement’s payment terms. Our
      standard terms generally require payment within 30 to 90 days of the date
      of invoice. Where these terms apply, we regard the fee as fixed or
      determinable, and recognize revenue upon delivery (assuming other revenue
      recognition criteria are met). If the payment terms do not meet this
      standard, but rather, involve “extended payment terms,” the fee may not be
      considered to be fixed or determinable, and the revenue would then be
      recognized when customer installments are due and
  payable.
  ·
              Collectibility is
      probable. To recognize revenue, we judge collectibility of the
      arrangement fees on a customer-by-customer basis pursuant to a credit
      review policy. We typically sell to customers with which we have had a
      history of successful collections. For new customers, we evaluate the
      customer’s financial position and ability to pay. If we determine that
      collectibility is not probable based upon the credit review process or the
      customer’s payment history, revenue is recognized when cash is
      collected.
   26
 If there are any undelivered elements, we defer revenue for those elements, as
long as vendor specific objective evidence (VSOE) exists for the undelivered
elements. Payment for product is due upon shipment, subject to specific payment
terms. Payment for professional services is due upon providing the services,
subject to specific payment terms. Reimbursements received for out-of-pocket
expenses and shipping costs, which have not been significant to date, are
recognized as revenue in accordance with ASC 605-45, Revenue Recognition – Principal
Agent Considerations.
 
 The price
charged for maintenance and/or support is defined in the contract, and is based
on a fixed price for both hardware and software components as stipulated in the
customer agreement. Customers have the option to renew the maintenance and/or
support arrangement in subsequent periods at the same or similar rate as paid in
the initial year subject to contractual adjustments for inflation in some cases.
Revenue from maintenance and support services is deferred and recognized
pro-rata over the maintenance and/or support term, which is typically one year
in length. Payments for services made in advance of the provision of services
are recorded as deferred revenue and customer deposits in the accompanying
balance sheets. Training services are offered independently of the purchase of
product. The value of these training services is determined based on the price
charged when such services are sold separately. Training revenue is recognized
upon performance of the service.
 
 We
recognize service revenue from software development contracts in accordance with
ASC 605-35, Revenue
Recognition – Construction-Type and Production-Type Contracts. Product
and implementation revenue related to contracts for software development is
recognized using the percentage of completion method, in accordance with the
“Input Method”, when all of the following conditions are met: a contract exists
with the customer at a fixed price, we expect to fulfill all of its material
contractual obligations to the customer for each deliverable of the contract, a
reasonable estimate of the costs to complete the contract can be made, and
collection of the receivable is probable. The amount of revenue recognized is
based on the total project fee under the agreement and the percentage of
completion achieved.  The percentage of completion is measured by
monitoring progress using records of actual time incurred to date in the project
compared to the total estimated project requirements, which corresponds to the
costs related to the earned revenues. Changes in estimates are recognized in the
periods affected by the changes. Any anticipated losses on contracts in progress
are charged to earnings when identified. The amounts billed to customers in
excess of revenues recognized to date are deferred and recorded as deferred
revenue and customer deposits in the accompanying balance sheets.  The
amount of revenue recognized in excess of billings is booked to unbilled
accounts receivable.
 
 We
recognize revenue from the licensing of our intellectual property portfolio
according to ASC 985-605, Revenue Recognition –
Software, based on the terms of the royalty, partnership and
cross-licensing agreements involved. In the event that a license to our
intellectual property is granted after the commencement of litigation
proceedings between us and the licensee, the proceeds of such transaction are
recognized as licensing revenue only if sufficient historical evidence exists
for the determination of fair value of the licensed patents to support the
segregation of the proceeds between a gain on litigation settlement and patent
license revenues consistent with Financial Accounting Standards Board (FASB)
Concepts Statement No. 6, Elements of Financial
Statements (CON 6). As of December 31, 2009, these criteria for
recognizing license revenue following the commencement of litigation had not
been met.
 
 In July
2006, we entered into a Patent License Agreement with Sony Corporation (Sony)
and Sony Computer Entertainment, Inc. (SCEI). Under the license agreement,
Avistar granted Sony and its subsidiaries, including SCEI, a license to all of
our patents with a filing date on or before January 1, 2006 for a specific field
of use relating to video conferencing. The license covers Sony’s video
conferencing apparatus as well as other products, including video-enabled
personal computer products and certain SCEI PlayStation products. Future
royalties under this license are being recognized as estimated royalty-based
sales occur in accordance with ASC 985-605, Revenue Recognition -
Software.  We use historical and forward looking sales
forecasts provided by SCEI and third party sources, in conjunction with past
actual royalty reports provided periodically by SCEI directly to us, to develop
an estimate of royalties recognized for each quarterly reporting
period.  The royalty reports we receive directly from SCEI are delayed
beyond the period in which the actual royalties are generated, and thus the
estimate of current period royalties requires significant management judgment
and is subject to corrections in a future period once actual royalties become
known.
 
 In June
2007, we entered into a Patent License Agreement with Radvision Ltd. Under the
license agreement, we granted Radvision and its subsidiaries a license in the
field of videoconferencing to all of our patents, patent applications and
patents issuing therefrom with a filing date on or before May 15, 2007. Also
under the license agreement, Radvision granted to us a license in the field of
videoconferencing to all of Radvision’s patents, patent applications and patents
issuing therefrom with a filing date on or before May 15, 2007. The license
agreement includes mutual releases of the parties from claims of past
infringement of the licensed patents. As partial consideration for the licenses
and releases granted under the agreement, Radvision made a one-time license
payment to us of $4.0 million, which was recognized as licensing revenue in the
three months ended June 30, 2007.
  On
September 8, 2008 and on September 9, 2008, we entered into a Licensed Works
Agreement, Licensed Works Agreement Statement of Work and a Patent License
Agreement with International Business Machines Corporation, or IBM, under which
we agreed to integrate our bandwidth management technology and related
intellectual property into future Lotus Unified Communications offerings by IBM,
and to provide maintenance support services. An initial cash payment of $3.0
million was made by IBM to us on November 7, 2008, and a second non-refundable
payment of $1.5 million was made on August 31, 2009.   We expect
IBM to make one additional non-refundable payment of $1.5 million associated
with scheduled phases of delivery.  IBM has agreed to make future
royalty payments to us equal to two percent of the world-wide net revenue
derived by IBM from Lotus Unified Communications products sold that exceeds a
contractual base amount, and maintenance payments received from existing
customers, which incorporate our technology.  The agreements have a
five year term and are non-cancelable except for material default by either
party.  The agreements convey to IBM a non-exclusive world-wide
license to our patent portfolio existing at the time of the agreements and for
all subsequent patents issued with an effective filing date of up to five years
from the date of the agreements.  The agreements also provide for a
release of each party for any and all claims of past infringement.  In
April 2009, the agreements were amended to extend the initial term from five
years to six years.  We have determined the value of maintenance based
on VSOE, and allocated the residual portion of the initial $6.0 million to the
integration project.  The residual portion is being recognized under
the percentage of completion method, in accordance with the “Input Method”, and
the maintenance revenue will be recognized over the future maintenance service
period.  As we believe there are no future deliverables associated
with the intellectual property patent licenses, no additional provision for this
element has been made.  For the year ended December 31, 2009, we
recognized $2.4 million in product revenue and $655,000 in service revenue. The
remaining $676,000 is expected to be recognized in product and service revenue
under the percentage of completion method over the remaining projected
development time.  As of December 31, 2009 we have $110,000 in
unbilled accounts receivable which represents revenue recognized in excess of
billings. The estimate of current period percentage of completion requires
significant management judgment and is subject to updates in future periods
until the project is complete.
   27
 Income
from Settlement and Patent Licensing
  We
recognize the proceeds from settlement and patent licensing agreements based on
the terms involved. When litigation has been filed prior to a settlement and
patent licensing agreement, and insufficient historical evidence exists for the
determination of fair value of the patents licensed to support the segregation
of the proceeds between a gain on litigation settlement and patent license
revenues, we report all proceeds in “income from settlement and patent
licensing” within operating costs and expenses. The gain portion of the
proceeds, when sufficient historical evidence exists to segregate the proceeds,
would be reported according to ASC 450, Contingencies. When a patent
license agreement is entered into prior to the commencement of litigation, we
report the proceeds of such transaction as licensing revenue in the period in
which such proceeds are received, subject to the revenue recognition criteria
described above.
  On
November 12, 2004, we entered into a settlement and a patent cross-license
agreement with Polycom Inc., thus ending litigation against Polycom, Inc. for
patent infringement. As part of the settlement and patent cross-license
agreement with Polycom, Inc, we granted Polycom, Inc. a non-exclusive, fully
paid-up license to our entire patent portfolio. The settlement and patent
cross-license agreement includes a five-year capture period from the date of the
settlement, adding all new patents with a priority date extending up to five
years from the date of execution of the agreement. Polycom, Inc, as part of the
settlement and patent cross-licensing agreement, made a one-time payment to the
Company of $27.5 million and we paid $6.4 million in contingent legal fees to
our litigation counsel upon completion of the settlement and patent
cross-licensing agreement. The contingent legal fees were payable only in the
event of a favorable outcome from the litigation with Polycom,
Inc.  We recognized the gross proceeds of $27.5 million from the
settlement and patent cross-license agreement as income from settlement and
patent licensing within operations over the five-year capture period, due to a
lack of evidence necessary to apportion the proceeds between an implied punitive
gain element in the settlement of the litigation, and software license revenues
from the cross-licensing of our patented technologies for prior and future use
by Polycom, Inc. Additionally, the $6.4 million in contingent legal fees was
deferred and was amortized to income from settlement and patent licensing over
the five year capture period, resulting in a net of $21.1 million being
recognized as income within operations over the five year capture period. As of
December 31, 2009, the deferred net income from settlement and patent licensing
with Polycom, Inc. was fully recognized.
  On
February 15, 2007, we entered into a Patent License Agreement with Tandberg ASA,
Tandberg Telecom AS and Tandberg, Inc.  Under this agreement, we dismissed
our infringement suit against Tandberg, Tandberg dismissed its infringement suit
against us, and we cross-licensed each other’s patent portfolios.  The
agreement resulted in a payment of $12.0 million to us from Tandberg. We recognized the
gross proceeds of $12.0 million from the patent license agreement as income from
settlement and patent licensing within operations in the three months ended
March 31, 2007.  To recognize the proceeds as revenue, we would have
required sufficient history of transactions to allow us to isolate the aspect of
the settlement attributable to the gain associated with the process of
litigation, separate from commercial compensation for the use of our
intellectual property.  Sufficient evidence was not available to allow this
distinction.   The Patent License Agreement with Tandberg includes a
ten year capture period, extending from the date of the agreement, during which
patents filed with a priority date within the capture period would be licensed
in addition to existing patents on the agreement date.  However, such
additional patents would be licensed under the agreement solely for purposes of
the manufacture, sale, license or other transfer of existing products of
Tandberg and products that are closely related enhancements of such products
based primarily and substantially on the existing products.  We reviewed
the existing products of Tandberg and considered the likelihood that future
patent filings by us would relate to or otherwise affect existing Tandberg
products and closely related enhancements thereto.  We concluded that the
filing for such additional patents was unlikely, and therefore concluded that
the ten year capture period was not material from an accounting perspective
related to recognition.
   28
  Stock
Based Compensation
  We
account for stock based compensation to employees according to ASC 718, Compensation – Stock
Compensation, which is a very complex accounting standard, the
application of which requires significant judgment and the use of estimates,
particularly surrounding Black-Scholes-Merton assumptions such as stock price
volatility and expected option terms, as well as expected option forfeiture
rates. There is little experience or guidance with respect to developing these
assumptions and models. ASC 718 requires the recognition of the fair value of
stock compensation in net income (loss). Refer to Note 2 “Stock-Based
Compensation” and Note 7 “Equity Compensation Plans” to our Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K for
more information.
  Valuation
of Accounts Receivable
  Estimates
are used in determining our allowance for doubtful accounts and are based on our
historical collection experience, historical write-offs, current trends, and the
credit quality of our customer base and the characteristics of our accounts
receivable by aging category. If the allowance for doubtful accounts were to be
understated, our operating income could be significantly reduced. The impact of
any such change or deviation may be increased by our reliance on a relatively
small number of customers for a large portion of our total revenue. As of
December 31, 2009, approximately 87% of our gross accounts receivable was
concentrated with four customers, each of whom individually represented more
than 10% of our gross receivables.  As of December 31, 2008,
approximately 98% of our gross accounts receivable was concentrated with four
customers, each of whom represented more than 10% of our total account
receivables.
 
 Results
of Operations
  The
following table sets forth data expressed as a percentage of total revenue for
the periods indicated.
  Percentage of Total RevenueYear Ended December 31,2009
              
              2008
              
              2007Revenue:Product
              
              
              45
              %
              
              
              45
              %
              
              
              29
              %Licensing
              
              
              10
              
              
              
              11
              
              
              
              42Services,
      maintenance and support
              
              
              45
              
              
              
              44
              
              
              
              29Total
      revenue
              
              
              100
              
              
              
              100
              
              
              
              100Costs
      and expenses:Cost
      of product revenues
              
              
              15
              
              
              
              25
              
              
              
              22Cost
      of services, maintenance and support revenues
              
              
              34
              
              
              
              27
              
              
              
              19Income
      from settlement and patent licensing
              
              
              (41
              )
              
              
              (48
              )
              
              
              (136
              )Research
      and development
              
              
              44
              
              
              
              59
              
              
              
              64Sales
      and marketing
              
              
              29
              
              
              
              40
              
              
              
              52General
      and administrative
              
              
              60
              
              
              
              66
              
              
              
              104Total
      costs and expenses
              
              
              141
              
              
              
              169
              
              
              
              125Loss
      from operations
              
              
              (41
              )
              
              
              (69
              )
              
              
              (25
              )Other
      income (expense):Interest
      income
              
              
              —
              
              
              
              1
              
              
              
              3Other
      (expense) income, net
              
              
              (5
              )
              
              
              (5
              )
              
              
              (2
              )Total
      other (expense) income, net
              
              
              (5
              )
              
              
              (4
              )
              
              
              1Loss
      before provision for (recovery from) income taxes
              
              
              (46
              )
              
              
              (73
              )
              
              
              (24
              )Provision
      for (recovery from) income taxes
              
              
              
              
              
              
              —
              
              
              
              —Net
      loss
              
              
              (46
              )%
              
              
              (73
              )%
              
              
              (24
              )%
 
  29
  COMPARISON
OF 2009 AND 2008
  Revenue
  Total
revenue remained relatively flat at $8.8 million for 2009 compared to $8.8
million for 2008.
  ·
              Product
      revenue remained relatively flat at approximately $3.9 million for 2009
      compared to $4.0 million for 2008.
  ·
              Licensing
      revenue, relating to the licensing of our patent portfolio, decreased by
      $101,000 or 11%, to $853,000 for 2009, from $954,000 for 2008, mainly due
      to a decline in the ongoing royalty revenue from
  Sony.
  ·
              Services,
      maintenance and support revenue, which includes our funded software
      development and maintenance and support, increased by $195,000, or 5%, to
      $4.0 million for 2009, from $3.8 million for 2008, mainly due to increase
      in revenue from software implementation and enhancement services and
      professional on-site services provided to existing
      customers,  offset by decrease in revenue from maintenance
      contracts with existing customers and decrease in freight revenue due to
      decline in hardware sales.
  In 2009,
revenue from three customers accounted for 68% of total revenue compared to four
customers accounting for 88% of total revenue in 2008. No other customer
accounted for greater than 10% of total revenue.  The level of sales to any
customer may vary from quarter to quarter. While we continue to expand our
indirect sales channel, we expect that there will be significant customer
concentration in future quarters. The loss of any one of those customers would
have a materially adverse impact on our financial condition and operating
results.
  Costs
and expenses
  Cost of product
revenue.  Cost of product revenue decreased by $868,000, or
40%, to $1.3 million in 2009 from $2.2 million for 2008. The decrease was
primarily attributable to lower hardware product sales which carried a higher
cost than software sales, offset by an increase of $93,000 in stock based
compensation in 2009. We expect the cost of product revenue to vary with the mix
of products sold in 2010.
  Cost of services, maintenance and
support revenue. Cost of services, maintenance and support revenue
increased by $613,000, or 26%, to $3.0 million in 2009 from $2.4 million in
2008, primarily due to an increase in software implementation and enhancement
services for customers, partially offset by a decrease in service overhead
expense in 2009. We expect the cost to vary with the mix of services,
maintenance and support provided to our customers in 2010.
  Income from settlement and patent
licensing.Income from settlement
and patent licensing decreased by $575,000, or 14%, to $3.7 million in 2009 from
$4.2 million for 2008, reflecting the completion of the amortization of the net
proceeds from the November 2004 Polycom settlement and cross-licensing agreement
over a five year period that began in November 2004 and ended in November
2009.
  Research and
development.Research
and development expenses decreased by $1.3 million, or 25%, to $3.9 million in
2009 from $5.2 million in 2008. The decrease was primarily attributable to a
reduction in personnel and personnel related expenses, a greater allocation of
engineering employees and external labor expenses to cost of services,
maintenance and support revenue associated with an increase in software
implementation and enhancement service deliveries, and a decrease in other
engineering overhead expense in 2009.
  Sales and marketing.Sales
and marketing expenses decreased by $940,000, or 27% to $2.6 million in 2009
from $3.5 million in 2008. The decrease was primarily due to a reduction in
personnel and personnel related expenses and cost optimization efforts,
partially offset by an increase of $190,000 in stock based
compensation.  Sales and marketing expenses are expected to remain
relatively flat in 2010.
  General and
administrative.General
and administrative expenses decreased by $431,000, or 8% to $5.3 million in 2009
from $5.7 million in 2008. The decrease was due primarily to an overall decrease
in personnel and personnel related expenses and the ongoing cost optimization
efforts, partially offset by severance expenses and increase in legal fees.
General and administrative expenses in 2010 are expected to decrease as part of
the aggressive ongoing cost control measures.
  Other
income (expense)
  Interest income.Interest
income decreased by $86,000, or 91%, to $8,000 in 2009 from $94,000 in 2008,
primarily due to both a decrease in interest rates and a decrease in the average
outstanding balance of cash and cash equivalents that earned interest in 2009
compared to 2008.
  Other expense, net.Other
expense, net remained relatively flat at $440,000 for 2009 compared to $439,000
for 2008.
   30
  Provision
for (recovery from) income taxes
  Provision
for (recovery from) income taxes decreased to a net recovery position of $29,000
in 2009 from a $23,000 expense in 2008, mainly due to realization of foreign
corporate income tax benefit related to prior tax years for Avistar Systems U.K.
Limited (ASUK), our wholly-owned subsidiary in United Kingdom.
  COMPARISON
OF 2008 AND 2007
  Revenue
  Total
revenue decreased by $3.2 million or 27%, to $8.8 million for 2008, from $12.0
million for 2007, primarily due to decreases in licensing revenue.
  ·
              Product
      revenue increased by $0.5 million or 14%, to $4.0 million for 2008 from
      $3.5 million for 2007. The increase was primarily due to revenue of $1.3
      million from IBM, offset by decreased sales to existing customers in 2008
      compared to 2007.
  ·
              Licensing
      revenue, relating to the licensing of our patent portfolio, decreased by
      $4.1 million, or 81%, to $954,000 for 2008, from $5.0 million for
      2007.  The decrease was primarily attributable to the lack of
      new licensing agreements in 2008 compared to the Radvision licensing
      agreement, which resulted in $4.0 million in licensing revenue in
      2007.
  ·
              Services,
      maintenance and support revenue, which includes our installation services,
      funded software development and maintenance and support, increased by
      $367,000, or 11%, to $3.8 million for 2008, from $3.5 million for 2007,
      due primarily to an increase in revenue from professional on-site services
      provided to an existing customer.
  In 2008,
revenue from four customers accounted for 88% of total revenue compared to three
customers and 75% in 2007. No other customer accounted for greater than 10% of
total revenue.
  Costs
and expenses
  Cost of product
revenue.  Cost of product revenue decreased by $489,000, or
18%, to $2.2 million in 2008 from $2.7 million for 2007. The decrease was
primarily attributable to a decrease in personnel and personnel related expenses
for the assembly and testing of products, including a decrease of $47,000 in
stock based compensation expense.
  Cost of services, maintenance and
support revenue. Cost of services, maintenance and support revenue
increased by $109,000, or 5%, to $2.4 million in 2008 from $2.2 million in 2007,
primarily due to a net increase in allocated overhead cost.
  Income from settlement and patent
licensing.Income from settlement
and patent licensing decreased by $12 million, or 74%, to $4.2 million in 2008
from $16.2 million for 2007. The decrease was due to the Settlement and Patent
License Agreement entered into with Tandberg ASA and its subsidiaries in
February 2007, which resulted in a cash payment to us of $12.0 million, that was
fully recognized in 2007. The years ended December 31, 2008 and 2007 each also
reflect $4.2 million of amortization of the net proceeds from the November 2004
Polycom settlement and cross-license agreement, recognized over a five year
period beginning in November 2004 and ending in November 2009.
  Research and
development.Research
and development expenses decreased by $2.5 million, or 32%, to $5.2 million in
2008 from $7.7 million in 2007. The decrease was primarily attributable to a
decrease in personnel and personnel related expenses, including a decrease of
$368,000 in stock based compensation expense.
  Sales and marketing.Sales
and marketing expenses decreased by $2.7 million, or 43% to $3.5 million in 2008
from $6.2 million in 2007. The decrease was primarily attributable to a decrease
in personnel and personnel related expenses, including a decrease of $576,000 in
stock based compensation expense.
  General and
administrative.General
and administrative expenses decreased by $6.8 million, or 54% to $5.7 million in
2008 from $12.5 million in 2007. The decrease was due primarily to $4.3 million
in legal fees associated with our litigation against Tandberg for patent
infringement that occurred during 2007, with no comparable expense in the same
period during 2008.   Additionally, to a lesser extent, there was
a decrease in personnel and personnel related expenses including a decrease of
$191,000 in stock based compensation expense, partially offset by increased
employee severance expense, incurred primarily during the first quarter of
2008.
   31
  Other
income (expense)
  Interest income.Interest
income decreased by $252,000, or 73%, to $94,000 in 2008 from $346,000 in 2007.
The decrease was due to both a decrease in interest rates and a decrease in the
average outstanding balance of investments that earned interest in 2008, as
compared to 2007.
  Other expense, net.Other
expense, net increased by $251,000, or 134%, to $439,000 in 2008 from $188,000
in 2007.  The increase was due to higher interest expense due to a
higher outstanding balance of debt outstanding during 2008, as compared to
2007.
  Provision
for (recovery from) income taxes
  There was
no significant change in the provision for income taxes in 2008 as compared to
2007.  Both provisions for income taxes of $23,000 in 2008 and 2007
were related to foreign tax expense.
  Liquidity
and Capital Resources
  We have
funded our operations since inception primarily from product, services and
licensing revenue, the net proceeds of $31.3 million from our August 2000
initial public offering of common stock, lines of credit with related parties
and financial institutions, the proceeds of approximately $5.7 million and $3.6
million from the private sale of our common stock in October 2003 and
March 2004, respectively, the gross proceeds of $39.5 million from the
settlement and patent cross-license agreements signed with Polycom, Inc. in
2004 and Tandberg ASA, Tandberg AS and Tandberg, Inc. in February 2007, and
the proceeds of $7.0 million from issuance of Convertible Subordinated Secured
Notes in January 2008.
  We had
cash and cash equivalents of $294,000 as of December 31, 2009 and $4.9 million
as of December 31, 2008. For the year ended December 31, 2009, we had a net
decrease in cash and cash equivalents of $4.6 million. The net cash used by
operations of $4.9 million for the year ended December 31, 2009 resulted
primarily from the net loss of $4.0 million, a decrease in deferred income from
settlement and patent licensing of $4.7 million, and a decrease in deferred
services revenue and customer deposits of $1.7 million.  This was
partially offset by non-cash expenses of $2.1 million, a decrease in accounts
receivable of $1.7 million and a decrease in deferred settlement and patent
licensing costs of $1.1 million.  The net cash used in investing activities
of $82,000 for the year ended December 31, 2009 was due to the purchase of
property and equipment.  The net cash provided by financing activities
of $363,000 for the year ended December 31, 2009 related primarily to $9.3
million of borrowings on our line of credit, offset by $5.0 million in payments
made on the line of credit and $4.1 million in early repayments of convertible
debt.
  Our
accounts receivable at December 31, 2009 decreased 62% over the December 31,
2008 balance from $2.7 million to $1.0 million mainly due to $1.0 million
advance billing of services to a customer in December 2008 that was subsequently
collected in January 2009.
  We had
cash and cash equivalents of $4.9 million as of December 31, 2008. For
2008, we had a net increase in cash and cash equivalents of $821,000. The net
cash used by operations of $8.9 million for the year ended December 31, 2008
resulted primarily from the net loss of $6.4 million, a decrease in deferred
income from settlement and patent licensing of $5.6 million, an increase in
accounts receivable of $1.3 million, a decrease in account payable of $708,000,
partially offset by an increase in deferred services revenue and customer
deposits of $1.5 million, non-cash expenses of $2.0 million,  and a
decrease in deferred settlement and patent licensing costs of $1.3
million.  The net cash provided by investing activities of $718,000 for the
year ended December 31, 2008 was primarily due to the maturities of short-term
investments of $799,000.  The net cash provided by financing
activities of $9.0 million for the year ended December 31, 2008 related
primarily to $7.0 million in proceeds from the issuance of convertible debt in
January 2008, and $7.0 million of borrowings on our line of credit, offset by
payments made on our line of credit of $5.1 million.
  For 2007,
we had a net cash outflow of $3.8 million resulting primarily from net cash
outflows from operations of $4.5 million, net cash outflows from investing
activities of $1.8 million and net cash inflows from financing activities of
$2.5 million. The net cash outflows from operations were primarily due to a net
loss of $2.9 million, a decrease in deferred income from settlement and patent
licensing and other of $5.5 million, and a decrease in accrued liabilities and
other of $812,000, partially offset by non-cash expenses of $3.2 million of
stock-based compensation and depreciation, and a decrease in deferred settlement
and patenting licensing costs of $1.3 million. The net cash outflows from
investing were due to the purchase of $1.0 million of property and equipment and
the purchase of $799,000 in short-term investments. The net cash inflows from
financing activities were due to $2.1 million drawn on our line of credit, and
$372,000 from the net issuance of common stock through our employee stock
purchase plan and stock option plans.
   32
  Expenditures
for property and equipment in 2009 were approximately $82,000. At
December 31, 2009, we did not have any material commitments for future
capital expenditures. We anticipate spending approximately $240,000 in capital
expenditures during the next 12 months.
  The
following table summarizes our known contractual obligations and commitments as
of December 31, 2009 (in thousands) for the periods presented.
  Payments due by periodTotal
              
              
              Less than 1
                Year
              
              
              1
      – 3
                Years
              
              
              3
      – 5
                Years
              
              
              More than
                5 YearsContractual
      obligationsOperating
      lease obligations, net of projected sublease proceeds
              
              $
              2,094
              
              
              $
              748
              
              
              $
              1,267
              
              
              $
              41
              
              
              $
              38Purchase
      obligations
              
              
              125
              
              
              
              58
              
              
              
              67
              
              
              
              —
              
              
              
              —Total
              
              $
              2,219
              
              
              $
              806
              
              
              $
              1,334
              
              
              $
              41
              
              
              $
              38
  On
December 23, 2006, we entered into a Revolving Credit Promissory Note and a
Security Agreement with a financial institution to borrow up to $10.0 million
under a revolving line of credit subject to annual renewal with the consent of
the Company and the lender. The Revolving Credit Promissory Note was renewed and
amended on December 22, 2009 which extended the maturity date of the facility by
one year to December 21, 2010, and increased the line of credit from $10.0
million to $11.25 million through and including March 30, 2010 and then
decreased the line of credit to $6.0 million for the remainder of the period
through the maturity date.   The amended security agreement, that
was further amended on January 12, 2010, granted the lender a security interest
in and right of setoff against substantially all of our assets, tangible and
intangible, except for substantially all of our patents and patent applications
which we sold to Intellectual Ventures Fund 61 LLC pursuant to a patent purchase
agreement dated as of December 18, 2009. Gerald Burnett, our Chairman, provided
a collateralized guarantee to the financial institution, assuring payment of our
obligations under the agreement and as a consequence, there are no restrictive
covenants, allowing us greater access to the full amount of the facility. Dr.
Burnett also provided a personal guarantee to us assuring us a line of credit of
up to $7.0 million with the same terms and mechanisms as the existing revolving
line of credit, if needed, through March 31, 2011. The renewed line of
credit requires monthly interest-only payments based on Adjusted LIBOR plus
0.90% or Prime Rate plus 1.00%. We elected Adjusted LIBOR plus 0.90% or 1.15% at
December 31, 2009. We repaid $5.0 million and borrowed $9.3 million under the
revolving line of credit during 2009, and had a balance of $11.25 million
outstanding as of December 31, 2009, which we paid in full in January
2010.  On March 25, 2010, the Revolving Credit Promissory Note was further
amended to decrease the maximum line of credit facility to $5.0 million for the
period from February 22, 2010 through the maturity date.
  On
January 4, 2008, we issued $7,000,000 of 4.5% Convertible Subordinated Secured
Notes, which were due in 2010 (Notes). The Notes were sold pursuant to a
Convertible Note Purchase Agreement to Baldwin Enterprises, Inc., a subsidiary
of Leucadia National Corporation, directors Gerald Burnett, R. Stephen
Heinrichs, William Campbell, and Craig Heimark, former officers Simon Moss and
Darren Innes, and WS Investment Company. Our obligations under the Notes were
secured by the grant of a security interest in substantially all our tangible
and intangible assets pursuant to a Security Agreement among us and the
purchasers. Prior to the election of the Note holders to convert their notes,
the Notes had a two year term which would have come due on January 4, 2010 and
were convertible prior to maturity.  Interest on the Notes accrued at
the rate of 4.5% per annum and was payable semi-annually in arrears on June 4
and December 4 of each year, commencing on June 4, 2008.  Commencing
on the one year anniversary of the issuance of the Notes until maturity, the
holders of the Notes would have been entitled to convert the Notes into shares
of common stock at an initial conversion price per share of $0.70.  In
May 2009, we issued a total of 4,199,997 shares of common stock to Gerald
Burnett, R. Stephen Heinrichs, William Campbell, Craig Heimark, Simon Moss and
WS Investment Company upon their election to convert their Notes in the
aggregate principal amount of $2.9 million into common stock. In October 2009,
we repaid the Notes issued to Darren Innes in full with a payment of
approximately $60,000 and in December 2009, we repaid the Notes issued to
Baldwin Enterprises, Inc. in full with a payment of $4.0 million.  As
of December 31, 2009, there was no convertible debt outstanding.
  As of
December 31, 2009, we had no material off-balance sheet arrangements, other than
the operating leases described in the contractual obligations table
above.   We enter into indemnification provisions under
agreements with other companies in our ordinary course of business, typically
with our contractors, customers, landlords and our investors. Under these
provisions, we generally indemnify and hold harmless the indemnified party for
losses suffered or incurred by the indemnified party as a result of our
activities or, in some cases, as a result of the indemnified party's activities
under the agreement. These indemnification provisions generally survive
termination of the underlying agreement. The maximum potential amount of future
payments we could be required to make under these indemnification provisions is
generally unlimited. As of December 31, 2009, we had not incurred material costs
to defend lawsuits or settle claims related to these indemnifications agreements
and therefore, we have no liabilities recorded for these agreements as of
December 31, 2009.
  On January 19, 2010, we entered into a patent license
agreement with Springboard Group S.A.R.L. ("SKYPE").  Under the Agreement,
we granted to SKYPE for the lives of the patents, a royalty-free, irrevocable,
non-exclusive license under certain patents to make, have made (subject to
certain limitations), use, import or export, offer to sell, sell, lease,
license, or otherwise transfer or distribute certain licensed products. 
These granted rights and license include rights for authorized entities and end
users of SKYPE to form combinations with other products for certain authorized
purposes.  As consideration for the license, we received a payment of $3.0
million from SKYPE on January 25, 2010.
   33
  On January 21, 2010, we sold substantially all of our
patent portfolio and associated patent applications to Intellectual Ventures
Fund 61 LLC for a one time cash payment of $11.0 million.  We did
retain royalty rights under our existing patent license agreements as well as a
grant back license to the patents and patent applications for our current and
future products.  As a result of this sale, we expect our efforts and
expenditures on patent prosecution, licensing and settlement activities in
future periods to be substantially reduced and our prospects for revenues from
the licensing of patents and patent applications and our prospects for
generating new income from settlement and licensing activities to also be
substantially reduced.  Accordingly, our ongoing operations will have
to be funded directly from operations and from debt and equity financing
activities.  Failure to generate cash from operations or from debt or
equity financing activities would have a substantial and adverse affect on our
business, operations and prospects.
  Based on
the proceeds we received from the license of our patents and the sale of the
majority of our patents and patent applications in January 2010, the results of
our ongoing cost reduction efforts and Dr. Burnett’s personal guarantee to
Avistar to support an extension of the revolving line of credit, we believe that
our existing cash and cash equivalents balance and line of credit will provide
us with sufficient funds to finance our operations for the next 12 months. We
intend to continue to invest in the development of new products and enhancements
to our existing products. Our future liquidity and capital requirements will
depend upon numerous factors, including without limitation, general economic
conditions and conditions in the financial services industry in particular, the
level and timing of product, the maintenance of our cost control measures
structured to align operations with predictable revenues, the costs and timing
of our product development efforts and the success of these development efforts,
the costs and timing of our sales, partnering and marketing activities, the
extent to which our existing and new products gain market acceptance and
competing technological and market developments, all of which may impact our
ability to achieve and maintain profitability or generate positive cash
flows.
  From time
to time, we may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be no
assurance that such funding, if needed, will be available on terms attractive to
us, or at all. Furthermore, any additional debt or equity financing arrangements
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise additional
funds, may require us to relinquish our rights to certain of our technologies or
products. Our failure to raise capital when needed could have a material adverse
effect on our business, operating results and financial condition.
  Recent
Accounting Pronouncements
  In June
2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity’s Own Stock (EITF 07-5)
or ASC 815-10-65-3. ASC 815-10-65-3 provides that an entity should use a
two-step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. ASC 815-10-65-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. We adopted this statement on January 1,
2009.  The adoption of ASC 815-10-65-3 did not have a material impact
on our financial condition and results of operations.
  In April
2009, the FASB issued FASB Staff Position No. FAS 141(R)-1 or ASC 805-10-65-1,
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies (FSP FAS 141(R)-1), to amend SFAS 141 (revised 2007), Business Combinations. ASC
805-10-65-1 addresses the initial recognition, measurement and subsequent
accounting for assets and liabilities arising from contingencies in a business
combination, and requires that such assets acquired or liabilities assumed be
initially recognized at fair value at the acquisition date if fair value can be
determined during the measurement period. If the acquisition-date fair value
cannot be determined, the asset acquired or liability assumed arising from a
contingency is recognized only if certain criteria are met. This ASC also
requires that a systematic and rational basis for subsequently measuring and
accounting for the assets or liabilities be developed depending on their nature.
ASC 805-10-65-1 is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  We adopted this statement upon its
issuance.  The impact of ASC 805-10-65-1 on accounting for business
combinations is dependent upon acquisition activity on or after its effective
date.
  In April
2009, the FASB issued three FASB Staff Position (FSP) statements intended to
provide additional guidance and enhance disclosures regarding fair value
measurements and impairments of securities.  FASB Staff Position No.
FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP FAS 157-4) or ASC 820-10-65-4 provides guidelines for making fair value
measurements more consistent with the principles presented in FASB Statement No.
157, Fair Value Measurements(FAS 157) or ASC 820-10.  FASB Staff Position No. FAS 107-1 and
APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1) or
ASC 825-10-65-1, enhances consistency in financial reporting by increasing the
frequency of fair value disclosures.  FASB Staff Position No. 115-2
and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS
124-2) or ASC 320-10-65-1, provides additional guidance designed to create
greater clarity and consistency in accounting for and presenting impairment
losses on securities.  These ASCs are effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 only if all three ASCs are early adopted at
the same time. We adopted these ASCs on June 30, 2009.  The adoption
of these statements did not have a material impact on our financial condition
and results of operations.
   34
 In
May 2009, the FASB issued Statement No. 165, Subsequent Events(SFAS No.
165) or ASC 855. ASC 855 is intended to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. ASC
855 is effective for interim or annual financial periods ending after June 15,
2009.  We adopted this statement on June 30, 2009. The adoption of ASC
855 did not have a material impact on our financial condition and results of
operations.
  In June
2009, the FASB issued Statement No. 168, The FASB Accounting Codification and
Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB No.
162(SFAS No. 168) or ASC 105.  The FASB Accounting Standards
CodificationTM  (“Codification”)
does not change U. S. GAAP, but combines all authoritative standards such as
those issued by the FASB, AICPA, and EITF, into a comprehensive, topically
organized online database.  The Codification was released on July 1,
2009 and will become the single source of authoritative U. S. GAAP applicable
for all nongovernmental entities, except for rules and interpretive releases of
the SEC.  The Codification is effective for all interim periods and
year ends subsequent to September 15, 2009. We adopted this statement on
September 30, 2009.  The adoption of this statement affected our
financial statement disclosure references since all future references to
authoritative accounting literature will be references in accordance with SFAS
168, but did not have an impact on our financial condition and results of
operations.
  In August
2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures – Measuring Liabilities at Fair Value (ASU
2009-05).  The update provides clarification for circumstances in
which a quoted price in an active market for an identical liability is not
available. ASU 2009-05 is effective for the first reporting period beginning
after August 2009.  We adopted this statement upon its issuance. The
adoption of this statement did not have a material impact on our financial
condition and results of operations.
  In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issue Task Force (ASU 2009-13), and ASU No. 2009-14, Software (Topic 985) – Certain
Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU
2009-13 requires companies to allocate revenue in multiple-element arrangements
based on an element’s estimated selling price if vendor-specific or other third
party evidence of value is not available.  ASU 2009-14 modifies the
software revenue recognition guidance to exclude from its scope tangible
products that contain both software and non-software components that function
together to deliver a product’s essential functionality.  Both
statements are effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. We will adopt this statement on its effective date.  We do
not anticipate that the adoption of this statement will have a material impact
on our financial condition and results of operations.
 
 In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value
Measurements. This ASU requires new disclosures and clarifies certain
existing disclosure requirements about fair value measurements. ASU 2010-06
requires a reporting entity to disclose significant transfers in and out of
Level 1 and Level 2 fair value measurements, to describe the reasons for the
transfers and to present separately information about purchases, sales,
issuances and settlements for fair value measurements using significant
unobservable inputs. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements, which is effective for interim and annual
reporting periods beginning after December 15, 2010; early adoption is
permitted. We do not anticipate that the adoption of this statement will have a
material impact on our financial condition and results of
operations.
 
 In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events – Amendments to
Certain Recognition and Disclosure Requirements (ASU
2010-09).  The update removes the requirement for an SEC filer to
disclose the date through which subsequent events have been
evaluated.  The change alleviates potential conflicts between ASC
855-10 and the SEC’s requirements.  ASU 2010-09 is effective upon
issuance of the final update.  We adopted this statement upon its
issuance. The adoption of this statement did not have a material impact on our
financial condition and results of operations.
  35
  Item 7a.  Omitted
  Item
8. Financial Statements and Supplementary
Data
  Our
consolidated financial statements and Report of Independent Registered Public
Accounting Firm appears on pages F-2 through F-26 of this
Report.
  Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
  None
  Item
9a. Controls and
Procedures
  Evaluation
of disclosure controls and procedures
  Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on
Form 10-K (the Evaluation Date). Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded as of the
Evaluation Date that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act were
effective such that information required to be disclosed by us in reports that
we file or submit under the Exchange Act (i) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure, and (ii) is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
  Management’s Report on Internal
Control over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the criteria set forth
in Internal Control -
Integrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under the criteria set forth
in Internal Control —
Integrated Framework, our management concluded that our internal control
over financial reporting was effective as of December 31, 2009.
  Changes
in Internal Control over Financial Reporting
  There was
no change in our internal control over financial reporting that occurred during
the quarter ended December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  Inherent
Limitations on Effectiveness of Controls
  In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs.
  Attestation
Report of Registered Public Accounting Firm Not Required
  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this annual report.
  Item
9b. Other
Information
  None
   36
  PART III
  Item 10. Directors,
Executive Officers and Corporate Governance
  The
information required by this item is incorporated by reference to the sections
captioned “Election of Directors” and “Section 16(a) Beneficial
Ownership Reporting Compliance” contained in our Proxy Statement related to the
2010 Annual Meeting of Stockholders, to be filed with the SEC within 120 days of
December 31, 2009, pursuant to General Instruction G(3) of
Form 10-K (the “Proxy Statement”). Certain information required by this
item concerning executive officers is set forth in Part I of this Report in
“Business—Executive Officers,” and certain other information required by this
item is incorporated by reference from the sections captioned “Principal
Stockholders” contained in our Proxy Statement.
  We have
adopted a code of ethics that applies to our principal executive officers and
all members of our finance department, including the principal financial officer
and principal accounting officer. This code of ethics, which also applies to
employees generally, is posted on our Internet website. The Internet address for
our website is http://www.avistar.com, and the code of ethics may be found as
follows:
  1.
              From
      our main Web page, first click on
“Company.”
  2.
              Next,
      click on “Investor Relations.”
  3.
              Next,
      click on “Avistar’s Business Conduct and Ethics
  Policy.”
  We intend
to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding
an amendment to, or waiver from, a provision of this code of ethics by posting
such information on our website, at the address and location specified
above.
  Item 11. Executive
Compensation
  The
information required by this item is incorporated by reference to the section
captioned “Executive Compensation and Other Matters” contained in our Proxy
Statement.
   37
  
  Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  The
information required by this item is incorporated by reference to the sections
captioned “Principal Stockholders”, “Executive Compensation and Other Matters”
and “Certain Transactions” contained in our Proxy Statement.
  Equity
Compensation Plan Information
  The
following table provides information as of December 31, 2009 with respect
to the shares of our Common Stock that may be issued upon exercise of options
and vesting of restricted stock units under our existing equity compensation
plans.
  A
              
              B
              
              CPlan Category
              
              Number of securities
                to be issued upon
                exercise of outstanding
                options
      and restricted stock units
              
              Weighted-average
                exercise price of
                outstanding options
              
              Number of securities
                remaining available for
                future issuance under
                equity compensation
                plans (excluding
                securities reflected in
                Column A)Equity
      compensation plans approved by security holders
              
              
              12,908,668
              (1)
              
              $
              1.89
              
              
              
              2,619,686
              (2)Equity
      compensation plans not approved by security holders
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              12,906,668
              
              
              $
              1.89
              
              
              
              2,619,686
 
 
 (1)
              This
      number reflects the number of shares to be issued upon exercise of
      outstanding options and vesting of restricted stock units under our 2009
      Equity Incentive Plan (the “2009 Plan”), 2000 Director Option Plan
      (“Director Plan”) and the 1997 Stock Option Plan (the “1997 Plan”). This
      number excludes purchase rights accruing under the Employee Stock Purchase
      Plan (“Purchase Plan”). The Purchase Plan authorizes the granting of stock
      purchase rights to eligible employees during six month offering periods.
      Shares are purchased through employee payroll deductions at purchase
      prices equal to 85% of the lesser of the fair market value of our Common
      Stock at either the first day of each offering period or the date of
      purchase.
  (2)
              Includes
      946,523 shares remaining available for issuance under the 2009 Plan,
      478,750 shares available for issuance under the Director Plan and
      1,194,413 shares available for issuance under the Purchase Plan. No
      securities are available for future issuance under the 1997 Plan. The 2009
      Plan provides for an annual increase in the number of shares of Common
      Stock reserved for issuance thereunder on the first day of our fiscal year
      beginning with the fiscal year 2010, in an amount equal to the lesser of
      (x) 6,000,000 shares, (y) 4% of the outstanding shares of the
      Company’s Common Stock as of the last day of the preceding fiscal year,
      calculated on a fully diluted basis, and (z) such lesser amount as
      determined by the Board. The Director Plan currently provides for an
      annual increase to the number of shares reserved thereunder on the first
      day of the Company’s fiscal year equal to the lesser of (x) 175,000
      shares, (y) 1% of the outstanding shares of our Common Stock on such
      date, and (z) such amount as determined by the Board. The Purchase
      Plan provides for an annual increase in the number of shares of Common
      Stock reserved thereunder on the first day of our fiscal year in an amount
      equal to the lesser of (x) 900,000 shares, (y) 3% of our
      outstanding shares on the last day of the prior fiscal year, and
      (z) such amount as determined by the Board. Under the terms of the
      Plans, on January 1, 2009, 1,200,000 and 175,000 shares were added to
      the 2000 Option Plan and the Director Plan, respectively. No shares were
      added to the Purchase Plan on January 1,
  2009.
  Item 13. Certain
Relationships and Related Transactions and Director
Independence
  The
information required by this item is incorporated by reference to the sections
captioned “Proposal One—Election of Directors,” “Compensation Committee
Interlocks and Insider Participation” and “Certain Transactions” contained in
our Proxy Statement.
  Item 14. Principal
Accountant Fees and Services
  The
information required by this section is incorporated by reference from the
information in the section entitled “Ratification of Appointment of Independent
Accountants” in our Proxy Statement.
  
   38
  PART IV
  
  Item 15.Exhibits,
Financial Statement Schedules
  (a)(1) Financial
Statements
  The
following financial statements are incorporated by reference in Item 8 of this
Annual Report:
  PageReport
      of Independent Registered Public Accounting Firm
              
              
              F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              
              
              F-3Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008
      and 2007
              
              
              F-4Consolidated
      Statements of Stockholders’ Equity (Deficit) for the years ended
      December 31, 2009, 2008 and 2007
              
              
              F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008
      and 2007
              
              
              F-6Notes
      to the Consolidated Financial Statements
              
              
              F-7
 
  (a)(2) Financial Statement
Schedules
  Schedule
II—Valuation and Qualifying Accounts (see page S-1)
  Schedules
not listed above have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
  (a)(3) Exhibits
 3.2
                
                Restated
      Certificate of Incorporation(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)3.3
                
                Bylaws
      of Avistar Communications Corporation(Filed
      as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2004 filed with the Securities and Exchange Commission
      on March 28, 2005.)4.1
                
                Specimen
      Certificate evidencing shares of Common Stock(Filed as an exhibit to the Company’s
      Registration Statement on Form S-1 (File No. 333-39008) as declared
      effective by the Securities and Exchange Commission on August 16,
      2000.)10.1
                
                1997
      Stock Option Plan, as amended*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.1.1
                
                1997
      Stock Option Plan Form of Stock Option Agreement*(Filed as an exhibit to the Company’s
      Registration Statement on Form S-1 (File No. 333-39008) as declared
      effective by the Securities and Exchange Commission on August 16,
      2000.)10.2
                
                2000
      Stock Option Plan, as amended*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.3
                
                2000
      Director Option Plan, as amended*(Filed as
      an exhibit to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2005 filed with the Securities and Exchange Commission
      on April 28, 2006.)10.4
                
                Form
      of Director Option Agreement*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.5
                
                2000
      Employee Stock Purchase Program, as amended*(Filed as an exhibit to the Registrant’s Quarterly Report on
      Form  10-Q for the three months ended September 30, 2006 filed
      with the Securities and Exchange Commission on November 14,
      2006.)10.6
                
                Form
      of Indemnification Agreement*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.7
                
                Settlement
      Agreement and Release between Avistar Communications Corporation and R.
      Stephen Heinrichs dated April 26, 2001*(Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on May 8,
      2001.)10.8
                
                Lease
      Agreement among Avistar Communications Corporation and Crossroads
      Associates and Clocktower Associates dated December 1, 2006 (Filed as an exhibit to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2006 filed with the
      Securities and Exchange Commission on March 22,
    2007.)
    39
   10.9
                
                Common
      Stock Purchase Agreement by and among Avistar Communications Corporation
      and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust, Grady
      Burnett and Wendolyn Hearn dated October 15, 2003(Filed as an exhibit to the Registrant’s
      Quarterly Report on Form 10-Q for the three months ended September 30,
      2003 filed with the Securities and Exchange Commission on October 23,
      2003.)10.10
                
                Stock
      Purchase Agreement among Avistar Communications Corporation, Fuller &
      Thaler Behavioral Finance Fund, Ltd. and Fuller & Thaler Avalanche
      Fund, L.P. dated March 23, 2004(Filed as an
      exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter
      ended March 31, 2004 filed with the Securities and Exchange Commission on
      May 11, 2004.)10.11
                
                Settlement
      Agreement among Avistar Communications Corporation, Collaboration
      Properties, Inc. and Polycom, Inc. dated November 12, 2004(Filed as an exhibit to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2004 filed with the
      Securities and Exchange Commission on March 28, 2005.)10.12†
                
                Patent
      Cross-License Agreement Among the Company, Collaboration Properties, Inc.
      and Polycom, Inc. dated November 12, 2004(Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 2005 filed with the Securities and Exchange
      Commission on April 28, 2006.)10.13†
                  
                  
                  10.14†
                
                Patent
      License Agreement dated May 15, 2006 among Avistar Communications
      Corporation, Collaboration Properties, Inc., Sony Corporation and Sony
      Computer Entertainment, Inc.(Filed as an
      exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three
      months ended September 30, 2006 filed with the Securities and Exchange
      Commission on November 14, 2006.)
                  
                  Patent License Agreement dated February 15, 2007
      by and among Avistar Communications Corporation, Collaboration Properties,
      Inc., Tandberg ASA, Tandberg Telecom AS, and Tandberg, Inc. (Filed on May
      14, 2007 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q
      for the quarter ended March 31, 2007)10.15†
                
                Patent License Agreement dated May 15, 2007 by and
      among Avistar Communications Corporation, Avistar Systems (UK) Limited,
      and Radvision LTD.  (Filed on August 3, 2007 as an exhibit to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2007)10.16
                
                Employment Agreement between Avistar
      Communications Corporation and Simon B. Moss effective July 16, 2007. *
      (Filed on November 13, 2007 as an exhibit to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended September 30,
      2007)10.17
                
                Amended and restated Security Agreement dated
      December 17, 2007 between Avistar Communications Corporation and
      JPMorganChase Bank, N.A. originally dated December 23, 2006. (Filed as an
      exhibit to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2007 filed with the Securities and Exchange Commission on
      March 31, 2008)10.18
                
                Amendment dated December 17, 2007 to the Revolving
      Credit Promissory Note issued by Avistar Communications Corporation in
      favor of JPMorgan originally dated December 23, 2006. (Filed as an exhibit
      to the Registrant’s Annual Report on Form 10-K for the year ended December
      31, 2007 filed with the Securities and Exchange Commission on March 31,
      2008)10.19
                
                Second amendment dated December 17, 2007 to the
      Revolving Credit Promissory Note issued by Avistar Communications
      Corporation in favor of JPMorgan originally dated December 23, 2006.
      (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 2007 filed with the Securities and Exchange
      Commission on March 31, 2008)10.20
                
                Amendment dated December 17, 2007 to the Guaranty
      issued by Gerald J. Burnett and The Gerald J. Burnett and Marjorie J.
      Burnett Revocable Trust in favor of JPMorgan originally dated December 23,
      2006. (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2007 filed with the Securities and
      Exchange Commission on March 31, 2008)10.21
                
                Convertible Note Purchase Agreement among the
      Company and the Purchasers named therein dated January 4, 2008 (Filed on
      January 9, 2008 as an exhibit to the Registrant’s Current Report on Form
      8-K)10.22
                
                Security Agreement among the Company, Baldwin
      Enterprises, Inc., as Collateral Agent, and the Purchasers named therein
      dated January 4, 2008 (Filed on January 9, 2008 as an exhibit to the
      Registrant’s Current Report on Form 8-K)10.23
                
                Form of 4.5% Convertible Subordinated Secured Note
      Due 2010 (Filed on January 9, 2008 as an exhibit to the Registrant’s
      Current Report on Form
8-K)
  40
   10.24
                
                Inter-creditor Agreement among the Purchasers of
      the 4.5% Convertible Subordinated Secured Notes Due 2010 dated January 4,
      2008 (Filed on January 9, 2008 as an exhibit to the Registrant’s Current
      Report on Form 8-K)10.25†
                
                Licensed
      Works Agreement between Avistar Communications Corporation and
      International Business Machines Corporation dated September 8, 2008(Filed as an exhibit to the Registrant’s
      Quarterly Report on Form 10-Q for the three months ended September 30,
      2008 filed with the Securities and Exchange Commission on November 14,
      2008.)10.26†
                
                Licensed
      Works Agreement Statement of Work between Avistar Communications
      Corporation and International Business Machines Corporation dated
      September 8, 2008(Filed as an exhibit to
      the Registrant’s Quarterly Report on Form 10-Q for the three months ended
      September 30, 2008 filed with the Securities and Exchange Commission on
      November 14, 2008.)10.27†
                
                Patent
      License Agreement between Avistar Communications Corporation and
      International Business Machines Corporation dated September 9, 2008. (Filed as an exhibit to the Registrant’s Quarterly
      Report on Form 10-Q for the three months ended September 30, 2008 filed
      with the Securities and Exchange Commission on November 14,
      2008.)10.28
                
                Amended and Restated
      Revolving Credit Promissory Note issued by Avistar Communications
      Corporation to JPMorgan Chase Bank, N.A. dated December 22, 2008
      (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2008 filed with the Securities and
      Exchange Commission on March 31, 2009.)10.29
                
                Facility Agreement
      between Avistar Communications Corporation and JPMorgan Chase Bank, N.A.
      dated December 22, 2008 (Filed as an exhibit to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2008 filed with
      the Securities and Exchange Commission on March 31, 2009.)10.30
                
                Amended and Restated
      Collateral Agreement dated December 22, 2008 between Avistar
      Communications Corporation and JPMorgan Chase Bank, N.A. dated December
      22, 2008 (Filed as an exhibit to the Registrant’s Annual Report on
      Form 10-K for the year ended December 31, 2008 filed with the Securities
      and Exchange Commission on March 31, 2009.)10.31
                
                Second Amended and
      Restated Security Agreement between Avistar Communications Corporation and
      JPMorgan Chase Bank, N.A. (Filed as an exhibit to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2008 filed with
      the Securities and Exchange Commission on March 31, 2009.)10.32
                
                Amended
      and Restated Guaranty issued by Gerald J. Burnett and The Gerald J.
      Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase
      Bank, N.A. dated December 22, 2008 (Filed as an exhibit
      to the Registrant’s Annual Report on Form 10-K for the year ended December
      31, 2008 filed with the Securities and Exchange Commission on March 31,
      2009.)10.33
                
                Amended and Restated
      Form of Note Sale Agreement among Gerald J. Burnett, The Gerald J. Burnett
      and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank, N.A.
      (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2008 filed with the Securities and
      Exchange Commission on March 31, 2009.)10.34
                
                Personal guarantee
      issued by Gerald J. Burnett in favor of Avistar Communications Corporation
      dated March 29, 2009 (Filed as an exhibit to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2008 filed with
      the Securities and Exchange Commission on March 31, 2009.)10.35
                
                Separation
      Agreement and Release between Avistar Communications Corporation and Simon
      Moss dated July 8, 2009* (Filed on July 14,
      2009 as an exhibit to the Registrant’s Current Report on Form
      8-K.)10.36
                
                Employment
      Agreement between Avistar Communications Corporation and Robert Kirk dated
      July 14, 2009* (Filed on July 14, 2009 and
      amended on July 17, 2009  as an exhibit to the Registrant’s
      Current Report on Form 8-K.)10.37
                
                Compromise
      Agreement between Avistar Systems (UK) Limited and Darren Innes dated
      August 19, 2009 *(Filed on August 25, 2009
      as an exhibit to the Registrant’s Current Report on Form
      8-K.)10.38
                
                2009
      Equity Incentive Plan* (Filed on December
      14, 2009 as an exhibit to the Registrant’s Current Report on Form
      8-K.)10.38.1
                
                2009
      Equity Incentive Plan Form of Stock Option Agreement* (Filed on December 14, 2009 as an exhibit to the
      Registrant’s Current Report on Form
8-K.)
       41
   10.38.2
                
                2009
      Equity Incentive Plan Form of Restricted Stock Unit Agreement* (Filed on December 14, 2009 as an exhibit to the
      Registrant’s Current Report on Form 8-K.)10.39†
                
                Patent Purchase Agreement dated December 18, 2009
      between Avistar Communications Corporation and Intellectual Ventures Fund
      61 LLC.10.40
                
                Second
      Amended and Restated Revolving Credit Promissory Note issued by Avistar
      Communications Corporation to JPMorgan Chase Bank, N.A. dated December 22,
      2009.10.41
                
                Facility
      Agreement between Avistar Communications Corporation and JPMorgan Chase
      Bank, N.A. dated December 22, 2009.10.42
                
                Second
      Amended and Restated Collateral Agreement between Avistar Communications
      Corporation and JPMorgan Chase Bank, N.A. dated December 22,
      2009.10.43
                
                Second
      Amended and Restated Guaranty issued by Gerald J. Burnett and The Gerald
      J. Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan
      Chase Bank, N.A. dated December 22, 2009.10.44
                
                Amended
      and Restated Note Sale Agreement among Gerald J. Burnett, The Gerald J.
      Burnett and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank,
      N.A.10.45
                
                Third
      Amended and Restated Security Agreement between Avistar Communications
      Corporation and JPMorgan Chase Bank, N.A. dated December 22,
      2009.10.46
                
                Facility
      Agreement between Avistar Communications Corporation and JPMorgan Chase
      Bank, N.A. dated January 11, 2010.10.47
                
                Fourth
      Amended and Restated Security Agreement between Avistar Communications
      Corporation and JPMorgan Chase Bank, N.A dated January 11,
      2010.10.48
                
                Reaffirmation
      of Guaranty issued by Gerald J. Burnett and The Gerald J. Burnett and
      Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase Bank, N.A.
      dated January 11, 2010.10.49
                
                UCC
      Financing Statement Amendment between Avistar Communications Corporation
      and JPMorgan Chase Bank, N.A10.50
                
                Personal
      guarantee issued by Gerald J. Burnett in favor of Avistar Communications
      Corporation dated March 26, 201021.1
                
                Subsidiaries
      of the Company23.1
                
                Consent
      of Independent Registered Public Accounting Firm: Burr Pilger Mayer,
      Inc.24.1
                
                Power
      of Attorney (see page 43)31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification by the Chief Executive
      Officer31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification by the Chief Financial
      Officer32
                
                Certification
      by the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 *
              Indicates
      management contract or compensatory plan or arrangement required to be
      filed an exhibit pursuant to Item 14(c) of Form
  10-K.
  †
              Portions
      of the exhibit have been omitted pursuant to a request for confidential
      treatment and the omitted portions have been separately filed with the
      Commission.
   42
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
  AVISTAR
      COMMUNICATIONS CORPORATIONBy:
              /s/   ROBERT F.
      KIRKRobert
      F. KirkChief
      Executive Officer and DirectorDate:
      March 30, 2010
 
  POWER
OF ATTORNEY
  KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Robert F. Kirk and Elias A. MurrayMetzger, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, to sign any and all amendments (including post- effective
amendments) to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue
hereof.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
  Signature
              
              
              
              Title
              
              
              
              Date/s/   Gerald J.
      Burnett
              
              Chairman
              
              March
      30, 2010Gerald
      J. Burnett/s/   Robert F.
      Kirk
              
              Chief
      Executive Officer and Director
              
              March
      30, 2010Robert
      F. Kirk
              
              (Principal
      Executive Officer)/s/   Elias A.
      MurrayMetzger
              
              Chief
      Financial Officer, Chief Administrative Officer and Corporate
      Secretary
              
              March
      30, 2010Elias
      A. MurrayMetzger
              
              (Principal
      Financial and Accounting Officer)/s/   William L.
      Campbell
              
              Director
              
              March
      30, 2010William
      L. Campbell/s/   Craig F.
      Heimark
              
              Director
              
              March
      30, 2010Craig
      F. Heimark/s/   R. Stephen
      Heinrichs
              
              Director
              
              March
      30, 2010R.
      Stephen Heinrichs/s/   Robert M.
      Metcalfe
              
              Director
              
              March
      30, 2010Robert
      M. Metcalfe
  
   43
  INDEX
TO FINANCIAL STATEMENTS
  PageReport
      of Independent Registered Public Accounting Firm
              
              
              F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              
              
              F-3Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008
      and 2007
              
              
              F-4Consolidated
      Statements of Stockholders’ Equity (Deficit) for the years ended
      December 31, 2009, 2008 and 2007
              
              
              F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008
      and 2007
              
              
              F-6Notes
      to the Consolidated Financial Statements
              
              
              F-7
 
   F-1
  Report
of Independent Registered Public Accounting Firm
  To the
Board of Directors and Stockholders of
 Avistar
Communications Corporation
  We have
audited the accompanying consolidated balance sheets of Avistar Communications
Corporation and its subsidiary as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2009. Our audits also included the related financial statement schedule listed
in Item 15(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor have we been engaged to perform, an audit of the Company’s internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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 Avistar Communications
Corporation and its subsidiary as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
   /s/
      BURR PILGER MAYER, INC.San
      Jose, CaliforniaMarch 30,
      2010
  
   F-2
  AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
  CONSOLIDATED
BALANCE SHEETS
  as
of December 31, 2009 and 2008
  (in
thousands, except share and per share data)
  December 31,
                  2009
                
                December 31,
                  2008Assets:Current
      assets:Cash
      and cash equivalents
                
                $
                294
                
                
                $
                4,898Accounts
      receivable, net of allowance for doubtful accounts of $13 and $20 at
      December 31, 2009 and 2008, respectively
                
                
                1,027
                
                
                
                2,701Inventories
                
                
                56
                
                
                
                307Deferred
      settlement and patent licensing costs
                
                
                -
                
                
                
                1,100Prepaid
      expenses and other current assets
                
                
                300
                
                
                
                320Total
      current assets
                
                
                1,677
                
                
                
                9,326Property
      and equipment, net
                
                
                147
                
                
                
                310Other
      assets
                
                
                132
                
                
                
                157Total
      assets
                
                $
                1,956
                
                
                $
                9,793Liabilities
      and Stockholders’ Equity (Deficit):Current
      liabilities:Line
      of credit
                
                $
                11,250
                
                
                $
                7,000Accounts
      payable
                
                
                807
                
                
                
                579Deferred
      income from settlement and patent licensing
                
                
                -
                
                
                
                4,751Deferred
      services revenue and customer deposits
                
                
                2,008
                
                
                
                3,687Accrued
      liabilities and other
                
                
                1,432
                
                
                
                1,382Total
      current liabilities
                
                
                15,497
                
                
                
                17,399Long-term
      liabilities:Long
      term convertible debt
                
                
                -
                
                
                
                7,000Other
      liabilities
                
                
                73
                
                
                
                23Total
      liabilities
                
                
                15,570
                
                
                
                24,422Commitments
      and contingencies (Note 4)Stockholders’
      equity (deficit):Common
      stock, $0.001 par value; 250,000,000 shares authorized at
      December 31, 2009 and 2008; 40,159,466 and 35,750,680 shares issued
      at December 31, 2009 and 2008, respectively
                
                
                40
                
                
                
                36Less:
      treasury common stock, 1,182,875 shares at December 31, 2009 and
      2008, at cost
                
                
                (53
                )
                
                
                (53
                )Additional
      paid-in-capital
                
                
                102,504
                
                
                
                97,506Accumulated
      deficit
                
                
                (116,105
                )
                
                
                (112,118
                )Total
      stockholders’ equity (deficit)
                
                
                (13,614
                )
                
                
                (14,629
                )Total
      liabilities and stockholders’ equity (deficit)
                
                $
                1,956
                
                
                $
                9,793
    The
accompanying notes are an integral part of these financial
statements.
  F-3
  AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
  CONSOLIDATED
STATEMENTS OF OPERATIONS
  for
the years ended December 31, 2009, 2008 and 2007
  (in
thousands, except per share data)
  Year Ended December 31,2009
              
              
              2008
              
              
              2007Revenue:Product
              
              $
              3,932
              
              
              $
              3,957
              
              
              $
              3,462Licensing
              
              
              853
              
              
              
              954
              
              
              
              5,016Services,
      maintenance and support
              
              
              4,039
              
              
              
              3,844
              
              
              
              3,477Total
      revenue
              
              
              8,824
              
              
              
              8,755
              
              
              
              11,955Costs
      and expenses:Cost
      of product revenues*
              
              
              1,327
              
              
              
              2,195
              
              
              
              2,684Cost
      of services, maintenance and support revenues*
              
              
              2,965
              
              
              
              2,352
              
              
              
              2,243Income
      from settlement and patent licensing
              
              
              (3,651
              )
              
              
              (4,226
              )
              
              
              (16,226
              )Research
      and development*
              
              
              3,888
              
              
              
              5,200
              
              
              
              7,670Sales
      and marketing*
              
              
              2,581
              
              
              
              3,521
              
              
              
              6,192General
      and administrative*
              
              
              5,298
              
              
              
              5,729
              
              
              
              12,465Total
      costs and expenses
              
              
              12,408
              
              
              
              14,771
              
              
              
              15,028Loss
      from operations
              
              
              (3,584
              )
              
              
              (6,016
              )
              
              
              (3,073
              )Other
      (expense) income:Interest
      income
              
              
              8
              
              
              
              94
              
              
              
              346Other
      (expense) income, net
              
              
              (440
              )
              
              
              (439
              )
              
              
              (188
              )Total
      other (expense) income, net
              
              
              (432
              )
              
              
              (345
              )
              
              
              158Loss
      before provision for (recovery from) income taxes
              
              
              (4,016
              )
              
              
              (6,361
              )
              
              
              (2,915
              )Provision
      for (recovery from) income taxes
              
              
              (29
              )
              
              
              23
              
              
              
              23Net
      loss
              
              $
              (3,987
              )
              
              $
              (6,384
              )
              
              $
              (2,938
              )Net
      loss per share – basic and diluted
              
              $
              (0.11
              )
              
              $
              (0.18
              )
              
              $
              (0.09
              )Weighted
      average shares used in calculating basic and diluted net loss per
      share
              
              
              37,318
              
              
              
              34,551
              
              
              
              34,290
 
 *
      Including stock-based compensation of:Cost of product, services, maintenance and support revenue
              
              $
              234
              
              
              $
              141
              
              
              $
              188Research and development
              
              
              579
              
              
              
              511
              
              
              
              879Sales and marketing
              
              
              228
              
              
              
              38
              
              
              
              614General and administrative
              
              
              848
              
              
              
              817
              
              
              
              1,008


The
accompanying notes are an integral part of these financial
statements.
 F-4
 
 AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
  for
the years ended December 31, 2009, 2008 and 2007
  (in
thousands, except share amounts)
   Additional
                
                
                
                
                
                TotalCommon Stock
                
                
                Treasury Stock
                
                
                Paid-In
                
                
                Accumulated
                
                
                Stockholders’Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                Equity (Deficit)Balance
      at December 31, 2006
                
                
                35,219,768
                
                
                $
                35
                
                
                
                1,182,875
                
                
                $
                (53
                )
                
                $
                92,865
                
                
                $
                (102,796
                )
                
                $
                (9,949
                )Issuance
      of common stock to employees pursuant to employee stock purchase
      plan
                
                
                176,072
                
                
                
                1
                
                
                
                —
                
                
                
                —
                
                
                
                219
                
                
                
                —
                
                
                
                220Issuance
      of common stock to employees pursuant to exercise of
    options
                
                
                282,967
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                210
                
                
                
                —
                
                
                
                210Repurchase
      of stock options from employees
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (58
                )
                
                
                —
                
                
                
                (58
                )Non-employee
      stock-based compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                66
                
                
                
                —
                
                
                
                66Employee
      stock-based compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,623
                
                
                
                —
                
                
                
                2,623Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (2,938
                )
                
                
                (2,938
                )Balance
      at December 31, 2007
                
                
                35,678,807
                
                
                
                36
                
                
                
                1,182,875
                
                
                
                (53
                )
                
                
                95,925
                
                
                
                (105,734
                )
                
                
                (9,826
                )Issuance
      of common stock to employees pursuant to employee stock purchase
      plan
                
                
                66,373
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                67
                
                
                
                —
                
                
                
                67Issuance
      of common stock to employees pursuant to exercise of
    options
                
                
                5,500
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                7
                
                
                
                —
                
                
                
                7Non-employee
      stock-based compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                18
                
                
                
                —
                
                
                
                18Employee
      stock-based compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,489
                
                
                
                —
                
                
                
                1,489Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (6,384
                )
                
                
                (6,384
                )Balance
      at December 31, 2008
                
                
                35,750,680
                
                
                
                36
                
                
                
                1,182,875
                
                
                
                (53
                )
                
                
                97,506
                
                
                
                (112,118
                )
                
                
                (14,629
                )Issuance
      of common stock to employees pursuant to employee stock purchase
      plan
                
                
                41,182
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                30
                
                
                
                —
                
                
                
                30Issuance
      of common stock to employees pursuant to exercise of
    options
                
                
                167,607
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                143
                
                
                
                —
                
                
                
                143Non-employee
      stock-based compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                9
                
                
                
                —
                
                
                
                9Issuance
      of common stock pursuant to conversion of convertible debt
                
                
                4,199,997
                
                
                
                4
                
                
                
                —
                
                
                
                —
                
                
                
                2,936
                
                
                
                —
                
                
                
                2,940Employee
      stock-based compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,880
                
                
                
                —
                
                
                
                1,880Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (3,987
                )
                
                
                (3,987
                )Balance
      at December 31, 2009
                
                
                40,159,466
                
                
                $
                40
                
                
                
                1,182,875
                
                
                $
                (53
                )
                
                $
                102,504
                
                
                $
                (116,105
                )
                
                $
                (13,614
                )
  The
accompanying notes are an integral part of these financial
statements.
  F-5
  AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  for
the years ended December 31, 2009, 2008 and 2007
  (in
thousands)
  Year Ended December 31,2009
              
              
              2008
              
              
              2007Cash
      Flows from Operating Activities:Net
      loss
              
              $
              (3,
      987
              )
              
              $
              (6,384
              )
              
              $
              (2,938
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              245
              
              
              
              538
              
              
              
              468Compensation
      on equity awards issued to consultants and employees
              
              
              1,889
              
              
              
              1,507
              
              
              
              2,689Provision
      for doubtful accounts
              
              
              (7
              )
              
              
              (4
              )
              
              
              (27
              )Changes
      in assets and liabilities:Accounts
      receivable
              
              
              1,681
              
              
              
              (1,312
              )
              
              
              51Inventories
              
              
              251
              
              
              
              121
              
              
              
              284Prepaid
      expenses and other current assets
              
              
              20
              
              
              
              142
              
              
              
              72Deferred
      settlement and patent licensing costs
              
              
              1,100
              
              
              
              1,273
              
              
              
              1,274Other
      assets
              
              
              25
              
              
              
              129
              
              
              
              1Accounts
      payable
              
              
              228
              
              
              
              (708
              )
              
              
              (291
              )Deferred
      income from settlement and patent licensing and other
              
              
              (4,701
              )
              
              
              (5,560
              )
              
              
              (5,494
              )Deferred
      services revenue and customer deposits
              
              
              (1,679
              )
              
              
              1,456
              
              
              
              252Accrued
      liabilities and other
              
              
              50
              
              
              
              (69
              )
              
              
              (812
              )Net
      cash used in operating activities
              
              
              (4,885
              )
              
              
              (8,871
              )
              
              
              (4,471
              )Cash
      Flows from Investing Activities:Purchase
      of short and long-term investments
              
              
              —
              
              
              
              —
              
              
              
              (799
              )Maturities
      of short and long-term investments
              
              
              —
              
              
              
              799
              
              
              
              —Sale
      of property and equipment
              
              
              —
              
              
              
              8
              
              
              
              —Purchase
      of property and equipment
              
              
              (82
              )
              
              
              (89
              )
              
              
              (979
              )Net
      cash (used in) provided by investing activities
              
              
              (82
              )
              
              
              718
              
              
              
              (1,778
              )Cash
      Flows from Financing Activities:Line
      of credit payments
              
              
              (5,049
              )
              
              
              (5,100
              )
              
              
              —Proceeds
      from line of credit
              
              
              9,299
              
              
              
              7,000
              
              
              
              2,100Proceeds
      from convertible debt issuance
              
              
              —
              
              
              
              7,000
              
              
              
              —Payment
      of convertible debt
              
              
              (4,060
              )
              
              
              —
              
              
              
              —Net
      proceeds from issuance of common stock
              
              
              173
              
              
              
              74
              
              
              
              372Net
      cash provided by financing activities
              
              
              363
              
              
              
              8,974
              
              
              
              2,472Net
      increase (decrease) in cash and cash equivalents
              
              
              (4,604
              )
              
              
              821
              
              
              
              (3,777
              )Cash
      and cash equivalents, beginning of year
              
              
              4,898
              
              
              
              4,077
              
              
              
              7,854Cash
      and cash equivalents, end of year
              
              $
              294
              
              
              $
              4,898
              
              
              $
              4,077Supplemental
      Cash Flow Information:Cash
      paid for income taxes
              
              $
              15
              
              
              $
              —
              
              
              $
              —Cash
      paid for interest
              
              
              465
              
              
              
              412
              
              
              
              138Non-Cash
      Financing ActivitiesDebt
      converted to equity
              
              $
              2,940
              
              
              $
              —
              
              
              $
              —
 
 The
accompanying notes are an integral part of these financial
statements.
 
   F-6
  
  AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
  NOTES
TO FINANCIAL STATEMENTS
  
  1.
              Business,
      Organization, Basis of Presentation, and Risks and
      Uncertainties
 
 Business
  Avistar
Communications Corporation (“Avistar” or the “Company”) creates technology that
provides the missing critical element in unified communications: bringing people
in organizations face-to-face, through enhanced communications, for true
collaboration anytime, anyplace. The Company’s latest product, Avistar C3TM,
draws on over a decade of market experience to deliver a single-click desktop
videoconferencing and collaboration experience that moves business
communications into a new era. Available as a stand-alone solution, or
integrated with existing unified communications software from other vendors,
Avistar C3TM users gain instant messaging-style ability to initiate video
communications across and outside the enterprise. Patented bandwidth management
enables thousands of users to access desktop videoconferencing, Voice over IP
(VoIP) and streaming media without requiring substantial new network investment
or impairing network performance.  By integrating Avistar C3TM tightly
into the way they work, customers can use Avistar’s solutions to help reduce
costs and improve productivity and communications within their enterprise and
between enterprises, to enhance their relationships with customers, suppliers
and partners. Using Avistar C3TM software and leveraging video, telephony and
Internet networking standards, Avistar solutions are designed to be scalable,
reliable, cost effective, easy to use, and capable of evolving with
communications networks as bandwidth increases and as new standards and
protocols emerge. The Company currently sells the Avistar system directly and
indirectly to small and medium size businesses, or SMBs, and large globally
distributed organizations, or Enterprise markets, comprising the Global 5000.
The Company’s objective is to establish its technology as the standard for
networked visual unified communications and collaboration through limited direct
sales, indirect channel sales/partnerships and the licensing of the Company’s
technology to others.
 
 Organization
  The Company was founded as a Nevada limited partnership in
1993. The Company filed articles of incorporation in Nevada in December 1997
under the name Avistar Systems Corporation. The Company reincorporated in
Delaware in March 2000 and changed the Company name to Avistar Communications
Corporation in April 2000. The operating assets and liabilities of the business
were then contributed to the Company’s wholly owned subsidiary, Avistar Systems
Corporation, a Delaware corporation. In July 2001, the Company’s Board of
Directors and the Board of Directors of Avistar Systems approved the merger of
Avistar Systems with and into Avistar Communications Corporation. The merger was
completed in July 2001. In
October 2007, the Company merged Collaboration Properties, Inc., the Company's
wholly-owned subsidiary, with and into the Company, with the Company being the
surviving corporation. Avistar has one
wholly-owned subsidiary, Avistar Systems U.K. Limited
(ASUK).
  Basis
of Presentation
  The
accompanying financial statements present the consolidated financial position,
results of operations, and cash flows of Avistar and ASUK after elimination of
all intercompany accounts and transactions. The consolidated results are
referred to, collectively, as those of Avistar or the Company in these notes.
The Company has prepared the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America.
  The
functional currency of ASUK is the United States dollar. All gains and losses
resulting from transactions denominated in currencies other than the United
States dollar are included in the statements of operations and have not been
material.
  The
Company’s fiscal year end is December 31.
 
 Risks
and Uncertainties
  The
markets for the Company’s products and services are in the early stages of
development. Some of the Company’s products utilize changing and emerging
technologies. As is typical in industries of this nature, demand and market
acceptance are subject to a high level of uncertainty, particularly when there
are adverse conditions in the economy. Acceptance of the Company’s products,
over time, is critical to the Company’s success. The Company’s prospects must be
evaluated in light of difficulties encountered by it and its competitors in
further developing this evolving marketplace. The Company has generated losses
since inception and had an accumulated deficit of $116.1 million as of
December 31, 2009. The Company’s operating results may fluctuate
significantly in the future as a result of a variety of factors, including, but
not limited to, the economic environment, the adoption of different distribution
channels, and the timing of new product announcements by the Company or its
competitors.
 
 The Company’s future liquidity and capital requirements
will depend upon numerous factors, including, but not limited to, the ability to
become profitable or generate positive cash flow from operations, the Company’s
cost reduction efforts,  Dr. Burnett’s personal guarantee to Avistar
to support an extension of the revolving line of credit through March 31, 2011,
the Company’s ability to obtain a renewal of its existing line of credit or a
new line of credit with another bank, the costs and timing of its expansion of
product development efforts and the success of these development efforts, the
costs and timing of its expansion of sales and marketing activities, the extent
to which its existing and new products gain market acceptance, competing
technological and market developments, the costs involved in maintaining,
enforcing and defending patent claims and other intellectual property rights,
the level and timing of revenue, and other factors.If adequate
funds are not available on acceptable terms or at all, the Company’s ability to
achieve or sustain positive cash flows, maintain current operations, fund any
potential expansion, take advantage of unanticipated opportunities, develop or
enhance products or services, or otherwise respond to competitive pressures
would be significantly limited.
   F-7
  2.
              Summary
      of Significant Accounting Policies and Balance Sheet
    Details
  Use
of Estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues, income and expenses during the period. Actual
results may differ from those estimates.
  Cash
and Cash Equivalents and Short and Long-term Investments
  The
Company considers all investment instruments purchased with an
original maturity of three months or less to be cash equivalents.
Investment securities with original or remaining maturities of more than three
months but less than one year are considered short-term investments. Auction
rate securities with original or remaining maturities of more than three months
are considered short-term investments even if they are subject to re-pricing
within three months.  The Company was not invested in any auction rate
securities as of December 31, 2009 and 2008. Investment securities held with the
intent to reinvest or hold for longer than a year, or with remaining maturities
of one year or more, are considered long-term investments. The Company’s cash
equivalents at December 31, 2009 and 2008 consisted of money market funds
with original maturities of three months or less, and are therefore classified
as cash and cash equivalents in the accompanying balance sheets.
  The
Company accounts for its short-term and long-term investments in accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 320, Investments - Debt
and Equity Securities.The Company’s short and long-term investments in
securities are classified as available-for-sale and are reported at fair value,
with unrealized gains and losses, net of tax, recorded in other comprehensive
income (loss). Realized gains or losses and declines in value judged to be other
than temporary, if any, on available- for-sale securities are reported in other
income, net. The Company reviews the securities for impairments considering
current factors including the economic environment, market conditions and the
operational performance and other specific factors relating to the business
underlying the securities. The Company records impairment charges equal to the
amount that the carrying value of its available-for-sale securities exceeds the
estimated fair market value of the securities as of the evaluation date. The
fair value for publicly held securities is determined based on quoted market
prices as of the evaluation date. In computing realized gains and losses on
available-for-sale securities, the Company determines cost based on amounts
paid, including direct costs such as commissions, to acquire the security using
the specific identification method. The Company did not have any short or
long-term investments at December 31, 2009 and December 31, 2008.
  Cash and
cash equivalents consisted of cash and money market funds of $294,000 and $4.9
million at December 31, 2009 and 2008, respectively.
  Fair
Value Measurements
  Effective
January 1, 2008, the Company adopted ASC 820, Fair Value Measurements and
Disclosures. ASC 820 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
Fair value is defined under ASC 820 as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used
to measure fair value under ASC 820 must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used
to measure fair value, which are the following:
  Level
      1 – Quoted prices in active markets for identical assets or
      liabilities.
  Level
      2 – Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable, or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.
  Level
      3 – Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.
   F-8
 In
accordance with ASC 820, the following table represents the Company’s fair value
hierarchy for its financial assets (cash equivalents) as of December 31, 2009
(in thousands):
  Fair
      Value
              
              Level
      1
              
              Level
      2
              
              Level
      3Cash
      Equivalents:Money
      market funds
              
              $              5
              
              $            5
              
              
              $ —
              
              
              $            —Total
      cash equivalents
              
              $              5
              
              $            5
              
              
              $ —
              
              
              $            —
  Significant
Concentrations
  A
relatively small number of customers have accounted for a significant percentage
of the Company’s revenue for the years ended December 31, 2009, 2008 and 2007.
Revenues from these customers as a percentage of total revenues for each fiscal
year are as follows:
  2009
              
              2008
              
              2007Customer
      A
              
              
              35
              %
              
              
              18
              %
              
              
              *
              %Customer
      B
              
              
              19
              %
              
              
              *
              %
              
              
              *
              %Customer
      C
              
              
              14
              %
              
              
              40
              %
              
              
              24
              %Customer
      D
              
              
              *
              %
              
              
              11
              %
              
              
              *
              %Customer
      E
              
              
              *
              %
              
              
              19
              %
              
              
              18
              %Customer
      F
              
              
              *
              %
              
              
              *
              %
              
              
              33
              %
 
 *
              Less
      than 10%
  Any
change in the relationship with these customers could have a potentially adverse
effect on the Company’s financial position.
  Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of temporary cash investments and trade receivables. The
Company has cash and investment policies that limit the amount of credit
exposure to any one financial institution, or restrict placement of these
investments to financial institutions evaluated as highly credit worthy. As of
December 31, 2009, the Company had cash and cash equivalents on deposit
with a major financial institution that were above theFDIC
insured limits. Concentrations of credit risk with respect to trade receivables
relate to those trade receivables from both United States and foreign entities.
As of December 31, 2009, approximately 87% of our gross accounts receivable was
concentrated with four customers, each of whom represented more than 10% of our
gross accounts receivable. As of December 31, 2008, approximately 98% of
our gross accounts receivable was concentrated with four customers, each of whom
represented more than 10% of our gross accounts receivable. No other customer
individually accounted for greater than 10% of total accounts receivable as of
December 31, 2009 and 2008.
  Allowance
for Doubtful Accounts
  The
Company uses estimates in determining the allowance for doubtful accounts based
on historical collection experience, historical write-offs, current trends and
the credit quality of the Company’s customer base, and the characteristics of
accounts receivable by aging category. Accounts are generally considered
delinquent when thirty days past due. Uncollectible accounts are written off
directly to the allowance for doubtful accounts. If the allowance for doubtful
accounts was understated, operating income could be significantly reduced. The
impact of any such change or deviation may be increased by the Company’s
reliance on a relatively small number of customers for a large portion of its
total revenue.
  Fair
Value of Financial Instruments
  The
carrying amounts of the Company’s financial assets and liabilities, including
cash and cash equivalents,  accounts receivable, line of credit, and
accounts payable at December 31, 2009 and 2008, approximate fair value
because of the short maturity of these instruments.
   F-9
  
  Inventories
  Inventories
are stated at the lower of cost (first-in, first-out method) or market. When
required, provisions are made to reduce excess and obsolete inventories to their
estimated net realizable value. Inventories consisted of the following (in
thousands):
  December 31,_2009
              
              
              2008Raw
      materials and sub-assemblies
              
              $
              1
              
              
              $
              10Finished
      goods
              
              
              55
              
              
              
              297Total
      inventories
              
              $
              56
              
              
              $
              307
   Property
and Equipment
  Property
and equipment are stated at cost and are depreciated using the double declining
balance method over the estimated useful lives (three or five years) of the
assets. Depreciation expense was approximately $245,000, $538,000, and $468,000
for the years ending December 31, 2009, 2008, and 2007, respectively. Repairs
and maintenance are expensed as incurred. The Company has net property and
equipment of $145,000 in the United States and $2,000 in the United
Kingdom.  Property and equipment consisted of the following (in
thousands):
  December 31,2009
              
              
              2008Computer
      equipment
              
              $
              1,573
              
              
              $
              1,512Computer
      software
              
              
              398
              
              
              
              377Furniture,
      fixtures and equipment
              
              
              228
              
              
              
              228Leasehold
      improvements
              
              
              201
              
              
              
              201Total
      property and equipment, at cost
              
              
              2,400
              
              
              
              2,318Less:
      accumulated depreciation
              
              
              (2,253
              )
              
              
              (2,008
              )Total
      preoperty and equipment, net
              
              $
              147
              
              
              $
              310
 
  Accrued
Liabilities and Other
  Accrued
liabilities and other consisted of the following (in thousands):
  December 31,2009
              
              
              2008Accrued
      consulting and professional fees
              
              $
              428
              
              
              $
              410Accrued
      payroll and related benefits
              
              
              365
              
              
              
              424Accrued
      commissions and bonuses
              
              
              10
              
              
              
              186Deferred
      rent payable
              
              
              174
              
              
              
              171Accrued
      loss on subleases
              
              
              47
              
              
              
              63Accrued
      severance
              
              
              202
              
              
              
              —Other
              
              
              206
              
              
              
              128Total
      accrued and other liabilities
              
              $
              1,432
              
              
              $
              1,382
   Patent
Costs
  Due to
uncertainties about the estimated future economic benefits and lives of the
Company’s patents and patent applications, all related outside patent costs have
been expensed as incurred. Outside patent costs were approximately $941,000,
$1.0 million and $1.8 million for 2009, 2008 and 2007, respectively, and are
reflected in general and administrative expenses in the accompanying statements
of operations.
  Revenue
Recognition and Deferred Revenue
  The
Company recognizes product and services revenue in accordance with ASC 985-605,
Revenue Recognition -
Software,or ASC
605-25, Revenue Recognition –
Multiple-Element Arrangements. The Company derives product revenue from
the sale and licensing of a set of desktop (endpoint) products (hardware and
software) and infrastructure products (hardware and software) that combine to
form an Avistar video-enabled collaboration solution. Services revenue includes
revenue from post-contract customer support, training and software development.
The fair value of all product, post-contract customer support and training
offered to customers is determined based on the price charged when such products
or services are sold separately.
  F-10
  Arrangements
that include multiple product and service elements may include software and
hardware products, as well as post-contract customer support and training.
Pursuant to ASC 985-605, the Company recognizes revenue when all of the
following criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv)
collectibility is probable. The Company applies these criteria as discussed
below:
 
 ·
              Persuasive evidence of an
      arrangement exists. We require a written contract, signed by both
      the customer and Avistar, or a purchase order from those customers that
      have previously negotiated a standard end-user license arrangement or
      volume purchase agreement, prior to recognizing revenue on an
      arrangement.
  ·
              Delivery has
      occurred.  We deliver software and hardware to customers
      either electronically or physically and we have no further obligations
      with respect to the agreement. The standard delivery terms are FOB
      shipping point.
  ·
              The fee is fixed or
      determinable. Our determination that an arrangement fee is fixed or
      determinable depends principally on the arrangement’s payment terms. Our
      standard terms generally require payment within 30 to 90 days of the date
      of invoice. Where these terms apply, we regard the fee as fixed or
      determinable, and recognize revenue upon delivery (assuming other revenue
      recognition criteria are met). If the payment terms do not meet this
      standard, but rather, involve “extended payment terms,” the fee may not be
      considered to be fixed or determinable, and the revenue would then be
      recognized when customer installments are due and
  payable.
  ·
              Collectibility is
      probable. To recognize revenue, we judge collectibility of the
      arrangement fees on a customer-by-customer basis pursuant to a credit
      review policy. We typically sell to customers with which we have had a
      history of successful collections. For new customers, we evaluate the
      customer’s financial position and ability to pay. If we determine that
      collectibility is not probable based upon the credit review process or the
      customer’s payment history, revenue is recognized when cash is
      collected.
  If there
are any undelivered elements, the Company defers revenue for those elements, as
long as vendor specific objective evidence (VSOE) exists for the undelivered
elements. Payment for product is due upon shipment, subject to specific payment
terms. Payment for professional services is due upon providing the services,
subject to specific payment terms. Reimbursements received for out-of-pocket
expenses and shipping costs, which have not been significant to date, are
recognized as revenue in accordance with ASC 605-45, Revenue Recognition – Principal
Agent Considerations.
 
 The price
charged for maintenance and/or support is defined in the contract, and is based
on a fixed price for both hardware and software components as stipulated in the
customer agreement. Customers have the option to renew the maintenance and/or
support arrangement in subsequent periods at the same or similar rate as paid in
the initial year subject to contractual adjustments for inflation in some cases.
Revenue from maintenance and support services is deferred and recognized
pro-rata over the maintenance and/or support term, which is typically one year
in length. Payments for services made in advance of the provision of services
are recorded as deferred revenue and customer deposits in the accompanying
balance sheets. Training services are offered independently of the purchase of
product. The value of these training services is determined based on the price
charged when such services are sold separately. Training revenue is recognized
upon performance of the service.
 
 The
Company recognizes service revenue from software development contracts in
accordance with ASC 605-35, Revenue Recognition –
Construction-Type and Production-Type Contracts. Product and
implementation revenue related to contracts for software development is
recognized using the percentage of completion method, in accordance with the
“Input Method”, when all of the following conditions are met: a contract exists
with the customer at a fixed price, the Company expects to fulfill all of its
material contractual obligations to the customer for each deliverable of the
contract, a reasonable estimate of the costs to complete the contract can be
made, and collection of the receivable is probable. The amount of revenue
recognized is based on the total project fee under the agreement and the
percentage of completion achieved.  The percentage of completion is
measured by monitoring progress using records of actual time incurred to date in
the project compared to the total estimated project requirements, which
corresponds to the costs related to the earned revenues. Changes in estimates
are recognized in the periods affected by the changes. Any anticipated losses on
contracts in progress are charged to earnings when identified. The amounts
billed to customers in excess of revenues recognized to date are deferred and
recorded as deferred revenue and customer deposits in the accompanying balance
sheets. The amount of revenue recognized in excess of billings is recorded as
unbilled accounts receivable.
 
 The
Company recognizes revenue from the licensing of its intellectual property
portfolio according to ASC 985-605, Revenue Recognition –
Software, based on the terms of the royalty, partnership and
cross-licensing agreements involved. In the event that a license to the
Company’s intellectual property is granted after the commencement of litigation
proceedings between the Company and the licensee, the proceeds of such
transaction are recognized as licensing revenue only if sufficient historical
evidence exists for the determination of fair value of the licensed patents to
support the segregation of the proceeds between a gain on litigation settlement
and patent license revenues consistent with Financial Accounting Standards Board
(FASB) Concepts Statement No. 6, Elements of Financial
Statements (CON 6). As of December 31, 2009, these criteria for
recognizing license revenue following the commencement of litigation had not
been met.
  F-11
 In July
2006, the Company entered into a Patent License Agreement with Sony Corporation
(Sony) and Sony Computer Entertainment, Inc. (SCEI). Under the license
agreement, the Company granted Sony and its subsidiaries, including SCEI, a
license to all of the Company’s patents with a filing date on or before January
1, 2006 for a specific field of use relating to video conferencing. The license
covers Sony’s video conferencing apparatus as well as other products, including
video-enabled personal computer products and certain SCEI PlayStation products.
Future royalties under this license are being recognized as estimated
royalty-based sales occur in accordance with ASC 985-605, Revenue Recognition -
Software.  The Company uses historical and forward looking
sales forecasts provided by SCEI and third party sources, in conjunction with
past actual royalty reports provided periodically by SCEI directly to us, to
develop an estimate of royalties recognized for each quarterly reporting
period.  The royalty reports the Company receives directly from SCEI
is delayed beyond the period in which the actual royalties are generated, and
thus the estimate of current period royalties requires significant management
judgment and is subject to corrections in a future period once actual royalties
become known.
 
 In June
2007, we entered into a Patent License Agreement with Radvision Ltd. Under the
license agreement, we granted Radvision and its subsidiaries a license in the
field of videoconferencing to all of our patents, patent applications and
patents issuing therefrom with a filing date on or before May 15, 2007. Also
under the license agreement, Radvision granted to us a license in the field of
videoconferencing to all of Radvision’s patents, patent applications and patents
issuing therefrom with a filing date on or before May 15, 2007. The license
agreement includes mutual releases of the parties from claims of past
infringement of the licensed patents. As partial consideration for the licenses
and releases granted under the agreement, Radvision made a one-time license
payment to us of $4.0 million, which was recognized as licensing revenue in the
three months ended June 30, 2007.
  On
September 8, 2008 and on September 9, 2008, the Company entered into a Licensed
Works Agreement, Licensed Works Agreement Statement of Work and a Patent License
Agreement with International Business Machines Corporation, or IBM, under which
the Company agreed to integrate the Company’s bandwidth management technology
and related intellectual property into future Lotus Unified Communications
offerings by IBM, and to provide maintenance support services. An initial cash
payment of $3.0 million was made by IBM to the Company on November 7, 2008, and
a second non-refundable payment of $1.5 million was made on August 31,
2009.   The Company expects IBM to make one additional
non-refundable payment of $1.5 million associated with scheduled phases of
delivery.  IBM has agreed to make future royalty payments to us equal
to two percent of the world-wide net revenue derived by IBM from Lotus Unified
Communications products sold that exceeds a contractual base amount, and
maintenance payments received from existing customers, which incorporate the
Company’s technology.  The agreements have a five year term and are
non-cancelable except for material default by either party.  The
agreements convey to IBM a non-exclusive world-wide license to the Company’s
patent portfolio existing at the time of the agreements and for all subsequent
patents issued with an effective filing date of up to five years from the date
of the agreements.  The agreements also provide for a release of each
party for any and all claims of past infringement.  In April 2009, the
agreements were amended to extend the initial term from five years to six
years.  The Company has determined the value of maintenance based on
VSOE, and allocated the residual portion of the initial $6.0 million to the
integration project.  The residual portion is being recognized under
the percentage of completion method, in accordance with the “Input Method”, and
the maintenance revenue will be recognized over the future maintenance service
period.  As the Company believes there are no future deliverables
associated with the intellectual property patent licenses, no additional
provision for this element has been made.  For the year ended December
31, 2009, the Company recognized $2.4 million in product revenue and $655,000 in
service revenue. The remaining $676,000 is expected to be recognized in product
and service revenue under the percentage of completion method over the remaining
projected development time. As of December 31, 2009 the Company had $110,000 in
unbilled accounts receivable which represents revenue recognized in excess of
billings. The estimate of current period percentage of completion requires
significant management judgment and is subject to updates in future periods
until the project is complete.
  Income
from Settlement and Patent Licensing
  The
Company recognizes the proceeds from settlement and patent licensing agreements
based on the terms involved. When litigation has been filed prior to a
settlement and patent licensing agreement, and insufficient historical evidence
exists for the determination of fair value of the patents licensed to support
the segregation of the proceeds between a gain on litigation settlement and
patent license revenues, the Company reports all proceeds in “income from
settlement and patent licensing” within operating costs and expenses. The gain
portion of the proceeds, when sufficient historical evidence exists to segregate
the proceeds, would be reported according to ASC 450, Contingencies. When a patent
license agreement is entered into prior to the commencement of litigation, the
Company reports the proceeds of such transaction as licensing revenue in the
period in which such proceeds are received, subject to the revenue recognition
criteria described above.
   F-12
  On
November 12, 2004, the Company entered into a settlement and a patent
cross-license agreement with Polycom Inc., thus ending litigation against
Polycom, Inc. for patent infringement. As part of the settlement and patent
cross-license agreement with Polycom, Inc, the Company granted Polycom, Inc. a
non-exclusive, fully paid-up license to its entire patent portfolio. The
settlement and patent cross-license agreement includes a five-year capture
period from the date of the settlement, adding all new patents with a priority
date extending up to five years from the date of execution of the agreement.
Polycom, Inc, as part of the settlement and patent cross-licensing agreement,
made a one-time payment to the Company of $27.5 million and the Company paid
$6.4 million in contingent legal fees to the Company’s litigation counsel upon
completion of the settlement and patent cross-licensing agreement. The
contingent legal fees were payable only in the event of a favorable outcome from
the litigation with Polycom, Inc.  The Company recognized the gross
proceeds of $27.5 million from the settlement and patent cross-license agreement
as income from settlement and patent licensing within operations over the
five-year capture period, due to a lack of evidence necessary to apportion the
proceeds between an implied punitive gain element in the settlement of the
litigation, and software license revenues from the cross-licensing of the
Company’s patented technologies for prior and future use by Polycom, Inc.
Additionally, the $6.4 million in contingent legal fees was deferred and was
amortized to income from settlement and patent licensing over the five year
capture period, resulting in a net of $21.1 million being recognized as income
within operations over the five year capture period. As of December 31, 2009,
the deferred net income from settlement and patent licensing with Polycom, Inc.
was fully recognized.
  On
February 15, 2007, the Company entered into a Patent License Agreement with
Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc.  Under this agreement,
the Company dismissed the Company’s infringement suit against Tandberg, Tandberg
dismissed its infringement suit against the Company, and the Company and
Tandberg cross-licensed each other’s patent portfolios.  The agreement
resulted in a payment of $12.0 million to the Company from Tandberg. The Company recognized
the gross proceeds of $12.0 million from the patent license agreement as income
from settlement and patent licensing within operations in the three months ended
March 31, 2007.  To recognize the proceeds as revenue, the Company would
have required sufficient history of transactions to allow it to isolate the
aspect of the settlement attributable to the gain associated with the process of
litigation, separate from commercial compensation for the use of the Company’s
intellectual property.  Sufficient evidence was not available to allow this
distinction.   The Patent License Agreement with Tandberg includes a
ten year capture period, extending from the date of the agreement, during which
patents filed with a priority date within the capture period would be licensed
in addition to existing patents on the agreement date.  However, such
additional patents would be licensed under the agreement solely for purposes of
the manufacture, sale, license or other transfer of existing products of
Tandberg and products that are closely related enhancements of such products
based primarily and substantially on the existing products.  The Company
reviewed the existing products of Tandberg and considered the likelihood that
future patent filings by the Company would relate to or otherwise affect
existing Tandberg products and closely related enhancements thereto.  The
Company concluded that the filing for such additional patents was unlikely, and
therefore concluded that the ten year capture period was not material from an
accounting perspective related to recognition.
  Taxes
Collected from Customers and Remitted to Governmental
Authorities
  Taxes
collected from customers and remitted to governmental authorities are recognized
on a net basis in the accompanying statements of operations.
  Warranty
  The
Company accrues the estimated costs of fulfilling the warranty provisions of its
contracts over the warranty period, which is typically 90 days. There was no
warranty accrual as of December 31, 2009 and 2008.
  Research
and Development
  Research
and development costs include engineering expenses, such as salaries and related
benefits, depreciation, professional services and overhead expenses related to
the general development of Avistar’s products, and are expensed as incurred.
Software development costs are capitalized beginning when a product’s
technological feasibility has been established and ending when a product is
available for general release to customers. Avistar has not capitalized any
software development costs since the period between establishing technological
feasibility and general release of the product is relatively short, and these
costs have not been significant.
  Stock-Based
Compensation
  The
Company accounts for stock-based compensation in accordance with ASC 718,Compensation
– Stock Compensation(ASC 718)which establishes accounting for stock-based awards exchanged for
employee services. Accordingly, stock-based compensation cost is measured at
grant date, based on the fair value of the award, and is recognized as expense
over the employee’s service period.
   F-13
  Stock-based
compensation expense for fiscal 2009, 2008 and 2007 included compensation
expense for all stock-based compensation awards granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated
in accordance with the original provision of ASC 718. Stock-based compensation
expense for all stock-based compensation awards granted after January 1,
2006 is based on the grant-date fair value estimated in accordance with the
provisions of ASC 718. The Company recognizes compensation expense on a
straight-line basis over the requisite service period of the award.
  The
effect of recording stock-based compensation for the years ended December 31,
2009, 2008 and 2007 was as follows (in thousands):
  Year Ended December 31,2009
              
              
              2008
              
              
              2007Stock-based
      compensation expense by type of award:Employee stock options
              
              $
              1,846
              
              
              $
              1,482
              
              
              $
              2,513Employee
      restricted stock units
              
              
              16
              
              
              
              —
              
              
              
              —Non-employee stock options
              
              
              9
              
              
              
              18
              
              
              
              66Employee stock purchase
      plan
              
              
              18
              
              
              
              7
              
              
              
              110Total
      stock-based compensation
              
              
              1,889
              
              
              
              1,507
              
              
              
              2,689Tax
      effect of stock-based compensation
              
              
              —
              
              
              
              —
              
              
              
              —Net
      effect of stock-based compensation on net loss
              
              $
              1,889
              
              
              $
              1,507
              
              
              $
              2,689
  For the
year ended December 31, 2009, the Company recognized stock-based compensation
expense of $131,000 associated with the extension of the exercise period for the
vested stock options under the separation agreement entered into by and between
the Company and Simon Moss, former Chief Executive Officer in July 2009. The
amount was measured based upon the difference between the fair value of the
vested options immediately before and after the modification.
  Comprehensive
Income
  ASC 220,
Comprehensive Income
(ASC 220), establishes standards for the reporting and the display of
comprehensive income (loss) and its components. This standard defines
comprehensive income (loss) as the changes in equity of an enterprise, except
those resulting from stockholder transactions. Accordingly, comprehensive income
(loss) includes certain changes in equity that are excluded from the net income
or loss. The comprehensive loss was approximately $4.0 million, $6.4 million and
$2.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively.  There was no other comprehensive income (loss) for the
years ended December 31, 2009, 2008 and 2007.
  Recent
Accounting Pronouncements
  In June
2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity’s Own Stock (EITF 07-5)
or ASC 815-10-65-3. ASC 815-10-65-3 provides that an entity should use a
two-step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. ASC 815-10-65-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. The Company adopted this statement on January 1,
2009.  The adoption of ASC 815-10-65-3 did not have a material impact
on the Company’s financial condition and results of operations.
  In April
2009, the FASB issued FASB Staff Position No. FAS 141(R)-1 or ASC 805-10-65-1,
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies (FSP FAS 141(R)-1), to amend SFAS 141 (revised 2007), Business Combinations. ASC
805-10-65-1 addresses the initial recognition, measurement and subsequent
accounting for assets and liabilities arising from contingencies in a business
combination, and requires that such assets acquired or liabilities assumed be
initially recognized at fair value at the acquisition date if fair value can be
determined during the measurement period. If the acquisition-date fair value
cannot be determined, the asset acquired or liability assumed arising from a
contingency is recognized only if certain criteria are met. This ASC also
requires that a systematic and rational basis for subsequently measuring and
accounting for the assets or liabilities be developed depending on their nature.
ASC 805-10-65-1 is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The Company adopted this statement upon its
issuance.  The impact of ASC 805-10-65-1 on accounting for business
combinations is dependent upon acquisition activity on or after its effective
date.
  In April
2009, the FASB issued three FASB Staff Position (FSP) statements intended to
provide additional guidance and enhance disclosures regarding fair value
measurements and impairments of securities.  FASB Staff Position No.
FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP FAS 157-4) or ASC 820-10-65-4 provides guidelines for making fair value
measurements more consistent with the principles presented in FASB Statement No.
157, Fair Value
Measurements (FAS 157) or ASC 820-10.  FASB Staff Position No.
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (FSP FAS 107-1 and APB 28-1) or ASC 825-10-65-1,
enhances consistency in financial reporting by increasing the frequency of fair
value disclosures.  FASB Staff Position No. 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2) or ASC
320-10-65-1, provides additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses on
securities.  These ASCs are effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009 only if all three ASCs are early adopted at the same
time. The Company adopted these ASCs on June 30, 2009.  The adoption
of these statements did not have a material impact on the Company’s financial
condition and results of operations.
   F-14
 In
May 2009, the FASB issued Statement No. 165, Subsequent Events(SFAS No.
165) or ASC 855. ASC 855 is intended to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. ASC
855 is effective for interim or annual financial periods ending after June 15,
2009.  The Company adopted this statement on June 30, 2009. The
adoption of ASC 855 did not have a material impact on the Company’s financial
condition and results of operations.
  In June
2009, the FASB issued Statement No. 168, The FASB Accounting Codification and
Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB No.
162(SFAS No. 168) or ASC 105.  The FASB Accounting Standards
CodificationTM  (“Codification”)
does not change U. S. GAAP, but combines all authoritative standards such as
those issued by the FASB, AICPA, and EITF, into a comprehensive, topically
organized online database.  The Codification was released on July 1,
2009 and is the single source of authoritative U. S. GAAP applicable for all
nongovernmental entities, except for rules and interpretive releases of the
SEC.  The Codification is effective for all interim periods and year
ends subsequent to September 15, 2009. The Company adopted this statement on
September 30, 2009.  The adoption of this statement affected the
Company’s financial statement disclosure references since all future references
to authoritative accounting literature will be references in accordance with
SFAS 168, but did not have an impact on the Company’s financial condition and
results of operations.
  In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value Measurements and
Disclosures – Measuring Liabilities at Fair Value (ASU
2009-05).  The update provides clarification for circumstances in
which a quoted price in an active market for an identical liability is not
available. ASU 2009-05 is effective for the first reporting period beginning
after August 2009.  The Company adopted this statement upon its
issuance. The adoption of this statement did not have a material impact on the
Company’s financial condition and results of operations.
  In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issue Task Force (ASU 2009-13), and ASU No. 2009-14, Software (Topic 985) – Certain
Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU
2009-13 requires companies to allocate revenue in multiple-element arrangements
based on an element’s estimated selling price if vendor-specific or other third
party evidence of value is not available.  ASU 2009-14 modifies the
software revenue recognition guidance to exclude from its scope tangible
products that contain both software and non-software components that function
together to deliver a product’s essential functionality.  Both
statements are effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The Company plans to adopt these statements on their effective date.
The Company does not expect the adoption of these statements to have a material
impact of the Company’s financial condition and results of
operations.
  In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value
Measurements. This ASU requires new disclosures and clarifies certain
existing disclosure requirements about fair value measurements. ASU 2010-06
requires a reporting entity to disclose significant transfers in and out of
Level 1 and Level 2 fair value measurements, to describe the reasons for the
transfers and to present separately information about purchases, sales,
issuances and settlements for fair value measurements using significant
unobservable inputs. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements, which is effective for interim and annual
reporting periods beginning after December 15, 2010; early adoption is
permitted. The Company does not expect the adoption of these statements to have
a material impact of the Company’s financial condition and results of
operations.
 
 In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events – Amendments to
Certain Recognition and Disclosure Requirements (ASU
2010-09).  The update removes the requirement for an SEC filer to
disclose the date through which subsequent events have been
evaluated.  The change alleviates potential conflicts between ASC
855-10 and the SEC’s requirements.  ASU 2010-09 is effective upon
issuance of the final update.  The Company adopted this statement upon
its issuance. The adoption of this statement did not have a material impact on
the Company’s financial condition and results of operations.
  F-15
 3.      Borrowings
  Line
of Credit
  On
December 23, 2006, the Company entered into a Revolving Credit Promissory
Note and a Security Agreement with a financial institution to borrow up to $10.0
million under a revolving line of credit subject to annual renewal with the
consent of the Company and the lender. The Revolving Credit Promissory Note was
renewed and amended on December 22, 2009 which extended the maturity date of the
facility by one year to December 21, 2010, and increased the line of credit from
$10.0 million to $11.25 million through and including March 30, 2010 and then
decreased the line of credit to $6.0 million.  The
maximum facility amount was further reduced to $5.0 million in March 2010 for
the remainder of the period through the maturity date.The amended
security agreement, that was amended on January 12, 2010, granted the lender a
security interest in and right of setoff against substantially all of the
Company’s assets, tangible and intangible, except for substantially all of
Avistar’s patents and patent applications sold to Intellectual Ventures Fund 61
LLC (“Intellectual Ventures”) pursuant to a patent purchase agreement dated as
of December 18, 2009 (see Note 11). Gerald Burnett, the Company’s Chairman,
provided a collateralized guarantee to the financial institution, assuring
payment of the Company’s obligations under the agreement and as a consequence,
there are no restrictive covenants, allowing the Company greater access to the
full amount of the facility. Dr. Burnett also provided a personal guarantee to
us assuring us a line of credit of up to $7.0 million with the same terms and
mechanisms as the existing revolving line of credit, if needed,
through March 31, 2011.
 
 The
renewed line of credit requires monthly interest-only payments based on Adjusted
LIBOR plus 0.90% or Prime Rate plus 1.00%. The Company elected Adjusted LIBOR
plus 0.90% or 1.15% at December 31, 2009. The Company repaid $5.0 million and
borrowed $9.3 million under the revolving line of credit during 2009, and had a
balance of $11.25 million outstanding as of December 31, 2009, which was paid in
full in January 2010.
  Convertible
Debt
  On
January 4, 2008, the Company issued $7,000,000 of 4.5% Convertible Subordinated
Secured Notes (Notes), which were due in 2010. The Notes were sold pursuant to a
Convertible Note Purchase Agreement to Baldwin Enterprises, Inc., a subsidiary
of Leucadia National Corporation, directors Gerald Burnett, R. Stephen
Heinrichs, William Campbell, and Craig Heimark, former officers Simon Moss and
Darren Innes, and WS Investment Company. The Company’s obligations under the
Notes were secured by the grant of a security interest in substantially all the
Company’s tangible and intangible assets pursuant to a Security Agreement among
the Company and the purchasers. Prior to the election of the Note holders to
convert their notes, the Notes had a two year term, which would have become due
on January 4, 2010 and were convertible prior to maturity.  Interest
on the Notes accrued at the rate of 4.5% per annum and would have been payable
semi-annually in arrears on June 4 and December 4 of each year, commencing on
June 4, 2008.  Commencing on the one year anniversary of the issuance
of the Notes until maturity, the holders of the Notes were entitled to convert
the Notes into shares of common stock at an initial conversion price per share
of $0.70.
  In May
2009, the Company issued a total of 4,199,997 shares of common stock to Gerald
Burnett, R. Stephen Heinrichs, William Campbell, Craig Heimark, Simon Moss and
WS Investment Company upon their election to convert their notes with an
aggregate principal amount of $2.9 million into common stock. In October 2009,
the Company repaid the Notes issued to Darren Innes in full with a payment of
approximately $60,000 and in December 2009, the Company repaid the Notes issued
to Baldwin Enterprises, Inc. in full with a payment of $4.0
million.  As of December 31, 2009, there was no convertible debt
outstanding.
  4.
              Commitments
      and Contingencies
  At
December 31, 2009, the Company had open purchase orders and other
contractual obligations of approximately $125,000, primarily related to minimum
prepaid license and maintenance fees for the Company’s licensing of software
from  a third party vendor. These purchase order commitments and
contractual obligations will be reflected in the Company’s financial statements
once goods or services have been received, or payments related to the
obligations become due.
  
   F-16
  Facilities
Leases
  The
Company leases its facilities under operating leases that expire through
March 2017.  During 2008 and 2009, the Company has subleased some
of its operating facilities in San Mateo, California and New York, New York, and
assigned its primary facility lease in London, United Kingdom. As a result of
these subleases and assignment, the future minimum lease commitments under all
facility leases as of December 31, 2009, net of sublease proceeds, are as
follows (in thousands):
  Minimum
      Lease Payments
              
              
              Sublease
      Proceeds
              
              
              NetYear
      Ending December 31,2010
              
              $
              1,280
              
              
              $
              (532
              )
              
              $
              7482011
              
              
              1,333
              
              
              
              (343
              )
              
              
              9902012
              
              
              567
              
              
              
              (290
              )
              
              
              2772013
              
              
              310
              
              
              
              (285
              )
              
              
              252014
              
              
              310
              
              
              
              (294
              )
              
              
              16Thereafter
              
              
              698
              
              
              
              (660
              )
              
              
              38Total
      future minimum lease payments
              
              $
              4,498
              
              
              $
              (2,404
              )
              
              $
              2,094
 Gross
rent expense for 2009, 2008 and 2007 was approximately $1.1 million, $1.4
million and $1.2 million, respectively.  Sublease rental income under
non-cancelable subleases was $557,000 and $219,000 for 2009 and 2008,
respectively.  There was no sublease rental income for
2007.
 Software
Indemnifications
  The
Company enters into standard indemnification agreements in the ordinary course
of business. Pursuant to these agreements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally the Company’s business partners or
customers, in connection with any patent, copyright or other intellectual
property infringement claim by any third party with respect to its products. The
term of these indemnification agreements is generally perpetual. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is generally limited to the cost of products
purchased per customer, but may be material when customer purchases since
inception are considered in aggregate. The Company has never incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.
Accordingly, the Company has no liabilities recorded for these agreements as of
December 31, 2009.
  Legal
Proceedings
  From time
to time the Company is subject to legal proceedings and claims in the ordinary
course of business. The Company makes a provision for a liability when it is
both probable that a liability has been incurred and the amount of the loss can
be reasonably estimated.  These provisions are reviewed at least
quarterly and adjusted to reflect the impacts of negotiations, settlements,
ruling, advice of legal counsel and other information and events pertaining to a
particular case.  However, dispute resolution is inherently
unpredictable, and the costs and other effects of pending or future claims,
litigation, legal and administrative cases and proceedings, and changes in any
such matters, and developments or assertions by or against the Company relating
to intellectual property rights and intellectual property licenses, could have a
material adverse effect on the Company’s business, financial condition and
operating results.
   F-17
  
  5.
              Related
      Party Transactions
  UBS Warburg LLC, which is an
affiliate of UBS AG, is a stockholder of the Company and is also a customer of
the Company. As of December 31, 2009 and December 31, 2008, UBS Warburg LLC held
less than 5% of the Company’s stock. Revenue from UBS Warburg LLC and its
affiliates represented 8%, 19% and 18% of the Company’s total revenue for 2009,
2008 and 2007, respectively.  Management believes the transactions
with UBS Warburg LLC and its affiliates are at terms comparable to those
provided to unrelated third parties. As of December 31, 2009 and December 31,
2008, the Company had accounts receivable outstanding from UBS Warburg LLC and
its affiliates of approximately $191,000 and $350,000,
respectively.
  On
January 4, 2008, Avistar issued $7,000,000 of 4.5% Convertible Subordinated
Secured Notes (Notes), which were due in January 2010. The Notes were sold
pursuant to a Convertible Note Purchase Agreement to Baldwin Enterprises, Inc.,
a subsidiary of Leucadia National Corporation, directors Gerald Burnett, R.
Stephen Heinrichs, William Campbell, and Craig Heimark, Simon Moss and Darren
Innes, officers of the Company at the date of issuance, and WS Investment
Company, a fund associated with Wilson Sonsini Goodrich & Rosati (WSGR), the
Company’s legal counsel.  In May 2009, all Note holders, except
Baldwin Enterprise, Inc. and Darren Innes, elected to have the principal amounts
outstanding under their respective Notes converted into common stock of the
Company.  All outstanding amounts under the Notes issued to Mr. Innes
(approximately $60,000) and Baldwin Enterprise, Inc. ($4.0 million) were repaid
by the Company in full in October 2009 and December 2009,
respectively.  As of December 31, 2009, there was not convertible debt
outstanding.
  6.
              Stockholders’
      Equity
  Stock
Repurchase Plan
  On
March 22, 2001, the Company announced that its Board of Directors
authorized the repurchase of up to $2.0 million of its common stock in the open
market. No shares of common stock were repurchased by the Company during 2009,
2008 or 2007.
  Preferred
Stock
  In
April 2000, the stockholders of the Company authorized 10,000,000 shares of
convertible preferred stock, effective upon completion of its initial public
offering in August 2000. As of December 31, 2009, the Company had
10,000,000 shares of convertible preferred stock authorized, at $0.001 per share
par value. No shares of convertible preferred stock were issued or outstanding
as of December 31, 2009.
  7.
              Equity
      Compensation Plans
  1997
Stock Option Plan
  In
December 1997, the Board established the 1997 Stock Option Plan (the 1997
Plan) and authorized the issuance of 1,828,602 shares of common stock
thereunder. In December 1999 and May 2000, respectively, the Board
authorized an additional 1,065,625 shares and 100,000 shares to be issued under
the Plan. In connection with the initial public offering in August 2000,
the Board terminated the 1997 Plan as to future grants, effective
August 17, 2000. Under the 1997 Plan, incentive stock options to purchase
shares of common stock were granted only to employees at not-less-than 100% of
the fair market value at the grant date as determined by the Board.
Additionally, nonqualified stock options to purchase shares of common stock were
granted to employees and consultants at not-less-than 85% of the fair market
value at the grant date. Options granted generally have had a contractual life
of ten years.
  Options
granted under the plan vest over a four-year period, with 25% vesting after one
year and the remaining balance vesting 6.25% per quarter. At December 31,
2009, options to purchase a total of 337,400 shares were outstanding under the
1997 Plan, and no options were available for grant.
  2000
Stock Option Plan
  In
April 2000, the Board established the 2000 Stock Option Plan (the “2000
Plan”). Initially, a total of 3,000,000 shares of common stock were approved by
the Board for issuance under the 2000 Plan, together with annual increases in
the number of shares of common stock reserved under the 2000 Plan beginning on
the first day of the Company’s fiscal year, commencing January 1, 2001. In
January 2001, the Board approved an increase of 1,004,936 shares. In
January 2002, the Board approved an increase of 1,007,858 shares. In
January 2003, the Board approved an increase of 1,011,957 shares. In
January of each year from 2004 to 2009 the Board approved increases of
1,200,000 shares. The contractual term of the options granted under the 2000
Plan may not exceed 10 years and in the case of the grantees who own more than
10% of the Company’s outstanding stock at the time of grant, the contractual
term of the option may not exceed five years. Options granted under the 2000
Plan vest and become exercisable as set forth in each option agreement;
generally one quarter vest after one year and one-twelfth vest quarterly
thereafter. In the event of a merger or sale of substantially all assets, these
options must be assumed by the successor and if not assumed, will fully vest. As
a result of past and future increases, a maximum of 15,000,000 shares of common
stock could be issued under the 2000 Plan. The Company granted options to
purchase approximately 2.7 million, 2.3 million and 4.4 million shares under the
2000 Plan in 2009, 2008 and 2007, respectively. The 2000 Plan was terminated
with respect to future grants and replaced by the 2009 Equity Incentive Plan
(the “2009 Plan”) in December 2009. Outstanding options to purchase a total of
9,989,768 shares under the 2000 Plan remained outstanding under the 2000 Plan as
of December 31, 2009, with no additional options available for future
grant.
   F-18
   2000
Director Option Plan
  In
April 2000, the Company adopted the 2000 Director Option Plan (the
“Director Plan”). Initially, a total of 90,000 shares of common stock were
approved by the Board for issuance under the Director Plan, together with an
annual increase in the number of shares of common stock reserved thereunder as
provided in the Director Plan beginning on the first day of the Company’s fiscal
year, commencing January 1, 2001. In January 2001, the Board approved
an annual increase of 12,000 shares. In May 2001, the Board approved an
additional 198,000 shares under the Director Plan. In January 2002, the
Board approved the annual increase of 30,000 shares. In January 2003, the
Board approved the annual increase of 30,000 shares. In April 2003, the
Board approved an additional 104,000 shares under this plan. In January of each
year from 2004 through 2009, the Board approved annual increases of 175,000
shares. As of December 31, 2009, the Company has authorized a total of
1,514,000 shares for issuance under the Director Plan. As a result of past and
future annual increases, a maximum of 1,689,000 share of common stock could be
issued over the 10-year life of the Director Plan. The Company granted options
to purchase 170,000, 170,000 and 145,000 shares under the Director Plan in 2009,
2008 and 2007 respectively. At December 31, 2009 options to purchase a
total of 974,000 shares were outstanding under the Director Plan and 478,750
options were available for future grant.
  In
April 2005, the Board authorized further amendments to the Director Plan,
subject to stockholder approval, to: (i) provide that annual grants under
the Director Plan shall take place on January 1 of each year starting in
2006, (ii) provide that, after the first year, options granted under the
Director Plan vest at a rate of 1/48 per month rather than 1/4 per year,
(iii) provide that options granted under the Director Plan shall continue
to vest and be exercisable for so long as the option holder remains a director
or consultant to the Company, subject to the term of the option;
(iv) extend the time period for optionees to exercise options following the
date on which they are no longer a director or consultant to the Company, and
(v) to provide the Board with the authority to make amendments to the
Director Plan applicable to all options granted under the Director Plan,
including options granted prior to the effective date of the amendment. The
proposed amendments were approved by stockholders in June 2005 but did not
affect options already granted under the Director Plan prior to the effective
date of the amendments.
  2009
Equity Incentive Plan
  In
December 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009
Plan”), which replaced the 2000 Plan. The 2009 Plan permits the grant of
incentive stock options, nonqualified stock options, restricted stock, and
restricted stock units.  The maximum aggregate
number of shares that may be subject to awards and sold under the 2009 Plan is
12,543,791 shares, which is composed of (i) 2,508,325 shares that, as of
September 21, 2009, had been reserved but not issued pursuant to any awards
granted under the 2000 Plan, and are not subject to any awards granted
thereunder, and (ii) up to an additional 10,035,466 shares subject to stock
options or similar awards granted under the 2000 Plan that expire or otherwise
terminate without having been exercised in full and shares issued pursuant to
awards granted under the 2000 Plan that are forfeited to or repurchased by the
Company.  The shares may be authorized, but unissued, or reacquired
common stock.  In addition, the Plan as with the 2000 Plan, provides
for annual increasesin the number
of shares available for issuance thereunder on the first day of each fiscal year
beginning January 1, 2010, equal to the lesser of (i) 6,000,000 shares, (ii)
4% of the outstanding shares of our Common Stock on the last day of the
immediately preceding fiscal year, or (iii) such other amount as determined by
the Board.The
contractual term of the options granted under the 2009 Plan may not exceed 10
years and in the case of the grantees who own more than 10% of the Company’s
outstanding stock at the time of grant, the contractual term of the incentive
stock option may not exceed five years. Options and restricted stock units
granted under the 2009 Plan vest and become exercisable as set forth in each
option or award agreement; generally 25% vesting after one year and 1/48 vesting
monthly thereafter for options, and generally 100% vesting on the second
anniversary of the grant date for restricted stock units. The Company granted
restricted stock units for 1.6 million shares and options to purchase 7,500
shares under the 2009 Plan in 2009. As of December 31, 2009, a total of
1,607,500 shares were subject to outstanding options and restricted stock units
granted under the 2009 Plan, 9,989,768 shares were subject to outstanding
options and restricted stock units granted under the 2000 Plan, and a total of
946,523 shares were available for future grant under the 2009 Plan.
   F-19
  2000
Employee Stock Purchase Plan
  In
April 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the
“ESPP”). Initially, a total of 1,500,000 shares of common stock were approved by
the Board for issuance under the ESPP, together with an annual increase in the
number of shares of common stock reserved thereunder as provided in the ESPP
beginning on the first day of the Company’s fiscal year, commencing
January 1, 2001. In January 2001, the Board approved an increase of
753,702 shares. As of December 31, 2009, the Company has authorized a total
of 2,253,702 shares for issuance under the ESPP. As a result of past and future
annual increases, a maximum of 10,500,000 shares could be sold over the 10-year
life of the ESPP. The ESPP permits employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee’s compensation, at
85% of the lower of the fair market value of the Company’s common stock on the
first or the last day of each offering period. A total of 41,182, 66,373 and
176,072 shares were sold under the ESPP during 2009, 2008 and 2007,
respectively.
  On
July 19, 2006, the Compensation Committee of the Board of Directors of the
Company approved amendments to the ESPP to (i) change the offering periods
under the plan from approximately 24 months to approximately six months,
commencing on the first trading day on or after February 1 and
August 1 of each year, and (ii) eliminate the section of the ESPP that
provided for automatic withdrawal and re-enrollment in the event that the fair
market value of the common stock on any exercise date was lower than the fair
market value of the common stock on the enrollment date of the same offering
period.
  Valuation
Assumptions for Stock-Based Compensation
  The
Company estimated the fair value of stock options and ESPP shares, using a
Black-Scholes-Merton valuation model, consistent with the provisions of ASC 718,
and SEC Staff Accounting Bulletin (SAB) No. 107. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes-Merton
option valuation model and the straight-line attribution approach with the
following weighted-average assumptions for the years ended December 31, 2009,
2008 and 2007:
  Year Ended December 31,2009
              
              2008
              
              2007Employee
      Stock Option PlanExpected
      dividend
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Average
      risk-free interest rate
              
              
              1.7
              %
              
              
              2.2
              %
              
              
              4.4
              %Expected
      volatility
              
              
              109
              %
              
              
              115
              %
              
              
              132
              %Expected
      term (years)
              
              
              4.0
              
              
              
              2.9
              
              
              
              6.1
 
  Year Ended December 31,2009
              
              2008
              
              2007Employee
      Stock Purchase PlanExpected
      dividend
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Average
      risk-free interest rate
              
              
              0.3
              %
              
              
              2.0
              %
              
              
              5.1
              %Expected
      volatility
              
              
              132
              %
              
              
              144
              %
              
              
              155
              %Expected
      term (months)
              
              
              6.0
              
              
              
              6.0
              
              
              
              6
              .0
  The
dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. The risk-free
interest rates are taken from the Daily Federal Yield Curve Rates as of the
grant dates as published by the Federal Reserve, and represent the yields on
actively traded Treasury securities for terms equal to the expected term of the
options. Expected volatility is based on the historical volatility of the
Company’s common stock over a period consistent with the expected term of the
stock option. For
the year ended December 31, 2009, the expected term of employee stock options
represents the weighted average period the stock options are expected to remain
outstanding and is based on the entire history of exercises and cancellations on
all past option grants made by the Company during which its equity shares have
been publicly traded, the contractual term, the vesting period and the expected
remaining term of the outstanding options.  For years ended December
31, 2008 and 2007, the expected term calculation is based on an average
prescribed by SAB 107, based on the weighted average of the vesting periods,
which is generally one quarter vesting after one year and one sixteenth vesting
quarterly for twelve quarters, and adding the term of the option, which is
generally ten years, and dividing by two.
  The
Company recognizes the estimated compensation expense of restricted stock units,
net of estimated forfeitures, over the vesting term.  The estimated
compensation expense is based on the fair value of the Company’s common stock on
the date of grant.
   F-20
  Summary
of Stock Options
  Option
and restricted stock unit activity under the 1997 Plan, the 2000 Plan, the
Director Plan and the 2009 Plan for the years ended December 31, 2009, 2008
and 2007 was as follows:
  Options OutstandingShares
                Available for
      Stock
                Option and
      Restricted Stock Units Grant
              Shares
              
              Weighted
                Average
                Exercise PriceBalance,
      December 31, 2006
              
              
              2,089,393
              
              8,888,722
              
              $      2.87Authorized
              
              
              1,375,000
              
              —
              
              —Granted
      – Stock Options
              
              
              (4,550,000
              )
              4,550,000
              
              1.21Exercised
      – Stock Options
              
              
              —
              
              (282,967
              )
              0.74Canceled
      – Stock Options
              
              
              2,419,063
              
              (2,590,663
              )
              2.59Balance,
      December 31, 2007
              
              
              1,333,456
              
              10,565,092
              
              $      2.28Authorized
              
              
              1,375,000
              
              —
              
              —Granted–
      Stock Options
              
              
              (2,459,318
              )
              2,459,318
              
              0.85Exercised–
      Stock Options
              
              
              —
              
              (5,500
              )
              0.99Canceled–
      Stock Options
              
              
              1,312,561
              
              (1,389,311
              )
              2.40Balance,
      December 31, 2008
              
              
              1,561,699
              
              11,629,599
              
              $      1.97Authorized
              
              
              1,376,250
              
              —
              
              —Granted
      – Stock Options
              
              
              (2,890,428
              )
              2,890,428
              
              0.86Granted
      – Restricted Stock Units
              
              
              (1,600,000
              )
              —
              
              —Exercised
      – Stock Options
              
              
              —
              
              (167,607
              )
              0.85Canceled/
      Expired – Stock Options
              
              
              2,977,752
              
              (3,043,752
              )
              1.27Balance,
      December 31, 2009
              
              
              1,425,273
              
              11,308,668
              
              $      1.89
 
  The
pretax intrinsic value of outstanding options is the difference between the
closing price of Avistar shares as quoted on the Pink Sheets, an
over-the-counter securities market, for December 31, 2009 and the exercise
price, multiplied by the number of in-the-money options. The intrinsic value of
options changes based on the fair market value of Avistar stock. Total intrinsic
value of options exercised for the years ended December 31, 2009, 2008 and
2007 was $28,000, $1,500 and $138,000, respectively.
  Information
regarding the stock options outstanding at December 31, 2009 is summarized
below:
 Number
      of Shares
                
                
                Weighted
      Average Exercise price
                
                
                Weighted
      Average Remaining Contractual Life (years)
                
                
                Aggregate
      Intrinsic Value (thousands)As
      of December 31, 2009Options
      outstanding
                
                
                11,308,668
                
                
                $
                1.89
                
                
                
                5.16
                
                
                $
                20Options
      vested and expected to vest
                
                
                10,555,687
                
                
                $
                1.96
                
                
                
                4.87
                
                
                $
                18Options
      exercisable
                
                
                7,790,697
                
                
                $
                2.33
                
                
                
                3.46
                
                
                $
                9
  The
following table summarizes significant ranges of outstanding and exercisable
options as of December 31, 2009:
  Options Outstanding
              
              Options ExercisableRange of
                Exercise Prices
              
              Number
                Outstanding at
                December 31, 2009
              
              Weighted-Average
                Remaining
                Contractual Life
              
              Weighted-Average
                Exercise Price
              
              Number
                Exercisable at
                December 31, 2009
              
              Weighted-Average
                Exercise Price$0.30
      - $0.80
              
              
              2,422,000
              
              
              
              8.32
              
              
              
              $0.72
              
              
              
              581,707
              
              
              
              $0.61$0.81
      - $0.88
              
              
              1,820,302
              
              
              
              2.71
              
              
              
              0.86
              
              
              
              1,500,302
              
              
              
              0.86$0.90
      - $0.95
              
              
              1,649,116
              
              
              
              6.52
              
              
              
              0.93
              
              
              
              834,884
              
              
              
              0.91$0.99
      - $1.27
              
              
              1,620,126
              
              
              
              5.23
              
              
              
              1.21
              
              
              
              1,348,626
              
              
              
              1.21$1.27
      - $1.60
              
              
              1,666,124
              
              
              
              3.95
              
              
              
              1.50
              
              
              
              1,430,713
              
              
              
              1.48$1.69
      - $8.50
              
              
              1,800,400
              
              
              
              4.08
              
              
              
              3.54
              
              
              
              1,763,865
              
              
              
              3.58$17.25
              
              
              330,600
              
              
              
              0.25
              
              
              
              17.25
              
              
              
              330,600
              
              
              
              17.2511,308,668
              
              
              
              5.16
              
              
              
              $1.89
              
              
              
              7,790,697
              
              
              
              $2.33
 
   F-21
  As of
December 31, 2009, the Company had an unrecognized stock-based compensation
balance related to stock options of approximately $2.1 million before
estimated forfeitures and after actual cancellations. ASC 718 requires
forfeitures to be estimated at the time of grant and revised if necessary in
subsequent periods if actual forfeitures differ from those estimates. Based on
the Company’s historical experience of option pre-vesting cancellations, the
Company has assumed an annualized forfeiture rate of 13% for its executive
options and 26% for non-executive options. Accordingly, as of December 31,
2009, the Company estimated that the stock-based compensation for the options
not expected to vest was approximately $799,000 and therefore, the unrecognized
deferred stock-based compensation balance related to stock options was adjusted
to approximately $1.3 million after estimated forfeitures and after actual
cancellations. This amount will be recognized over an estimated weighted average
period of 2.9 years. For the years ended December 31, 2009, 2008 and 2007, the
Company granted 2,850,428, 2,459,318 and 4,550,000 stock options to employees,
with an estimated total grant-date fair value of $1.8 million, $1.3 million
and  $5.0 million, or $0.64, $0.54 and $1.10 per share, respectively.
For the years ended December 31, 2009, 2008 and 2007, approximately 2.2 million,
2.5 million and 1.6 million options vested with a total fair value of
approximately $2.0 million, $2.6 million and $2.6 million,
respectively.
  Summary
of Restricted Stock Units
  In
December 2009, the Company granted 1.6 million restricted stock units to
employees, with a weighted average grant date fair value of approximately
$670,000 or $0.42 per share. There were no restricted stock units granted in
2008 and 2007. There was no restricted stock units vested, released and or
forfeited during 2009.
  Information
regarding the restricted stock units outstanding as of December 31, 2009 is
summarized below:
  Number
      of Shares
              
              
              Weighted
      Average Remaining Contractual Life (years)
              
              
              Aggregate
      Intrinsic Value (thousands)As
      of December 31, 2009Restricted
      stock units outstanding
              
              
              1,600,000
              
              
              
              1.95
              
              
              $
              720Restricted
      stock units vested and expected to vest
              
              
              1,325,760
              
              
              
              1.95
              
              
              $
              597
  The
intrinsic value of the restricted stock units is calculated as the market value
as end of the fiscal year, based on the closing price of Avistar shares as
quoted on the Pink Sheets as of December 31, 2009 of $0.45.
  As of
December 31, 2009, the Company had an unrecognized stock-based compensation
balance related to restricted stock units of approximately $536,000, adjusted
for estimated forfeitures which will be recognized over a weighted average
period of 1.95 years.
  Common
Stock Reserved for Future Issuance
  As of
December 31, 2009, the Company had reserved the following shares of common
stock for issuance in connection with:
  Stock
      option plans and equity incentive plan
              
              
              14,333,941Employee
      stock purchase plan
              
              
              1,194,413Total
              
              
              15,528,354
 
  8.
              Income
      Taxes
  Income
taxes are accounted for using an asset and liability approach in accordance with
ASC 740, Income Taxes
(ASC 740), which requires the recognition of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company’s financial
statements. The measurement of current and deferred tax liabilities and assets
are based on the provisions of enacted tax law. The effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
  Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and the tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are provided if based upon the weight of
available evidence, it is considered more likely than not that some or all of
the deferred tax assets will not be realized.
  The
Company accounts for uncertain tax positions according to the provisions of ASC
740.  ASC 740 contains a two-step approach for recognizing and
measuring uncertain tax positions. Tax positions are evaluated for recognition
by determining if the weight of
available evidence indicates that it is probable that the position will be
sustained on audit, including resolution of related appeals or litigation. Tax
benefits are then measured as the largest amount which is more than 50% likely
of being realized upon ultimate settlement. The Company considers many factors
when evaluating and estimating tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate actual
outcomes.  No material changes have occurred in the Company’s tax
positions taken as of December 31, 2008 during the year ended December 31,
2009.
   F-22
  As of
December 31, 2009, the Company had a net deferred tax asset of $27.5 million and
unrecognized tax benefit under ASC 740 of $913,000.  A valuation
allowance has been provided for the entire net deferred tax assets.
  At
December 31, 2009 and 2008, respectively, the total amount of unrecognized tax
benefits was $913,000 and $915,000.  A reconciliation of unrecognized
tax benefits follows:
  Balance
      at January 1, 2008
              
              $
              817Additions
      for 2008 tax positions
              
              
              98Balance
      at December 31, 2008
              
              
              915Additions
      for 2009 tax positions
              
              
              27Adjustment to prior tax
      positions
              
              
              (29
              )Balance
      at December 31, 2009
              
              $
              913
  The
Company files income tax returns in the U.S. federal jurisdiction and in various
states, and the tax returns filed for the years 2001 through 2008 have not been
examined and the applicable statutes of limitationhave not expired with respect to those
returns.  Because of net operating loss and research credit
carryovers, substantially all of the Company’s tax years remain open to
examination.
  The
Company’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense.
  The
(recovery from) provision for income taxes consisted of the following (in
thousands):
  Year Ended December 31,2009
              
              
              2008
              
              
              2007Current:Federal
              
              $
              (6
              )
              
              $
              —
              
              
              $
              —Foreign
              
              
              (23
              )
              
              
              23
              
              
              
              23$
              (29
              )
              
              $
              23
              
              
              $
              23
 
  For
financial reporting purposes, loss before (recovery from) provision for income
taxes included the following components (in thousands):
  Year Ended December 31,2009
              
              
              2008
              
              
              2007Domestic
              
              $
              (4,068
              )
              
              $
              (6,444
              )
              
              $
              (3,021
              )Foreign
              
              
              52
              
              
              
              83
              
              
              
              106Loss
      before provision for income taxes
              
              $
              (4,016
              )
              
              $
              (6,361
              )
              
              $
              (2,915
              )
 
  The
Company’s effective income tax provision differed from the federal statutory
rate of 34% due to the following (in thousands):
  Year Ended December 31,2009
              
              
              2008
              
              
              2007Expected
      tax benefit at federal statutory rate
              
              $
              (1,365
              )
              
              $
              (2,163
              )
              
              $
              (991
              )Foreign
      and state taxes, net
              
              
              (23
              )
              
              
              23
              
              
              
              23Recovery
      of federal tax payments
              
              
              (6
              )
              
              
              —
              
              
              
              —Non-deductible
      stock compensation and other
              
              
              430
              
              
              
              397
              
              
              
              629Current
      year operating losses and temporary differences for which no tax benefit
      is recognized
              
              
              935
              
              
              
              1,766
              
              
              
              362(Recovery
      from) Provision for income taxes
              
              $
              (29
              )
              
              $
              23
              
              
              $
              23
 
   F-23
  The net
deferred income tax asset consisted of the following as of December 31,
2009 and 2008 (in thousands):
  December 31,2009
              
              
              2008Deferred
      income tax assets:Federal
      net operating loss carry-forwards
              
              $
              21,257
              
              
              $
              19,700State
      net operating loss carry-forwards
              
              
              2,184
              
              
              
              1,868Tax
      credit carry-forwards
              
              
              2,494
              
              
              
              2,524Deferred
      settlement and patent licensing, net
              
              
              —
              
              
              
              1,416Reserves
      and other
              
              
              1,317
              
              
              
              1,095Property
      and equipment
              
              
              257
              
              
              
              21227,509
              
              
              
              26,815Valuation
      allowance
              
              
              (27,509
              )
              
              
              (26,815
              )Net
      deferred income tax asset
              
              $
              —
              
              
              $
              —
  Net
operating loss carry-forwards at December 31, 2009 were approximately $62.5
million and $44.6 million, for federal and state income tax purposes,
respectively. The federal net operating loss carry-forwards expire on various
dates through the year 2029. The valuation allowance increased by $694,000 in
2009, increased by $2.0 million in 2008 and increased by $161,000 in
2007.
  As of
December 31, 2009, unused research and development tax credits of
approximately $1.3 million and $1.5 million are available to reduce future
federal and California income taxes, respectively. Federal credit carry-forwards
expire beginning in the year 2017. California credits will carry forward
indefinitely.
  The
Internal Revenue Code of 1986, as amended, contains provisions that may limit
the net operating loss carry-forwards to be used in any given year upon the
occurrence of certain events, including a significant change in ownership
interest. The Company believes significant uncertainty exists regarding the
realizability of the net operating loss and tax credit carry-forwards and other
timing differences. Accordingly, a valuation allowance has been provided for the
entire net deferred tax asset.
  9.
              Net
      Loss Per Share
  Basic and
diluted net loss per share of common stock is presented in conformity with ASC 260,Earnings
Per Share(ASC 260), for all periods presented.
  In
accordance with ASC
260, basic net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period, less
shares subject to repurchase. Diluted net loss per share is computed on the
basis of the weighted average number of shares and potential common shares
outstanding during the period. Potential common shares result from the assumed
exercise of outstanding stock options that have a dilutive effect when applying
the treasury stock method. The Company has excluded all outstanding stock
options and shares subject to repurchase from the calculation of diluted net
loss per share for 2009, 2008 and 2007, because all such securities are
antidilutive (owing to the fact that the Company is in a loss position).
Accordingly, diluted net loss per share is equal to basic net loss per share for
all years presented.
  The total
number of potential dilutive common shares excluded from the calculations of
diluted net loss per share was 87,165, 206,756 and 590,788 for 2009, 2008 and
2007, respectively.
  The
following table presents the calculation of basic and diluted net loss per share
(in thousands, except per share data):
  Year Ended December 31,2009
              
              
              2008
              
              
              2007Numerator
      – basic and diluted:Net loss
              
              $
              (3,987
              )
              
              $
              (6,384
              )
              
              $
              (2,938
              )Denominator
      – basic and diluted:Weighted
      average shares of common stock used in computing net loss per
      share
              
              
              37,318
              
              
              
              34,551
              
              
              
              34,290Net
      loss per share - basic and diluted
              
              $
              (0.11
              )
              
              $
              (0.18
              )
              
              $
              (0.09
              )
 
  
   F-24
  10.
              Segment
      Reporting
  Disclosure
of segments is presented in accordance with ASC 280, Segment Reporting (ASC 280).
ASC 280 establishes standards for disclosures regarding operating segments,
products and services, geographic areas and major customers. The Company is
organized and operates as two operating segments: (1) the design, development,
manufacturing, sale and marketing of networked video communications products
(products division) and (2) the prosecution, maintenance, support and licensing
of the Company’s intellectual property and technology, some of which is used in
the Company’s products (intellectual property division). Service revenue relates
mainly to the maintenance, support, training and software development, and is
included in the products division for purposes of reporting and decision-making.
The products division also engages in corporate functions, and provides
financing and services to its intellectual property division. The Company’s
chief operating decision-maker, its Chief Executive Officer (CEO), monitors the
Company’s operations based upon the information reflected in the following table
(in thousands). The table includes a reconciliation of the revenue and expense
classification used by the CEO with the revenue, other income and expenses
reported in the Company’s consolidated financial statements included elsewhere
herein. The reconciliation for the revenue category reflects the fact that the
CEO views activity recorded in the account “income from settlement and patent
licensing” as revenue within the intellectual property division.
  Intellectual
      Property Division
              
              
              Products
      Division
              
              
              Reconciliation
              
              
              TotalYear
      Ended December 31, 2009Revenue
              
              $
              4,504
              
              
              $
              7,971
              
              
              $
              (3,651
              )
              
              $
              8,824Depreciation
      expense
              
              
              —
              
              
              
              (245
              )
              
              
              —
              
              
              
              (245
              )Stock-based
      compensation
              
              
              (268
              )
              
              
              (1,621
              )
              
              
              —
              
              
              
              (1,889
              )Total
      costs and expenses
              
              
              (1,761
              )
              
              
              (14,298
              )
              
              
              3,651
              
              
              
              12,408Interest
      income
              
              
              —
              
              
              
              8
              
              
              
              —
              
              
              
              8Interest
      expense
              
              
              —
              
              
              
              (440
              )
              
              
              —
              
              
              
              (440
              )Net
      income (loss)
              
              
              2,743
              
              
              
              (6,730
              )
              
              
              —
              
              
              
              (3,987
              )Assets
              
              
              451
              
              
              
              1,505
              
              
              
              —
              
              
              
              1,956Year
      Ended December 31, 2008Revenue
              
              $
              5,180
              
              
              $
              7,801
              
              
              $
              (4,226
              )
              
              $
              8,755Depreciation
      expense
              
              
              —
              
              
              
              (538
              )
              
              
              —
              
              
              
              (538
              )Stock-based
      compensation
              
              
              (248
              )
              
              
              (1,259
              )
              
              
              —
              
              
              
              (1,507
              )Total
      costs and expenses
              
              
              (2,030
              )
              
              
              (16,967
              )
              
              
              4,226
              
              
              
              (14,771
              )Interest
      income
              
              
              —
              
              
              
              94
              
              
              
              —
              
              
              
              94Interest
      expense
              
              
              —
              
              
              
              (439
              )
              
              
              —
              
              
              
              (439
              )Net
      income (loss)
              
              
              3,150
              
              
              
              (9,534
              )
              
              
              —
              
              
              
              (6,384
              )Assets
              
              
              1,610
              
              
              
              8,183
              
              
              
              —
              
              
              
              9,793Year
      Ended December 31, 2007Revenue
              
              $
              21,162
              
              
              $
              7,019
              
              
              $
              (16,226
              )
              
              $
              11,955Depreciation expense
              
              
              —
              
              
              
              (468
              )
              
              
              —
              
              
              
              (468
              )Stock-based compensation
              
              
              (240
              )
              
              
              (2,449
              )
              
              
              —
              
              
              
              (2,689
              )Total costs and expenses
              
              
              (7,513
              )
              
              
              (23,741
              )
              
              
              16,226
              
              
              
              (15,028
              )Interest income
              
              
              —
              
              
              
              346
              
              
              
              —
              
              
              
              346Interest expense
              
              
              —
              
              
              
              (187
              )
              
              
              —
              
              
              
              (187
              )Net income (loss)
              
              
              13,649
              
              
              
              (16,587
              )
              
              
              —
              
              
              
              (2,938
              )Assets
              
              
              2,808
              
              
              
              7,769
              
              
              
              —
              
              
              
              10,577
 
  International
revenue, which consists of sales to customers with operations principally in
Western Europe and Asia, comprised 44%, 51% and 72% of total revenue for 2009,
2008 and 2007, respectively. Revenue is allocated to individual countries and
geographical region by customer, based on where the product is shipped to,
location of services performed or the location of equipment that is under an
annual maintenance agreement. In the case of patent licensing, revenue is
allocated to geographical region based on the location of the customer. For
2009, 2008 and 2007, respectively, international revenues from customers in the
United Kingdom accounted for 34%, 22% and 12% respectively, of total revenue.
The Company had no significant long-lived assets in any country other than the
United States for any period presented.
  
   F-25
  11.
Subsequent Events
  On January 19, 2010, the Company entered into a patent
license agreement with Springboard Group S.A.R.L. ("SKYPE").  Under the
Agreement, the Company granted to SKYPE for the lives of the patents, a
royalty-free, irrevocable, non-exclusive license under certain patents to make,
have made (subject to certain limitations), use, import or export, offer to
sell, sell, lease, license, or otherwise transfer or distribute certain licensed
products.  These granted rights and license include rights for authorized
entities and end users of SKYPE to form combinations with other products for
certain authorized purposes.  As consideration for the license, the Company
received a payment of $3.0 million from SKYPE on January 25,
2010.
  On
January 21, 2010, the Company completed the sale of substantially all of its
U.S.
patents and patent applications, and related foreign patents and patent
applications to Intellectual Ventures Fund 61 LLC (Intellectual Ventures)
related to an agreement that was entered into on December 18, 2009.  The Company received the
purchase price of $11.0 million from Intellectual
Ventures on January 21, 2010.  The Company also obtained a full
grant-back
license under the patent portfolio from Intellectual Ventures.
 On March
25, 2010, the Revolving Credit Promissory Note (see Note 3) was further amended
to decrease the maximum line of credit facility amount to $5.0 million for the
period from February 22, 2010 through the maturity date.
 12.
              Selected
      Quarterly Results of Operations
(unaudited)
  The
following tables set forth, for the periods indicated, the Company’s unaudited
financial information for the last eight quarters. The Company believes that the
financial statements used to prepare this information include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this information when read in conjunction with the Company’s
financial statements and notes to financial statements. The operating results
for any quarter do not necessarily indicate the results expected for any future
period.
  As
described in the Summary of Significant Accounting Policies, Income from
Settlement and Patent Licensing, the Company recognized the payment received
from Polycom and the associated deferred contingent legal costs paid in income
from settlement and patent licensing in equal installments over a five-year
period starting November 12, 2004.
 
 
 Quarter EndedDecember 31,
                2009
              
              September 30,
                2009
              
              June 30,
      2009
              
              March 31,
      2009(In thousands except per share data)Total
      revenue
              
              $
              1,887
              
              
              $
              1,429
              
              $
              2,878
              
              $
              2,630Cost
      of product revenue
              
              
              401
              
              
              
              263
              
              
              288
              
              
              375Cost
      of services, maintenance and support revenue
              
              
              565
              
              
              
              737
              
              
              861
              
              
              802Net
      loss
              
              $
              (1,536
              )
              
              $
              (1,885
              )
              $
              (151
              )
              $
              (415
              )Net
      loss per share—Basic/Diluted
              
              $
              (0.04
              )
              
              $
              (0.05
              )
              $
              (0.00
              )
              $
              (0.01
              )Weighted
      average shares—Basic/Diluted
              
              
              38,977
              
              
              
              38,970
              
              
              36,561
              
              
              34,698
 
 Quarter EndedDecember 31,
                2008
              
              September 30,
                2008
              
              June 30,
      2008
              
              March 31,
      2008(In thousands except per share data)Total
      revenue
              
              $
              3,109
              
              
              $
              2,705
              
              $
              1,790
              
              $
              1,151Cost
      of product revenue
              
              
              551
              
              
              
              720
              
              
              565
              
              
              359Cost
      of services, maintenance and support revenue
              
              
              646
              
              
              
              584
              
              
              603
              
              
              519Net
      loss
              
              $
              (231
              )
              
              $
              (774
              )
              $
              (1,612
              )
              $
              (3,767
              )Net
      loss per share—Basic/Diluted
              
              $
              (0.01
              )
              
              $
              (0.02
              )
              $
              (0.05
              )
              $
              (0.11
              )Weighted
      average shares—Basic/Diluted
              
              
              34,568
              
              
              
              34,561
              
              
              34,547
              
              
              34,532
 
  F-26
  Item
15(a)
  AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY
  SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS
   Balance at
                Beginning of
                Year
              
              
              Additions
                Charged to
                Operations
              
              
              Write-Offs
              
              
              Balance at
                End of Year(In thousands)Allowance
      for Doubtful AccountsYear
      Ended:December
      31, 2009
              
              $
              20
              
              
              $
              44
              
              
              $
              (51
              )
              
              $
              13December 31,
      2008
              
              
              24
              
              
              
              4
              
              
              
              (8
              )
              
              
              20December 31,
      2007
              
              
              51
              
              
              
              17
              
              
              
              (44
              )
              
              
              24
    S-1
  INDEX
TO EXHIBITS
 3.2
                
                Restated
      Certificate of Incorporation(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)3.3
                
                Bylaws
      of Avistar Communications Corporation(Filed
      as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2004 filed with the Securities and Exchange Commission
      on March 28, 2005.)4.1
                
                Specimen
      Certificate evidencing shares of Common Stock(Filed as an exhibit to the Company’s
      Registration Statement on Form S-1 (File No. 333-39008) as declared
      effective by the Securities and Exchange Commission on August 16,
      2000.)10.1
                
                1997
      Stock Option Plan, as amended*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.1.1
                
                1997
      Stock Option Plan Form of Stock Option Agreement*(Filed as an exhibit to the Company’s
      Registration Statement on Form S-1 (File No. 333-39008) as declared
      effective by the Securities and Exchange Commission on August 16,
      2000.)10.2
                
                2000
      Stock Option Plan, as amended*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.3
                
                2000
      Director Option Plan, as amended*(Filed as
      an exhibit to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2005 filed with the Securities and Exchange Commission
      on April 28, 2006.)10.4
                
                Form
      of Director Option Agreement*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.5
                
                2000
      Employee Stock Purchase Program, as amended*(Filed as an exhibit to the Registrant’s Quarterly Report on
      Form  10-Q for the three months ended September 30, 2006 filed
      with the Securities and Exchange Commission on November 14,
      2006.)10.6
                
                Form
      of Indemnification Agreement*(Filed as an
      exhibit to the Company’s Registration Statement on Form S-1 (File No.
      333-39008) as declared effective by the Securities and Exchange Commission
      on August 16, 2000.)10.7
                
                Settlement
      Agreement and Release between Avistar Communications Corporation and R.
      Stephen Heinrichs dated April 26, 2001*(Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on May 8,
      2001.)10.8
                
                Lease
      Agreement among Avistar Communications Corporation and Crossroads
      Associates and Clocktower Associates dated December 1, 2006 (Filed as an exhibit to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2006 filed with the
      Securities and Exchange Commission on March 22, 2007.)10.9
                
                Common
      Stock Purchase Agreement by and among Avistar Communications Corporation
      and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust, Grady
      Burnett and Wendolyn Hearn dated October 15, 2003(Filed as an exhibit to the Registrant’s
      Quarterly Report on Form 10-Q for the three months ended September 30,
      2003 filed with the Securities and Exchange Commission on October 23,
      2003.)10.10
                
                Stock
      Purchase Agreement among Avistar Communications Corporation, Fuller &
      Thaler Behavioral Finance Fund, Ltd. and Fuller & Thaler Avalanche
      Fund, L.P. dated March 23, 2004(Filed as an exhibit to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2004 filed with the Securities and Exchange Commission on May 11,
      2004.)10.11
                
                Settlement
      Agreement among Avistar Communications Corporation, Collaboration
      Properties, Inc. and Polycom, Inc. dated November 12, 2004(Filed as an exhibit to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2004 filed with the
      Securities and Exchange Commission on March 28, 2005.)10.12†
                
                Patent
      Cross-License Agreement Among the Company, Collaboration Properties, Inc.
      and Polycom, Inc. dated November 12, 2004(Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 2005 filed with the Securities and Exchange
      Commission on April 28, 2006.)10.13†
                  
                  
                  10.14†
                
                Patent
      License Agreement dated May 15, 2006 among Avistar Communications
      Corporation, Collaboration Properties, Inc., Sony Corporation and Sony
      Computer Entertainment, Inc.(Filed as an
      exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three
      months ended September 30, 2006 filed with the Securities and Exchange
      Commission on November 14, 2006.)
                  
                  Patent License Agreement dated February 15, 2007
      by and among Avistar Communications Corporation, Collaboration Properties,
      Inc., Tandberg ASA, Tandberg Telecom AS, and Tandberg, Inc. (Filed on May
      14, 2007 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q
      for the quarter ended March 31,
2007)
   
  10.15†
                
                Patent License Agreement dated May 15, 2007 by and
      among Avistar Communications Corporation, Avistar Systems (UK) Limited,
      and Radvision LTD.  (Filed on August 3, 2007 as an exhibit to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2007)10.16
                
                Employment Agreement between Avistar
      Communications Corporation and Simon B. Moss effective July 16, 2007. *
      (Filed on November 13, 2007 as an exhibit to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended September 30,
      2007)10.17
                
                Amended and restated Security Agreement dated
      December 17, 2007 between Avistar Communications Corporation and
      JPMorganChase Bank, N.A. originally dated December 23, 2006. (Filed as an
      exhibit to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2007 filed with the Securities and Exchange Commission on
      March 31, 2008)10.18
                
                Amendment dated December 17, 2007 to the Revolving
      Credit Promissory Note issued by Avistar Communications Corporation in
      favor of JPMorgan originally dated December 23, 2006. (Filed as an exhibit
      to the Registrant’s Annual Report on Form 10-K for the year ended December
      31, 2007 filed with the Securities and Exchange Commission on March 31,
      2008)10.19
                
                Second amendment dated December 17, 2007 to the
      Revolving Credit Promissory Note issued by Avistar Communications
      Corporation in favor of JPMorgan originally dated December 23, 2006.
      (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 2007 filed with the Securities and Exchange
      Commission on March 31, 2008)10.20
                
                Amendment dated December 17, 2007 to the Guaranty
      issued by Gerald J. Burnett and The Gerald J. Burnett and Marjorie J.
      Burnett Revocable Trust in favor of JPMorgan originally dated December 23,
      2006. (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2007 filed with the Securities and
      Exchange Commission on March 31, 2008)10.21
                
                Convertible Note Purchase Agreement among the
      Company and the Purchasers named therein dated January 4, 2008 (Filed on
      January 9, 2008 as an exhibit to the Registrant’s Current Report on Form
      8-K)10.22
                
                Security Agreement among the Company, Baldwin
      Enterprises, Inc., as Collateral Agent, and the Purchasers named therein
      dated January 4, 2008 (Filed on January 9, 2008 as an exhibit to the
      Registrant’s Current Report on Form 8-K)10.23
                
                Form of 4.5% Convertible Subordinated Secured Note
      Due 2010 (Filed on January 9, 2008 as an exhibit to the Registrant’s
      Current Report on Form 8-K)10.24
                
                Inter-creditor Agreement among the Purchasers of
      the 4.5% Convertible Subordinated Secured Notes Due 2010 dated January 4,
      2008 (Filed on January 9, 2008 as an exhibit to the Registrant’s Current
      Report on Form 8-K)10.25†
                
                Licensed
      Works Agreement between Avistar Communications Corporation and
      International Business Machines Corporation dated September 8, 2008(Filed as an exhibit to the Registrant’s
      Quarterly Report on Form 10-Q for the three months ended September 30,
      2008 filed with the Securities and Exchange Commission on November 14,
      2008.)10.26†
                
                Licensed
      Works Agreement Statement of Work between Avistar Communications
      Corporation and International Business Machines Corporation dated
      September 8, 2008(Filed as an exhibit to
      the Registrant’s Quarterly Report on Form 10-Q for the three months ended
      September 30, 2008 filed with the Securities and Exchange Commission on
      November 14, 2008.)10.27†
                
                Patent
      License Agreement between Avistar Communications Corporation and
      International Business Machines Corporation dated September 9, 2008. (Filed as an exhibit to the Registrant’s Quarterly
      Report on Form 10-Q for the three months ended September 30, 2008 filed
      with the Securities and Exchange Commission on November 14,
      2008.)10.28
                
                Amended and Restated
      Revolving Credit Promissory Note issued by Avistar Communications
      Corporation to JPMorgan Chase Bank, N.A. dated December 22, 2008
      (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2008 filed with the Securities and
      Exchange Commission on March 31, 2009..)
   
  10.29
                
                Facility Agreement
      between Avistar Communications Corporation and JPMorgan Chase Bank, N.A.
      dated December 22, 2008 (Filed as an exhibit to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2008 filed with
      the Securities and Exchange Commission on March 31, 2009.)10.30
                
                Amended and Restated
      Collateral Agreement dated December 22, 2008 between Avistar
      Communications Corporation and JPMorgan Chase Bank, N.A. dated December
      22, 2008 (Filed as an exhibit to the Registrant’s Annual Report on
      Form 10-K for the year ended December 31, 2008 filed with the Securities
      and Exchange Commission on March 31, 2009.)10.31
                
                Second Amended and
      Restated Security Agreement between Avistar Communications Corporation and
      JPMorgan Chase Bank, N.A. (Filed as an exhibit to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2008 filed with
      the Securities and Exchange Commission on March 31, 2009.)10.32
                
                Amended
      and Restated Guaranty issued by Gerald J. Burnett and The Gerald J.
      Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase
      Bank, N.A. dated December 22, 2008 (Filed as an exhibit
      to the Registrant’s Annual Report on Form 10-K for the year ended December
      31, 2008 filed with the Securities and Exchange Commission on March 31,
      2009.)10.33
                
                Amended and Restated
      Form of Note Sale Agreement among Gerald J. Burnett, The Gerald J. Burnett
      and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank, N.A.
      (Filed as an exhibit to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2008 filed with the Securities and
      Exchange Commission on March 31, 2009.)10.34
                
                Personal guarantee
      issued by Gerald J. Burnett in favor of Avistar Communications Corporation
      dated March 29, 2009 (Filed as an exhibit to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2008 filed with
      the Securities and Exchange Commission on March 31, 2009.)10.35
                
                Separation
      Agreement and Release between Avistar Communications Corporation and Simon
      Moss dated July 8, 2009* (Filed on July 14,
      2009 as an exhibit to the Registrant’s Current Report on Form
      8-K.)10.36
                
                Employment
      Agreement between Avistar Communications Corporation and Robert Kirk dated
      July 14, 2009* (Filed on July 14, 2009 and
      amended on July 17, 2009  as an exhibit to the Registrant’s
      Current Report on Form 8-K.)10.37
                
                Compromise
      Agreement between Avistar Systems (UK) Limited and Darren Innes dated
      August 19, 2009* (Filed on August 25, 2009
      as an exhibit to the Registrant’s Current Report on Form
      8-K.)10.38
                
                2009
      Equity Incentive Plan* (Filed on December
      14, 2009 as an exhibit to the Registrant’s Current Report on Form
      8-K.)10.38.1
                
                2009
      Equity Incentive Plan Form of Stock Option Agreement* (Filed on December 14, 2009 as an exhibit to the
      Registrant’s Current Report on Form 8-K.)10.38.2
                
                2009
      Equity Incentive Plan Form of Restricted Stock Unit Agreement* (Filed on December 14, 2009 as an exhibit to the
      Registrant’s Current Report on Form 8-K.)10.39†
                
                Patent Purchase Agreement dated December 18, 2009
      between Avistar Communications Corporation and Intellectual Ventures Fund
      61 LLC.10.40
                
                Second
      Amended and Restated Revolving Credit Promissory Note issued by Avistar
      Communications Corporation to JPMorgan Chase Bank, N.A. dated December 22,
      2009.10.41
                
                Facility
      Agreement between Avistar Communications Corporation and JPMorgan Chase
      Bank, N.A. dated December 22, 2009.10.42
                
                Second
      Amended and Restated Collateral Agreement between Avistar Communications
      Corporation and JPMorgan Chase Bank, N.A. dated December 22,
      2009.10.43
                
                Second
      Amended and Restated Guaranty issued by Gerald J. Burnett and The Gerald
      J. Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan
      Chase Bank, N.A. dated December 22, 2009.10.44
                
                Amended
      and Restated Note Sale Agreement among Gerald J. Burnett, The Gerald J.
      Burnett and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank,
      N.A.10.45
                
                Third
      Amended and Restated Security Agreement between Avistar Communications
      Corporation and JPMorgan Chase Bank, N.A. dated December 22,
      2009.
     
   10.46
                
                Facility
      Agreement between Avistar Communications Corporation and JPMorgan Chase
      Bank, N.A. dated January 11, 2010.10.47
                
                Fourth
      Amended and Restated Security Agreement between Avistar Communications
      Corporation and JPMorgan Chase Bank, N.A dated January 11,
      2010.10.48
                
                Reaffirmation
      of Guaranty issued by Gerald J. Burnett and The Gerald J. Burnett and
      Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase Bank, N.A.
      dated January 11, 2010.10.49
                
                UCC
      Financing Statement Amendment between Avistar Communications Corporation
      and JPMorgan Chase Bank, N.A10.50
                
                Personal
      guarantee issued by Gerald J. Burnett in favor of Avistar Communications
      Corporation dated March 26, 201021.1
                
                Subsidiaries
      of the Company23.1
                
                Consent
      of Independent Registered Public Accounting Firm: Burr Pilger Mayer,
      Inc.24.1
                
                Power
      of Attorney (see page 43)31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification by the Chief Executive
      Officer31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification by the Chief Financial
      Officer32
                
                Certification
      by the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 *
              Indicates
      management contract or compensatory plan or arrangement required to be
      filed an exhibit pursuant to Item 14(c) of
      Form 10-K.
  †
              Portions
      of the exhibit have been omitted pursuant to a request for confidential
      treatment and the omitted portions have been separately filed with the
      Commission.