UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

---

|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2003                     
|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(State or other jurisdiction
of incorporation or organization)                               |  | 88-0463156(I.R.S. Employer
Identification Number)
|---------------------------------------------------------------------------------------------------- |  | -------------------------------------------------
|555 Twin Dolphin Drive, Suite 360
Redwood Shores, California(Address of Principal Executive Offices) |  | 94065(Zip Code)                                  

Registrant's telephone number, including area code: (650) 610-2900

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

|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value

---

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold on June 30, 2003 was $4,656,141. Shares of Common Stock held by each executive officer and director and by each person who owns 5% 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.

As
of December 31, 2003, the registrant had outstanding 30,210,758 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference into Part III of this Annual Report on Form 10-K specific portions of its Proxy Statement
for its 2004 Annual Meeting of Stockholders.



---



AVISTAR COMMUNICATIONS CORPORATION  ANNUAL REPORT ON FORM 10-K  YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

|                                                                                              |  | Page
|--------------------------------------------------------------------------------------------- |  | ----
|PART I                                                                                        |  |     
|Item 1. Business                                                                              |  | 3   
|Item 2. Properties                                                                            |  | 19  
|Item 3. Legal Proceedings                                                                     |  | 19  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 20  
|PART II                                                                                       |  |     
|Item 5. Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 21  
|Item 6. Selected Financial Data                                                               |  | 22  
|Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 23  
|Item 7a. Quantitative and Qualitative Disclosures About Market Risk                           |  | 41  
|Item 8. Financial Statements and Supplementary Data                                           |  | 42  
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 42  
|Item 9a. Controls and Procedures                                                              |  | 42  
|PART III                                                                                      |  |     
|Item 10. Directors and Executive Officers of the Registrant                                   |  | 43  
|Item 11. Executive Compensation                                                               |  | 43  
|Item 12. Security Ownership of Certain Beneficial Owners and Management                       |  | 43  
|Item 13. Certain Relationships and Related Transactions                                       |  | 43  
|Item 14. Principal Accounting Fees and Services                                               |  | 43  
|PART IV                                                                                       |  |     
|Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  | 44  
|Index 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 Report, the words "expects," "anticipates," "believes," "plans," "intends" and
"estimates" and similar expressions are intended to identify forward looking statements. 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" or
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

We were 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.

Our
principal executive offices are located at 555 Twin Dolphin Drive, Suite 360, Redwood Shores, California, 94065. Our telephone number is (650) 610-2900. Our
trademarks include Avistar and the Avistar logo, AvistarVOS, Shareboard and The Enterprise Video Company. This Annual Report on Form 10-K also includes our and other organizations'
product names, trade names and trademarks. Our website is www.Avistar.com and we post a link to our reports filed with the Securities and Exchange Commission on our website (see
"CompanyInvestor RelationsSEC Information"). Information contained on our website is not part of this Annual Report.

Overview

We develop, market and support an integrated suite of vBusinessvideo-enabled eBusinessapplications, all powered by the
AvistarVOS software. From the desktop, we deliver TV-quality interactive video calling, content creation and publishing, broadcast origination and distribution,
video-on-demand, and integrated data sharing. The Avistar video and data collaboration applications are all managed by the AvistarVOS video operating system. By integrating
video tightly into the way they work, our customers can use our system to save costs and improve productivity and communications within the enterprise and between enterprises to enhance relationships
with customers, suppliers and partners. Using AvistarVOS software and leveraging video, telephony and Internet networking standards, Avistar applications 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 sell our system directly to enterprises in selected
strategic vertical markets, and have focused initially on the financial services and manufacturing industries. Our objective is to establish our technology as the standard for networked video.

We
operate in two segments. Avistar Communications Corporation engages in the design, development, manufacture, sale and marketing of networked video communications products and

3

---

associated
support services, and Collaboration Properties, Inc., or CPI, our wholly owned subsidiary, engages in the prosecution, maintenance, support and licensing of our software and the
intellectual property that we have developed, some of which is used in our products. As of December 31, 2003, CPI had not entered into any third party licensing agreements.

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, are
causing businesses to look for new tools that will help them increase productivity, take advantage of revenue opportunities and differentiate themselves. Enterprises of all sizes stand to benefit from
new and advanced communication tools that enable their employees, partners, suppliers and customers to collaborate more effectively within and across buildings and over disparate geographies and time
zones, recognizing that speed in decision-making is becoming even more critical in today's business environment.

For
years, enterprises have relied on communication tools used principally in a point-to-point manner, such as telephone and fax. More recently, businesses have
also embraced network-based collaboration applications, such as teleconferencing, voicemail and email. The emergence of the Internet has accelerated the adoption of these network-based collaboration
applications. The increasing availability and affordability of bandwidth on communication networks is further driving businesses to utilize new tools of communication, such as web conferencing, to
enhance collaboration among users. For example, an August 2003 study from Collaborative Strategies, Inc. forecasted a 28% compound four-year growth rate for the electronic
video and data collaboration market.

As
technology advances and becomes more affordable and modes of communication expand, enterprises are seeking widely deployable and cost effective technology to replicate, at the
desktop, the integration of audio and visual communication and document or project 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 management and decision making across geography/functions.
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 increases. Beyond traditional teleconferencing and data
sharing communications, 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. 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.

Limitations of Current Means of Collaboration

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, 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 networked video. 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

4

---

speed
problem resolution and motivate action, trust and understanding. Users want to be able to create and publish video content from their desktops either spontaneously, as with email or voicemail,
or in a more formal manner for broader distribution through the Internet or corporate data network.

Although
limited video technologies are already in use at many enterprises, businesses and other organizations require increasingly comprehensive, integrated and scalable video-enabled
communication capabilities. For example, video conferencing is often limited to 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, usability, reliability
and efficiency, as well as access by individuals.

Similarly,
broadcasting of stored video or television programming at a desktop or in a conference room is of highly varying quality and generally cannot be added on a
real-time basis to a live videoconference. Some products are limited to exclusively using the enterprise data network or the Internet to carry two-way desktop video
conferencing or to transmit video one-way. As a result, they are unable to deliver television quality video in normal corporate settings, and are limited in their ability to create,
publish and broadcast these videoconferences. In addition, it is difficult to expand these existing products within an enterprise, and even more difficult to do so among enterprises because of
bandwidth, security, functionality and quality limitations of current enterprise networks.

Elements of a Complete 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 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.
It must also effectively utilize existing and evolving network infrastructure. We believe a complete collaboration solution must provide the following:

Applications and functionality



Quality



Scalability



Reliability



5

---



Adaptability



Affordability



We
believe high quality networked video communication allows businesses to improve collaboration and thereby offers 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 networks.

The Avistar Solution

Avistar delivers a networked video system enabled by a unique architecture and a powerful software platform: the AvistarVOS video operating system. This software
provides a comprehensive, integrated suite of video applications that include on-demand access to interactive video calling and conferencing, content creation and publishing, broadcast
video, and video-on-demand, as well as data sharing, directory services and network management. These applications support users within and amongst enterprises and over data
networks, telephony networks and the Internet. Our system architecture is open and flexible in order to embrace continued technological innovation and standardization. Our system is designed to use
existing and emerging communication and video standards such as session initiation protocol, or SIP, to deliver the quality and ease of use of the telephone system.

Avistar
has built a complete video collaboration solution that today is delivering TV-quality video to thousands of desktops across hundreds of buildings. Each of our
applications can be used, integrated and managed in conjunction with one another. People often conceive of video in the enterprise only as two-way, real-time conferencing. Our
system allows broadcast video to be included in a video call and allows the entire session to be recorded simultaneously, and made available as stored video. Our system 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 a wide range of businesses from a single office operation to global corporations with branch
offices and/or widely dispersed operations.

6

---

Interactive video calling.Our system allows users to participate in spontaneous interactive video collaborations from their
desktops. Users can simultaneously see and hear multiple participants in windows on their workstations. 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. 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 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.

Video content creation and publishing.With our solution, users can create and publish video content from their desktops by
recording themselves, recording a multi-point conference or adding commentary to a broadcast and recording the entire session. Recorded content can be played back on demand and can be published in
various forms inside and outside the enterprise. This includes video emails, called vBriefs, which allow users to easily create video messages which recipients, with common mail clients and browsers,
can watch. This helps differentiate and highly personalize the sender's email. As an example, research analysts can record introductory commentary and distribute their research reports in a way that
cuts through the email clutter of their audiences' inbox. Similarly, video can be simply and quickly be published to web sites from a user's desk.

Broadcast video.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 broadcast 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.

Video-on-demand.Users anywhere on the Avistar network can easily retrieve stored videos. For
example, a corporation uses 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.

Integrated 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. 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. As an example, multiple design engineers can share a
technical drawing in order to resolve an issue with a defective part.

7

---

Our
system has the following key features necessary to make integrated video collaboration effective:

Easy to use interface.Our applications bring the rich interaction of a face-to-face meeting and the
quality and ease of use of the telephone to our systems through:



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 justification.

Network 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

8

---

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, 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.

We
believe our solution includes the following benefits to our customers:



9

---



System Architecture and Technology

Our networked video system is based on our fifth major release of our open architecture, which enables users to communicate visually using various networking
protocols and transport media, including 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:



Our
software 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 the video operating system 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.320, H.323, NTSC, PAL, MPEG, Microsoft Windows Media Video and Real Networks RealMedia.

We
believe our AvistarVOS video operating system positions us to lead the transformation described above. Further, we provide a suite of collaboration applications that seamlessly
operate with the AvistarVOS system 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.

Our
system uses TCP/IP, the standard Internet protocol, for initiating video calls, scheduling and starting broadcast presentations, and managing the creation and access of stored video
materials. In addition, we use TCP/IP for overall systems and network management throughout our software platform. This approach allows us to deliver connectivity throughout an enterprise and allows
us to leverage existing Internet infrastructure. For delivery of live local area network high-quality video

10

---

streams
with low delays, we use traditional circuit switched technologies, including our own Avistar network technology. 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 desktop 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, switches, and the compression and decompression equipment components of our
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 Internet-based reports of video call activity.

Because
of the tight integration of various video network components, namely, the Avistar Switch, Media Server, Conference Center, Broadcast Podium and gateways, our architecture has the
following key features:



11

---



System Products and Applications

Our system products and applications consist of shared resources accessible to an entire Avistar network from desktop and conference room users.

Shared Resources

Like the architecture of most data networks, our system is designed to maximize the use of shared resources on the network. This configuration results in a thin
client, or a desktop that is not burdened with memory or processor intensive software and hardware. Each user can access higher quality software, gateways, multi-point conference centers, media
servers and video broadcasts with lower per user acquisition and management costs than is possible with non-networked video solutions. These shared resources consist of the following
products and applications:

Local Area Network and Wide Area Network Products



Server and Software Products



12

---



Internet Protocol-Based Applications



Desktop and Conference Room Client Products

Avistar Conference.We deliver a complete system that includes all hardware and software components required to video-enable
desktops and conference rooms. The standard Avistar two-way desktop system consists of the following hardware components:



13

---



Avistar Room Systems.We deliver complete video systems for a wide range of room sizes and layouts. We believe that the key
advantages of our system are that the interface used in a conference room system is consistent with the interface used on individual desktops, allowing for all forms of video-enabled communications:
interactive video calling, content creation and publishing, broadcasting and video-on-demand. Therefore, desktop users are familiar with the controls used in Avistar room
systems and do not need additional training to operate the room system, nor do they need an additional technician to set-up and connect conference room calls (as is common with traditional
room systems).

Video Turrets.Through partnerships with the top two voice trading platform (turret) providers, Avistar provides traders with
an integrated voice and video turret system. The video turret combines call-control functionality and turret audio with video. This enhances the functionality of the turret while tying
audio-only participants on phones and turrets into video calls and broadcasts.

Avistar Digital Viewer.The Digital Viewer allows users to view streaming presentations from any Avistar presentation,
Avistar broadcast source or other RealNetworks/RealVideo-format video source. Active presentations can be easily viewed by clicking on a list of
available presentations. Users can also view streaming content available over the Internet through their Avistar Digital Viewer.

Customers

As of December 31, 2003, we have licensed and recognized revenue with respect to over 9,000 end-users at approximately 423 customer sites in
143 cities and 42 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. The following is a list of some of the customers that, together with their affiliates, have generated the largest portion of our revenue since our inception:



Deutsche
Bank AG and its affiliates accounted for 62% of our total revenue for 2003.

International
revenue, which consists of sales to customers with operations principally in Western Europe and Asia comprised 58%, 49% and 47% of total revenue for 2003, 2002 and 2001,
respectively. For 2003, 2002 and 2001, revenues to customers in the United Kingdom accounted for 40%, 26% and 21%, respectively, of total revenues.

Segment Information

We operate through two segments:



Financial
information regarding these segments is provided in Note 11 to our consolidated financial statements included in this Annual Report on Form 10-K. To
date, CPI has not signed any material licensing agreements.

14

---

Sales and Marketing

Sales.We have a direct sales force in the United States and Europe consisting of regional sales managers and account
managers located in New York, New York and London, England. Regional sales managers have direct responsibility for selling and account management, while account managers are responsible for system
utilization and expansion at existing customer sites.

Marketing.Our marketing efforts are directed towards select vertical markets, with a current emphasis on financial services
and, to a lesser degree, manufacturing. We have identified specific collaboration needs for enterprises in each of these vertical markets. We then help our customers understand how our system can
satisfy these needs, thereby increasing the number of users. We emphasize initiatives to develop market awareness of our system and services as well as increased usage of our installed systems. We
also use marketing programs to build recognition of our corporate brand.

Installation, Maintenance, Training and Support Services

We provide a wide variety of services for installation and design of our video communications products, including workflow analysis to identify patterns of
collaboration between workgroups to determine the best configuration of networked resources for the enterprise. We generally install our systems for new customers. In an increasing number of cases,
our customer's information technology group or services partner install follow-on orders. In the future, we expect our customers or their services partners will increasingly perform
installation of additional systems.

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 onsite or at an Avistar facility and for system administrators at an Avistar facility on a for-fee basis.

Backlog

The estimated backlog of product orders believed to be firm was $600,000 at December 31, 2003 and $700,000 at December 31, 2002. We expect most of
the orders as of December 31, 2003 will be shipped in the first two quarters of 2004. Backlog is not necessarily indicative of past or future operating results.

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 and licensing 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 and Internet technologies. We believe that our diverse technical expertise
contributes to the highly integrated functionality of our system. Research and development expenses were $2.4 million in 2003, $3.7 million in 2002 and $5.3 million in 2001. We
expect to devote a significant amount of our resources to research and development in the foreseeable future.

Manufacturing

We use contract manufacturers to produce components and perform component purchasing and some material assembly. Our operations staff develops manufacturing
strategies and qualifies and audits manufacturing processes and suppliers. We work with our contract manufacturers to reduce

15

---

manufacturing
costs and to resolve quality control issues, as well as performing final assembly and testing of our standard products. We believe our manufacturing strategy enables us to utilize the
manufacturing capabilities of our contract manufacturers, while allowing us to focus on rapid system development and deployment, software architecture and development of video communication
applications. We use third party, commercially available camera components, microphones, speakers and monitors for desktop and room systems, as well as third party compression and decompression
components for our gateways.

Intellectual Property and Proprietary Rights

Our ability to compete, and continue to provide technological 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
technology. We believe that other factors such as the technological and creative skills of our personnel, new system developments, frequent system and feature enhancements and reliable system support
and maintenance are also essential to maintaining our leadership position in technology.

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
registration in additional 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, AvistarVOS, Shareboard and The Enterprise Video Company.

Through
Collaboration Properties, Inc., our wholly owned subsidiary, as of December 31, 2003, we held 20 United States patents and 40 non-United States patents.
Four additional United States and non-United States patents had been allowed. The patents that have been issued expire at varying dates between 2013 and 2015. In addition, numerous patent
applications are pending in the United States and several other jurisdictions. Specifically, these patent applications, most of which relate to and claim priority from an application originally filed
in 1993, include both method and apparatus claims. These patents and pending patent applications disclose and/or claim aspects of our analog or digital desktop video conferencing technology, video and
multimedia storage technology for messaging and publishing, directory services, and public wide area networking access, switching and architecture. A portion of these technologies is currently
utilized in our system. To date, we have focused on expanding our patent portfolio and expediting patent issuance. We plan to continue these efforts and to seek to license our patents to reinforce the
adoption of our technology.

We
generally enter into confidentiality, license and nondisclosure agreements with our employees, consultants, prospective customers, licensees, and partners that 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 these cases, these agreements provide that these
customers may be entitled to retain copies of the software and will 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.

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. These agreements also generally include both marketing provisions under which these vendors promote our system and development forums under which we have an
opportunity to participate in the vendor's development plans to include features and functions that are favorable to us.

16

---

Competition

The market for video collaboration products and systems is highly competitive and fragmented. 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 systems, we compete primarily with Polycom Inc.,
Tandberg Inc. and VCON Telecommunications Ltd.

We
believe we may face increasing competition in the future from alternative video communications solutions that employ new technologies or new combinations of technologies from
companies such as Cisco Systems, Inc., Hewlett-Packard Company, Microsoft Corporation, RealNetworks, Inc. and WebEx Communications, Inc., that enable web-based or
network-based video communications with low-cost digital camera systems.

We
believe that the principal factors affecting competition in our markets include:



Currently,
our principal competitors are companies that provide products and services in specific areas where we offer our integrated system, such as:



While
a number of companies have marketed applications that enable users to use individual features similar to our system, we do not believe that any single competitor currently offers a
fully integrated system that provides all the features of our system. We believe these companies in many cases can also represent complementary opportunities to extend the reach of our system by
potentially expanding the market for video networking.

17

---



We expect competition to increase significantly in the future from existing providers of specialized video communications products and companies that may 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 products and services.

Employees

As of December 31, 2003, we had 54 employees, including personnel dedicated to research and development, customer services, 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, none of whom is 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

Our officers and their ages as of December 31, 2003 were as follows:

|Name                |  | Age |  | Position                                                 
|------------------- |  | --- |  | ---------------------------------------------------------
|Gerald J. Burnett   |  | 61  |  | Chairman of the Board and Chief Executive Officer        
|William L. Campbell |  | 55  |  | Vice Chairman, and Executive Vice President and Secretary
|Robert J. Habig     |  | 49  |  | Chief Financial Officer                                  
|J. Chris Lauwers    |  | 43  |  | Chief Technology Officer                                 
|Stephen F. Arisco   |  | 45  |  | Vice President, Operations and Customer Support          

Gerald J. Burnettis one of our founders and has been Chairman of our Board of Directors and our Chief Executive Officer since
March 2000. He served as Chief Executive Officer of Avistar Systems from December 1998 until March of 2000. From 1993 to 1997, he was a director of Avistar Systems or a principal of its
predecessor limited partnership. He is a member of the Corporation (Board of Trustees) of the Massachusetts Institute of Technology. Dr. Burnett holds a B.S. and an M.S. from the Massachusetts
Institute of Technology in electrical engineering and computer science and a Ph.D. from Princeton University in computer science and communications.

William L. Campbellis one of our founders and has been a member of our Board of Directors and our Executive Vice President since
March 2000. He has been our Corporate Secretary since June 2001 and served as our interim Chief Financial Officer from April 2001 to May 2001. He has been President and
Chief Executive Officer of CPI since December 1997. Mr. Campbell holds a B.S. in general

18

---

engineering
from the U.S. Military Academy and an M.S. in management from the Sloan School of the Massachusetts Institute of Technology.

Robert J. Habighas been our Chief Financial Officer since May 2001. Previously, he served as Chief Financial Officer at
Think3, Inc., a private computer-aided design software company from March 1999 to February 2001, as Chief Financial Officer at CrossWorlds Software, an enterprise software company
from July 1998 to February 1999, as Executive Vice President at First Data Corporation, a financial transactions processing company, from May 1997 to June 1998, as a
business unit Chief Financial Officer at Allied Signal Corporation, an automotive, aerospace and chemical manufacturing company from 1994 to 1997 and held various positions with PepsiCo from 1979 to
1994. Mr. Habig holds a B.A. in economics and business from Lafayette College and an M.B.A. from the Simon Graduate School of Business at the University of Rochester.

J. Chris Lauwershas been our Chief Technology Officer since February 2000. He served as Vice President of Engineering of Avistar
Systems from 1994 to 2000. He previously served as Principal Software Architect at Vicor Inc., a private e-business product solutions and engineering consulting company, from 1990
to 1994, and as a research associate at Olivetti Research Center from 1987 to 1990. Mr. Lauwers holds a B.S. in electrical engineering from the Katholieke Universiteit Leuven of Belgium.
Mr. Lauwers also holds an M.S. and a Ph.D. in electrical engineering and computer science from Stanford University.

Stephen F. Ariscohas been our Vice President of Operations and Customer Service since February 2000. He previously served as
Director of Operations and Customer Service of Avistar Systems from December 1997 to January 2000. From 1987 through December 1997, he was Director of Customer Service and
Operations at TRW Financial Systems, a systems integration company. Mr. Arisco holds a B.S. in Business from the University of Phoenix.

Item 2.Properties

Our corporate headquarters are located in Redwood Shores, California, where we occupy approximately 14,000 square feet under a lease that expires in
March 2007. We believe that our current leased facilities, together with facilities that are available to us or are being negotiated, will be sufficient to meet our needs for the next twelve
months. In addition, we lease a combined total of approximately
9,000 square feet of office space in New York, New York, Dallas, Texas and London, England. As of December 31, 2003, approximately 750 square feet of our corporate headquarters was being
utilized by CPI, our wholly-owned subsidiary.

Item 3.Legal Proceedings

On September 23, 2002, CPI, our wholly-owned subsidiary, commenced a patent infringement lawsuit against Polycom, Inc. alleging that several Polycom
videoconferencing products infringe four patents held by CPI. The suit was filed in the United States District Court for the Northern District of California. The four patents involved are U.S. Patent
Nos. 5,867,654, 5,896,500, 6,212,547 and 6,343,314. These patents cover technologies relating to video and data conferencing over unshielded twisted pair (UTP) networks, distributed
call-state management, separate monitors for simultaneous computer-based data sharing and videoconferencing and remote participant hold and disconnect functions in multi-party
conferencing. Polycom responded to CPI's claims on November 14, 2002, at which time it both answered the complaint and asserted counterclaims against CPI for non-infringement,
invalidity and unenforceability. On January 31, 2003, Polycom filed a motion with the court, which was subsequently granted by the court on March 7, 2003, requesting permission to amend
its counterclaims to incorporate claims of alleged infringements by Avistar Communications of four PictureTel patents that Polycom has told us it has had assigned to it. Three of the four
counterclaims involved a third party, and these three counterclaims were dropped by Polycom on June 23, 2003, subsequent to an agreement

19

---

between
Polycom and the third party. On August 9, 2003, CPI and Polycom filed motions for summary judgment with the court, seeking judgment as a matter of law concerning CPI's ability to
qualify for "small entity status" in the filing of its four patents being asserted against Polycom. On October 17, 2003, the court denied Polycom's motion for summary judgment and granted CPI's
motion for summary judgment, thereby negating Polycom's defense of unenforceablity concerning CPI's having filed these patents as a "small entity."

Briefings
on claims construction issues and a hearing before the presiding judge (Markman hearing) took place on March 8, 2004. A trial date for CPI's claims against Polycom and
Polycom's counterclaims has been set for January 10, 2005. The prosecution of this lawsuit and the defense of the proposed Polycom counterclaim may require us to expend significant financial
and managerial resources and therefore may have a material negative impact on our business. The duration and ultimate outcome of this litigation are uncertain. In addition, an adverse judgment, if
entered against CPI or Avistar, could require CPI or Avistar to pay substantial compensation and/or damages to Polycom, which could harm our business, financial position and results of operations and
cause our stock price to decline substantially. Litigation such as this suit can take years to resolve and can be expensive to prosecute. Regardless of the outcome, the prosecution of our claims in
this lawsuit may require us to obtain additional financing.

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

None.

20

---



PART II

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

Our common stock traded on the NASDAQ National Market from August 17, 2000 to October 29, 2002 and has traded on the NASDAQ SmallCap Market since
October 30, 2002 under the symbol "AVSR." Prior to August 17, 2000, there was no public market for our Common Stock. The following table sets forth for the period indicated the high and
low closing sale prices for our common stock, as reported by the NASDAQ Stock Market.

Year Ended
December 31, 2003

Year Ended
December 31, 2002High

Low

High

LowFirst Quarter

$
1.58

$
0.23

$
2.32

$
1.45Second Quarter

$
1.06

$
0.81

$
1.63

$
0.68Third Quarter

$
0.85

$
0.54

$
1.15

$
0.40Fourth Quarter

$
2.90

$
0.70

$
0.80

$
0.23


On
December 31, 2003, the last reported sale price of our common stock on the NASDAQ SmallCap Market was $1.52 per share. According to the records of our transfer agent, as of
December 31, 2003 there were 70 holders of record of our common stock and we believe there are a substantially greater number of beneficial holders.

Recent Sales of Unregistered Securities

On October 15, 2003, we issued and sold 4,615,385 shares of our common stock at a purchase price of $1.30 per share to Gerald J. Burnett, our Chairman,
President and Chief Executive Officer and other members of Dr. Burnett's family, each of whom are accredited investors. The aggregate offering price was $6.0 million. The fees and
expenses for this transaction were approximately $300,000, resulting in net proceeds to us of approximately $5.7 million. Pursuant to the foregoing sale, we agreed to register the shares under
the Securities Act of 1933, as amended, in the event that we determine to register any of our securities either for our own account or the account of our other stockholders. Under the terms of the
private placement, Dr. Burnett agreed to certain restrictions on 1,602,847 of the 3,661,539 shares purchased by him. These restrictions require Dr. Burnett to vote such shares in the
same proportion as our outstanding common stock not beneficially owned by him.

The
foregoing transaction did not involve any public offering, and we believe that the transaction was exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof or Regulation D promulgated thereunder. The purchasers in the foregoing transaction represented their intention to acquire the securities for investment only and not
with a view to or for resale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the foregoing transaction. All
purchasers had adequate access, through their relationships with Avistar, to information about us.

We
used a portion of the net proceeds of the private placement to repay the $1.5 million outstanding balance under our line of credit from Comerica Bank. We have used and intend
to continue to use the remaining net proceeds of the financing for working capital purposes.

Dividend Policy

We have never paid any cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future.

21

---



Item 6.Selected Financial Data

The selected consolidated financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and notes thereto. The selected statements of operations data for the years ended December 31, 2003, 2002 and 2001 and the selected balance
sheet data as of December 31, 2003 and 2002 are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this Annual Report on
Form 10-K. The selected statement of operations data for the year ended December 31, 2000 and 1999 and the selected balance sheet data as of December 31, 2001, 2000
and 1999 is derived from our financial statements not included in the Annual Report on Form 10-K. The historical results presented below are not necessarily indicative of future
results.

|                                                                                 |                                                              | Year Ended December 31, |                             
|-------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------- | ----------------------------
|
|
|Statements of Operations Data                                                    |                                                              |                         |                             
|Revenue:                                                                         |                                                              |                         |                             
|                                                                                 | Product                                                      |                         | $                           
|                                                                                 | Services, maintenance and support                            |                         |                             
|                                                                                 |                                                              |                         |                             
|                                                                                 |                                                              |                         | Total revenue               
|                                                                                 |                                                              |                         |                             
|Cost of revenue:                                                                 |                                                              |                         |                             
|                                                                                 | Product                                                      |                         |                             
|                                                                                 | Services, maintenance and support                            |                         |                             
|                                                                                 |                                                              |                         |                             
|                                                                                 |                                                              |                         | Total cost of revenue       
|                                                                                 |                                                              |                         |                             
|Gross margin                                                                     |                                                              |                         | 3,063                       
|                                                                                 |                                                              |                         |                             
|Operating expenses:                                                              |                                                              |                         |                             
|                                                                                 | Research and development                                     |                         |                             
|                                                                                 | Sales and marketing                                          |                         |                             
|                                                                                 | General and administrative                                   |                         |                             
|                                                                                 | Amortization of deferred stock compensation                  |                         |                             
|                                                                                 |                                                              |                         |                             
|                                                                                 |                                                              |                         | Total operating expenses    
|                                                                                 |                                                              |                         |                             
|                                                                                 | Loss from operations                                         |                         |                             
|                                                                                 |                                                              |                         |                             
|Other income (expenses):                                                         |                                                              |                         |                             
|                                                                                 | Interest income                                              |                         |                             
|                                                                                 | Other income (expense), net                                  |                         |                             
|                                                                                 |                                                              |                         |                             
|                                                                                 |                                                              |                         | Total other income (expense)
|                                                                                 |                                                              |                         |                             
|Loss before provision for (recovery from) income taxes                           |                                                              |                         | (8,599                      
|                                                                                 |                                                              |                         |                             
|Provision for (recovery from) income taxes                                       |                                                              |                         | 20                          
|                                                                                 |                                                              |                         |                             
|Net Loss                                                                         |                                                              | $                       | (8,619                      
|                                                                                 |                                                              |                         |                             
|                                                                                 | Beneficial conversion related to convertible preferred stock |                         |                             
|                                                                                 |                                                              |                         |                             
|                                                                                 | Net loss attributable to common stockholders                 |                         | $                           
|                                                                                 |                                                              |                         |                             
|Net loss per sharebasic and diluted                                             |                                                              | $                       | (0.33                       
|                                                                                 |                                                              |                         |                             
|Weighted average shares used in calculating basic and diluted net loss per share |                                                              |                         | 26,368                      

22

---

|                                                          |                    | As of December 31, |      
|--------------------------------------------------------- | ------------------ | ------------------ | -----
|
|
|Balance Sheet Data                                        |                    |                    |      
|Cash and cash equivalents                                 |                    | $                  | 5,438
|Short-term investments                                    |                    |                    |     
|Working capital                                           |                    |                    | 4,848
|Total assets                                              |                    |                    | 8,228
|Notes payable and accrued interest due to related parties |                    |                    |      
|                                                          | Current portion    |                    |      
|                                                          | Noncurrent portion |                    |      
|Preferred stock                                           |                    |                    |     
|Stockholders' equity (deficit)                            |                    |                    | 5,491

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 "Factors Affecting Future Operating Results" 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 "Factors Affecting Future Operating Results." These factors may cause our actual results to differ materially from any forward looking statement.

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

We develop, market and support an integrated suite of video-enabled vBusiness applications, all powered by our AvistarVOS (video operating system) software. From
the desktop, we deliver TV-quality interactive video calling, content creation and publishing, broadcast origination and distribution, video-on-demand and
integrated data sharing. Our customers use our system to improve productivity and communication within their enterprise, and between enterprises to enhance relationships with colleagues, customers,
suppliers and partners. Using AvistarVOS software and leveraging video, telephony and Internet networking standards, our applications 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 sell our system directly to enterprises in selected strategic vertical markets
and have focused primarily on the financial services, and to a lesser degree, manufacturing industries. Our objective is to establish our technology as the standard for networked video.

23

---

We
operate in two segments. We engage in the design, development, manufacturing, sale and marketing of networked video communications products, and associated support services, and CPI,
our wholly-owned subsidiary, engages in the prosecution, maintenance, support and licensing of the intellectual property that we have developed, some of which is used in our products. As of
December 31, 2003, CPI had not entered into any such third party licensing agreements.

We
operate on a 52-week fiscal year ending December 31. Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted
in the United States, which require us to make certain estimates and assumptions (see Note 2 to the Consolidated Financial Statements).

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

We
derive product revenue principally 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. In addition, we derive revenue from fees for installation, maintenance, support, training services and software development. Product revenue as a percentage
of total revenue was 43% for 2003 and 50% for 2002.

We
recognize revenue from product sales when all of the following conditions are met: the product has been shipped, an arrangement exists with the customer at a fixed price and we have
the right to invoice the customer, collection of the receivable is probable, and we have fulfilled all of our material contractual obligations to the customer. When we provide installation services,
the product and installation revenue is recognized upon completion of installation and receipt of customer confirmation, subject to the satisfaction of the revenue recognition criteria described
above. When the customer or a third party provides installation services, the product revenue is recognized upon shipment, subject to satisfaction of the revenue recognition criteria described above.
Payment for product is due upon shipment, subject to specific payment terms. The price charged for maintenance and/or support is defined in the contract, and is based on a percentage of product list
prices as stipulated in the customer agreement. Customers have the option to renew the maintenance and/or support services in subsequent periods at the same rate as paid in the initial year. Revenue
from maintenance and support is recognized pro-rata over the maintenance and/or support term, which is typically one year in length. 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 and training revenue is recognized upon performance of the
service. We recognize service revenue from software development contracts using the percentage of completion method, when all of the following conditions

24

---

are
met: a contract exists with the customer at a fixed price, we have fulfilled all of our material contractual obligations to the customer for a deliverable of the contract, verification of
completion of the deliverable has been received, and collection of the receivable is probable. Reimbursements received for out-of-pocket expenses incurred during installation
and support services, which have not been significant to date, are recognized as revenue in accordance with Emerging Issues Task Force (EITF) Issue No. 01-14, "Income Statement
Characterization of Reimbursements Received for "Out of Pocket" Expenses Incurred."

To
date, a significant portion of our revenue has resulted from sales to a limited number of customers, particularly Deutsche Bank AG and their affiliates. For 2003, we recorded revenue
of approximately $4.1 million, or 62% of total revenue from Deutsche Bank AG and their affiliates. No other customers individually accounted for greater than 10% of our total revenue for 2003.
For 2002, we recorded revenue of approximately $5.8 million, or 66% of total revenue, from Deutsche Bank AG and JP Morgan Chase & Company and their affiliates, each of whom generated
more than 10% of our total revenue. We anticipate that our revenue, and therefore, our operating results for any given period, will continue to depend to a significant extent on a limited number of
customers. As a result, the loss of or a reduction in sales to any one of these customers would have a significant adverse impact on our operations and financial performance.

International
revenue, which consists of sales to customers with operations principally in Western Europe and Asia, comprised 58% of total revenue for 2003, 49% for 2002 and 47% for
2001.

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 was 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, 2003, approximately 89% of our accounts receivable balance was concentrated with one customer. As of December 31, 2002, approximately 65% of our accounts receivable were
concentrated with one customer.

Valuation
of Inventories

We
record a provision for obsolete or excess inventory for models that are no longer manufactured or are at risk of being replaced with new versions of our product. In determining the
allowance for obsolete or excess inventory, we look at our forecasted demand versus quantities on hand and commitments. Any significant unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory and commitments and our reported results. If actual market conditions are less favorable than those projected, additional inventory
write-downs, provision for purchase commitments and charges against earnings may be required, which would negatively affect our operating income for such period.

25

---

Results of Operations

The following table sets forth data expressed as a percentage of total revenue for the periods indicated.

|                                                       |                                             | Year Ended December 31, |                         
|------------------------------------------------------ | ------------------------------------------- | ----------------------- | ------------------------
|
|
|Revenue:                                               |                                             |                         |                         
|                                                       | Product                                     |                         | 43                      
|                                                       | Services, maintenance and support           |                         | 57                      
|                                                       |                                             |                         |                         
|                                                       |                                             |                         | Total revenue           
|                                                       |                                             |                         |                         
|Cost of revenue:                                       |                                             |                         |                         
|                                                       | Product                                     |                         | 21                      
|                                                       | Services, maintenance and support           |                         | 32                      
|                                                       |                                             |                         |                         
|                                                       |                                             |                         | Total cost of revenue   
|                                                       |                                             |                         |                         
|Gross margin                                           |                                             | 47                      |                         
|                                                       |                                             |                         |                         
|Operating expenses:                                    |                                             |                         |                         
|                                                       | Research and development                    |                         | 37                      
|                                                       | Sales and marketing                         |                         | 55                      
|                                                       | General and administrative                  |                         | 92                      
|                                                       | Amortization of deferred stock compensation |                         | 2                       
|                                                       |                                             |                         |                         
|                                                       |                                             |                         | Total operating expenses
|                                                       |                                             |                         |                         
|Loss from operations                                   |                                             | (139                    | )                       
|                                                       |                                             |                         |                         
|Other income (expense):                                |                                             |                         |                         
|                                                       | Interest income                             |                         | 1                       
|                                                       | Other income (expense), net                 |                         | 7                       
|                                                       |                                             |                         |                         
|                                                       |                                             |                         | Total other income, net 
|                                                       |                                             |                         |                         
|Loss before provision for (recovery from) income taxes |                                             | (131                    | )                       
|                                                       |                                             |                         |                         
|Provision for (recovery from) income taxes             |                                             | 0                       |                         
|                                                       |                                             |                         |                         
|Net loss                                               |                                             | (131                    | )%                      
|                                                       |                                             |                         |                         

26

---



COMPARISON OF 2003, 2002 AND 2001

Revenue

Total revenue decreased by 25% in 2003 to $6.6 million from $8.8 million for 2002. The decrease in total revenue in 2003 relative to 2002 was due to
flat product sales and the timing of revenue recognition from 2001 business in 2002. Flat product sales in 2003 were due in large part to stagnant demand for enterprise information technology
experienced in the economy and in the financial services industry in particular, resulting in constrained budgets and delayed procurement decisions by existing and potential customers. For 2003, one
customer accounted for 62% of our total revenue. For 2002, two customers accounted for 66% of our total revenue. The level of sales to any customer may vary from quarter to quarter and year to year.
We anticipate that our revenue will continue to depend on a limited number of major customers for the foreseeable future, although the companies considered to be major customers and the percentage of
revenue represented by each major customer may vary from period to period. The loss of any one of those customers would have a material adverse impact on our financial condition and operating results.

Total
revenue decreased by 46% in 2002 to $8.8 million from $16.2 million for 2001. The decrease in total revenue in 2002 relative to 2001 was due primarily to lower
product sales and the general slowdown experienced in the economy.

Cost of Revenue

Cost of revenue declined by 21% in 2003 to $3.5 million from $4.5 million for 2002. The decrease in cost of revenue in 2003 relative to 2002 was
primarily due to the reduction in direct product costs caused by the decreased product volume and, to a lesser extent, due to the reduction in maintenance and support costs caused by the consolidation
of our support center operations at our corporate headquarters.

Cost
of revenue declined by 41% in 2002 to $4.5 million from $7.6 million for 2001. The decrease in cost of revenue in 2002 relative to 2001 was primarily due to the
reduction in direct product costs caused by the decline in product volume.

Gross Margin

Gross margin as a percentage of revenue decreased in 2003 to 46% from 49% for 2002. The decrease in gross margin as a percentage of revenue for 2003 relative to
2002 was due in large part to the reduced product revenue, which resulted in less coverage of the fixed component of the cost of product sales. In addition, the decrease in gross margin as a
percentage of revenue for 2003 relative to 2002 was due to higher service revenue as a percentage of total revenue for 2003, which generally carries a lower margin than product revenue.

Gross
margin as a percentage of revenue decreased in 2002 to 49% from 53% for 2001. The decrease in gross margin as a percentage of revenue for 2002 relative to 2001 was due to higher
service revenue as a percentage of total revenue for 2002, which generally carries a lower margin than product revenue, as well as the lower overall revenue base, which provided less coverage of the
fixed component of the cost of sales.

Operating Expenses

Research and development.Research and development expenses decreased by 35% in 2003 to $2.4 million from
$3.7 million for 2002. The decrease in research and development expenses in 2003 relative to 2002 was primarily due to the reduction in personnel and personnel related expense as a result of a
12% decline in average staffing levels and a reduction in outside services and external consulting expenses, as well as reduced capital expenditures and associated depreciation. Research and

27

---

development
expenses decreased by 30% in 2002 to $3.7 million from $5.3 million for 2001. The decrease in research and development expenses in 2002 relative to 2001 was primarily due to
the reduction in personnel and personnel related expense as a result of a 10% decline in staffing levels and a reduction in outside service costs.

Sales and marketing.Sales and marketing expenses remained relatively flat in 2003 at $3.6 million compared to
$3.7 million for 2002. Sales and marketing expenses decreased by 39% in 2002 to $3.7 million from $6.1 million for 2001. The decrease in sales and marketing expenses in 2002
relative to 2001 was due to decreased personnel and personnel related costs as a result of a 10% decline in staffing levels, decreased commission expense due to lower product sales, reductions in
marketing program expenditures and reductions in outside service costs.

General and administrative.General and administrative expenses increased by 31% in 2003 to $6.0 million from
$4.6 million for 2002. The increase in general and administrative expenses in 2003 relative to 2002 was due primarily to an increase in legal fees. General and administrative expenses decreased
by 8% in 2002 to $4.6 million from $5.0 million for 2001. The decrease in general and administrative expenses in 2002 relative to 2001 was a result of decreased personnel and external
labor costs, offset by increased outside professional services expenses.

Amortization of deferred stock compensation.Amortization of deferred stock compensation decreased by 62% in 2003 to $135,000
from $358,000 for 2002. The decrease in amortization of deferred stock compensation in 2003 relative to 2002 was due to the completion of option amortization, as well as forfeitures of stock options
by employees no longer with our company. Amortization of deferred stock compensation decreased by 60% in 2002 to $358,000 from $898,000 for 2001. The decrease in amortization of deferred stock
compensation in 2002 relative to 2001 was due to the completion of option amortization for certain option grants, as well as forfeitures of stock options by employees no longer with our company.

Other income (expense), net.Other income (expense), net increased by 6% in 2003 to $525,000 from $496,000 for 2002. The
increase in other income (expense), net in 2003 relative to 2002 was due primarily to net insurance proceeds of $570,000 received in satisfaction of a business interruption claim for losses incurred
by our New York City office following the September 11, 2001 terrorist attack on the World Trade Center, offset by lower interest income associated with a declining balance of cash, cash
equivalents and short-term investments and lower interest rates. Other income (expense), net decreased by 34% in 2002 to $496,000 from $756,000 for 2001. The decrease in other income
(expense), net in 2002 relative to 2001 was due to lower interest income associated with a declining balance of cash, cash equivalents and short-term investments and lower interest rates,
partially offset by $0.2 million in net grant proceeds received in 2002 from the New York City disaster relief program associated with the events of September 11, 2001.

Liquidity and Capital Resources

We have funded our operations since inception primarily from product and services 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 $6.4 million from the sale of Series B preferred
stock in December 1999 and the proceeds of approximately $5.7 million from the private sale of our common stock in October 2003.

We
had cash and cash equivalents of $5.4 million as of December 31, 2003 and $4.8 million as of December 31, 2002. For 2003, we had a net cash inflow of
$0.7 million resulting primarily from net cash proceeds from issuance of common stock of $6.0 million and proceeds from net sales of short-term investments of
$2.4 million, offset by net cash used in operations of $7.5 million. The net cash proceeds from issuance of common stock are primarily due to the private sale of 4,615,385 shares

28

---

of
our common stock to Gerald J. Burnett, our Chairman, President and Chief Executive Officer, and other members of his family at a price per share of $1.30, resulting in net proceeds of this private
financing, after deducting expenses of the financing, of $5.7 million. The net cash used in operations primarily reflected a net loss of $8.6 million and a decrease in deferred revenue
and customer deposits of $0.3 million, but was partially offset by an increase in accounts payable of $0.4 million, an increase in accrued liabilities and other of $0.2 million, a
decrease in inventories of $0.2 million and a decrease in prepaid expenses and other current assets of $0.1 million. The cash outflows associated with the net loss, along with the slight
decrease in inventories and prepaid expenses reflect the smaller scale of our business in 2003 relative to 2002. The increase in accounts payable and accrued liabilities and other reflect the timing
of disbursements relative to 2002.

For
2002, we had a net cash outflow of $2.7 million resulting primarily from net cash used in operations of $5.9 million, which was offset by proceeds from net sales of
short-term investments of $3.4 million. The net cash used in operations primarily reflected a net loss of $7.6 million, a decrease in accrued liabilities and other of
$1.3 million and a decrease in deferred revenue and customer deposits of $0.2 million, partially offset by a decrease in accounts receivable of $2.0 million, a decrease in prepaid
expenses and other current assets of $0.5 million and non-cash stock compensation expense of $0.4 million. The cash outflows associated with the net loss, reduced accrued
liabilities and reduced accounts receivable reflect the smaller scale of our business in 2002 relative to 2001.

For
2001, we had a net cash outflow of $14.2 million resulting primarily from net cash used in operations of $8.0 million, net purchases of short-term
investments of $5.8 million and purchases of property and equipment of $0.8 million. The net cash used in operations primarily reflected a net loss of $7.9 million, a decrease in
accounts payable of $1.4 million and a decrease in deferred revenue and customer deposits of $0.9 million, partially offset by non-cash stock compensation expense of
$0.9 million, a decrease in accounts receivable of $0.9 million and a decrease in inventories of $1.1 million. The cash outflows associated with the net loss, reduced inventories
and reduced accounts receivable reflect the smaller scale of our business in 2001 relative to 2000.

Expenditures
for property and equipment for 2003 were approximately $0.2 million. At December 31, 2003, we did not have any material commitments for future capital
expenditures. We anticipate spending approximately $0.4 million in capital expenditures in the next 12 months.

The
following table summarizes our known contractual obligations and commitments as of December 31, 2003 (in thousands) for the periods presented.

|                        |                             | Payments due by period
|----------------------- | --------------------------- | ----------------------
|
|Contractual Obligations |                             |                       
|                        | Long-Term Debt Obligations  |                       
|                        | Capital Lease Obligations   |                       
|                        | Operating Lease Obligations |                       
|                        | Purchase Obligations        |                       
|                        | Other Long-Term Liabilities |                       
|                        |                             |                       
|                        | Total                       |                       
|                        |                             |                       

On
February 27, 2002, we entered into a Loan and Security Agreement with a financial institution to borrow up to $4.5 million under a revolving line of credit. On
December 15, 2002, we entered into an amendment to the Loan and Security Agreement to increase the maximum funds available under the line of credit to $6.0 million and extend the term of
the agreement. The amended Loan and Security Agreement, as further amended in March 2003, had an expiration date of February 27, 2004. The agreement, as amended, includes a first
priority security interest in all our assets, excluding

29

---

intellectual
property. Gerald Burnett, our Chairman and Chief Executive Officer, has provided a collateralized guarantee to the financial institution, assuring payment of our obligations under the
agreement and as a consequence, a number of restrictive covenants from the original Loan and Security Agreement have been deleted, except for quick ratio and loan to value covenants, allowing us
greater access to the full amount of the facility. In addition to the guarantee provided to the financial institution, Dr. Burnett provided a personal guarantee to Avistar, assuring the
provision of $6.0 million to Avistar in the event the line of credit from the financial institution was unavailable for any reason.

On
October 15, 2003, we completed the private sale of 4,615,385 shares of our common stock to Dr. Burnett and other members of his family at a price per share of $1.30. The
net proceeds of this private financing, after deducting expenses of the financing, were approximately $5.7 million. Under the terms of the private placement, Dr. Burnett agreed to
certain restrictions on 1,602,847 of the 3,661,539 shares purchased by him. These restrictions require Dr. Burnett to vote such shares in the same proportion as our outstanding common stock not
beneficially owned by Dr. Burnett. As a result of this private placement, Dr. Burnett's previous commitment to provide us with up to $6.0 million in funds in the event that we
were not able to borrow at least $6.0 million under the Loan and Security Agreement was terminated by its terms.

During
2003, we borrowed $1.5 million under the Loan and Security Agreement. These outstanding borrowings were repaid in October 2003 using a portion of the proceeds from
the private sale of common stock to Dr. Burnett and other members of his family. As of December 31, 2003, we did not have any borrowings outstanding under the line of credit.

On
February 27, 2004, the Loan and Security Agreement was amended to change the maximum borrowings thereunder to $3.5 million, subject to certain quick ratio and loan to
value covenants, and to extend the term of the Loan and Security Agreement to February 27, 2005. In connection with this amendment, Dr. Burnett's collateralized guarantee was amended to
reduce the amount of such guarantee to $3.5 million. In addition to the guarantee provided to the financial institution, Dr. Burnett
has also provided a personal guarantee to Avistar assuring the provision of up to $2.0 million to Avistar in the event that at least $2.0 million is not available to us under the line of
credit, or an alternate financing arrangement, for any reason. As of the date of the filing of this report, we had no outstanding borrowings under the line of credit and were eligible to borrow up to
$3.5 million.

We
currently believe that existing cash and cash equivalents balances, short-term investments and available borrowings under the Loan and Security Agreement, as amended, and
the commitment from our CEO 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. We may need to arrange for the availability of additional funding upon the
expiration of the Loan and Security Agreement on February 27, 2005, either through the execution of an extension of the Loan and Security Agreement or through other means, in order to meet our
future business requirements for the following 12 months. Additional funds and additional financing may not be available on favorable terms, or at all. If we are unable to obtain additional
funding on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which
could seriously harm our business, financial condition, results of operations and ability to continue operations. Furthermore, any additional equity financing may be dilutive to our stockholders and
such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock, and debt financing, if available, may involve significant fees, interest payment
obligations and 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 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 revenue, the costs and

30

---

timing
of our product development efforts and the success of these development efforts, the costs and timing of our sales and marketing activities, the extent to which our existing and new products
gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights including, without
limitation, the costs and result of CPI's litigation with Polycom and other factors, all of which may impact our ability to achieve and maintain profitability.

Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS 148, "Summary of Statement No. 148 Accounting for Stock-Based Compensation-Transition and
Disclosure-an Amendment of FASB Statement No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have adopted the disclosure requirements of SFAS 148.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards
for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the statement, which
previously were often classified as equity, must now be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003, and
otherwise became effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our condensed
consolidated financial statements.

Factors Affecting Future Operating Results

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. If the market for our system 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 about the uses and benefits of our system. Our efforts to educate potential customers may not result in our system achieving 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. Similarly, customers using existing information systems in which they have made
significant investments may refuse to adopt our system if they perceive that our offerings will not complement their existing systems. Consequently, the conversion from traditional methods of
communication to the extensive use of networked video may not occur as rapidly as we wish.

We have incurred substantial losses in the past and may not be profitable in the future.

We
incurred net losses of $8.6 million for 2003, $7.6 million for 2002 and $7.9 million for 2001. As of December 31, 2003, our accumulated deficit was
$80.8 million. Our revenue may not increase, or even remain at its current level. In addition, our operating expenses may increase as we continue to develop our business in the future. As a
result, to become profitable, we will need to increase our revenue by increasing sales to existing customers and by attracting additional customers. If our expenses increase more rapidly than our
revenue, or if revenue and expense levels remain the same, we may never become profitable. If we fail to achieve our plan of generating positive cash flow from operations over the next
12 months, we may be required to raise additional funds, and additional financing may not be available on favorable terms, if at all. Although our Chairman and Chief Executive Officer has

31

---

guaranteed
our Loan and Security Agreement, we cannot be certain that he will continue to do so. We cannot predict whether or when we will become profitable. If we do become profitable, we may not be
able to sustain or increase profitability on a quarterly or annual basis. In addition, if we fail to reach 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.

General economic conditions have and may continue to reduce our revenues and harm our business.

The
international economic slowdown and the downturn in the investment banking industry that began in the year 2000 has negatively affected our business in 2001, 2002 and 2003, and may
continue to do so in the future. During this period, the investment banking industry suffered a sharp decline, which caused many of our existing and potential customers to cancel or delay orders for
our products. If our customers and potential customers continue to delay ordering our products, we will fall short of our revenue expectations for 2004 and beyond. The outlook for the video
communications industry is uncertain. 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.

We have filed a complaint alleging patent infringement against Polycom, Inc. The prosecution of this lawsuit could require us to expend significant
financial and managerial resources and may have a material negative impact on our business. If we do not prevail, we may be required to pay monetary damages.

On
September 23, 2002, CPI, our wholly-owned subsidiary, commenced a patent infringement lawsuit against Polycom, Inc. alleging that several Polycom videoconferencing
products infringe four patents held by CPI. The suit was filed in the United States District Court for the Northern District of California. The four patents involved are U.S. Patent Nos. 5,867,654,
5,896,500, 6,212,547 and 6,343,314. These patents cover technologies relating to video and data conferencing over unshielded twisted pair (UTP) networks, distributed call-state management,
separate monitors for simultaneous computer-based data sharing and videoconferencing and remote participant hold and disconnect functions in multi-party conferencing. Polycom responded to CPI's claims
on November 14, 2002, at
which time it both answered the complaint and asserted counterclaims against CPI for non-infringement, invalidity and unenforceability On January 31, 2003, Polycom filed a motion
with the court, which was subsequently granted by the court on March 7, 2003, requesting permission to amend its counterclaims to incorporate claims of alleged infringements by Avistar
Communications of four PictureTel patents that Polycom has told us it has had assigned to it. Three of the four counterclaims involved a third party, and Polycom dropped these three counterclaims on
June 23, 2003, subsequent to an agreement between Polycom and the third party. On August 9, 2003, CPI and Polycom filed motions for summary judgment with the court, seeking judgment as a
matter of law concerning CPI's ability to qualify for "small entity status" in the filing of its four patents being asserted against Polycom. On October 17, 2003 the court denied Polycom's
motion for summary judgment and granted CPI's motion for summary judgment, thereby negating Polycom's defense of unenforceability concerning CPI's having filed these patents as a "small entity."

Briefings
on claims construction issues and a hearing before the presiding judge (Markman hearing) took place on March 8, 2004. A trial date for CPI's claims against Polycom and
Polycom's counterclaims has been set for January 10, 2005. The prosecution of this lawsuit and the defense of the Polycom counterclaim may require us to expend significant financial and
managerial resources and therefore may have a material negative impact on our business. The duration and ultimate outcome of this litigation are uncertain. In addition, an adverse judgment, if entered
against CPI or Avistar, could require CPI or Avistar to pay substantial compensation and/or damages to Polycom, which could harm

32

---

our
business, financial position and results of operations and cause our stock price to decline substantially. Litigation such as this suit can take years to resolve and can be expensive to prosecute
and defend. Regardless of the outcome, the prosecution of CPI's claims and defense of the counterclaims in this lawsuit may require us to obtain additional financing.

Our expected future working capital needs may require that we seek additional debt or equity funding which, if not available, could cause our business to
suffer.

Our
future liquidity and working capital requirements will depend upon numerous factors, including:



We
may need to arrange for the availability of additional funding in order to meet our future business requirements. 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 future opportunities, respond to competitive pressures or unanticipated requirements, or finance our
litigation with Polycom, which could seriously harm our business, financial condition, results of operations and ability to continue operations. There can be no assurance that such funding will be
available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and such equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock, 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 lengthy sales cycle to acquire new customers or large follow-on orders 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 due to the time needed to educate customers about the
uses and
benefits of our system, and the significant 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, or 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. Recent economic conditions 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 in the future continue to cause, our operating results to vary significantly from quarter to quarter and year to
year. This makes it difficult for us to forecast revenue, and could cause volatility in the market price of our common stock. A lost or delayed order could result in lower revenue than expected in a
particular quarter or year.

33

---

Since a majority of our revenue has come from follow-on orders, our financial performance could be harmed if we fail to obtain follow-on
orders in the future.

Our
customers typically place limited initial orders for our networked video communications system, as they seek to evaluate its usefulness and value. Our strategy is to pursue
additional and larger follow-on orders after these initial orders. Revenue generated from follow-on orders accounted for approximately 96% of our revenue in 2003 and 95% in
2002. Economic conditions have contributed to decreases in our clients' capital spending in the past, and we have experienced a decrease in the size and number of follow-on orders. Our
future financial performance depends on successful initial installations of our system and successful generation of follow-on orders as the Avistar network expands within a customer
organization. If our system does not meet the needs and expectations of customers, we may not be able to generate follow-on orders.

Because we depend on a few customers for a majority of our revenue, the loss of one or more of them could cause a significant decrease in our
revenue.

We
have historically derived the majority of our revenue from a limited number of customers, particularly Deutsche Bank and their affiliates. Collectively, this customer accounted for
62% of our revenue for 2003. This contribution reflects the acquisition by Deutsche Bank of other financial services firms that were previously Avistar customers, as well as the purchase of Avistar
technology by Deutsche Bank for new accounts as part of Deutsche Bank's client connectivity program. No other customers individually accounted for greater than 10% of our total revenue for 2003. For
2002, Deutsche Bank and JP Morgan Chase & Company and their affiliates accounted for 66% of our revenue, each of whom generated more than 10% of our total revenue. We expect to continue to
depend upon a limited number of customers for a substantial portion of our revenue. As of December 31, 2003, approximately
89% of our accounts receivable were concentrated with one customer. As of December 31, 2002, approximately 65% of our accounts receivable were concentrated with two customers, each of whom
represented more than 10% of our total accounts receivable balance.

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. Because we currently depend on a limited number of customers with lengthy budgeting cycles and unpredictable buying patterns, 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.

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. The market for our system is characterized by:



Our
system is designed to work with a variety of hardware and software configurations and data networking infrastructures used by our customers. The majority of these customer networks
rely on

34

---

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
transport video and 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 or improve our system in response to evolving industry standards or customers' demands, our
system could become obsolete, which would harm our financial condition and reputation.

Difficulties or delays in installing our products could harm our revenue and margins.

We
recognize 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. If we experience difficulties with installation or do not meet deadlines due to delays caused by our customers or ourselves, we could be required to devote more customer
support, technical and other resources to a particular installation. If we encounter delays in installing our products for new or existing customers or installation requires significant amounts of our
professional services support, our revenue recognition could be delayed, our costs could increase and our margins could suffer.



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, Tandberg Inc. and VCON Telecommunications Ltd. We believe we may face
increasing competition in the future from alternative video communications solutions that employ new technologies or new combinations of technologies from companies such as Cisco Systems, Inc.,
Hewlett-Packard Company, Microsoft Corporation, RealNetworks, Inc. and WebEx Communications, Inc., that enable web-based or network-based video communications with
low-cost digital camera systems. The market in which we operate is highly competitive. In addition, because our industry is relatively new and one which is characterized by rapid
technological change, evolving user needs, developing industry standards and protocols and the frequent 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.

We
expect competition to increase in the future from existing 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.

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, or that competitive pressures faced by us will not harm our business, financial condition and results of operations.

35

---

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 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 CPI holds patents and has filed patent applications covering some of the inventions embodied in our systems, our means of protecting our proprietary rights
may not be adequate. It may be possible for a third party to 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. Unauthorized
copying, use or reverse engineering of our system could harm our business, financial condition or results of operations.

Infringement claims could require us to expend significant financial and managerial resources.

A
third party could claim that our technology infringes upon its proprietary rights. As the number of software systems in our target market increases and the functionality of these
systems overlap, we believe that the number of infringement suits filed by software developers may increase. At a hearing held on March 7, 2003, the judge in the existing lawsuit in which CPI
is claiming that Polycom infringes four CPI patents granted Polycom's motion to amend its counterclaims to include claims of alleged infringements by Avistar Communications of four PictureTel patents
that Polycom has told us it has had assigned to it. Three of the four counterclaims for patent infringement related to equipment provided to Avistar by a third-party. These three counterclaims
involving the third party were dropped on June 23, 2003, subsequent to an agreement between Polycom and the third party.

Briefings
on claims construction issues and a hearing before the presiding judge (Markman hearing) took place on March 8, 2004. A trial date for CPI's claims against Polycom and
Polycom's remaining counterclaim has been set for January 10, 2005. Prosecuting and defending against any infringement claims, even those that are not meritorious, could result in the
expenditure of significant financial and managerial resources, could take years to resolve and may require us to obtain additional financing. In addition, if we are found liable for infringement, it
could require CPI or Avistar to pay substantial compensation and/or damages to Polycom and we may not be able to continue offering that portion of our system that is found to be infringing.
Redesigning our system components to avoid alleged or actual infringement could result in the expenditure of significant and managerial resources and diminish the value of our system, which could harm
our business, financial position and results of operations and cause our stock price to decline substantially.

Our system could have defects for which we could be held liable for, and which could result in lost revenue, increased costs, 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

36

---

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.

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.

The loss of any of our outside contract manufacturers or third party equipment suppliers that produce key components of our system could significantly disrupt our
manufacturing and new product development process.

We
depend on outside contract manufacturers to produce components of our systems. A significant portion of our compression and decompression product, or gateway product, is currently
supplied by a single source, Tandberg, Inc. In addition, we depend on various third party suppliers for the cameras, microphones, speakers and monitors that we install at desktops and in
conference rooms as a part of each video communications network system. Two of these contract manufacturers, SAE Materials Inc. and Pacific Corporation, are single source suppliers for key
components of our products. Another supplier, Equator Technologies Inc., is our only current source of a component used in products recently introduced to the marketplace. Our reliance on these
third parties involves a number of risks, including:



37

---



If
these manufacturers or suppliers cease to provide us with the assistance or the components necessary for the operation of our business, we may not be able to identify alternate
sources in a timely fashion. Any transition to alternate manufacturers or suppliers would likely result in operational problems and increased expenses and could cause delays in the shipment of or
otherwise limit our ability to provide our products. We cannot assure you that we would be able to enter into agreements with new manufacturers or suppliers on commercially reasonable terms, or at
all. Any disruption in product flow may limit our revenue, delay our product development, seriously harm our competitive position and/or result in additional costs or cancellation of orders by our
customers.

If we are unable to expand our direct sales force and/or add distribution channels, our business will suffer.

To
increase our revenue, we must increase the size of our direct sales force and add indirect distribution channels, such as systems integrators, product partners and/or value-added
resellers, and/or effect sales through our customers. If we are unable to maintain or increase our direct sales force or add indirect distribution channels due to our own cost constraints, limited
availability of qualified personnel 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. Furthermore, it can take several months before a new hire becomes a productive member of our sales force. The loss of existing direct
and/or indirect salespeople, or the failure of new salespeople and/or indirect sales partners to develop the necessary skills in a timely manner, could reduce 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.

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 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.

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 manage growth effectively will harm our business, financial condition and operating results. Furthermore, in order to remain competitive or to expand our business,
we may find it necessary or 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.

38

---

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 58% of total revenue for 2003 and 49% for 2002. Some of the
risks we may encounter in conducting international business activities include the following:



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.

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.

We may not meet the continued listing criteria for the NASDAQ SmallCap Market, which could materially adversely affect the price and liquidity of our stock, our
business and our financial condition.

For
continued listing of our common stock on The NASDAQ SmallCap Market, we are required to, among other things (i) maintain stockholders' equity of at least $2.5 million,
and (ii) maintain a minimum closing bid price of our common stock of at least $1.00. As of December 31, 2003, we had stockholders' equity of $5.5 million and the closing price of
our common stock on March 1, 2004 was $1.36. If our stockholders' equity declines below $2.5 million or the closing bid price of our common stock remains below $1.00 for 30 or more
consecutive trading days, our common stock could be subject

39

---

to
delisting from trading on The NASDAQ SmallCap Market. There can be no assurance that we will continue to meet all requirements for continued listing on The NASDAQ SmallCap Market, including the
minimum bid price requirement, the requirement for a minimum stockholder's equity of $2.5 million or the other continued listing standards of such market.

If
we are unable to continue to list our common stock for trading on The NASDAQ SmallCap Market, there may be adverse impact on the market price and liquidity of our common stock, and
our stock may be subject to the "penny stock rules" contained in Section 15(g) of the Securities Exchange Act of 1934, as amended, and the rules promulgated there under. Delisting of our common
stock from The NASDAQ SmallCap Market could also materially adversely affect our business, including, among other things: our ability to raise additional financing to fund our operations; our ability
to attract and retain customers; and our ability to attract and retain personnel, including management personnel. In
addition, if we were unable to list our common stock for trading on NASDAQ, many institutional investors would no longer be able to retain their interests in and/or make further investments in our
common stock because of their internal rules and protocols.

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, that 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:



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, from time to time, experienced significant price and volume fluctuations, which have particularly affected the market prices for high technology companies, and
which often are unrelated and disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, political and market conditions, may
negatively affect the market price of our common stock.

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.

40

---

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 our control 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 that will
affect the value of your investment.

Our
executive officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 72% of our common stock as of December 31, 2003. 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 our company, which could
cause the market price of our common stock to decline.

Item 7a.Quantitative and Qualitative Disclosures About Market Risk

We develop products primarily in the United States and sell those products primarily in North America, Europe and Asia. International revenue, which consists of
sales to customers with operations principally in Western Europe and Asia, comprised 58% of total revenue for the year ended December 31, 2003 and 49% for the year ended December 31,
2002. As a result, our financial condition could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all of our sales are
currently made in United States dollars, a strengthening of the United States dollar could make our products less competitive in foreign markets. We do not use derivative financial instruments for
speculative or trading purposes, nor do we engage in any foreign currency hedging transactions.

Our
interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term
instruments. We expect that our interest income will be negatively affected by declines in short-term interest rates.

Cash and Cash Equivalents and Short-Term Investments

Cash equivalents consist primarily of commercial paper and money market and municipal bond funds acquired with remaining maturity periods of three months or less
and are stated at cost, plus accrued interest that approximates market value. Short-term investments consist of corporate notes that are classified as available for sale and are stated at
fair value. We would not expect our operating results or cash flow to be significantly impacted by the effect of sudden changes in market interest rates given the nature of our short-term
investments.

41

---

The
following table provides information about our investment portfolio. For investment securities, the table presents cash and cash equivalents and short-term investments
and related weighted average interest rates by category at December 31, 2003.

Amounts

Weighted Average
Interest Rate(in thousands)DescriptionCash, cash equivalents and short-term investments:Cash

$
427

Market preferreds


1,000

Other cash equivalents


4,011

1.07
%Fair Value at December 31, 2003

$
5,438


Item 8.Financial Statements and Supplementary Data

Our consolidated financial statements and the independent auditors' report appear on pages F-1 through F-21 of this Report.

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

On May 3, 2002, we dismissed Arthur Andersen LLP as our independent public accountants, and on such date also selected KPMG LLP to replace Arthur Andersen
in this role. This change in our independent accountants was the subject of our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2002.

Item 9a.Controls and Procedures

(a)   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. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

(b)   Changes
in internal control over financial reporting: There was no change in our internal control over financial reporting that occurred during the period covered by
this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

42

---



PART III

Item 10.Directors and Executive Officers of the Registrant

The information required by this item concerning our directors is incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's Proxy Statement related to the 2004 Annual Meeting of Stockholders, to be filed by the Company with
the Securities and Exchange Commission within 120 days of the end of 2003 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Management" and certain other information required by this item is
incorporated by reference from the section captioned "Principal Stockholders" contained in the Proxy Statement.

We
have adopted a code of ethics that applies to our principal executive officer 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:



We
intend to satisfy the disclosure requirement under Item 10 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 the Proxy
Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to the sections captioned "Principal Stockholders" and "Record Date and Principal Share
Ownership" and the table captioned "Equity Compensation Plan Information" contained in the Proxy Statement.

Item 13.Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the sections captioned "Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" contained in the 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 the Proxy Statement.

43

---

PART IV

Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K



The following financial statements are incorporated by reference in Item 8 of this Report:

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                         |  | F-2 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                         |  | F-3 
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001           |  | F-4 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001 |  | F-5 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001           |  | F-6 
|Notes to the Financial Statements                                                                    |  | F-7 



Schedule IIValuation
and Qualifying Accounts and Reserves (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.



|3.2(1)     |  | Restated Certificate of Incorporation                                                                                                 
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|3.3(2)     |  | Bylaws of Avistar Communications Corporation                                                                                          
|4.1(1)     |  | Specimen Certificate evidencing shares of Common Stock                                                                                
|4.2(1)     |  | Registration and Information Rights Agreement dated December 9, 1999                                                                  
|10.1(1)    |  | 1997 Stock Option Plan, as amended*                                                                                                   
|10.1.1(1)  |  | 1997 Stock Option Plan Form of Stock Option Agreement*                                                                                
|10.2(1)    |  | 2000 Stock Option Plan, as amended*                                                                                                   
|10.3(3)    |  | 2000 Director Option Plan, as amended*                                                                                                
|10.4(1)    |  | Form of Director Option Agreement*                                                                                                    
|10.5(4)    |  | 2000 Employee Stock Purchase Program, as amended*                                                                                     
|10.6(1)    |  | Form of Indemnification Agreement*                                                                                                    
|10.7(5)   |  | Preferred Supplier Agreement dated June 24, 1997 by and between Avistar and Tandberg, Inc., including modifications Nos. 1, 2, 3 and 4
|10.7.1(1) |  | Modification No. 5 to the Preferred Supplier Agreement dated June 27, 2000                                                            
|10.7.2(2) |  | Modification No. 6 to the Preferred Supplier Agreement dated November 27, 2000                                                        
|10.8(6)    |  | Settlement Agreement and Release between the Registrant and R. Stephen Heinrichs dated April 26, 2001*                                
|10.9(7)    |  | Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia dated February 27, 2002                        
|           |  |                                                                                                                                       

44

---

|10.9.1(7) |  | First Amendment dated December 17, 2002 to Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia                                                     
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9.2(7) |  | Unconditional Guaranty of the Gerald J. Burnett and Marjorie J. Burnett Revocable Trust dated December 17, 2002                                                                       
|10.9.3(7) |  | Unconditional Guaranty of Gerald J. Burnett dated December 17, 2002                                                                                                                   
|10.9.4(7)  |  | Second Amendment dated March 10, 2003 to Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia                                                       
|10.9.5     |  | Fourth Amendment dated February 27, 2004 to Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia                                                    
|10.9.6     |  | Reaffirmation of Unconditional Guaranty of the Gerald J. Burnett and Marjorie J. Burnett Revocable Trust dated February 24, 2004                                                      
|10.9.7     |  | Guaranty of Gerald J. Burnett dated February 27, 2004                                                                                                                                 
|10.10(8)   |  | Office Lease Agreement between CA-Twin Dolphin Plaza Limited Partnership and the Registrant dated July 30, 2003                                                                       
|10.11(8)   |  | Common Stock Purchase Agreement by and among the Registrant and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust, Grady Burnett and Wendolyn Hearn dated October 15, 2003
|21.1(7)    |  | Subsidiaries of the Company                                                                                                                                                           
|23.1       |  | Consent of KPMG LLP                                                                                                                                                                   
|24.1       |  | Power of Attorney (see page 47)                                                                                                                                                       
|31.1       |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer                                                                                                                 
|31.2       |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer                                                                                                                 
|32         |  | 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      

---

45

---

(b)Reports on Form 8-K.On October 24, 2003, the Company furnished a Current Report
on Form 8-K relating to the Company's announcement of its earnings for the three months ended September 30, 2003. On October 20, 2003, the Company filed a Current
Report on Form 8-K relating to the Company's announcement that it had entered into a common stock purchase agreement with certain investors and completed the private sale of its
common stock to such investors.

(c)Exhibits.See Item 14(a)(3) above.

(d)Financial Statement Schedules.See Item 14(a)(2) above.

46

---



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
on Form 10K to be signed on its behalf by the undersigned, thereunto duly authorized.

|                     |  | AVISTAR COMMUNICATIONS
CORPORATION
|-------------------- |  | ----------------------------------
|                     |  |                                   
|                     |  | By:                               
|                     |  |                                   
|Date: March 16, 2004 |  |                                   

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerald J. Burnett and Robert J. Habig, his true and
lawful attorney-in-fact and agent, 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 attorney-in-fact and agent, 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 attorney-in-fact and agent, 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. BURNETTGerald J. Burnett       |  | Chief Executive Officer and Chairman (Principal Executive Officer)   |  | March 16, 2004
|/s/ROBERT J. HABIGRobert J. Habig           |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 16, 2004
|/s/WILLIAM L. CAMPBELLWilliam L. Campbell   |  | Executive Vice President and Director                                |  | March 16, 2004
|/s/R. STEPHEN HEINRICHSR. Stephen Heinrichs |  | Director                                                             |  | March 16, 2004
|/s/ROBERT P. LATTARobert P. Latta           |  | Director                                                             |  | March 16, 2004
|                                            |  |                                                                      |  |               

47

---

|/s/ROBERT M. METCALFERobert M. Metcalfe |  | Director |  | March 16, 2004
|--------------------------------------- |  | -------- |  | --------------
|/s/DAVID M. SOLODavid M. Solo           |  | Director |  | March 16, 2004

48

---



INDEX TO FINANCIAL STATEMENTS

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                         |  | F-2 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                         |  | F-3 
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001           |  | F-4 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001 |  | F-5 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001           |  | F-6 
|Notes to the Financial Statements                                                                    |  | F-7 

F-1

---



Independent Auditors' Report

The
Board of Directors and Stockholders
Avistar Communications Corporation:

We
have audited the accompanying consolidated balance sheets of Avistar Communications Corporation and subsidiaries as of December 31, 2003 and 2002 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2003. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule. 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 financial statements and financial statement schedule based on our audits. The 2001 financial statements and financial statement schedule of Avistar
Communications Corporation were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and financial statement schedule in
their report dated January 23, 2002 (except with respect to a certain matter as to which the date is February 27, 2002).

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements as of and for the years ended December 31, 2003 and 2002 referred to above present fairly, in all material respects, the
financial position of Avistar Communications Corporation and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related 2003 and 2002 financial
statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

| |  | /s/KPMG LLP
| |  | -----------

Mountain
View, California
January 16, 2004, except as to
Note 3, which is as of
February 27, 2004

F-2

---



AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS        as of December 31, 2003 and 2002        (in thousands, except share and per
share data)

|                                      |                       | December 31,
2003                                                                                                                                                                |                                            | December 31,
2002 |        
|------------------------------------- | --------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------- | -------
|Assets:                               |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      | Current assets:       |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       | Cash and cash equivalents                                                                                                                                                        |                                            | $                 | 5,438  
|                                      |                       | Short-term investments                                                                                                                                                           |                                            |                   |       
|                                      |                       | Accounts receivable, net of allowance for doubtful accounts of $44 and $69 at December 31, 2003 and 2002, respectively                                                           |                                            |                   | 695    
|                                      |                       | Inventories, including inventory shipped to customers' sites, not yet installed of $41 and $71 at December 31, 2003 and 2002, respectively                                       |                                            |                   | 937    
|                                      |                       | Prepaid expenses and other current assets                                                                                                                                        |                                            |                   | 515    
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       |                                                                                                                                                                                  | Total current assets                       |                   |        
|                                      |                       | Property and equipment, net                                                                                                                                                      |                                            |                   | 352    
|                                      |                       | Other assets                                                                                                                                                                     |                                            |                   | 291    
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       |                                                                                                                                                                                  | Total assets                               |                   | $      
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        
|Liabilities and Stockholders' Equity: |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      | Current liabilities:  |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       | Accounts payable                                                                                                                                                                 |                                            | $                 | 941    
|                                      |                       | Deferred revenue and customer deposits                                                                                                                                           |                                            |                   | 671    
|                                      |                       | Accrued liabilities and other                                                                                                                                                    |                                            |                   | 1,125  
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       |                                                                                                                                                                                  | Total current liabilities                  |                   |        
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      | Stockholders' equity: |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       | Common stock, $0.001 par value; 250,000,000 shares authorized at December 31, 2003 and 2002; 31,390,383 and 26,465,058 shares issued at December 31, 2003 and 2002, respectively |                                            |                   | 31     
|                                      |                       | Less: treasury common stock, 1,179,625 shares at December 31, 2003 and 2002, at cost                                                                                             |                                            |                   | (51    
|                                      |                       | Additional paid-in-capital                                                                                                                                                       |                                            |                   | 86,278 
|                                      |                       | Deferred stock compensation                                                                                                                                                      |                                            |                   |       
|                                      |                       | Other comprehensive income                                                                                                                                                       |                                            |                   |       
|                                      |                       | Accumulated deficit                                                                                                                                                              |                                            |                   | (80,767
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       |                                                                                                                                                                                  | Total stockholders' equity                 |                   |        
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        
|                                      |                       |                                                                                                                                                                                  | Total liabilities and stockholders' equity |                   | $      
|                                      |                       |                                                                                                                                                                                  |                                            |                   |        

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

F-3

---



AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        for the years ended December 31, 2003, 2002 and 2001        (in thousands,
except per share data)

|                                                                                    |                                              | Year Ended December 31,  |       
|----------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------ | ------
|
|Revenue:                                                                            |                                              |                          |       
|                                                                                    | Product                                      |                          | $     
|                                                                                    | Services, maintenance and support            |                          |       
|                                                                                    |                                              |                          |       
|                                                                                    |                                              | Total revenue            |       
|                                                                                    |                                              |                          |       
|Cost of revenue:                                                                    |                                              |                          |       
|                                                                                    | Product                                      |                          |       
|                                                                                    | Services, maintenance and support            |                          |       
|                                                                                    |                                              |                          |       
|                                                                                    |                                              | Total cost of revenue    |       
|                                                                                    |                                              |                          |       
|                                                                                    |                                              | Gross margin             |       
|                                                                                    |                                              |                          |       
|Operating Expenses:                                                                 |                                              |                          |       
|                                                                                    | Research and development                     |                          |       
|                                                                                    | Sales and marketing                          |                          |       
|                                                                                    | General and administrative                   |                          |       
|                                                                                    | Amortization of deferred stock compensation* |                          |       
|                                                                                    |                                              |                          |       
|                                                                                    |                                              | Total operating expenses |       
|                                                                                    |                                              |                          |       
|                                                                                    |                                              | Loss from operations     |       
|                                                                                    |                                              |                          |       
|Other income (expense)                                                              |                                              |                          |       
|                                                                                    | Interest income                              |                          |       
|                                                                                    | Other income (expense), net                  |                          |       
|                                                                                    |                                              |                          |       
|                                                                                    |                                              | Total other income, net  |       
|                                                                                    |                                              |                          |       
|Loss before provision for (recovery from) income taxes                              |                                              |                          | (8,599
|                                                                                    |                                              |                          |       
|Provision for (recovery from) income taxes                                          |                                              |                          | 20    
|                                                                                    |                                              |                          |       
|Net loss                                                                            |                                              |                          | (8,619
|                                                                                    |                                              |                          |       
|Net loss per sharebasic and diluted                                                |                                              | $                        | (0.33 
|                                                                                    |                                              |                          |       
|Weighted average shares used in calculating basic and diluted net loss per share    |                                              |                          | 26,368
|                                                                                    |                                              |                          |       
|                                                                                    |                                              |                          |       
|* Amortization of deferred stock compensation excluded from the following expenses: |                                              |                          |       
|                                                                                    | Cost of revenue                              |                          | $     
|                                                                                    | Research and development                     |                          |       
|                                                                                    | Sales and marketing                          |                          |       
|                                                                                    | General and administrative                   |                          |       
|                                                                                    |                                              |                          |       
|                                                                                    |                                              | $                        | 135   
|                                                                                    |                                              |                          |       

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

F-4

---



AVISTAR COMMUNICATIONS CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        for the years ended December 31, 2003, 2002 and 2001        (in thousands, except
share amounts)

|                                                                               |  | Common Stock |  | Treasury Stock |    |  |           |  |   |     |   |   |        |   |  
|------------------------------------------------------------------------------ |  | ------------ |  | -------------- | -- |  | --------- |  | - | --- | - | - | ------ | - | -
|
|
|Balance at December 31, 2000                                                   |  | 26,266,990   |  | $              | 26 |  | 1,143,625 |  | $ | (40 | ) | $ | 80,184 |   | $
|Purchase of common stock pursuant to stock repurchase program                  |  |             |  |                |   |  | 22,500    |  |   |    |   |   | (34    | ) |  
|Issuance of common stock to employees pursuant to employee stock purchase plan |  | 63,776       |  |                |   |  |          |  |   |    |   |   | 201    |   |  
|Issuance of common stock to employees pursuant to exercise of options          |  | 31,837       |  |                |   |  |          |  |   |    |   |   | 21     |   |  
|Amortization of deferred stock compensation, net of forfeitures                |  |             |  |                |   |  |          |  |   |    |   |   | (364   | ) |  
|Non-employee stock-based compensation                                          |  |             |  |                |   |  |          |  |   |    |   |   | 31     |   |  
|Unrealized gain on short-term investments                                      |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|Net loss                                                                       |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|                                                                               |  |              |  |                |    |  |           |  |   |     |   |   |        |   |  
|Balance at December 31, 2001                                                   |  | 26,362,603   |  |                | 26 |  | 1,166,125 |  |   | (40 | ) |   | 80,039 |   |  
|                                                                               |  |              |  |                |    |  |           |  |   |     |   |   |        |   |  
|Purchase of common stock pursuant to stock repurchase program                  |  |             |  |                |   |  | 13,500    |  |   | (11 | ) |   |       |   |  
|Issuance of common stock to employees pursuant to employee stock purchase plan |  | 98,305       |  |                |   |  |          |  |   |    |   |   | 109    |   |  
|Issuance of common stock to employees pursuant to exercise of options          |  | 4,150        |  |                |   |  |          |  |   |    |   |   | 4      |   |  
|Amortization of deferred stock compensation, net of forfeitures                |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|Non-employee stock-based compensation                                          |  |             |  |                |   |  |          |  |   |    |   |   | 102    |   |  
|Unrealized loss on short-term investments                                      |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|Net loss                                                                       |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|                                                                               |  |              |  |                |    |  |           |  |   |     |   |   |        |   |  
|Balance at December 31, 2002                                                   |  | 26,465,058   |  |                | 26 |  | 1,179,625 |  |   | (51 | ) |   | 80,254 |   |  
|                                                                               |  |              |  |                |    |  |           |  |   |     |   |   |        |   |  
|Issuance of common stock to employees pursuant to employee stock purchase plan |  | 87,191       |  |                |   |  |          |  |   |    |   |   | 64     |   |  
|Issuance of common stock to employees pursuant to exercise of options          |  | 222,749      |  |                |   |  |          |  |   |    |   |   | 219    |   |  
|Issuance of common stock pursuant to private placement (net of placement fees) |  | 4,615,385    |  |                | 5  |  |          |  |   |    |   |   | 5,698  |   |  
|Amortization of deferred stock compensation, net of forfeitures                |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|Non-employee stock-based compensation                                          |  |             |  |                |   |  |          |  |   |    |   |   | 43     |   |  
|Unrealized loss on short-term investments                                      |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|Net loss                                                                       |  |             |  |                |   |  |          |  |   |    |   |   |       |   |  
|                                                                               |  |              |  |                |    |  |           |  |   |     |   |   |        |   |  
|Balance at December 31, 2003                                                   |  | 31,390,383   |  | $              | 31 |  | 1,179,625 |  | $ | (51 | ) | $ | 86,278 |   | $
|                                                                               |  |              |  |                |    |  |           |  |   |     |   |   |        |   |  

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

F-5

---



AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        for the years ended December 31, 2003, 2002 and 2001        (in
thousands)

|                                      |                                                                             | Year Ended December 31,                       |                                          
|------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------- | -----------------------------------------
|
|Cash Flows from Operating Activities: |                                                                             |                                               |                                          
|                                      | Net loss                                                                    |                                               | $                                        
|                                      | Adjustments to reconcile net loss to net cash used in operating activities: |                                               |                                          
|                                      |                                                                             | Depreciation                                  |                                          
|                                      |                                                                             | Stock-based compensation                      |                                          
|                                      |                                                                             | Compensation on options issued to consultants |                                          
|                                      |                                                                             | Provision for doubtful accounts               |                                          
|                                      |                                                                             | Changes in current assets and liabilities:    |                                          
|                                      |                                                                             |                                               | Accounts receivable                      
|                                      |                                                                             |                                               | Inventories                              
|                                      |                                                                             |                                               | Prepaid expenses and other current assets
|                                      |                                                                             |                                               | Other assets                             
|                                      |                                                                             |                                               | Accounts payable                         
|                                      |                                                                             |                                               | Deferred revenue and customer deposits   
|                                      |                                                                             |                                               | Accrued liabilities and other            
|                                      |                                                                             |                                               |                                          
|                                      | Net cash used in operating activities                                       |                                               |                                          
|                                      |                                                                             |                                               |                                          
|Cash Flows from Investing Activities: |                                                                             |                                               |                                          
|                                      | Purchase of short-term investments                                          |                                               |                                          
|                                      | Sale of short-term investments                                              |                                               |                                          
|                                      | Purchase of property and equipment                                          |                                               |                                          
|                                      |                                                                             |                                               |                                          
|                                      | Net cash provided by investing activities                                   |                                               |                                          
|                                      |                                                                             |                                               |                                          
|Cash Flows from Financing Activities: |                                                                             |                                               |                                          
|                                      | Increase (decrease) in bank overdraft                                       |                                               |                                          
|                                      | Proceeds from issuance of common stock                                      |                                               |                                          
|                                      | Repurchases of common stock                                                 |                                               |                                          
|                                      |                                                                             |                                               |                                          
|                                      | Net cash provided by (used in) financing activities                         |                                               |                                          
|                                      |                                                                             |                                               |                                          
|                                      | Net increase (decrease) in cash and cash equivalents                        |                                               |                                          
|                                      | Cash and cash equivalents, beginning of period                              |                                               |                                          
|                                      |                                                                             |                                               |                                          
|                                      | Cash and cash equivalents, end of period                                    |                                               | $                                        
|                                      |                                                                             |                                               |                                          
|Supplemental Cash Flow Information:   |                                                                             |                                               |                                          
|                                      | Cash paid for income taxes                                                  |                                               | $                                        
|                                      | Cash paid for interest                                                      |                                               | $                                        

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

F-6

---



AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES        NOTES TO FINANCIAL STATEMENTS

1.     Business, Organization, Reorganization, Initial Public Offering, Basis of Presentation, and Risks and Uncertainties

Business

Avistar Communications Corporation ("Avistar" or the "Company") provides the Avistar vBusiness integrated suite of video-enabled applications, including networked
video communications software and hardware products and services. Avistar's products include applications for interactive video calling, content creation and publishing, broadcast video and
video-on-demand, as well as data sharing, directory services and network management. Avistar designs, develops, markets, sells, manufactures and/or assembles and installs and
supports its products. Avistar's real-time and non-real-time products are based upon its architecture and Video Operating System (AvistarVOS) platform, which
facilitates distribution over local and wide area networks using telephony or Internet services as appropriate. Avistar's services include software development, consulting, implementation, training,
maintenance and support. In addition, Avistar seeks to prosecute, maintain, support and license the intellectual property developed by the Company through its wholly-owned subsidiary, Collaboration
Properties, Inc., a Nevada corporation (CPI).

Organization

The business was founded in 1993 as a Nevada limited partnership, Avistar Systems, Limited Partnership ("ASLP"). In December 1997, ASLP entered into an
acquisition agreement with a newly formed corporation, Avistar Systems Corporation ("ASC"), to convey all of ASLP's assets, and transfer all of ASLP's liabilities, in exchange for 16,000,000 shares of
ASC's Series A convertible preferred stock (see Note 6) and 2,171,400 shares of common stock. Effective December 31, 1997, all operations previously conducted by ASLP were
thereafter undertaken by ASC.

Collaboration
Properties, Inc. ("CPI") and VCT, Inc. ("VCT") were founded in 1997 and 1998, respectively, to hold certain intellectual property, including patents, which
underlie certain technology used by ASLP and subsequently by ASC. Three of the stockholders of CPI and VCT owned approximately 95% of CPI and 100% of VCT and were also the partners of Collaborative
Holdings L.P. ("CHLP"), which owned a controlling interest in ASLP. The remaining 5% ownership of CPI was held by UBS (USA), Inc. ("UBS") which also held a 5% ownership interest in ASC (see
Note 5 and Note 6). Accordingly, the accounts of CPI and VCT have been combined at historical cost with those of ASC for all periods presented since their inception.

Reorganization

Effective March 31, 2000, ASC merged with and into a newly formed Delaware corporation, Avistar Communications Corporation. The operating assets and
liabilities of the business were then contributed to a wholly owned subsidiary, Avistar Systems Corporation ("Avistar Systems"), a Delaware corporation. At the same time, the owners of CPI and VCT
transferred all of their stock in those entities to Avistar as a capital contribution. As a result, CPI and VCT are recorded at their historical cost basis and became wholly owned subsidiaries of
Avistar as of March 31, 2000. In April 2000, the operations of VCT were merged with and into CPI.

In
June 2000, all of the Series A preferred stock held by ASC was distributed to the Company's three founders and several other individuals based on their respective
ownership interests in ASLP. In addition, all of the shares of Avistar's common stock, held by ASLP were distributed to the Company's employees, former advisors and officers. These common shares
represent an amount equal to those shares of Class B units in ASLP that were owned by the respective individuals before the acquisition.

F-7

---

In
July 2001, the Board of Directors of Avistar Communications and the board of directors of Avistar Systems approved the merger of Avistar Systems, the wholly owned subsidiary of
Avistar Communications, with and into Avistar Communications. The merger was completed in July 2001. The assets and liabilities of Avistar Systems were transferred to the Company at historical
cost on the date of the merger.

Initial Public Offering

In August 2000, the Company completed its initial public offering, selling three million shares of common stock at $12 per share. The initial public
offering resulted in net proceeds to the Company of approximately $31.3 million after the payment of the underwriters' commission and deduction of offering expenses.

In
August 2000, the Company used a portion of the net proceeds from the initial public offering to repay the outstanding balances of notes payable and accrued interest due related
parties of approximately $12.6 million. The remainder of the proceeds has been used to fund the Company's working capital requirements and invested in securities with varying maturities and is
included in cash and cash equivalents, and short-term investments.

Basis of Presentation

The accompanying financial statements as of December 31, 2003 and 2002 present the consolidated financial position of Avistar and its two wholly-owned
operating subsidiaries, Avistar Systems U.K. Limited ("ASUK") and CPI 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
functional currency of ASUK is the United States dollar. Accordingly, all gains and losses resulting from transactions denominated in currencies other than the United States dollar
are included in the statements of operations.

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 $80.8 million as of December 31, 2003. 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 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. The Company may need to raise additional funds, and additional financing may not be available on favorable terms, if at all. If the Company cannot raise funds, if needed, on acceptable
terms, the

F-8

---

Company
may not be able to develop or enhance its products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm the
Company's business, financial condition results of operations and ability to continue operations. If additional funds are raised through the issuance of equity securities, the Company's net tangible
book value per share is likely to decrease, the percentage ownership of then current stockholders will be diluted and such equity securities may have rights, preferences or privileges senior to those
of the holders of the Company's common stock.

2.     Summary of Significant Accounting Policies

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 and expenses
during the period. Actual results could differ from those estimates.

Cash and Cash Equivalents and Short-term Investments

The Company considers all investment instruments purchased with a remaining maturity of three months or less to be cash equivalents. The Company's cash
equivalents at December 31, 2003 and December 31, 2002 consisted of money market funds and short-term securities. The Company has classified all investments not classified as
cash equivalents as short term since it has the intent and ability to redeem them within one year. The Company classifies its short-term investments as available for sale with unrealized
gains or losses reported as a separate component of stockholders' equity. The fair value of the Company's investments was determined based on quoted market prices at the reporting date for those
instruments. At December 31, 2003, all short-term investments have a remaining maturity of three months or less and are therefore classified as cash and cash equivalents in the
accompanying balance sheet. Short-term investments as of December 31, 2002 consisted of the following:

2002Cost

Market Value(in thousands)InvestmentsCorporate obligations

$
1,900

$
1,902Other


500


500Total

$
2,400

$
2,402


At
December 31, 2002, investments with scheduled maturities within one year were $2.4 million.

Supplemental Cash Flow Information

During 2003, approximately $50,000 cash was paid for income taxes and approximately $8,000 cash was paid for interest. During 2002 no cash was paid for income
taxes or interest.

F-9

---

Significant Concentrations

A relatively small number of customers have accounted for a significant percentage of the Company's net sales. Sales to major customers as a percentage of sales
are as follows for 2003, 2002 and 2001:

2003

2002

2001Customer A

62
%
55
%
33
%Customer B

*

11
%
10
%Customer C

*

*

22
%


---

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 and restrict placement of these investments to financial institutions evaluated as highly credit
worthy. Concentration of credit risk with respect to trade receivables relate to those trade receivables from both United States and foreign entities. As of December 31, 2003, approximately 89%
of accounts receivable were concentrated with one customer. As of December 31, 2002, approximately 65% of accounts receivable were concentrated with one customer. As of December 31, 2003
and 2002, no other customers individually accounted for greater than 10% of total accounts receivable.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial assets and liabilities, including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, short-term borrowings and notes payable at December 31, 2003 and 2002, approximate fair value because of the short maturity of these instruments.

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 31,2003

2002Raw materials and subassemblies

$
83

$
70Finished goods


813


1,007Inventory shipped to customer sites, not yet installed


41


71$
937

$
1,148


Inventory
shipped to customer sites, not yet installed, represents product shipped to customer sites pending completion of the installation process by the Company. As of
December 31, 2003 and December 31, 2002, the Company had billed approximately $160,000 and $45,000, respectively, to customers related to these shipments, but did not record the revenue,
as the installations had not been completed and confirmed by the customer. Although customers are billed in accordance with customer agreements, these deferred revenue amounts are netted against
accounts receivable until the customer confirms installation.

F-10

---

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 years) of the
assets. Repairs and maintenance are expensed as incurred. Property and equipment consisted of the following (in thousands):

December 31,2003

2002Computer equipment

$
496

$
1,997Computer software


199


312Furniture, fixtures and equipment


254


359949


2,668Less: Accumulated depreciation


(597
)

(2,290
)$
352

$
378


Accrued Liabilities and Other

Accrued liabilities and other consisted of the following (in thousands):

December 31,2003

2002Accrued consulting and professional fees

$
583

$
283Accrued payroll and related benefits


216


261Accrued commissions and bonuses


43


40Other


283


314$
1,125

$
898


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 $0.1 million, $0.2 million and $0.5 million for 2003, 2002 and 2001, respectively, and are reflected in
general and administrative expenses in the accompanying statements of operations.

Revenue Recognition and Deferred Revenue

The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition" (SOP 97-2), and SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." The Company recognizes revenue from product sales when all of the
following conditions are met: the product has been shipped, an arrangement exists with the customer at a fixed price and the Company has the right to invoice the customer, collection of the receivable
is probable, and the Company has fulfilled all of its material contractual obligations to the customer.

When
the Company provides installation services, the product and installation revenue is recognized upon completion of the installation process and receipt of customer confirmation,
subject to the satisfaction of the revenue recognition criteria described above. When the customer or a third party provides installation services, the product revenue is recognized upon shipment,
subject to satisfaction of the revenue recognition criteria described above. Payment for product is due upon shipment, subject to specific payment terms. Payment for installation and professional
services are due upon providing

F-11

---

the
services, subject to specific payment terms. If payments for systems are made in advance of the completion of installation, such amounts are deferred and recorded as deferred revenue and customer
deposits in the accompanying balance sheets until installation has occurred and the customer has provided confirmation. Reimbursements received for out-of-pocket expenses
incurred during installation and support services, which have not been significant to date, are recognized as revenue in accordance with Emerging Issues Task Force (EITF) Issue
No. 01-14 (EITF 01-14), "Income Statement Characterization of Reimbursements Received for "Out of Pocket" Expenses Incurred."

The
price charged for maintenance and/or support is defined in the contract, and is based on a percentage of product list prices as stipulated in the customer agreement. Customers have
the option to renew the maintenance and/or support arrangement in subsequent periods at the same rate as paid in the initial year. 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, and training revenue is recognized upon performance of the service.

The
Company recognizes service revenue from software development contracts in accordance with SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." Revenue related to contracts for software development is recognized using the percentage of completion method, when all of the following conditions are
met: a contract exists with the customer at a fixed price, the Company has fulfilled all of its material contractual obligations to the customer for each deliverable of the contract, verification of
completion of the deliverable has been received, and collection of the receivable is probable. 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. Assumptions used for recording revenue and earnings are adjusted in the period of change to reflect revisions in contract
value and estimated costs to complete the contract. Any anticipated losses on contracts in progress are charged to earnings when identified.

Warranty

The Company accrues the estimated costs of fulfilling the warranty provisions of its contracts over the warranty period, which is typically 90 days. The
warranty accrual was approximately $13,000 as of December 31, 2003 and approximately $20,000 as of December 31, 2002, and was included in accrued liabilities in the accompanying balance
sheets.

Stock-Based Compensation

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion
No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-
based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123 (see

F-12

---

Note 7).
The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

Year Ending December 31,2003

2002

2001Net loss, as reported

$
(8,619
)
$
(7,578
)
$
(7,919
)Add stockbased employee compensation expense included in reported net loss, net of tax


135


358


898Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax


(4,135
)

(3,995
)

(3,713
)Pro forma net loss

$
(12,619
)
$
(11,215
)
$
(10,734
)Basic and diluted loss per shareAs reported

$
(0.33
)
$
(0.30
)
$
(0.31
)Pro forma

$
(0.48
)
$
(0.44
)
$
(0.43
)


The
Company has adopted SFAS 123 for disclosure purposes. The weighted average fair value of options granted during 2003, 2002 and 2001, estimated on the date of grant using the
Black-Scholes option pricing model was $0.82, $1.15 and $1.73, respectively. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have
vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including a factor to represent expected stock price volatility.
Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's options. The fair value of 2003, 2002 and
2001 options granted is estimated on the date of grant using the following assumptions:

2003

2002

2001Expected dividend

0
%
0
%
0
%Average risk-free interest rate

2.9
%
3.8
%
4.5
%Expected volatility

156
%
187
%
185
%Expected term (in years)

4

4

4


Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS 148, "Summary of Statement No. 148 Accounting for Stock-Based CompensationTransition and
Disclosurean Amendment of FASB Statement No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The
Company has adopted the disclosure requirements of SFAS 148.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards
for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the statement, which
previously were often classified as equity, must now be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim

F-13

---

period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements.

Other Comprehensive Income

The FASB issued SFAS No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive
income (loss) and its components. SFAS 130 was adopted by the Company beginning on January 1, 1998. This standard defines comprehensive income as the changes in equity of an enterprise,
except those resulting from stockholder transactions. Accordingly, comprehensive income includes certain changes in equity that are excluded from the net income or loss. The comprehensive loss for
2003, 2002 and 2001 was $8.6 million, $7.7 million and $7.8 million, respectively. The change in net unrealized gains and losses on investments during fiscal 2003 is mainly
attributable to a decrease of approximately $2,000 in the fair value of investments.

The
components of comprehensive loss are as follows:

Year Ending December 31,2003

2002

2001Net loss

$
(8,619
)
$
(7,578
)
$
(7,919
)Other comprehensive income (loss):Change in net unrealized gains and losses on investments


(2
)

(77
)

79Total comprehensive loss

$
(8,621
)
$
(7,655
)
$
(7,840
)


3.     Line of Credit

On February 27, 2002, the Company entered into a Loan and Security Agreement with a financial institution for a revolving line of credit. As collateral
under this Loan and Security Agreement, the Company granted a first priority interest in all of the Company's assets, excluding intellectual property. On December 16, 2002, Gerald Burnett,
Chairman and Chief Executive Officer of the Company provided a collateralized guarantee, assuring payment of the Company's obligations under the agreement and as a consequence, restrictive covenants
from the original Loan and Security agreement were deleted in the amendment, except for a quick ratio and loan to value covenant, allowing the Company greater access to the full amount of the
facility. On February 27, 2004, the Loan and Security Agreement was amended to change the maximum borrowings under the line to $3.5 million, subject to certain quick ratio and loan to
value covenants, and to extend the term of the Loan and Security Agreement to February 27, 2005. In connection with this amendment, Dr. Burnett's collateralized guarantee was amended to
reduce the amount of such guarantee to $3.5 million. In addition to the guarantee provided to the financial institution, Dr. Burnett has also provided a personal guarantee to the Company
assuring the provision of up to $2.0 million to the Company in the event that at least $2.0 million is not available under the line of credit, or an alternate financing arrangement, for
any reason. As of the date of the filing of this report, the Company had no outstanding borrowings under the line of credit and was eligible to borrow up to $3.5 million.

F-14

---

4.     Commitments and Contingencies

The Company leases its facilities under operating leases that expire through April 2011. As of December 31, 2003, the future minimum lease
commitments under all leases were as follows (in thousands):

Year Ending December 31,

Amount2004

$
6442005


6862006


6492007


3002008


230Thereafter


554Total minimum lease payments

$
3,063


Rent
expense under all operating leases for each of 2003, 2002 and 2001 was approximately $1.2 million, $1.4 million and $1.4 million, respectively.

5.     Related Party Transactions

Certain directors with controlling interests in the Company are also the majority owners of two entities that conducted business with the Company,
Vicor Inc. ("Vicor") and Western Data Systems of Nevada, Inc. ("WDS"). Descriptions of certain transactions between the Company and these and other related entities follow.

Rent Sublease

Beginning in September 1999 the Company sub-leased certain office space, at cost, to Vicor, an affiliated entity, through common ownership. The
Company received approximately $34,000 for 2001 from Vicor under this sublease agreement. The sublease was terminated in July 2001. There were no outstanding receivables from Vicor as of
December 31, 2003 and 2002.

Revenue from a Related Party

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, 2003 and 2002,
UBS Warburg held less than 5% of the Company's stock. Revenue from UBS Warburg LLC and its affiliates represented less than 10% of total revenue for 2003 and 2002, and approximately 22% of total
revenue for 2001, 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, 2003 and 2002, the
Company had accounts receivable outstanding from UBS Warburg LLC and its affiliates of approximately $23,000 and $50,000, respectively.

Fees to Related Parties

Robert P. Latta, a member of the law firm Wilson Sonsini Goodrich & Rosati, Professional Corporation ("WSGR"), has served as a director of the Company
since February 2001. Mr. Latta and WSGR have represented the Company and its predecessors as corporate counsel since 1997. During 2003 and 2002, payments of approximately $303,000 and
$145,000, respectively, were made to WSGR for legal services provided to the Company.

During
2003 and 2002, payments for consulting fees of approximately $110,000 and $211,000, respectively, were made to R. Stephen Heinrichs, a former officer of the Company, who is also a

F-15

---

member
of the Board of Directors, pursuant to a Separation Agreement between Mr. Heinrichs and the Company dated April 26, 2001.

Private Placement of Common Stock

On October 15, 2003, the Company completed a private placement or sale of 4,615,385 shares of its common stock to Gerald J. Burnett and other members of
his family at a price per share of $1.30 resulting in gross proceeds to the Company of $6 million. The net proceeds of this private financing, after deducting expenses of the financing, were
approximately $5.7 million. Under the terms of the financing, Dr. Burnett agreed to certain restrictions on 1,602,847 of the 3,661,539 shares purchased by him in the private placement.
These restrictions require Dr. Burnett to vote such shares in the same proportion as the other outstanding voting stock of the Company not beneficially owned by Dr. Burnett. The Company
used a portion of the proceeds of the private placement to repay the $1.5 million outstanding balance under the Company's Loan and Security Agreement with Comerica Bank.

6.     Stockholders' Equity

Stock Spilt

In July 2000, the Company effected a one-for-five reverse stock split. All share and per share amounts in these financial
statements have been adjusted to give effect to the reverse stock split.

Stock Repurchase Plan

On March 22, 2001, the Company announced that its Board authorized the repurchase of up to $2.0 million of its common stock in the open market.
During 2002, the Company repurchased 13,500 shares at an aggregate cost of approximately $11,000. During 2001, the Company repurchased 22,500 shares at an aggregate cost of approximately $34,000. No
shares of common stock were repurchased by the Company during 2003.

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, 2003 and 2002, the Company had 10,000,000 shares of convertible preferred stock authorized, at $0.001 per share par value. No shares were
issued or outstanding as of December 31, 2003 and 2002.

In
June 2000, the Company's Board of Directors (the "Board") authorized the filing of a registration statement with the SEC to register shares of its common stock in connection
with its initial public offering. As a result of the initial public offering in August 2000, all 16,000,000 of the outstanding shares of Series A convertible preferred stock were
converted into 19,148,578 shares of common stock, which represents the sum of (1) 16,000,000 shares of common stock plus (2) an additional 3,148,578 shares of common stock representing a
beneficial conversion feature equal to the quotient of (A) the conversion amount, which was $37.8 million at August 16, 2000, and which includes an amount equal to $0.2167 per
share per annum, pro rated based on the number of days elapsed in the year, divided by (B) the initial offering price of $12.00 per share. The shares of Series A preferred stock had the
same voting rights as the shares of common stock into which they were converted. The Series A preferred stock had a liquidation preference of $2.009 per share plus all declared and unpaid
dividends on each share of Series A preferred stock.

F-16

---

Deferred Stock Compensation

In connection with the grant of stock options to purchase shares of common stock to employees during 2000, the Company recorded deferred compensation of
approximately $1.7 million, representing the difference between the estimated fair value of the common stock and the aggregate option exercise price of such options at the date of grant. This
amount is presented as a reduction of stockholders' equity and is being amortized ratably over the service period of the applicable options (generally four years). Amortization expense, net of
forfeitures related to deferred stock compensation was approximately $0.1 million, $0.4 million and $0.9 million in 2003, 2002 and 2001, respectively. Compensation expense is
decreased in the period of forfeiture for any accrued but unvested compensation arising from the termination of an option holder's services.

7.     Stock Option 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 had a life of ten years.

Options
granted under the plan vest over a four-year period, with 25% vesting after one year and the remaining vesting 6.25% per quarter. Under the 1997 Plan plan, the
Company granted options to purchase approximately 1.2 million common shares in 2000. In 2003, 2002 and 2001, the Company had no grants under this plan. At December 31, 2003 options to
purchase a total of 854,287 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 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. As of December 31, 2003, a total of 5,871,710 shares have been reserved for issuance under the 2000 Plan. The term of
the options granted under this 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 term of the option
may not exceed 5 years. Options granted under the 2000 Plan vest and become exercisable as set forth in each option agreement. 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. The 2000 Plan will terminate in 2010. As a result of the 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 1.2 million common shares in 2000 under this plan. In 2001, the Company granted options to purchase
approximately 2.3 million common shares under this plan. In 2002, the Company granted options to purchase approximately 1.3 million common shares under this plan. In 2003, the Company
granted options to purchase approximately 1.8 million common shares under this plan. At December 31, 2003

F-17

---

options
to purchase a total of 4,299,725 shares were outstanding under the 2000 Plan and 1,571,985 options were available for future grant.

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 plan, together with an annual increase in the number of shares of common stock reserved thereunder as provided in the plan beginning on the first day of the
Company's fiscal year, commencing January 1, 2001. In January 2001, the Board approved the annual increase of 12,000 shares. In May 2001, the Board approved an additional 198,000
shares under this 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. As of December 31, 2003, the Company has authorized a total of 464,000 shares for issuance under this plan.
As a result of the annual increases, a maximum of 1,689,000 shares of common stock could be issued over the 10-year life of the plan. Options to purchase 12,000 shares were granted in
2000. In 2001, the Company granted options to purchase 270,000 shares under this plan. In 2002, the Company granted options to purchase 18,000 shares under this plan. In 2003, the Company granted
options to purchase 120,000 shares under this plan. At December 31, 2003 options to purchase a total of 354,000 shares were outstanding under the Director Plan and 110,000 options were
available for future grant.

A
summary of the 1997 Plan, the 2000 Plan, and the Director Plan activity and related information for the years ended December 31, 2001, 2002 and 2003 follows:

Options OutstandingOptions
Available

Shares

Weighted
Average
Exercise PriceBalance, December 31, 2000

1,895,300

3,277,357

$
8.20Authorized

1,016,936




Granted

(2,528,200
)
2,528,200


2.00Exercised



(31,837
)

0.63Canceled/repurchased

477,950

(870,013
)

8.18Balance, December 31, 2001

861,986

4,903,707

$
5.05Authorized

1,235,859




Granted

(1,311,000
)
1,311,000


1.21Exercised



(4,150
)

0.90Canceled/repurchased

844,000

(1,029,827
)

3.41Balance, December 31, 2002

1,630,845

5,180,730

$
4.42Authorized

1,145,957




Granted

(1,956,000
)
1,956,000


1.13Exercised



(222,749
)

1.01Canceled/repurchased

861,183

(1,405,969
)

3.17Balance, December 31, 2003

1,681,985

5,508,012

$
3.70


F-18

---



Options Outstanding

Options ExercisableRange of
Exercise Prices

Number
Outstanding at December 31, 2003

Weighted-Average
Remaining Life

Weighted-Average
Exercise Price

Number
Exercisable at
December 31, 2003

Weighted-Average
Exercise Price$
0.25 -  0.87

330,625

7.56

$
0.58

126,125

$
0.31$
0.90 -  0.90

1,289,000

9.31


0.90




$
0.95 -  1.06

232,150

5.60


0.95

224,650


0.95$
1.21 -  1.21

651,388

8.37


1.21

241,538


1.21$
1.27 -  1.30

58,875

7.48


1.27

30,875


1.27$
1.47 -  1.47

564,450

7.27


1.47

350,699


1.47$
1.52 -  2.21

822,500

6.61


2.04

473,041


2.03$
2.29 -  8.50

900,587

7.90


5.86

464,218


7.90$
9.35 - 14.00

151,000

1.75


9.38

122,686


9.38$
17.25 - 17.25

507,437

6.25


17.25

474,720


17.255,508,012

7.59

$
3.70

2,508,552

$
6.01


2000 Employee Stock Purchase Plan

In April 2000, the Company adopted the 2000 Employee Stock Purchase Plan ("Employee Stock Purchase Plan"). Initially, a total of 1,500,000 shares of common
stock were approved by the Board, for issuance under the plan, together with an annual increase in the number of shares of common stock reserved thereunder as provided in the 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 753,702 shares. As of December 31, 2002, the Company has
authorized a total of 2,253,702 shares for issuance under this plan. As a result of these annual increases, a maximum of 10,500,000 shares could be sold over the 10-year life of the plan.
The Employee Stock Purchase Plan 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 87,191, 98,305 and 63,776 shares were sold under this plan during 2003, 2002 and 2001,
respectively.

Common Stock Reserved for Future Issuance

As of December 31, 2003, the Company had reserved the following shares of common stock for issuance in connection with:

Stock options under stock option plans

7,189,997Employee stock purchase plan

2,253,702Total

9,443,699


8.     Legal Proceedings

On September 23, 2002, CPI, the Company's wholly-owned subsidiary, commenced a patent infringement lawsuit against Polycom, Inc. alleging that
several Polycom videoconferencing products infringe four patents held by CPI. The suit was filed in the United States District Court for the Northern District of California. The four patents involved
are U.S. Patent Nos. 5,867,654, 5,896,500, 6,212,547 and 6,343,314. These patents cover technologies relating to video and data conferencing over unshielded twisted pair (UTP) networks, distributed
call-state management, separate monitors for simultaneous computer-based data sharing and videoconferencing and remote participant hold and disconnect functions in multi-party
conferencing. Polycom responded to CPI's claims on November 14, 2002, at which time it both answered the complaint and asserted counterclaims against CPI for

F-19

---

non-infringement,
invalidity and unenforceability. On January 31, 2003, Polycom filed a motion with the court, which was subsequently granted by the court on March 7, 2003,
requesting permission to amend its counterclaims to incorporate claims of alleged infringements by Avistar Communications of four PictureTel patents that Polycom has told the Company it has had
assigned to it. Three of the four counterclaims involved a third party, and these three counterclaims were dropped by Polycom on June 23, 2003, subsequent to an agreement between Polycom and
the third party. On August 9, 2003, CPI and Polycom filed motions for summary judgment with the court, seeking judgment as a matter of law concerning CPI's ability to qualify for "small entity
status" in the filing of its four patents being asserted against Polycom. On October 17, 2003, the court denied Polycom's motion for summary judgment and granted CPI's motion for summary
judgment, thereby negating Polycom's defense of unenforceability concerning CPI's having filed these patents as a "small entity." Briefings on claims construction issues and a hearing before the
presiding judge (Markman hearing) took place on March 8, 2004. A trial date for CPI's claims against Polycom and Polycom's counterclaims has been set for January 10, 2005. The duration
and ultimate outcome of this litigation are uncertain.

9.     Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 provides for an
asset and liability approach to account for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some or all of the deferred tax assets will not be recognized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period of enactment.

The
provision for (recovery from) income taxes relates to foreign tax. The Company provided for income taxes for its subsidiary in the United Kingdom (ASUK) of approximately $20,000 and
$18,000 in 2003 and 2002, respectively. In 2001, the Company had a recovery of approximately $19,000 for taxes previously expensed at ASUK.

The
provision for (recovery from) income taxes consisted of the following (in thousands):

Year Ended December 31,2003

2002

2001Current:Federal

$


$


$
State








Foreign


20


18


(19
)20


18


(19
)Deferred benefits:Federal


(2,985
)

(2,352
)

(6,729
)State


(490
)

(601
)

(574
)(3,475
)

(2,953
)

(7,303
)Valuation allowance


3,475


2,953


7,303$
20

$
18

$
(19
)


F-20

---

Avistar's
effective income tax provision differed from the federal statutory rate of 35% due to the following (in thousands):

Year Ended December 31,2003

2002

2001Expected tax benefit at federal statutory rate

$
(2,985
)
$
(2,646
)
$
(2,792
)Foreign and state taxes, net


20


18


(458
)Permanent non-deductible


57


136


Current year operating losses and temporary differences for which no tax benefit is recognized


2,928


2,510


3,289Other








(58
)Provision for (recovery from) income taxes

$
20

$
18

$
(19
)


Permanent
and non-deductible is primarily composed of the non-deductible portion of the deferred stock compensation expense.

The
net deferred income tax asset consisted of the following as of December 31, 2003 and 2002 (in thousands):

2003

2002Deferred income tax assets:Federal net operating loss carryforwards

$
12,550

$
9,545State net operating loss carryforwards


966


541Tax credit carry forward


1,853


1,549Reserves


284


334Property and Equipment


115


15,768


11,969Valuation allowance


(15,768
)

(11,969
)Net deferred income tax asset

$


$



Net
operating loss carryforwards at December 31, 2003 were approximately $35.9 million and $13.3 million, for Federal and state income tax purposes, respectively.
The net operating loss carryforwards expire on various dates through the year 2023. The Federal net operating loss
carryforwards expire on various dates through the year 2023. The California net operating loss carryforwards expire on various dates through the year 2013.

As
of December 31, 2003, unused research and development tax credits of approximately $0.9 million and $1.0 million are available to reduce future Federal and
California income taxes, respectively. Federal credit carryforwards expire beginning in year 2013. California credits will carry forward indefinitely.

The
Internal Revenue Code of 1986, as amended, contains provisions that may limit the net operating loss carryforwards to be used in any given year upon the occurrence of certain events,
including a significant change in ownership interest. The Company believes sufficient uncertainty exists regarding the realizability of the net operating loss and tax credit carryforwards and other
timing differences. Accordingly, a valuation allowance has been provided for the entire net deferred tax asset.

10.   Net Loss Per Share

Basic and diluted net loss per share of common stock is presented in conformity with SFAS No. 128 ("SFAS 128"), "Earnings Per Share," for all
periods presented. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for

F-21

---

nominal
consideration prior to an initial public offering must be included in the calculation of basic and diluted net loss per share as if such stock had been outstanding during 1999. To date, the
Company has had no issuances or grants for nominal consideration.

In
accordance with SFAS 128, 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 common equivalent shares outstanding during the period. Common equivalent 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 convertible preferred stock, outstanding
stock options and shares subject to repurchase from the calculation of diluted net loss per share for 2003, 2002 and 2001, because all such securities are antidilutive. Accordingly, diluted net loss
per share approximates basic net loss per share for all years presented.

The
total number of shares excluded from the calculations of diluted net loss per share was 1,556,292, 4,694,564 and 2,346,597 for 2003, 2002 and 2001, respectively. Basic and diluted
pro forma net loss per share have been computed as described above and also give effect, under SEC guidance, to the
conversion of the convertible preferred stock (using the as-if-converted method) from the original date of issuance and the effect of the beneficial conversion related to the
Series A convertible preferred stock.

The
following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

Year Ended December 31,2003

2002

2001Net Loss Attributable To Common Stockholders

$
(8,619
)
$
(7,578
)
$
(7,919
)Weighted Average Shares Of Common Stock Used In Computing Net Loss Per Share


26,368


25,260


25,168Net Loss Per Share Basic and Diluted

$
(0.33
)
$
(0.30
)
$
(0.31
)


11.   Segment Reporting

Disclosure of segments is presented in accordance with SFAS No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." SFAS 131 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 (Avistar in 2002 and 2001, Avistar and ASC in 2000) and
(2) the prosecution, maintenance, support and licensing of the intellectual property used in the Company's products (CPI). Service revenue relates mainly to the maintenance, support, training,
software development and installation of products and is included in Avistar for purposes of reporting and decision-making. Avistar also engages in the corporate functions and provides financing and
services to the subsidiaries. The Company's chief operating decision maker,

F-22

---

its
Chief Executive Officer, monitors the Company's operations based upon the information reflected in the following table (in thousands):

CPI

ACC

TotalYear Ended December 31, 2003Revenue

$


$
6,592

$
6,592Gross margin





3,063


3,063Depreciation expense


(6
)

(203
)

(209
)Total operating expenses


(2,446
)

(9,741
)

(12,187
)Interest income





44


44Interest expense





8


8Net loss


(2,446
)

(6,173
)

(8,619
)Assets


22


8,206


8,228Year Ended December 31, 2002Revenue

$


$
8,799

$
8,799Gross margin





4,322


4,322Depreciation expense


(5
)

(321
)

(326
)Total operating expenses


(1,209
)

(11,169
)

(12,378
)Interest income





269


269Interest expense








Net loss


(1,209
)

(6,369
)

(7,578
)Assets


179


10,221


10,400Year Ended December 31, 2001Revenue

$


$
16,196

$
16,196Gross margin





8,552


8,552Depreciation expense


(13
)

(287
)

(300
)Total operating expenses


(1,076
)

(16,170
)

(17,246
)Interest income





758


758Interest expense





(2
)

(2
)Net loss


(1,179
)

(6,740
)

(7,919
)Assets


78


19,187


19,265


International
revenue, which consists of domestic sales to customers with operations principally in Western Europe and Asia comprised 58%, 49% and 47% of total revenue for 2003, 2002 and
2001, respectively. For 2003, 2002 and 2001, respectively, international revenues to customers in the United Kingdom accounted for 40%, 26% and 21%, respectively, of total revenue. The Company had no
significant long-lived assets in any country other than in the United States for any period presented.

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

F-23

---

financial
statements and notes to financial statements. The operating results for any quarter do not necessarily indicate the results expected for any future period.

|                                             |  | Quarter Ended |       
|-------------------------------------------- |  | ------------- | ------
|
|
|Total revenue                                |  | $             | 1,409 
|Gross margin                                 |  |               | 670   
|Total operating expenses                     |  |               | 2,781 
|Net loss attributable to common shareholders |  | $             | (2,151
|Net loss per shareBasic/Diluted             |  | $             | (0.07 
|Weighted average shares                      |  |               | 29,400



|                                             |  | Quarter Ended |       
|-------------------------------------------- |  | ------------- | ------
|
|
|Total revenue                                |  | $             | 1,755 
|Gross margin                                 |  |               | 837   
|Total operating expenses                     |  |               | 2,942 
|Net loss attributable to common shareholders |  | $             | (2,064
|Net loss per shareBasic/Diluted             |  | $             | (0.08 
|Weighted average shares                      |  |               | 25,285

F-24

---



Item 15(a)

AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

|                                |                   | Balance at
Beginning of
Period |   | Additions
Charged to
Operations |  | Write-Offs |     | Balance at
End of
Period
|------------------------------- | ----------------- | ------------------------------ | - | ------------------------------- |  | ---------- | --- | ------------------------
|
|Allowance for Doubtful Accounts |                   |                                |   |                                 |  |            |     |                         
|Period Ended:                   |                   |                                |   |                                 |  |            |     |                         
|                                | December 31, 2003 |                                | $ | 69                              |  | $          | 125 |                         
|                                | December 31, 2002 |                                | $ | 232                             |  | $          | 56  |                         
|                                | December 31, 2001 |                                | $ | 312                             |  | $          | 52  |                         

S-2

---

INDEX TO EXHIBITS

|Exhibits |      |                                                                                                                                                                                       
|-------- | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2      | (1)  | Restated Certificate of Incorporation                                                                                                                                                 
|3.3      | (2)  | Bylaws of Avistar Communications Corporation                                                                                                                                          
|4.1      | (1)  | Specimen Certificate evidencing shares of Common Stock                                                                                                                                
|4.2      | (1)  | Registration and Information Rights Agreement dated December 9, 1999                                                                                                                  
|10.1     | (1)  | 1997 Stock Option Plan, as amended*                                                                                                                                                   
|10.1.1   | (1)  | 1997 Stock Option Plan Form of Stock Option Agreement*                                                                                                                                
|10.2     | (1)  | 2000 Stock Option Plan, as amended*                                                                                                                                                   
|10.3     | (3)  | 2000 Director Option Plan, as amended*                                                                                                                                                
|10.4     | (1)  | Form of Director Option Agreement*                                                                                                                                                    
|10.5     | (4)  | 2000 Employee Stock Purchase Program, as amended*                                                                                                                                     
|10.6     | (1)  | Form of Indemnification Agreement*                                                                                                                                                    
|10.7     | (5) | Preferred Supplier Agreement dated June 24, 1997 by and between Avistar and Tandberg, Inc., including modifications Nos. 1, 2, 3 and 4                                                
|10.7.1   | (1) | Modification No. 5 to the Preferred Supplier Agreement dated June 27, 2000                                                                                                            
|10.7.2   | (2) | Modification No. 6 to the Preferred Supplier Agreement dated November 27, 2000                                                                                                        
|10.8     | (6)  | Settlement Agreement and Release between the Registrant and R. Stephen Heinrichs dated April 26, 2001*                                                                                
|10.9     | (7)  | Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia dated February 27, 2002                                                                        
|10.9.1   | (7) | First Amendment dated December 17, 2002 to Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia                                                     
|10.9.2   | (7) | Unconditional Guaranty of the Gerald J. Burnett and Marjorie J. Burnett Revocable Trust dated December 17, 2002                                                                       
|10.9.3   | (7) | Unconditional Guaranty of Gerald J. Burnett dated December 17, 2002                                                                                                                   
|10.9.4   | (7)  | Second Amendment dated March 10, 2003 to Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia                                                       
|10.9.5   |      | Fourth Amendment dated February 27, 2004 to Master Loan and Security Agreement between the Registrant and Comerica BankCalifornia                                                    
|10.9.6   |      | Reaffirmation of Unconditional Guaranty of the Gerald J. Burnett and Marjorie J. Burnett Revocable Trust dated February 24, 2004                                                      
|10.9.7   |      | Guaranty of Gerald J. Burnett dated February 27, 2004                                                                                                                                 
|10.10    | (8)  | Office Lease Agreement between CA-Twin Dolphin Plaza Limited Partnership and the Registrant dated July 30, 2003                                                                       
|10.11    | (8)  | Common Stock Purchase Agreement by and among the Registrant and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust, Grady Burnett and Wendolyn Hearn dated October 15, 2003
|21.1     | (7)  | Subsidiaries of the Company                                                                                                                                                           
|         |      |                                                                                                                                                                                       

---

|23.1 |  | Consent of KPMG LLP                                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|24.1 |  | Power of Attorney (see page 47)                                                                                                                                                 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer                                                                                                           
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer                                                                                                           
|32   |  | 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

---

---

QuickLinks