----

----

  

| x                                                                                                                                                                         |   | QUARTERLY      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES      AND EXCHANGE ACT OF 1934  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                      |
| For      the quarterly period ended June 30, 2008                                                                                                                         |
|                                                                                                                                                                      |
| OR                                                                                                                                                                        |
|                                                                                                                                                                      |
| o                                                                                                                                                                         |   | TRANSITION      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES      AND EXCHANGE ACT OF 1934 |
|                                                                                                                                                                      |
| For      the transition period from                      to           |
|                                                                                                                                                                      |
| Commission      file number: 000-31121                                                                                                                                    |

|  DELAWARE                                                                     |   | 88-0463156                                   |
|------------------------------------------------------------------------------------|--------|----------------------------------------------|
| (State      or other jurisdiction                                                  |   | (I.R.S.      Employer Identification Number) |
| of      incorporation or organization)                                             |   |                                         |
|                                                                               |   |                                         |
| 1875 SOUTH GRANT STREET,      10TH  FLOOR, SAN MATEO, CA      94402           |
| (Address      of Principal Executive Office) (Zip Code)                            |
|                                                                               |   |                                         |
| Registrant’s      telephone number, including area code: (650)      525-3300 |

|  Large accelerated filer         o |   | Accelerated      filer   o |
|--------------------------------------------------------|--------|-------------------------------------------|

| Non-accelerated      filer   o |   | Smaller reporting      company   x |
|-----------------------------------------------|--------|---------------------------------------------------|

----

----

----

| PART    I.   | FINANCIAL      INFORMATION                                                                       | 3      |
|--------------|--------------------------------------------------------------------------------------------------|--------|
|         |                                                                                             |   |
| Item 1.      | Financial Statements (unaudited)                                                                 | 3      |
|         | Condensed Consolidated Balance      Sheets                                                       | 3      |
|         | Condensed Consolidated Statements of      Operations                                             | 4      |
|         | Condensed Consolidated Statements of Cash      Flows                                             | 5      |
|         | Notes to Condensed Consolidated      Financial Statements                                        | 6      |
| Item 2.      | Management’s Discussion and Analysis of Financial Condition      and Results of Operations | 16     |
| Item      3. | Intentionally      Omitted                                                                       |   |
| Item 4T.     | Controls and Procedures                                                                          | 25     |
|         |                                                                                             |   |
| PART II.     | OTHER INFORMATION                                                                                | 25     |
|         |                                                                                             |   |
| Item 1A.     | Risk Factors                                                                                     | 25     |
| Item 2.      | Unregistered Sales of Equity Securities and Use of      Proceeds                                 | 33     |
| Item 3.      | Defaults Upon Senior Securities                                                                  | 33     |
| Item 4.      | Submissions of Matters to a Vote of Security      Holders                                        | 33     |
| Item 5.      | Other Information                                                                                | 33     |
| Item 6.      | Exhibits                                                                                         | 34     |
|         |                                                                                             |   |
| SIGNATURES   |                                                                                             | 35     |

----

|                                                                                                                                                                                                                                                            |   | June 30,      2008 |     |   | December 31,      2007 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|--------|-----------------------------|--------|
|                                                                                                                                                                                                                                                            |   | (unaudited)             |     |
| Assets:                                                                                                                                                                                                                                                         |   |                    |     |   |                        |   |
| Current      assets:                                                                                                                                                                                                                                            |   |                    |     |   |                        |   |
| Cash      and cash equivalents                                                                                                                                                                                                                                  |   | $                       | 5,747    |   |                        | $      | 4,077 |   |
| Short-term      investments                                                                                                                                                                                                                                     |   |                    | —  |   |                        |   | 799 |   |
|     Total      cash, cash equivalents and short-term investments                                                                                                                                                                            |   |                    | 5,747    |   |                        |   | 4,876 |   |
| Accounts      receivable, net of allowance for doubtful accounts of $21 and $24 at June      30, 2008 and December 31, 2007, respectively                                                                                                                  |   |                    | 1,115    |   |                        |   | 1,385 |   |
| Inventories                                                                                                                                                                                                                                                     |   |                    | 458      |   |                        |   | 428 |   |
| Deferred      settlement and patent licensing costs                                                                                                                                                                                                             |   |                    | 1,256    |   |                        |   | 1,256 |   |
| Prepaid      expenses and other current assets                                                                                                                                                                                                                  |   |                    | 394      |   |                        |   | 462 |   |
| Total      current assets                                                                                                                                                                                                                                       |   |                    | 8,970    |   |                        |   | 8,407 |   |
| Property      and equipment, net                                                                                                                                                                                                                                |   |                    | 526      |   |                        |   | 767 |   |
| Long-term      deferred settlement and patent licensing costs                                                                                                                                                                                                   |   |                    | 481      |   |                        |   | 1,117 |   |
| Other      assets                                                                                                                                                                                                                                               |   |                    | 205      |   |                        |   | 286 |   |
| Total      assets                                                                                                                                                                                                                                               |   | $                       | 10,182   |   |                        | $      | 10,577 |   |
|                                                                                                                                                                                                                                                            |   |                    |     |   |                        |   |   |   |
| Liabilities      and Stockholders’ Equity (Deficit):                                                                                                                                                                                                      |   |                    |     |   |                        |   |   |   |
| Current      liabilities:                                                                                                                                                                                                                                       |   |                    |     |   |                        |   |   |   |
| Line      of credit                                                                                                                                                                                                                                             |   | $                       | 7,000    |   |                        | $      | 5,100 |   |
| Accounts      payable                                                                                                                                                                                                                                           |   |                    | 581      |   |                        |   | 1,287 |   |
| Deferred      income from settlement and patent licensing                                                                                                                                                                                                       |   |                    | 5,520    |   |                        |   | 5,520 |   |
| Deferred      services revenue and customer deposits                                                                                                                                                                                                            |   |                    | 1,302    |   |                        |   | 2,231 |   |
| Accrued      liabilities and other                                                                                                                                                                                                                              |   |                    | 1,591    |   |                        |   | 1,451 |   |
| Total      current liabilities                                                                                                                                                                                                                                  |   |                    | 15,994   |   |                        |   | 15,589 |   |
| Long-term      liabilities:                                                                                                                                                                                                                                     |   |                    |     |   |                        |   |   |   |
| Long-term      convertible debt                                                                                                                                                                                                                                 |   |                    | 7,000    |   |                        |   | — |   |
| Long-term      deferred income from settlement and patent licensing                                                                                                                                                                                             |   |                    | 1,987    |   |                        |   | 4,814 |   |
| Total      liabilities                                                                                                                                                                                                                                          |   |                    | 24,981   |   |                        |   | 20,403 |   |
| Commitments      and contingencies (Note 9)                                                                                                                                                                                                                     |   |                    |     |   |                        |   |   |   |
| Stockholders’      equity (deficit):                                                                                                                                                                                                                      |   |                    |     |   |                        |   |   |   |
| Common      stock, $0.001 par value; 250,000,000 shares authorized at June 30,      2008 and December 31, 2007; 35,730,014 and 35,678,807 shares issued      including treasury shares at June 30, 2008 and December 31, 2007,      respectively |   |                    | 36       |   |                        |   | 36 |   |
| Less:      treasury common stock, 1,182,875 shares at June 30, 2008 and      December 31, 2007, at cost                                                                                                                                               |   |                    | (53      | )      |                        |   | (53 | ) |
| Additional      paid-in-capital                                                                                                                                                                                                                                 |   |                    | 96,331   |   |                        |   | 95,925 |   |
| Accumulated      deficit                                                                                                                                                                                                                                        |   |                    | (111,113 | )      |                        |   | (105,734 | ) |
| Total      stockholders’ equity (deficit)                                                                                                                                                                                                                 |   |                    | (14,799  | )      |                        |   | (9,826 | ) |
| Total      liabilities and stockholders’ equity (deficit)                                                                                                                                                                                                 |   | $                       | 10,182   |   |                        | $      | 10,577 |   |

----

|                                                              |   | Three      Months Ended |   |    | Six      Months Ended |   |
|-------------------------------------------------------------------|--------|-------------------------|--------|---------|-----------------------|--------|
|                                                              |   | June      30,           |   |    | June      30,         |   |   | June      30, |   |   | June      30, |   |
|                                                              |   | 2008                    |   |    | 2007                  |   |   | 2008 |   |   | 2007 |   |
|                                                              |   | (unaudited)             |   |    | (unaudited)           |   |
| Revenue:                                                          |   |                    |   |    |                  |   |   |   |   |   |   |   |
| Product                                                           |   | $                       | 553    |    |                  | $      | 704 |   |   | $ | 802 |   |   | $ | 1,962 |   |
| Licensing                                                         |   |                    | 153    |    |                  |   | 4,321 |   |   |   | 307 |   |   |   | 4,553 |   |
| Services,      maintenance and support                            |   |                    | 1,084  |    |                  |   | 873 |   |   |   | 1,832 |   |   |   | 1,775 |   |
| Total      revenue                                                |   |                    | 1,790  |    |                  |   | 5,898 |   |   |   | 2,941 |   |   |   | 8,290 |   |
| Costs      and Expenses:                                          |   |                    |   |    |                  |   |   |   |   |   |   |   |   |   |   |   |
| Cost      of product revenue*                                     |   |                    | 565    |    |                  |   | 711 |   |   |   | 924 |   |   |   | 1,440 |   |
| Cost      of services, maintenance and support revenue*           |   |                    | 603    |    |                  |   | 571 |   |   |   | 1,122 |   |   |   | 1,247 |   |
| Income      from settlement and patent licensing                  |   |                    | (1,057 | )  |                  |   | (1,057 | )  |   |   | (2,114 | )  |   |   | (14,114 | )  |
| Research      and development*                                    |   |                    | 959    |    |                  |   | 1,840 |   |   |   | 2,810 |   |   |   | 3,497 |   |
| Sales      and marketing*                                         |   |                    | 789    |    |                  |   | 1,547 |   |   |   | 2,118 |   |   |   | 3,036 |   |
| General      and administrative*                                  |   |                    | 1,436  |    |                  |   | 1,948 |   |   |   | 3,314 |   |   |   | 8,411 |   |
|       Total      costs and expenses |   |                    | 3,295  |    |                  |   | 5,560 |   |   |   | 8,174 |   |   |   | 3,517 |   |
| (Loss)      income from operations                                |   |                    | (1,505 | )       |                  |   | 338 |   |   |   | (5,233 | ) |   |   | 4,773 |   |
| Other      (Expense) income:                                      |   |                    |   |    |                  |   |   |   |   |   |   |   |   |   |   |   |
| Interest      income                                              |   |                    | 21     |    |                  |   | 101 |   |   |   | 67 |   |   |   | 214 |   |
| Other      (expense) income, net                                  |   |                    | (128   | )       |                  |   | (51 | ) |   |   | (213 | ) |   |   | (106 | ) |
| Total      other (expense) income, net                            |   |                    | (107   | )  |                  |   | 50 |   |   |   | (146 | )  |   |   | 108 |   |
| Net      (loss) income                                            |   | $                       | (1,612 | )       |                  | $      | 388 |   |   | $ | (5,379 | ) |   | $ | 4,881 |   |
|                                                              |   |                    |   |    |                  |   |   |   |   |   |   |   |   |   |   |   |
| Net      (loss) income per share - basic and diluted              |   | $                       | (0.05  | )       |                  | $      | 0.01 |   |   | $ | (0.16 | ) |   | $ | 0.14 |   |
| Weighted      Average Shares Used in Calculating:                 |   |                    |   |    |                  |   |   |   |   |   |   |   |   |   |   |   |
| Basic      net (loss) income per share                            |   |                    | 34,547 |    |                  |   | 34,230 |   |   |   | 34,538 |   |   |   | 34,166 |   |
| Diluted      net (loss) income per share                          |   |                    | 34,547 |    |                  |   | 35,008 |   |   |   | 34,538 |   |   |   | 35,072 |   |

| *Including      Stock Based Compensation of:                    |   |   |   |    |   |   |   |   |   |   |   |    |
|-----------------------------------------------------------------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|---------|
| Cost      of product, services, maintenance and support revenue |   | $      | 19     |    |   | $      | 53     |   |   | $      | 26     |    |   | $ | 113 |   |
| Research      and development                                   |   |   | 88     |    |   |   | 180    |   |   |   | 151    |    |   |   | 384 |   |
| Sales      and marketing                                        |   |   | (60    | )  |   |   | 108    |   |   |   | (96    | )  |   |   | 293 |   |
| General      and administrative                                 |   |   | 156    |    |   |   | 235    |   |   |   | 269    |    |   |   | 468 |   |

----

|                                                                                                         |   | Six Months Ended |   |
|--------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                                         |   | June      30,              |   |   | June      30, |   |
|                                                                                                         |   | 2008                       |   |   | 2007 |   |
|                                                                                                         |   | (unaudited)                |   |
| Cash      Flows from Operating Activities:                                                                   |   |                       |   |   |   |   |
| Net      (loss) income                                                                                       |   | $                          | (5,379 | ) |   | $ | 4,881 |   |
| Adjustments      to reconcile net (loss) income to net cash (used in) provided by operating      activities: |   |                       |   |   |   |   |   |   |
| Depreciation                                                                                                 |   |                       | 268    |   |   |   | 148 |   |
| Stock      based compensation for options issued to consultants and      employees                           |   |                       | 350    |   |   |   | 1,258 |   |
| Provision      for doubtful accounts                                                                         |   |                       | (3     | ) |   |   | 2 |   |
| Changes      in assets and liabilities:                                                                      |   |                       |   |   |   |   |   |   |
| Accounts      receivable                                                                                     |   |                       | 273    |   |   |   | 305 |   |
| Inventories                                                                                                  |   |                       | (30    | ) |   |   | 153 |   |
| Prepaid      expenses and other current assets                                                               |   |                       | 68     |   |   |   | 81 |   |
| Deferred      settlement and patent licensing costs                                                          |   |                       | 636    |   |   |   | 637 |   |
| Other      assets                                                                                            |   |                       | 81     |   |   |   | (2 | ) |
| Accounts      payable                                                                                        |   |                       | (706   | ) |   |   | (440 | ) |
| Deferred      income from settlement and patent licensing and other                                          |   |                       | (2,827 | ) |   |   | (2,744 | ) |
| Deferred      services revenue and customer deposits                                                         |   |                       | (929   | ) |   |   | (1,118 | ) |
| Accrued      liabilities and other                                                                           |   |                       | 140    |   |   |   | (698 | )  |
| Net      cash (used in) provided by operating activities                                                     |   |                       | (8,058 | ) |   |   | 2,463 |   |
|                                                                                                         |   |                       |   |   |   |   |   |   |
| Cash      Flows from Investing Activities:                                                                   |   |                       |   |   |   |   |   |   |
| Maturities      of short-term investments                                                                    |   |                       | 799    |   |   |   | — |   |
| Sale      of property and equipment                                                                          |   |                       | 8      |   |   |   | — |   |
| Purchase      of property and equipment                                                                      |   |                       | (35    | ) |   |   | (475 | ) |
| Net      cash provided by (used in) investing activities                                                     |   |                       | 772    |   |   |   | (475 | )  |
|                                                                                                         |   |                       |   |   |   |   |   |   |
| Cash      Flows from Financing Activities:                                                                   |   |                       |   |   |   |   |   |   |
| Line      of credit payments                                                                                 |   |                       | (5,100 | ) |   |   | — |   |
| Borrowings      on line of credit                                                                            |   |                       | 7,000  |   |   |   | — |   |
| Proceeds      from debt issuance                                                                             |   |                       | 7,000  |   |   |   | — |   |
| Net      proceeds from issuance of common stock                                                              |   |                       | 56     |   |   |   | 296 |   |
| Net      cash provided by financing activities                                                               |   |                       | 8,956  |   |   |   | 296 |   |
| Net      increase (decrease) in cash and cash equivalents                                                    |   |                       | 1,670  |   |   |   | 2,284 |   |
| Cash      and cash equivalents, beginning of period                                                          |   |                       | 4,077  |   |   |   | 7,854 |   |
| Cash      and cash equivalents, end of period                                                                |   | $                          | 5,747  |   |   | $ | 10,138 |   |

----

SUBSIDIARY

----

|                                                                                          |   | June      30, 2008                                                |   | December 31,      2007 |   |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                          |   |          (Unaudited) |   |
| Cash      and cash equivalents:                                                               |   |                                                              |   |                        |   |
| Cash      and money market funds                                                              |   | $                                                                 | 749    |                        | $      | 740 |   |
| Commercial      paper cash equivalents                                                        |   | 4,998                                                             |   | 3,337                       |   |
| Total      cash and cash equivalents                                                          |   | 5,747                                                             |   | 4,077                       |   |
| Short-term      investments:                                                                  |   |                                                              |   |                        |   |
| Short-term      investments (average 27 remaining days to maturity on December 31,      2007) |   | —                                                           |   | 799                         |   |
| Total      cash, cash equivalents and short-term investments                                  |   | $                                                                 | 5,747  |                        | $      | 4,876 |   |

----

|            |   | Three Months Ended June      30, |   | Six Months Ended June      30, |   |
|-----------------|--------|-------------------------------------------------|--------|-----------------------------------------------|--------|
|            |   | 2008                                            |   | 2007                                          |   | 2008 |   | 2007 |   |
|            |   | (Unaudited)                                     |   | (Unaudited)                                   |   |
| Customer      A |   | *%                                              |   | 68%                                           |   | *% |   | 48% |   |
| Customer      B |   | 14%                                             |   | 11%                                           |   | 17% |   | 16% |   |
| Customer      C |   | 69%                                             |   | 10%                                           |   | 63% |   | 16% |   |
| Customer      D |   | *%                                              |   | *%                                            |   | 10% |   | *% |   |

|                                 |   | June      30, 2008                        |   | December 31,      2007 |   |
|--------------------------------------|--------|-------------------------------------------|--------|-----------------------------|--------|
|                                 |   |      (Unaudited) |   |
| Raw      materials and subassemblies |   | $                                         | 21     |                        | $      | 25 |   |
| Finished      goods                  |   | 437                                       |   | 403                         |   |
| Total      Inventories               |   | $                                         | 458    |                        | $      | 428 |   |

----

|   | · | Persuasive evidence of an      arrangement exists. The Company requires a written contract, signed      by both the customer and the Company, or a purchase order from those      customers that have previously negotiated a standard end-user license      arrangement or volume purchase agreement, prior to recognizing revenue on      an arrangement. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Delivery has occurred.      The Company delivers software and hardware to customers physically. The      standard delivery terms are FOB shippingpoint. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The fee is fixed or      determinable. The Company’s determination that an arrangement fee      is fixed or determinable depends principally on the arrangement’s payment      terms. The Company’s standard terms generally require payment within 30 to      90 days of the date of invoice. Where these terms apply, the Company      regards the fee as fixed or determinable, and recognizes revenue upon      delivery (assuming other revenue recognition criteria are met). If the      payment terms do not meet this standard, but rather, involve “extended      payment terms,” the fee may not be considered to be fixed or determinable,      and the revenue would then be recognized when customer installments are      due and payable. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Collectibility is      probable. To recognize revenue, the Company judges collectibility      of the arrangement fees on a customer-by-customer basis pursuant to a      credit review policy. The Company typically sells to customers with which      it has had a history of successful collections. For new customers, the      Company evaluates the customer’s financial position and ability to pay. If      the Company determines that collectibility is not probable based upon the      credit review process or the customer’s payment history, revenue is      recognized when cash is collected. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                             |   | Three Months Ended June      30,                                                            |   | Six Months Ended June      30,                                                              |   |
|------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|
|                                                             |   | 2008                                                                                                       |   | 2007                                                                                                       |   | 2008 |   | 2007 |   |
|                                                             |   | (Unaudited)                                                                                                |   | (Unaudited)                                                                                                |   |
| Stock-based      compensation expense by type of award:          |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |
|     Employee      stock options              |   | $                      193      |   | $                           503 |   | $                   347 |   | $                    1,139 |   |
| Non-employee      stock options                                  |   | 3                                                                                                          |   | 43                                                                                                         |   | 6 |   | 59 |   |
| Employee      stock purchase plan                                |   | 7                                                                                                          |   | 30                                                                                                         |   | (3 | ) | 60 |   |
| Total      stock-based compensation                              |   | 203                                                                                                        |   | 576                                                                                                        |   | 350 |   | 1,258 |   |
| Tax      effect of stock-based compensation                      |   | —                                                                                                    |   | —                                                                                                    |   | — |   | — |   |
| Net      effect of stock-based compensation on net income (loss) |   | $                      203 |   | $                           576 |   | $                   350 |   | $                 1,258 |   |

|   | Employee Stock Option Plan |
|--------|-------------------------------------------|

|                                 |   | Three      and Six Months Ended |   |
|--------------------------------------|--------|-------------------------------------------|--------|
|                                 |   | June      30, 2008                        |   | June      30, 2007 |   |
| Expected      dividend               |   | —                                   | %      | —      % |   |
| Average      risk-free interest rate |   | 2.3                                       | %      | 4.7      % |   |
| Expected      volatility             |   | 114                                       | %      | 136      % |   |
| Expected      term (years)           |   | 2.4                                       |   | 6.1 |   |

----

|   | Employee Stock Purchase Plan |
|--------|---------------------------------------------|

|                                 |   | Three      and Six Months Ended |   |
|--------------------------------------|--------|-------------------------------------------|--------|
|                                 |   | June      30, 2008                        |   | June      30, 2007 |   |
| Expected      dividend               |   | —                                   | %      | — | % |
| Average      risk-free interest rate |   | 2.3                                       | %      | 5.1 | % |
| Expected      volatility             |   | 176                                       | %      | 96 | % |
| Expected      term (months)          |   | 6.0                                       |   | 6.0 |   |

|   | Level      1 – Quoted prices in active markets for identical assets or      liabilities. |
|--------|------------------------------------------------------------------------------------------------|

|   | Level      2 – Inputs other than Level 1 that are observable, either directly or      indirectly, such as quoted prices for similar assets or liabilities;      quoted prices in markets that are not active; or other inputs that are      observable, or can be corroborated by observable market data for      substantially the full term of the assets or  liabilities. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Level      3 – Unobservable inputs that are supported by little or no market activity      and that are significant to the fair value of the assets or      liabilities. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                        |   | Fair      Value                                                                   |   | Level      1                                                                |   | Level      2 |                                                                       | Level      3 |   |
|-----------------------------|--------|-----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|--------------|----------------------------------------------------------------------------|--------------|--------|
| Cash      Equivalents:      |   |                                                                              |   |                                                                        |   |         |                                                                       |         |   |   |   |
| Money      market funds     |   | $                  84 |   | $            84 |   |         | $                — |         |   | $               — |   |
| Commercial      paper       |   | 4,998                                                                             |   | —                                                                     |   |         | 4,998                                                                      |         |   | — |   |
| Total      cash equivalents |   | $             5,082                            |   | $                84       |   |         | $           4,998                                 |         |   | $               — |   |

----

|                                                       |   | Three Months Ended June      30,                                            |   | Six Months Ended June      30,                                            |   |
|------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|
|                                                       |   | 2008                                                                                       |   | 2007                                                                                     |   | 2008 |   | 2007 |   |
|                                                       |   | (Unaudited)                                                                                |   | (Unaudited)                                                                              |   |
| Numerator:                                                 |   |                                                                                       |   |                                                                                     |   |   |   |   |   |
| Net      income (loss)                                     |   | $            (1,612            | )      | $              388 |   | $         (5,379 | ) | $        4,881 |   |
| Denominator:                                               |   |                                                                                       |   |                                                                                     |   |   |   |   |   |
| Basic      weighted average shares outstanding             |   | 34,547                                                                                     |   | 34,230                                                                                   |   | 34,538 |   | 34,166 |   |
| Add:      dilutive employee and non employee stock options |   | —                                                                                    |   | 778                                                                                      |   | — |   | 906 |   |
| Diluted      weighted average shares outstanding           |   | 34,547                                                                                     |   | 35,008                                                                                   |   | 34,538 |   | 35,072 |   |
| Basic      and diluted net income (loss) per share         |   | $              (0.05 | )      | $             0.01      |   | $           (0.16 | ) | $          0.14 |   |

----

|                                              |   | Intellectual      Property Division |    |   | Products      Division |   |    | Reconciliation |   |   | Total   |   |
|---------------------------------------------------|--------|-------------------------------------|---------|--------|------------------------|--------|---------|----------------|--------|--------|---------|--------|
| Three      Months Ended June 30, 2008 (unaudited) |   |                                |    |   |                   |   |    |           |   |   |    |   |
| Revenue                                           |   | $                                   | 1,210   |   |                   | $      | 1,637   |           |   | $      | (1,057  | )      |   | $ | 1,790 |   |
| Depreciation      expense                         |   |                                | — |   |                   |   | (137    | )              |   |   | — |   |   |   | (137 | ) |
| Total      costs and expenses                     |   |                                | (558    | )      |                   |   | (3,794  | )              |   |   | 1,057   |   |   |   | (3,295 | ) |
| Interest      income                              |   |                                | — |   |                   |   | 21      |           |   |   | — |   |   |   | 21 |   |
| Interest      expense                             |   |                                | — |   |                   |   | (128    | )              |   |   | — |   |   |   | (128 | ) |
| Net      income (loss)                            |   |                                | 652     |   |                   |   | (2,264  | )              |   |   | — |   |   |   | (1,612 | ) |
| Assets                                            |   |                                | 2,138   |   |                   |   | 8,044   |           |   |   | — |   |   |   | 10,182 |   |
| Three      Months Ended June 30, 2007 (unaudited) |   |                                |    |   |                   |   |    |           |   |   |    |   |   |   |   |   |
| Revenue                                           |   | $                                   | 5,298   |   |                   | $      | 1,657   |           |   | $      | (1,057  | )      |   | $ | 5,898 |   |
| Depreciation      expense                         |   |                                | — |   |                   |   | (98     | )              |   |   | — |   |   |   | (98 | ) |
| Total      costs and expenses                     |   |                                | (765    | )      |                   |   | (5,852  | )              |   |   | 1,057   |   |   |   | (5,560 | ) |
| Interest      income                              |   |                                | — |   |                   |   | 101     |           |   |   | — |   |   |   | 101 |   |
| Interest      expense                             |   |                                | — |   |                   |   | (51     | )              |   |   | — |   |   |   | (51 | ) |
| Net      income (loss)                            |   |                                | 4,533   |   |                   |   | (4,145  | )              |   |   | — |   |   |   | 388 |   |
| Assets                                            |   |                                | 3,624   |   |                   |   | 12,510  |           |   |   | — |   |   |   | 16,134 |   |
| Six      Months Ended June 30, 2008 (unaudited)   |   |                                |    |   |                   |   |    |           |   |   |    |   |   |   |   |   |
| Revenue                                           |   | $                                   | 2,421   |   |                   | $      | 2,634   |           |   | $      | (2,114  | )      |   | $ | 2,941 |   |
| Depreciation      expense                         |   |                                | — |   |                   |   | (268    | )              |   |   | — |   |   |   | (268 | ) |
| Total      costs and expenses                     |   |                                | (1,329  | )      |                   |   | (8,959  | )              |   |   | 2,114   |   |   |   | (8,174 | ) |
| Interest      income                              |   |                                | — |   |                   |   | 67      |           |   |   | — |   |   |   | 67 |   |
| Interest      expense                             |   |                                | — |   |                   |   | (213    | )              |   |   | — |   |   |   | (213 | ) |
| Net      income (loss)                            |   |                                | 1,092   |   |                   |   | (6,471  | )              |   |   | — |   |   |   | (5,379 | ) |
| Assets                                            |   |                                | 2,138   |   |                   |   | 8,044   |           |   |   | — |   |   |   | 10,182 |   |
| Six      Months Ended June 30, 2007 (unaudited)   |   |                                |    |   |                   |   |    |           |   |   |    |   |   |   |   |   |
| Revenue                                           |   | $                                   | 18,587  |   |                   | $      | 3,817   |           |   | $      | (14,114 | )      |   | $ | 8,290 |   |
| Depreciation      expense                         |   |                                | — |   |                   |   | (148    | )              |   |   | — |   |   |   | (148 | ) |
| Total      costs and expenses                     |   |                                | (5,920  | )      |                   |   | (11,711 | )              |   |   | 14,114  |   |   |   | (3,517 | ) |
| Interest      income                              |   |                                | — |   |                   |   | 214     |           |   |   | — |   |   |   | 214 |   |
| Interest      expense                             |   |                                | — |   |                   |   | (106    | )              |   |   | — |   |   |   | (106 | ) |
| Net      income (loss)                            |   |                                | 12,667  |   |                   |   | (7,786  | )              |   |   | — |   |   |   | 4,881 |   |
| Assets                                            |   |                                | 3,624   |   |                   |   | 12,510  |           |   |   | — |   |   |   | 16,134 |   |

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| Six      Months Ending  December 31, |   |   |                               | Amount |   |
|------------------------------------------------|--------|--------|------------------------------------|--------|--------|
| 2008                                           |   |   | $     328 |   |   |
| Year      Ending December 31,                  |   |   |                               |   |   |
| 2009                                           |   |   | 675                                |   |   |
| 2010                                           |   |   | 687                                |   |   |
| 2011                                           |   |   | 705                                |   |   |
| 2012                                           |   |   | 221                                |   |   |
| thereafter                                     |   |   | 173                                |   |   |
| Total      future minimum lease payments       |   |   | $   2,789           |   |   |

On November 16, 2007, the Company received adeficiency letter from The NASDAQ Stock Market indicating that the Company didnot comply with Marketplace Rule 4310(c)(3), which requires that the Companyhave a minimum of $2,500,000 in stockholders’ equity or $35,000,000 in marketvalue of listed securities or $500,000 of net income from continuing operationsfor the most recently completed fiscal year or two of the three most recentlycompleted fiscal years.  On June 30, 2008, Avistar received a noticefrom The NASDAQ Stock Market’s Listing Qualifications Panel that the Panel hasdecided to grant Avistar an exception to the market value of listed securitiesrequirement of the NASDAQ Capital Market through August 29, 2008. Under theterms of the exception, during the period from July 1, 2008 to August 29, 2008,Avistar must demonstrate the ability to close above a $35 million market valuefor its listed securities for ten consecutive trading days.

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

The following discussion should be read in conjunction withthe unaudited Condensed Consolidated Financial Statements and the Notes toCondensed Consolidated Financial Statements elsewhere herein, and the AuditedConsolidated Financial Statements and the Notes thereto contained in our AnnualReport on Form 10-K for the year ended December 31, 2007, as filed with theSEC on March 31, 2008.

Certain statements in this “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” are forward lookingstatements. These statements relate to future events or our future financialperformance and involve known and unknown risks, uncertainties and other factorsthat 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 theforward looking statements. These risks and other factors include those listedunder “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q. In somecases, 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. Actualevents or results may differ materially. In evaluating these statements, youshould specifically consider the various risks outlined under the heading “RiskFactors” in Part II of this Report. These factors may cause our actual resultsto differ materially from any forward looking statement.   Although webelieve that the expectations reflected in the forward looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements.

Overview

        Avistar createstechnology that provides the missing critical element in unified communications:bringing people in organizations face-to-face, through enhanced communicationsfor true collaboration anytime, anyplace. Our latest product, Avistar C3, drawson over a decade of market experience to deliver a single-click desktopvideoconferencing and collaboration experience that moves businesscommunications into a new era. Available as a stand-alone solution, orintegrated with existing unified communications software from other vendors,Avistar C3 users gain an instant messaging-style ability to initiate videocommunications across and outside the enterprise. Patented bandwidth managementenables thousands of users to access desktop videoconferencing, Voice over IP(VoIP) and streaming media without requiring substantial new network investmentor impairing network performance.  By integrating Avistar C3 tightlyinto the way they work, our customers can use our solutions to help reduce costsand improve productivity and communications within their enterprise and betweenenterprises, and to enhance their relationships with customers, suppliers andpartners. Using Avistar C3 software and leveraging video, telephony and Internetnetworking standards, Avistar solutions are designed to be scalable, reliable,cost effective, easy to use, and capable of evolving with communicationsnetworks as bandwidth increases and as new standards and protocols emerge. Wecurrently sell our system directly and indirectly to the small and medium sizedbusiness, or SMB and globally distributed organizations, or Enterprise, marketscomprising the Global 5000. Our objective is to establish our technology as thestandard for networked visual unified communications and collaboration throughdirect sales, indirect channel sales/partnerships and the licensing of ourtechnology to others. We also seek to license our broad portfolio of patentscovering, among other areas, video and rich media collaboration technologies,networked real-time text and non-text communications and desktop workstationecho cancellation.

        We have threego-to-market strategies. Product and Technology Sales involves direct andchannel sales of video and unified communications and collaboration solutionsand associated support services to the Global 5000. Partner and TechnologyLicensing involves co-marketing, sales and development, embedding, integrationand interoperability to enterprises, and IP Licensing involves the prosecution,maintenance, support and licensing of the intellectual property that we havedeveloped, some of which is used in our products.

16

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        Since inception,we have recognized the innovative value of our research and development efforts,and have invested in securing protection for these innovations through domesticand foreign patent applications and issuance. As of June 30, 2008, we held80 U.S. and foreign patents, which we look to license to others in thecollaboration technology marketplace.

In September 2007 and March 2008, we announced corporateinitiatives aimed at increasing our product sales, expanding our customerdeployments and support, improving our corporate efficiency and increasing ourdevelopment capacity.  The components of this initiativeinclude:

|   | · | Centering our sales, marketing and operations      activities, and associated management functions in our New York City      office; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Introducing a new go-to-market strategy and delivery      model for hosting desktop video services, a fully managed, turnkey,      desktop video solution that provides comprehensive video communications      and data-sharing capabilities without the need for companies to install      and maintain onsite videoinfrastructure; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Supplementing our position in the financial services      vertical by expanding our market focus to additional verticals with      complex business problems, where our collaboration products can help      global organizations speed business processes, save costs and reduce their      carbon footprints; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Engaging the market with a new, dynamic application      integration and network risk management product set with video as the      primary, empowering technology; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Implementing aggressive cost control measures structured to effectively align      operations and to      address Microsoft's      requests for re-examination of our U.S. Patents, while still allowing us      to continue to invest in      our product      line and to license      our intellectual      property andtechnology, |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | A reduction in our employees from an average of 88      in 2007 to approximately 47 on June 30, 2008;  and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

|   | · | Pursuing multiple distribution, services and technology      partners. |
|--------|--------|------------------------------------------------------------------------|

        These and otherchanges in our business are aimed at reducing our structural costs, increasingour organizational and partner-driven capacity, and leveraging our reputationfor innovation and intellectual property leadership in order to grow and expandour business.  However, these organizational changes and initiativesinvolve transitional costs and expenses and result in uncertainty in terms oftheir implementation and their impact on our business.  As with anysignificant organizational change, our initiatives will take time to implementand the results of these initiatives will not be apparent in the nearterm.

        On February 25,2008 we announced that Microsoft Corporation had filed requests forre-examination of 24 of our 29 U.S. patents. Subsequently, Microsoft also filedrequests for re-examination of our remaining 5 U.S. patents.  On June10, 2008 we announced that the U.S. Patent and Trademark Office (USPTO) hadcompleted its review of Microsoft’s requests for re-examination and had rejected19 of the re-examination applications in their entirety, and the majority of thearguments for one additional application. The USPTO agreed to re-examine, eitherin part or fully, 10 of our existing U.S. patents.  Subsequently,Microsoft submitted five petitions for reconsideration of the USPTO’s rejectionof Microsoft’s re-examination applications.  The USPTO’s review of thefive petitions for reconsideration is currently in process, with anindeterminate time period established for their decision on Microsoft’srequest.

        Once undertaken,the USPTO may take between six months and two years to complete patentre-examinations.  We believe that our U.S. patents are valid and weintend to defend our patents through the re-examinationprocess.  However, the re-examination of patents by the USPTO is alengthy, time consuming and expensive process in which the ultimate outcome isuncertain.  The re-examination process by the USPTO may adverselyimpact our licensing negotiations in process, and may require us to spendsubstantial time and resources defending our patents, including the fees andexpenses of our legal advisors.  The potential impact to our resultsof operations may require us to reduce our other operating expenses and seekadditional financing to fund our operations and the defense of ourpatents.

Critical Accounting Policies

        The preparation ofour Condensed Consolidated Financial Statements in accordance with accountingprinciples generally accepted in the United States requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities. Webase our estimates on historical experience and assumptions that we believe tobe reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates.

        We believe thefollowing critical accounting policies, among others, affect our moresignificant judgments and estimates used in the preparation of our CondensedConsolidated Financial Statements:

|   | · | Revenuerecognition; |
|--------|--------|---------------------|

|   | · | Income from settlement and patent      licensing; |
|--------|--------|---------------------------------------------------|

|   | · | Stock-basedcompensation; |
|--------|--------|--------------------------|

|   | · | Valuation of accounts receivable;    and |
|--------|--------|------------------------------------------|

|   | · | Valuation ofinventories. |
|--------|--------|--------------------------|

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Revenue Recognition

        We derive productrevenue from the sale and licensing of our video-enabled networkedcommunications system, consisting of a suite of Avistar-designed software andhardware products, including third party components. We also derive revenue fromfees for installation, maintenance, support, training services and softwaredevelopment. In addition, we derive revenue from the licensing of ourintellectual property portfolio. Product revenue as a percentage of totalrevenue was 31% and 12% for three months ended June 30, 2008 and 2007,respectively and 27% and 24% for six months ended June 30, 2008 and 2007,respectively.

        We recognizeproduct and services revenue in accordance with Statement of Position(SOP)  97-2, SoftwareRevenue Recognition (SOP 97-2), as amended by SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions (SOP 98-9). We derive productrevenue from the sale and licensing of a set of desktop (endpoint) products(hardware and software) and infrastructure products (hardware and software) thatcombine to form an Avistar video-enabled collaboration solution. Servicesrevenue includes revenue from installation services, post-contract customersupport, training, out of pocket expenses, freight and software development. Theinstallation services that we offer to customers relate to the physical set-upand configuration of desktop and infrastructure components of our solution. Thefair value of all product, installation services, post-contract customer supportand training offered to customers is determined based on the price charged whensuch products or services are sold separately.

Arrangements that include multiple product and serviceelements may include software and hardware products, as well as installationservices, post-contract customer support and training. Pursuant toSOP 97-2, we recognize revenue when all of the following criteria are met:(i) persuasive evidence of an arrangement exists, (ii) delivery hasoccurred, (iii) the fee is fixed or determinable, and(iv) collectibility is probable. We apply these criteria as discussedbelow:

|   | · | Persuasive evidence of an      arrangement exists. We require a written contract, signed by both      the customer and us, or a purchase order from those customers that have      previously negotiated a standard end-user license arrangement or volume      purchase agreement with us prior to recognizing revenue on an      arrangement. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Delivery has occurred.      We deliver software and hardware to our customers physically. Our standard      delivery terms are FOB shippingpoint. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The      fee is fixed or determinable. Our determination that an arrangement      fee is fixed or determinable depends principally on the arrangement’s      payment terms. Our standard terms generally require payment within 30 to      90 days of the date of invoice. Where these terms apply, we regard the fee      as fixed or determinable, and we recognize revenue upon delivery (assuming      other revenue recognition criteria are met). If the payment terms do not      meet this standard, but rather involve “extended payment terms,” we may      not consider the fee to be fixed or determinable and would then recognize      revenue when customer installments are due and  payable. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Collectibility is      probable. To recognize revenue, we must judge collectibility of the      arrangement fees, which we do on a customer-by-customer basis pursuant to      our credit review policy. We typically sell to customers with which we      have had a history of successful collections. For new customers, we      evaluate the customer’s financial position and ability to pay. If we      determine that collectibility is not probable based upon our credit review      process or the customer’s payment history, we recognize revenue when cash      is collected. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

If there are any undelivered elements, we defer revenue forthose elements, as long as Vendor Specific Objective Evidence (VSOE) exists forthe undelivered elements. Additionally, when we provide installation services,the product and installation revenue is recognized upon completion of theinstallation process and receipt of customer confirmation, subject to thesatisfaction of the revenue recognition criteria described above. We believethat the fee associated with the delivered product elements does not meet thecollectibility criteria if the installation services have not been completed.Customer confirmation is obtained and documented by means of a standard formindicating the installation services were provided and the hardware and softwarecomponents were installed. When the customer or a third party providesinstallation services, the product revenue is recognized upon shipment, subjectto satisfaction of the revenue recognition criteria describedabove.

Payment for product is due upon shipment, subject to specificpayment terms. Payment for installation and professional services is due uponproviding the services, subject to specific payment terms. Reimbursementsreceived for out of pocket expenses incurred during installation and supportservices and shipping costs  have not been significant to date. Theseexpenses are recognized as revenue in accordance with Emerging Issues Task Force(EITF) Issue No. 01-14, Income Statement Characterization ofReimbursements Received for “Out of Pocket” ExpensesIncurred.

The price charged for maintenance and/or support is definedin the product sale contract, and is based on a fixed price for both hardwareand software components as stipulated in the customer agreement. Customers havethe option to renew the maintenance and/or support services in subsequentperiods at the same or similar rate as paid in the initial year subject tocontractual adjustments for inflation in some cases. Revenue from maintenanceand support is recognized pro-rata over the maintenance and/or support term,which is typically one year in length. Payments for services made in advance ofthe provision of services are recorded as deferred revenue and customer depositsin the accompanying balance sheets. Training services are offered independentlyof the purchase of product. The value of these training services is determinedbased on the price charged when such services are sold separately. Trainingrevenue is recognized upon performance of the service.

18

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We recognize service revenue from software developmentcontracts in accordance with SOP 81-1, Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts. Revenue relatedto contracts for software development is recognized using the percentage ofcompletion method, when all of the following conditions are met: a contractexists with the customer at a fixed price, we have fulfilled all of our materialcontractual obligations to the customer for each deliverable of the contract,verification of completion of the deliverable has been received, and collectionof the receivable is probable. Amounts billed to customers in excess of revenuesrecognized to date are deferred and recorded as deferred revenue and customerdeposits in the accompanying balance sheets. Assumptions used for recordingrevenue and earnings are adjusted in the period of change to reflect revisionsin contract value and estimated costs to complete the contract. Any anticipatedlosses on contracts in progress are charged to earnings whenidentified.

We also recognize revenue from the licensing of ourintellectual property portfolio, according to SOP 97-2, based on the termsof the royalty, partnership and cross-licensing agreements involved. In theevent that a license to our intellectual property is granted after thecommencement of litigation between us and the licensee, the proceeds of suchtransaction are recognized as licensing revenue by us only if sufficienthistorical evidence exists for the determination of fair value of the licensedpatents to support the segregation of the proceeds between a gain on litigationsettlement and patent license revenues, consistent with FASB CON 6. As of June30, 2008, these criteria for recognizing license revenue following thecommencement of litigation have not been met, and proceeds received aftercommencement of litigation have therefore been recorded in “income fromsettlement and patent licensing” in our statement ofoperations.

        In July 2006,we entered into a Patent License Agreement with Sony Corporation (Sony) and SonyComputer Entertainment, Inc. (SCEI). Under the license agreement, wegranted Sony and its subsidiaries, including SCEI a license to all of ourpatents with a filing date on or before January 1, 2006 for a specificfield of use relating to video conferencing. The license covers Sony’s videoconferencing apparatus as well as other products, including video-enabledpersonal computer products and certain SCEI PlayStation products. Futureroyalties under this license are being recognized as estimated royalty-basedsales occur in accordance with SOP 97-2.  We use historical andforward looking sales forecasts provided by SCEI and third party sources inconjunction with actual royalty reports provided periodically by SCEI directlyto us, to develop an estimate of royalties recognized for each quarterlyreporting period.  The royalty reports issued directly from SCEI to usare delayed beyond the period in which the actual royalties occur, and thus theestimate of current period royalties requires significant management judgmentand is subject to corrections in a future period once actual royalties becomeknown.

         In June2007, we entered into a Patent License Agreement with Radvision Ltd. Under thelicense agreement, we granted Radvision and its subsidiaries a license in thefield of videoconferencing to all of our patents, patent applications andpatents issuing therefrom with a filing date on or before May 15, 2007. Alsounder the license agreement, Radvision granted to us a license in the field ofvideoconferencing to all of Radvision’s patents, patent applications and patentsissuing therefrom with a filing date on or before May 15, 2007. The licenseagreement includes mutual releases of the parties from claims of pastinfringement of the licensed patents. As partial consideration for the licensesand releases granted under the agreement, Radvision made a one-time licensepayment to us of $4.0 million, which was recognized as licensing revenue in thethree months ended June 30, 2007.

To date, a significant portion of our revenue has resultedfrom sales to a limited number of customers, particularly Deutsche Bank AG, UBSAG and their affiliates, Sony, SCEI and Radvision. Collectively, Deutsche BankAG, UBS AG and their affiliates, Sony and SCEI and Radvision accounted forapproximately 90% and 87% of total revenue for the six month periods endedJune 30, 2008 and 2007, respectively. As of June 30, 2008,approximately 86% of our gross accounts receivable was concentrated with twocustomers, each of whom represented more than 10% of our gross accountsreceivable. As of June 30, 2007, approximately 71% of our gross accountsreceivable was concentrated with three customers, each of whom represented morethan 10% of our gross accounts receivable.

International revenue, which consists of sales to customerswith operations principally in Western Europe and Asia, comprised 52% and 89% oftotal revenue for the three months ended June 30, 2008 and 2007, respectivelyand 52% and 78% of total revenue for the six months ended June 30, 2008 and2007, respectively.

Income from Settlement and Patent Licensing

We recognize the proceeds from settlement and patentlicensing agreements based on the terms involved. When litigation has been filedprior to a settlement and patent licensing agreement, and insufficienthistorical evidence exists for the determination of fair value of the patentslicensed to support the segregation of the proceeds between a gain on litigationsettlement and patent license revenues, we report all proceeds in “income fromsettlement and patent licensing” within operating costs and expenses. The gainportion of the proceeds, when sufficient historical evidence exists to segregatethe proceeds, would be reported according to Statement of Financial AccountingStandards (SFAS) No. 5, Accounting for Contingencies.To date, all proceeds from settlement and patent licensing agreements enteredinto following the commencement of litigation have been reported as income fromsettlement and patent licensing. When a patent license agreement is entered intoprior to the commencement of litigation, we report the proceeds of suchtransaction as licensing revenue in the period in which such proceeds arereceived, subject to the revenue recognition criteria describedabove.

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On February 15, 2007, we entered into a Patent LicenseAgreement with Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc.  Underthis agreement, we dismissed our infringement suit against Tandberg, Tandbergdismissed its infringement suit against us, and we cross-licensed each other’spatent portfolios.  The agreement resulted in a payment of $12.0 million tous from Tandberg. We recognized the gross proceeds of $12.0 million from the patent licenseagreement as income from settlement and patent licensing within operations inthe three months ended March 31, 2007.  To recognize the proceeds asrevenue, we would have required sufficient history of transactions to allow usto isolate the aspect of the settlement attributable to the gain associated withthe process of litigation, separate from commercial compensation for the use ofour intellectual property.  Sufficient evidence was not available to allowthis distinction.   The Patent License Agreement with Tandbergincludes a ten year capture period, extending from the date of the agreement,during which patents filed with a priority date within the capture period wouldbe licensed in addition to existing patents on the agreement date. However, such additional patents would be licensed under the agreement solelyfor purposes of the manufacture, sale, license or other transfer of existingproducts of Tandberg and products that are closely related enhancements of suchproducts based primarily and substantially on the existing products.  Wereviewed the existing products of Tandberg and considered the likelihood thatfuture patent filings by us would relate to or otherwise affect existingTandberg products and closely related enhancements thereto.  We concludedthat the filing for such additional patents was unlikely, and thereforeconcluded that the ten year capture period was not material from an accountingperspective related to recognition.

|   | Stock-BasedCompensation |
|--------|-------------------------|

We account for stock-based compensation to employeesaccording to the SFAS No. 123 (R), Share-Based Payment (SFASNo. 123R), which is a very complex accounting standard, the application ofwhich requires significant judgment and the use of estimates, particularlysurrounding Black-Scholes-Merton valuation assumptions such as stock price,volatility and expected option terms, as well as expected option forfeiturerates. There is little experience or guidance with respect to developing theseassumptions and models. SFAS No. 123R requires the recognition of the fair valueof stock compensation in net income (loss). Refer to Note 2 — Stock-BasedCompensation in the Notes to our Condensed Consolidated Financial Statementsincluded elsewhere in this Quarterly Report on Form 10-Q for moreinformation.

|   | Valuation of Accounts  Receivable |
|--------|-----------------------------------|

        Estimates are usedin determining our allowance for doubtful accounts and are based on ourhistorical collection experience, historical write-offs, current trends, and thecredit quality of our customer base and the characteristics of our accountsreceivable by aging category. If the allowance for doubtful accounts were to beunderstated, our operating income could be significantly reduced. The impact ofany such change or deviation may be increased by our reliance on a relativelysmall number of customers for a large portion of our total revenue. As ofJune 30, 2008, two customers represented 62% and 24% of our gross accountsreceivable balance. As of December 31, 2007, three customers represented38%, 30% and 10% of our gross accounts receivable balance.

|   | Valuation ofInventories |
|--------|-------------------------|

        We record aprovision for obsolete or excess inventory for systems and components that areno longer manufactured, or are at risk of being replaced with new versions ofour product. In determining the allowance for obsolete or excess inventory, welook at our forecasted demand versus quantities on hand and commitments. Anysignificant unanticipated changes in demand or technological developments couldhave a significant impact on the value of our inventory and commitments and ourreported results. If actual market conditions are less favorable than thoseprojected, additional inventory write-downs, provision for purchase commitmentsand charges against earnings may be required, which would negatively affect ouroperating results for such period.

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Results of Operations

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

|                                                   |   |                       | Percentage of Total Revenue |                     | Percentage of Total Revenue |   |    |
|--------------------------------------------------------|--------|----------------------------|--------------------------------------------|--------------------------|--------------------------------------------|--------|---------|
|                                                   |   | Three Months EndedJune 30, |                                       | Six Months EndedJune 30, |                                       |
|                                                   |   | 2008                       |                                       | 2007                     |                                       | 2008   |    | 2007 |   |
| Revenue:                                               |   |                       |                                       |                     |                                       |   |    |   |   |
| Product                                                |   | 31                         | %                                          | 12                       | %                                          | 27     | %       | 24 | % |
| Licensing                                              |   | 8                          |                                       | 73                       |                                       | 11     |    | 55 |   |
| Services, maintenance and support                      |   | 61                         |                                       | 15                       |                                       | 62     |    | 21 |   |
| Total revenue                                          |   | 100                        |                                       | 100                      |                                       | 100    |    | 100 |   |
| Costs and Expenses:                                    |   |                       |                                       |                     |                                       |   |    |   |   |
| Cost of product revenue                                |   | 32                         |                                       | 12                       |                                       | 31     |    | 17 |   |
| Cost of services, maintenance and support      revenue |   | 34                         |                                       | 10                       |                                       | 38     |    | 15 |   |
| Income from settlement and patent      licensing       |   | (59                        | )                                     | (18                      | )                                     | (72    | )       | (170 | ) |
| Research and development                               |   | 53                         |                                       | 31                       |                                       | 96     |    | 42 |   |
| Sales and marketing                                    |   | 44                         |                                       | 26                       |                                       | 72     |    | 37 |   |
| General and administrative                             |   | 80                         |                                       | 33                       |                                       | 113    |    | 101 |   |
| Total costs and expenses                               |   | 184                        |                                       | 94                       |                                       | 278    |    | 42 |   |
| Net (Loss) income from operations                      |   | (84                        | )                                          | 6                        |                                       | (178   | )       | 58 |   |
| Other income (expense):                                |   |                       |                                       |                     |                                       |   |    |   |   |
| Interest income                                        |   | 1                          |                                       | 2                        |                                       | 2      |    | 2 |   |
| Other expense, net                                     |   | (7                         | )                                          | (1                       | )                                          | (7     | )       | (1 | ) |
| Total other (expense) income, net                      |   | (6                         | )                                     | 1                        |                                       | (5     | )  | 1 |   |
| Net income (loss)                                      |   | (90                        | )%                                         | 7                        | %                                          | (183   | )%      | 59 | % |

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2008 AND2007

|   | Revenue |
|--------|---------|

Total revenue decreased by $4.1 million or 70%, to $1.8million for the three month period ended June 30, 2008, from $5.9 million forthe three months ended June 30, 2007. The decrease was due primarily to adecrease of $4.0 million in licensing revenue due to the lack of new licensingagreements in the quarter ended June 30, 2008.

|   |     Product revenue decreased by $151,000 or      21%, to $553,000 for the three months ended June 30, 2008, from $704,000      for the three months ended June 30, 2007. The decrease was due to      decreased new customer sales in the three month period ended June 30,      2008, as compared to the same period in  2007.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |     Licensing revenue, relating to the      licensing of our patent portfolio, decreased by $4.2 million, or 96%, to      $153,000 for the three months ended June 30, 2008, from $4.3 million for      the three months ended June 30, 2007 due primarily to the lack of new      licensing agreements in the quarter, as compared to the recognition of the      $4.0 million Radvision license agreement during the same quarter in      2007.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |     Services, maintenance and support      revenue, which includes our installation services, funded software      development and maintenance and support, increased by $211,000, or 24%, to      $1.1 million for the three months ended June 30, 2008, from $873,000 for      the three months ended June 30, 2007, due primarily to an increase in      revenue from professional on-site services provided to an existing      customer. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

For the three months ended June 30, 2008, revenue from twocustomers accounted for 83% of total revenue compared to three customers and 89%for the three months ended June 30, 2007. No other customer accounted forgreater than 10% of total revenue.  The level of sales to any customer mayvary from quarter to quarter. We expect that there will be significant customerconcentration in future quarters. The loss of any one of those customers wouldhave a materially adverse impact on our financial condition and operatingresults.

|   | Costs andExpenses |
|--------|-------------------|

Cost ofproduct revenue. Cost of product revenuedecreased by $146,000, or 21%, to $565,000 for the three months ended June 30,2008, from $711,000 for the three months ended June 30, 2007. This decrease incost of product revenue was due to the associated decrease in product sales forthe three months ended June 30, 2008 and lower personnel and personnel relatedexpense.

21

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Cost ofservices, maintenance and support revenue. Cost of services,maintenance and support revenue increased by $32,000, or 6%, to $603,000 for thethree months ended June 30, 2008, from $571,000 for the three months ended June30, 2007. We expect cost of services, maintenance and support revenue to vary inthe future due to labor costs associated with funded softwareprojects.

Income fromsettlement and patent licensing. Income from settlementand patent licensing was $1.1 million for the three month periods ended June 30,2008 and June 30, 2007, reflecting the amortization of the net proceeds from theNovember 2004 Polycom settlement and cross-license agreement over a five yearperiod, beginning in November 2004 and ending in November 2009.

Researchand development. Research and developmentexpenses decreased by $881,000, or 48%, to $1.0 million for the three monthsended June 30, 2008 from $1.8 million for the three months ended June 30,2007.  This decrease was primarily due to a decrease in personnel andpersonnel related expenses, including a $92,000 reduction in stock basedcompensation expense and a decrease in the use of externallabor.

Sales andmarketing. Sales and marketing expenses decreased by $758,000, or 49% to$789,000 for the three months ended June 30, 2008, from $1.5 million for thethree months ended June 30, 2007. The decrease was due primarily to a reductionin personnel and personnel related expenses, including a $168,000 reduction instock based compensation expense.

General andadministrative. General and administrative expenses decreased by$512,000, or 26% to $1.4 million for the three months ended June 30, 2008, from$1.9 million for the three months ended June 30, 2007. The decrease was dueprimarily to a reduction in legal expense associated with patent prosecution andfiling expenses, and a decrease in personnel and personnel related expenses,including a $79,000 reduction in stock based compensationexpense.

|   | Other Income |
|--------|--------------|

Interest income decreased by $80,000, or 79%, to $21,000 forthe three months ended June 30, 2008, from $101,000 for the three months endedJune 30, 2007. The decrease was due to lower interest income due to both adecrease in interest rates and a decrease in the average outstanding balance ofinvestments that earned interest in the three months ended June 30, 2008compared to the same period in 2007.

Other expense, net, increased by $77,000, or 151%, to$128,000 for the three months ended June 30, 2008, from $51,000 for the threemonths ended June 30, 2007. The increase was due to higher interest expense dueto a higher balance of debt outstanding during the three months ended June 30,2008 compared to the same period in 2007.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2008 AND2007

|   | Revenue |
|--------|---------|

Total revenue decreased by $5.3 million, or 65%, to $2.9million for the six months ended June 30, 2008, from $8.3 million for thesix months ended June 30, 2007. The decrease was primarily the result of the$4.0 million decrease in licensing revenue associated with the lack of newlicensing agreements in the six months ended June 30, 2008 and decreasedproducts sold to new customers in 2008 compared to 2007.

|   | • |   | Product revenue decreased by $1.2 million, or 59%, to      $802,000 million for the six months ended June 30, 2008, from $2.0      million for the six months ended June 30, 2007. The decrease was due to      decreased new customer sales in the six month period ended June 30, 2008,      as compared to the same period in2007. |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Licensing revenue, relating to the licensing of our      patent portfolio, decreased by $4.3 million to $307,000 for the six months      ended June 30, 2008, from $4.6 million for the six months ended June 30,      2007. The decrease was primarily attributable to the lack of new licensing      agreements in the six months ended June 30, 2008 compared to the Radvision      licensing agreement, which resulted in $4.0 million in licensing revenue      for the six months ended June 30,2007. |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Services, maintenance and support revenue, which      includes our installation services, funded software development and      maintenance and support, increased by $57,000, or 3%, and was      approximately $1.8 million for the six months ended June 30, 2008      and  June 30, 2007. |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

For the six months ended June 30, 2008, revenue from threecustomers accounted for 90% of total revenue, each of whom accounted for greaterthan 10% of total revenue. For the six months ended June 30, 2007, revenue fromthree customers accounted for 80% of total revenue, each of whom accounted forgreater than 10% of total revenue. We expect that there will be significantcustomer concentration in future quarters.  The loss of any one ofthose customers would have a material adverse impact on our financial conditionand operating results. 

22

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|   | Costs andExpenses |
|--------|-------------------|

Cost ofproduct revenue. Cost of product revenues decreased by $516,000, or 36%,to $924,000 for the six months ended June 30, 2008, from $1.4 million forthe six months ended June 30, 2007.  The decrease was primarilyattributable to decreased sales of our products and a decrease in personnel andpersonnel related expenses for the assembly and testing of such products,including a decrease in stock based compensation expense.

Cost ofservices, maintenance and support revenues. Cost of services, maintenanceand support revenues decreased by $125,000 or 10% to $1.1 million for the sixmonths ended June 30, 2008, from $1.2 million for the six months ended andJune 30, 2007.  This decrease was attributable in part to a decreaseinthe amount of the reclassification of  personnel expenses fromresearch and development  related to work performed on funded softwaredevelopment projects, partially offset by an increase in personnelexpense.

Income fromsettlement and patent licensing. Income from settlementand patent licensing decreased by $12.0 million, or 85% to $2.1 million for thesix months ended June 30, 2008, from $14.1 million for the six month periodended June 30, 2007. The decrease was due to the Settlement and Patent LicenseAgreement entered into with Tandberg ASA and its subsidiaries in February 2007,which resulted in a cash payment to us of $12.0 million. The six months endedJune 30, 2008 and 2007 each also reflect $2.1 million of amortization of the netproceeds from the November 2004 Polycom settlement and cross-license agreement,recognized over a five year period beginning in November 2004 and ending inNovember 2009.

Researchand development. Research and developmentexpenses decreased by $687,000, or 20%, to $2.8 million for the six months endedJune 30, 2008 from $3.5 million for the six months ended June 30, 2007. Thedecrease was primarily attributable to a decrease in personnel and personnelrelated expenses, including a decrease of $233,000 in stock based compensationexpense, a decrease in external labor expense, partially offset by a decrease inthe amount of the reclassification of personnel expenses to cost ofservices, maintenance and support expense related to work performed on fundedsoftware development projects.

Sales andmarketing. Sales and marketing expenses decreased by $918,000, or 30%, to$2.1 million for the six months ended June 30, 2007 from $3.0 million for thesix months ended June 30, 2007. The decrease was primarily attributable to adecrease in personnel and personnel related expenses, including a decrease of$389,000 in stock based compensation expense.

General andadministrative. General and administrative expenses decreased by $5.1million, or 61% to $3.3 million for the six months ended June 30, 2008 from $8.4million for the six months ended June 30, 2007. The decrease was due primarilyto $4.7 million in legal fees associated with our litigation against Tandbergfor patent infringement that occurred during the six months ended June 30, 2007,with no comparable expense in the same period during2008.   Additionally, to a lesser extent, there was a decrease inpersonnel and personnel related expenses including a decrease of $199,000 instock based compensation expense, partially offset by increased employeeseverance expense.

|  | Other income |
|--|--------------|

Interest income decreased by $147,000, or 69%, to $67,000 forthe six months ended June 30, 2008, from $214,000 for the six months ended June30, 2007. The decrease was due to lower interest income due to both a decreasein interest rates and a decrease in the average outstanding balance ofinvestments that earned interest in the six months ended June 30, 2008, ascompared to the same period in 2007.

Other expense, net, increased by $107,000, or 101%, to$213,000 for the six months ended June 30, 2008, from $106,000 for the sixmonths ended June 30, 2007. The increase was due to higher interest expense dueto a higher outstanding balance of debt outstanding during the six months endedJune 30, 2008, as compared to the same period in 2007.

Liquidity and Capital Resources

We had cash and cash equivalents of $5.7 million as of June30, 2008, and cash, cash equivalents and short-term investments of $4.9 millionas of December 31, 2007. For the six months ended June 30, 2008, we had a netincrease in cash and cash equivalents of $1.7 million. The net cash used byoperations of $8.1 million for the six months ended June 30, 2008 resultedprimarily from the net loss of $5.4 million, a decrease in deferred income fromsettlement and patent licensing of $2.8 million, a decrease in deferred servicesrevenue and customer deposits of $929,000, a decrease in account payable of$706,000, all offset by a decrease in deferred settlement and patent licensingcosts of $636,000 and non-cash expenses of $615,000.  The net cash providedby investing activities of $772,000 for the six months ended June 30, 2008 wasprimarily due to the maturities of short-term investments of $799,000.  Thenet cash provided by financing activities of $9.0 million for the sixmonths ended June 30, 2008 related primarily to $7.0 million in proceeds fromthe issuance of convertible debt, and $7.0 million of borrowings on our line ofcredit, offset by payments made on our line of credit of $5.1million.

At June 30, 2008, we had open purchase orders and othercontractual obligations of approximately $601,000, primarily related toinventory purchase commitments. We also have commitments that consist ofobligations under our operating leases. These purchase order commitments andcontractual obligations are reflected in our financial statements once goods orservices have been received or payments related to the obligations become due.A table summarizing our minimum purchasecommitments to our contract manufacturers and our minimum commitments undernon-cancelable operating leases as of December 31, 2007 is included in ourAnnual Report on Form 10-K for the year ended December 31, 2007, filed with theSecurities and Exchange Commission on March 31, 2008. In May 2008 andJune 2008, we subleased some of our office facilities in San Mateo, Californiaand New York, New York, and assigned our primary facility lease in London,United Kingdom.

23

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 As a result of these subleases and assignment, ourfuture minimum lease commitments under all facility leases as of June 30,2008, net of sublease proceeds, are as follows (in thousands):

| Six Months Ending       December 31,      |   |   |                                                       | Amount |   |
|-----------------------------------------------------|--------|--------|------------------------------------------------------------|--------|--------|
| 2008                                                |   |   | $              328 |   |   |
| Years Ending December 31,                           |   |   |                                                       |   |   |
| 2009                                                |   |   | 675                                                        |   |   |
| 2010                                                |   |   | 687                                                        |   |   |
| 2011                                                |   |   | 705                                                        |   |   |
| 2012                                                |   |   | 221                                                        |   |   |
| thereafter                                          |   |   | 173                                                        |   |   |
| Total  future minimum lease      payments |   |   | $         2,789                   |   |   |

 As of June 30, 2008, wehad no material off-balance sheet arrangements other than the operating leasesdescribed in the contractual obligations table above.   We enterinto indemnification provisions under agreements with other companies in ourordinary course of business, typically with our contractors, customers,landlords and our investors. Under these provisions, we generally indemnify andhold harmless the indemnified party for losses suffered or incurred by theindemnified party as a result of our activities or, in some cases, as a resultof the indemnified party's activities under the agreement. These indemnificationprovisions generally survive termination of the underlying agreement. Themaximum potential amount of future payments we could be required to make underthese indemnification provisions is generally unlimited. As of June 30, 2008, wehave not incurred material costs to defend lawsuits or settle claims related tothese indemnifications agreements and therefore, we have no liabilities recordedfor these agreements as of June 30, 2008.

We currently believe that our existing cash and cashequivalents balance and line of credit will provide us with sufficient funds tofinance our operations for the next 12 months. We intend to continue to investin the development of new products and enhancements to our existing products.Our future liquidity and capital requirements will depend upon numerous factors,including without limitation, general economic conditions and conditions in thefinancial services industry in particular, the level and timing of product,services and patent licensing revenues and income, the costs and timing of ourproduct development efforts and the success of these development efforts, thecosts and timing of our sales, partnering and marketing activities, the extentto which our existing and new products gain market acceptance, competingtechnological and market developments, and the costs involved in maintaining,defending and enforcing patent claims and other intellectual property rights,all of which may impact our ability to achieve and maintain profitability orgenerate positive cash flows.

        Recent AccountingPronouncements

In February 2008, the FASB issued FASB Staff Position No. FAS157-2, Effective Date of FASBStatement No. 157 (FSP 157-2), to partially defer SFAS 157. FSP 157-2defers the effective date of SFAS 157 for nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually), to fiscal years,and interim periods within those fiscal years, beginning after November 15,2008. We are currently evaluating the impact of adopting the provisions of FSP157-2.

In December 2007, the FASB Emerging Issues Task Force reacheda consensus and published Issue No. 07-01, Accounting for CollaborativeArrangements (EITF 07-01). EITF 07-01 defines a collaborative arrangementas a contractual arrangement in which the parties are active participants to thearrangements and exposed to significant risks and rewards that depend on thecommercial success of the endeavor. EITF 07-01 requires that costs incurred andrevenues generated from transactions with third parties should be reported bythe collaborators on the appropriate line item in their respective incomestatements. EITF 07-01 also states that the income statement characterization ofpayments between the participants to a collaborative arrangement should be basedon other authoritative literature if the payments are within the scope of suchliterature. EITF 07-01 requires collaborators to disclose, in the footnotes tofinancial statements in the initial period of adoption and annually thereafter,the income statement classification and amounts attributable to transactionsarising from collaborative arrangements between participants for each period forwhich an income statement is presented and information regarding the nature andpurpose of the collaborative arrangement, the collaborators' rights andobligations under the arrangement, and any accounting policies for thecollaborative arrangement. EITF 07-01 is effective for fiscal years beginningafter December 15, 2008. We are currently evaluating the impact of adopting theprovisions EITF 07-01.

24

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Item 4T.Controlsand Procedures

        (a) Evaluation ofdisclosure controls and procedures: Our management evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this Quarterly Report on Form 10-Q. Based on this evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934 (the Exchange Act)) were effective inproviding reasonable assurance that information required to be disclosed by usin reports that we file or submit under the Exchange Act (i) is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure, and (ii) is recorded, processed, summarized andreported within the time periods specified in Securities and Exchange Commissionrules and forms.  In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well designed and executed, can provide only reasonable assurance ofachieving the desired control objectives.  In addition, the design ofdisclosure controls and procedures must reflect the fact that there are resourceconstraints and that management is required to apply its judgment in evaluatingthe benefits of possible controls and procedures relative to theircosts.

        (b) Changes ininternal control over financial reporting: There was no change in our internalcontrol over financial reporting that occurred during the period covered by thisQuarterly Report on Form 10-Q that has materially affected, or is reasonablylikely to materially affect, our internal control over financialreporting.

PART II - OTHERINFORMATION

Item 1A. RiskFactors

|   | Factors Affecting Future Operating      Results |
|--------|-------------------------------------------------|

        We have incurredsubstantial losses in the past and may not be profitable in thefuture.

        We recorded a netloss of $5.4 million for the six months ended June 30, 2008, a net loss of $2.9million for fiscal year 2007, and a net loss of $8.1 million for fiscal year2006. As of June 30, 2008, our accumulated deficit was $111 million. Ourrevenue and income from settlement and patent licensing may not increase, oreven remain at its current level. In addition, our operating expenses, whichhave been reduced recently, may increase as we continue to develop our businessand pursue licensing opportunities. As a result, to become profitable, we willneed to increase our revenue and income from settlement and patent licensing byincreasing sales to existing customers and by attracting additional newcustomers, distribution partners and licensees. If our revenue does not increaseadequately, we may not become profitable. Due to the volatility of our productand licensing revenue and our income from settlement and patent licensingactivities, we may not be able to achieve, sustain or increase profitability ona quarterly or annual basis. If we fail to achieve or to maintain profitabilityor to sustain or grow our profits within the time frame expected by investors,the market price of our common stock may be adversely impacted.

        Our expectedfuture working capital needs may require that we seek additional debt or equityfunding which, if not available on acceptable terms, could cause our business tosuffer.

We may need to arrange for the availability of additionalfunding in order to meet our future business requirements. If we are unable toobtain additional funding when needed on acceptable terms, we may not be able todevelop or enhance our products, take advantage of opportunities, respond tocompetitive pressures or unanticipated requirements, or finance our efforts toprotect and enforce our intellectual property rights, which could seriously harmour business, financial condition, results of operations and ability to continueoperations.  We have in the past and may in the future reduce ourexpenditures by significantly reducing our employee headcount in order to betteralign our expenditures with our available resources.  Any suchreductions may adversely affect our ability to maintain or grow ourbusiness.

        We are in theprocess of implementing changes in our organizational structure, sales,marketing and distribution strategies, licensing efforts and strategicdirection, which, if unsuccessful, could adversely affect our business andresults of operations.

        In July 2007,Simon Moss was appointed as President of the products division of ourcompany.  In September 2007, William Campbell resigned from theposition of Chief Operating Officer, and in November 2007, we announced thatGerald Burnett was resigning from his position as our Chief Executive Officereffective January 1, 2008 and that he would be replaced in that position bySimon Moss.  In addition, during the second half of 2007 and the sixmonths ended June 30, 2008, we implemented a number of other management changes.  In September 2007 and March 2008, we announced corporate initiativesaimed at increasing our product sales, expanding our customer deployments andsupport, improving our corporate efficiency and increasing our developmentcapacity.  The components of this initiativeincluded:

|   | · | Supplementing our position in the financial services      vertical by expanding our market focus to additional verticals with      complex business problems, where our collaboration products can help      global organizations speed business processes, save costs and reduce their      carbon footprints; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Implementing aggressive cost control measures structured to effectively align      operations and to      address Microsoft's      requests for re-examination of our U.S. Patents, while still allowing us      to continue to invest in      our product      line and to license      our intellectual      property and  technology, |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | A reduction in our employees from an average of 88      in 2007 to approximately 47 at June 30, 2008;  and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

|   | · | Pursuing multiple distribution, services and technology      licensing partners. |
|--------|--------|----------------------------------------------------------------------------------|

25

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        These and otherchanges in our business are aimed at reducing our structural costs, increasingour organizational and partner-driven capacity, leveraging our reputation forinnovation and intellectual property leadership, and growing and expanding ourbusiness.  However, these organizational changes and initiativesinvolve transitional costs and expenses and result in uncertainty in terms oftheir implementation and their impact on our business.  As with anysignificant organizational change, our initiatives will take time to implement,and the results of these initiatives may not be apparent in the nearterm.  If our initiatives are unsuccessful in achieving our statedobjectives, our business could be harmed and our results of operations andfinancial condition could be adversely affected.

        We may not satisfythe criteria for continued listing on The NASDAQ Capital Market and oursecurities could be subject to delisting, which could materially and adverselyaffect the price and liquidity of our stock, our business and our financialcondition.

        On November 16,2007, we received a deficiency letter from The NASDAQ Stock Market indicatingthat we did not comply with Marketplace Rule 4310(c)(3), which requires that wehave a minimum of $2,500,000 in stockholders’ equity or $35,000,000 in marketvalue of listed securities or $500,000 of net income from continuing operationsfor the most recently completed fiscal year or two of the three most recentlycompleted fiscal years.  The NASDAQ staff noted that the market valueof our listed securities had been below the minimum $35,000,000 for the previous10 consecutive trading days.  On January 24, 2008, we presented aremedial compliance plan to the NASDAQ Listing Qualification Panel(Panel).  On March 19, 2008, the Panel notified us that we hadregained compliance with the $35 million market value listing criteria, but thatthe Panel had invoked its discretionary authority under NASDAQ Marketplace Rule4300 in order to establish a special monitoring period, until June 1, 2008,during which time we were required to close 10 consecutive trading days above a$35 million market value, or be required to re-submit a remedial compliance planto the Panel.

        Additionally,on April 18, 2008, we received a deficiency letter from The NASDAQ Stock Marketindicating that Avistar did not comply with Marketplace Rule 4310(c)(4), whichrequires us to have a minimum bid price of $1.00 for continuedlisting.  The NASDAQ Staff noted that for the 30 consecutive businessdays prior to the date of its letter, the bid price of our common stock closedbelow $1.00 per share.  We have been provided 180 calendar days, oruntil October 15, 2008, to regain compliance with thisrequirement.

        On June 3, 2008,the Panel advised us that we had failed to adequately demonstrate our ability toremain above the $35 million market value continued listing criteria during thespecial monitoring period, and were thereby required to submit a follow-upremedial compliance plan.  We submitted that plan to the Panel on June12, 2008.

        On June 30, 2008,we received a notice from The NASDAQ Stock Market’s Listing Qualifications Panelthat the Panel had decided to grant us an exception to the market value oflisted securities requirement of the NASDAQ Capital Market through August 29,2008. Under the terms of the exception, during the period from July 1, 2008 toAugust 29, 2008, we must demonstrate the ability to close above a $35 millionmarket value for our listed securities for ten consecutive tradingdays.

         If we areunable to regain compliance by August 29, 2008, our securities will be subjectto de-listing.  If we achieve compliance with the $35 million marketvalue criteria by August 29, 2008, we will also have regained technicalcompliance with the $1.00 per share listing requirement, although the NASDAQstaff may impose an additional monitoring period to assure longer-termcompliance with the Listing Qualifications.

        There can be noassurance that we will establish and remain in compliance with The NASDAQ’scontinued listing standards during the NASDAQ Panel’s exception period orthereafter.  If we are unable to continue to list our common stock fortrading on The NASDAQ Capital Market, there may be an adverse impact on themarket price and liquidity of our common stock, and our stock may be subject tothe “penny stock rules” contained in Section 15(g) of the Securities ExchangeAct of 1934, as amended, and the rules promulgated thereunder. Delisting of ourcommon stock from The NASDAQ Capital Market could also have a materially adverseeffect on our business, including, among other things: our ability to raiseadditional financing to fund our operations; our ability to attract and retaincustomers; and our ability to attract and retain personnel, including managementpersonnel. In addition, institutional investors may no longer be able to retaintheir interests in and/or make further investments in our common stock becauseof their internal rules and protocols.

        Our common stockhas been and will likely continue to be subject to substantial price and volumefluctuations due to a number of factors, many of which will be beyond ourcontrol, which may prevent our stockholders from reselling our common stock at aprofit.

        The trading priceof our common stock has in the past been and could in the future be subject tosignificant fluctuations in response to:

|   | · | general trends in the equities market, and/or trends in      the technology sector; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | quarterly variations in our results of      operations; |
|--------|--------|---------------------------------------------------------|

|   | · | announcements regarding our product      developments; |
|--------|--------|--------------------------------------------------------|

|   | · | the size and timing of agreements to license our patent      portfolio or enter into technology or distribution      partnerships; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|

|   | · | developments in the examination of our patent      applications and the re-examination of some of our issued patents by the      U.S. Patent and TrademarkOffice; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | announcements of technological innovations or new      products by us, our customers or  competitors; |
|--------|--------|-------------------------------------------------------------------------------------------------------|

|   | · | announcements of competitive product introductions by      our competitors; |
|--------|--------|-----------------------------------------------------------------------------|

|   | · | changes in the status of our listing on The NASDAQ      Capital Market; |
|--------|--------|-------------------------------------------------------------------------|

|   | · | sales, or the perception in the market of possible      sales, of a large number of shares of our common stock by our directors,      officers, employees or principal stockholders;  and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | developments or disputes concerning patents or      proprietary rights, or otherevents. |
|--------|--------|-----------------------------------------------------------------------------------------|

26

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If our revenue and results of operations are below theexpectations of public market securities analysts or investors, then significantfluctuations in the market price of our common stock could occur. In addition,the securities markets have, from time to time, experienced significant priceand volume fluctuations, which have particularly affected the market prices forhigh technology companies, and which often are unrelated and disproportionate tothe operating performance of specific companies. These broad marketfluctuations, as well as general economic, political and market conditions, maynegatively affect the market price of our common stock.

Provisions of our certificate of incorporation, our bylawsand Delaware law may make it difficult for a third party to acquire us, despitethe possible benefits to our stockholders.

Our certificate of incorporation, our bylaws, and Delawarelaw contain provisions that may inhibit changes in our control that are notapproved by our Board of Directors. For example, the Board of Directors has theauthority to issue up to 10,000,000 shares of preferred stock and to determinethe terms of this preferred stock, without any further vote or action on thepart of the stockholders.

These provisions may have the effect of delaying, deferringor preventing a change in the control of Avistar despite possible benefits toour stockholders, may discourage bids at a premium over the market price of ourcommon stock, and may adversely affect the market price of our common stock andthe voting and other rights of our stockholders.

Our principal stockholders can exercise a controllinginfluence over our business affairs and they may make business decisions withwhich you disagree that will affect the value of yourinvestment.

Our executive officers, directors and entities affiliatedwith them, in the aggregate, beneficially owned approximately 59% of our commonstock as of June 30, 2008. If they were to act together, these stockholderswould be able to exercise control over most matters requiring approval by ourstockholders, including the election of directors and approval of significantcorporate transactions. These actions may be taken even if they are opposed byother investors. This concentration of ownership may also have the effect ofdelaying or preventing a change in control of Avistar, which could cause themarket price of our common stock to decline.

If our share price is volatile, we may be the target ofsecurities litigation, which is costly and time-consuming todefend.

In the past, following periods of market volatility in theprice of a company’s securities, security holders have often instituted classaction litigation. Many technology companies have been subject to this type oflitigation. Our share price has, in the past, experienced price volatility, andmay continue to do so in the future. If the market value of our common stockexperiences adverse fluctuations and we become involved in this type oflitigation, regardless of the merits or outcome, we could incur substantiallegal costs and our management’s attention could be diverted, causing ourbusiness, financial condition and operating results to suffer.

Our market is in the early stages of development, and oursystem may not be widely accepted.

Our ability to achieve profitability depends in part on thewidespread adoption of networked video communications systems and the sale andadoption of our video system in particular, either as a separate solution or asa technology integrated into a unified communications platform. If the marketfor our system and technology fails to grow or grows more slowly than weanticipate, we may not be able to increase revenue or achieve profitability. Themarket for our system is relatively new and evolving. We have to devotesubstantial resources to educating prospective customers about the uses andbenefits of our system and the value added through the adoption of ourtechnology. Our efforts to educate potential customers may not result in oursystem achieving broad market acceptance. In addition, businesses that haveinvested or may invest substantial resources in other video products may bereluctant or slow to adopt our system or technology. Consequently, theconversion from traditional methods of communication to the extensive use ofnetworked video and unified communications may not occur as rapidly as wewish.

Our lengthy sales cycle to acquire new customers or largefollow-on orders may cause our operating results to vary significantly and makeit more difficult to forecast our revenue.

We have generally experienced a product sales cycle of fourto nine months for new customers or large follow-on orders from existingcustomers through direct sales.   This sales cycle is due to the timeneeded to educate customers about the uses and benefits of our system, and thetime needed to process the investment decisions that our prospective customersmust make when they decide to buy our system. Many of our prospective customershave neither budgeted expenses for networked video communications systems, norfor personnel specifically dedicated to the procurement, installation or supportof these systems. As a result, our customers spend a substantial amount of timebefore purchasing our system in performing internal reviews and obtainingcapital expenditure approvals. Economic conditions over the last several yearshave contributed to additional deliberation and an associated delay in the salescycle.

27

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Our lengthy sales cycle is one of the factors that hascaused, and may continue to cause our operating results to vary significantlyfrom quarter-to-quarter and year-to-year in the future. This makes it difficultfor us to forecast revenue, and could cause volatility in the market price ofour common stock. A lost or delayed order could result in lower than expectedrevenue in a particular quarter or year. There is also a tendency in thetechnology industry to close business deals at the end of a quarter, therebyincreasing the likelihood that a possible material deal would not be concludedin a current quarter, but slip into a subsequent reporting period. This kind ofdelay may result in a given quarter’s performance being below shareholderexpectations.

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

Our customers typically place limited initial orders for ournetworked video communications system, as they seek to evaluate its utilizationand resultant value. Our strategy is to pursue additional and larger follow-onorders after these initial orders. Product revenue generated from follow-onorders accounted for approximately 98% and 96% of our product revenue for thesix months ended June 30, 2008 and 2007, respectively. Our future productrevenue depends on the adoption of our products by new customers and successfulgeneration of follow-on orders as the Avistar network expands within acustomer’s organization. If our system does not meet the needs and expectationsof customers, we may not be able to generate follow-on orders.

Because we depend on a few customers for a majority of ourproduct revenue, services revenue, and income from settlement and patentlicensing, the loss of one or more of them could cause a significant decrease inour operating results.

To date, a significant portion of our revenue and income fromsettlement and patent licensing has resulted from sales or licenses to a limitednumber of customers, particularly Deutsche Bank AG, UBS AG, Polycom, Inc.,Radvision Ltd., and Sony and SCEI and their affiliates.  Collectively,Deutsche Bank AG, UBS AG, Polycom, Inc., Sony Corporation, and their affiliatesaccounted for approximately 94% of combined revenues and income from settlementand patent licensing for the three months ended June 30, 2008. As of June 30,2008, approximately 86% of our gross accounts receivable was concentrated withtwo customers, each of whom represented more than 10% of our gross accountsreceivable. As of December 31, 2007, approximately 78% of our grossaccounts receivable was concentrated with three customers, each of whomrepresented more than 10% of our gross accounts receivable.

The loss of a major customer or the reduction, delay orcancellation of orders from one or more of our significant customers could causeour revenue to decline and our losses to increase.  For example, incomefrom settlement and licensing activities from Tandberg, which was $12.0 millionin the first quarter of 2007, was a one-time payment. Additionally, we expect tocomplete the amortization of the Polycom, Inc. proceeds in 2009. If we areunable to license our patent portfolio to additional parties on terms equal toor better than our agreements with Polycom, Inc. and Tandberg, our licensingrevenue and our income from settlement and licensing will decline, which couldcause our losses to increase. We currently depend on a limited number ofcustomers with lengthy budgeting cycles and unpredictable buying patterns, andas a result, our revenue from quarter-to-quarter or year-to-year may bevolatile. Adverse changes in our revenue or operating results as a result ofthese budgeting cycles or any other reduction in capital expenditures by ourlarge customers could substantially reduce the trading price of our commonstock.

We may not be able to modify and improve our products in atimely and cost effective manner to respond to technological change and customerdemands.

Future hardware and software platforms embodying newtechnologies and the emergence of new industry standards and customerrequirements could render our system non-competitive or evenobsolete.  Additionally, communication and collaboration products andtechnologies are moving towards integrated platforms characterized as unifiedcommunications. The market for our system reflects:

|   | · | rapid technological  change; |
|--------|--------|------------------------------|

|   | · | the emergence of new  competitors; |
|--------|--------|------------------------------------|

|   | · | significant development  costs; |
|--------|--------|---------------------------------|

|   | · | changes in the requirements of our customers and their      communities of users; |
|--------|--------|-----------------------------------------------------------------------------------|

|   | · | integration of joint solutions in collaboration      platforms; |
|--------|--------|-----------------------------------------------------------------|

|   | · | evolving industry  standards; |
|--------|--------|-------------------------------|

|   | · | transition from hardware appliances and infrastructure      to software; and |
|--------|--------|------------------------------------------------------------------------------|

|   | · | transition to Internet protocol connectivity for video      at the desktop, with increasing availability of bandwidth and quality of      service. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

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Our system is designed to work with a variety of hardware andsoftware configurations, and be integrated with commoditized components(example: “web cams”) of data networking infrastructures used by our customers.The majority of these customer networks rely on Microsoft Windows servers.However, our software may not operate correctly on other hardware and softwareplatforms or with other programming languages, database environments and systemsthat our customers use. Also, we must constantly modify and improve our systemto keep pace with changes made to our customers’ platforms, data networkinginfrastructures, and their evolving ability to integrate video with otherapplications. This may result in uncertainty relating to the timing and natureof our new release announcements, introductions or modifications, which in turnmay cause confusion in the market, with a potentially harmful effect on ourbusiness. If we fail to promptly modify, integrate, or improve our system inresponse to evolving industry standards or customers’ demands, our system couldbecome less competitive, which would harm our financial condition andreputation.

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

We generally recognize initial product and installationrevenue upon the installation of our system in those cases where we areresponsible for installation, which often entails working with sophisticatedsoftware and computing and communications systems. If we experience difficultieswith installations or do not meet deadlines due to delays caused by ourcustomers or ourselves, we could be required to devote more customer support,technical and other resources to a particular installation. If we encounterdelays in installing our products for new or existing customers, or installationrequires significant amounts of our professional services support, our revenuerecognition could be delayed, our costs could increase and our margins couldsuffer.

Competition could reduce our market share and decrease ourrevenue.

The market in which we operate is highly competitive. Inaddition, because our industry is relatively new and is characterized by rapidtechnological change, evolving user needs, developing industry standards andprotocols and the introduction of new products and services, it is difficult forus to predict whether or when new competing technologies or new competitors willenter our market. Currently, our competition comes from many other kinds ofcompanies, including communication equipment, integrated solution, broadcastvideo and stand-alone “point solution” providers. Within the video-enablednetwork communications market, we compete primarily against Polycom, Inc.,Tandberg ASA, Sony Corporation, Apple Inc., Radvision Ltd. and Emblaze-VCONLtd.  Many of these companies, including Polycom, Inc., Tandberg, Sony,Radvision and Emblaze-VCON have acquired rights to use our patented technologythrough licensing agreements with us, which, in some cases, include rights touse future patents filed by us.  With increasing interest in the power ofvideo collaboration and the establishment of communities of users, we believe weface increasing competition from alternative video communications solutions thatemploy new technologies or new combinations of technologies from companies suchas Cisco Systems, Inc., Avaya, Inc., Microsoft Corporation and NortelNetworks Corporation that enable web-based or network-based video communicationswith low-cost digital camera systems.

We expect competition to increase in the future from existingcompetitors, partnerships of competitors, and from new market entrants withproducts that may be less expensive than ours, or that may provide betterperformance or additional features not currently provided by our products. Manyof our current and potential competitors have substantially greater financial,technical, manufacturing, marketing, distribution and other resources, greatername recognition and market presence, longer operating histories, lower coststructures and larger customer bases than we do. As a result, they may be ableto adapt more quickly to new or emerging technologies and changes in customerrequirements.

We may be required to reduce prices or increase spending inresponse to competition in order to retain or attract customers, pursue newmarket opportunities or invest in additional research and development efforts.As a result, our revenue, margins and market share may be harmed. We cannotassure you that we will be able to compete successfully against current andfuture competitors and partnerships of our competitors, or that competitivepressures faced by us will not harm our business, financial condition andresults of operations.

General economic conditions may impact our revenues and harmour business in the future, as they have in the past.

The international economic slowdown and the downturn in theinvestment banking industry that began in 2000 and continued for a number ofyears negatively affected our business, and a reoccurrence of a difficulteconomic environment may do so in the future. During the previous economicdownturn, the investment banking industry suffered a sharp decline, which causedmany of our existing and potential customers to cancel or delay orders for ourproducts. The U.S. economy may slow, and our customers and potential customersmay delay ordering our products, and we could fall short of our revenueexpectations for 2008 and beyond. Slower growth among our customers, tighteningof customers’ operating budgets, retrenchment in the capital markets and othergeneral economic factors all have had, and could in the future have, amaterially adverse effect on our revenue, capital resources, financial conditionand results of operations.

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Future revenues and income from settlement and licensingactivities are difficult to predict for several reasons, including our lengthyand costly licensing cycle. Our failure to predict revenues and incomeaccurately may cause us to miss analysts’ estimates and result in our stockprice declining.

Because our licensing cycle is a lengthy process, theaccurate prediction of future revenues and income from settlement and patentlicensing from new licensees is difficult. The process of persuading companiesto adopt our technologies, or convincing them that their products infringe uponour intellectual property rights, can be lengthy. There is also a tendency inthe technology industry to close business deals at the end of a quarter, therebyincreasing the likelihood that a possible material deal would not be concludedin a current quarter, but slip into a subsequent reporting period. This kind ofdelay may result in a given quarter’s performance being below analyst orshareholder expectations. The proceeds of our intellectual property licensingand enforcement efforts tend to be sporadic and difficult to predict.Recognition of those proceeds as revenue or income from settlement and licensingactivities depends on the terms of the license agreement involved, and thecircumstances surrounding the agreement. To finance litigation todefend or enforce our intellectual property rights, we may enter intocontingency arrangements with investors, legal counsel or other advisors thatwould give such parties a significant portion of any future licensing andsettlement amounts we derive from our patent portfolio. As a result, ourlicensing and enforcement efforts are expected to result in significantvolatility in our quarterly and annual financial condition and results ofoperations, which may result in us missing investor expectations, which maycause our stock price to decline.

Our U.S. Patents are the subject of a re-examination requestfiled with the U.S. Patent and Trademark Office by Microsoft Corporation, whichcould adversely affect our business and results of operations.

On February 25, 2008 we announced that Microsoft Corporationhad filed requests for re-examination of 24 of our 29 U.S. patents.Subsequently, Microsoft also filed requests for re-examination of our remaining5 U.S. patents.  On June 10, 2008 we announced that the USPTO hadcompleted its review of Microsoft’s requests for re-examination and had rejected19 of the re-examination applications in their entirety, and the majority of thearguments for one additional application. The USPTO agreed to re-examine, eitherin part or fully, 10 of our existing patents.  Subsequently, Microsoftsubmitted 5 petitions for reconsideration of USPTO’s rejection of Microsoft’sre-examination applications.  The USPTO’s review of the 5 petitionsfor reconsideration is currently in process, with an indeterminate time periodestablished for their decision on Microsoft’s request.

Once undertaken, the USPTO may take between six months andtwo years to complete patent re-examinations.  We believe that ourU.S. patents are valid and we intend to defend our patents through there-examination process.  However, the re-examination of patents by theUSPTO is a lengthy, time consuming and expensive process in which the ultimateoutcome is uncertain.  The re-examination process by the USPTO mayadversely impact our licensing negotiations in process, and may require us tospend substantial time and resources defending our patents, including the feesand expenses of our legal advisors.  The potential impact to ourresults of operations may require us to seek additional financing to fund ouroperations and the defense of our patents.

Infringement of our proprietary rights could affect ourcompetitive position, harm our reputation or cost us money.

We regard our system as open but proprietary. In an effort toprotect our proprietary rights, we rely primarily on a combination of patent,copyright, trademark and trade secret laws, as well as licensing, non-disclosureand other agreements with our consultants, suppliers, customers, partners andemployees. However, these laws and agreements provide only limited protection ofour proprietary rights. In addition, we may not have signed agreements in everycase, and the contractual provisions that are in place and the protection theyproduce may not provide us with adequate protection in all circumstances.Although we hold patents and have filed patent applications covering some of theinventions embodied in our systems, our means of protecting our proprietaryrights may not be adequate. It is possible that a third party couldcopy or otherwise obtain and use our technology without authorization andwithout our detection. In the event that we believe a third party is infringingour intellectual property rights, an infringement claim brought by us could,regardless of the outcome, result in substantial cost to us, divert ourmanagement’s attention and resources, be time consuming to prosecute and resultin unpredictable damage awards. A third party may also develop similartechnology independently, without infringing upon our patents and copyrights. Inaddition, the laws of some countries in which we sell our system may not protectour software and intellectual property rights to the same extent as the laws ofthe United States or other countries where we hold patents. As we move to moreof a software based system, inadequate licensing controls, unauthorized copying,and use, or reverse engineering of our system could harm our business, financialcondition or results of operations.

Others may bring infringement claims against us or challengethe legitimacy of our patents, which could be time-consuming and expensive todefend.

In recent years, there has been significant litigation in theUnited States involving patents and other intellectual property rights. We havebeen party to such litigation in the past and may be again in the future. Theprosecution and defense of such lawsuits would require us to expend significantfinancial and managerial resources, and therefore may have a material negativeimpact on our financial position and results of operations. The duration andultimate outcome of these proceedings are uncertain. We may be a party toadditional litigation in the future to protect our intellectual property, or asa result of an alleged infringement of the intellectual property of others.These claims and any resulting lawsuit could subject us to significant liabilityfor damages and invalidation of our proprietary rights. In addition, thevalidity of our patents has been challenged in the past and may be challenged inthe future through re-examination requests or other means. These lawsuits orchallenges of our patents legitimacy in the US or foreign patent offices,regardless of their success, would likely be time-consuming and expensive toresolve and would divert management’s time and attention. Any potentialintellectual property litigation also could force us to do one or more of thefollowing:

|   | · | stop selling, incorporating or using products or      services that use the challenged intellectual  property; |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

|   | · | obtain from the owner of the infringed intellectual      property a license to the relevant intellectual property, which may      require us to license our intellectual property to such owner, or may not      be available on reasonable terms or at  all; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | redesign those products or services that use technology      that is the subject of an infringement  claim. |
|--------|--------|-------------------------------------------------------------------------------------------------------------|

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If we are forced to take any of the foregoing actions, we maybe unable to manufacture, use, sell, import and export our products, which wouldreduce our revenues.

Our inability to protect the intellectual property created byus would cause our business to suffer.

We rely on a combination of license, development andnondisclosure agreements, trademark, trade secret and copyright law, andcontractual provisions to protect our other, non-patentable intellectualproperty rights. If we fail to protect these intellectual property rights, ourlicensees, potential licensees and others may seek to use our technology withoutthe payment of license fees and royalties, which could weaken our competitiveposition, reduce our operating results and increase the likelihood of costlylitigation. The growth of our business depends in part on the applicability ofour intellectual property to the products of third parties, and our ability toenforce intellectual property rights against them. In addition, effective tradesecret protection may be unavailable or limited in certain foreign countries.Although we intend to protect our rights vigorously, if we fail to do so, ourbusiness will suffer.

If our customers do not perceive our system or services to beeffective or of high quality, our brand and name recognition wouldsuffer.

We believe that establishing and maintaining brand and namerecognition is critical for attracting and expanding our targeted customer base.We also believe that the importance of reputation and name recognition willincrease as competition in our market increases. Promotion and enhancement ofour name will depend on the success of our marketing efforts, and on our abilityto continue to provide high quality systems and services, neither of which canbe assured. If our customers do not perceive our system or services to beeffective or of high quality, our brand and name recognition will suffer, whichwould harm our business.

Our system could have defects for which we could be heldliable for, and which could result in lost revenue, increased costs, and loss ofour credibility or delay in the further acceptance of our system in themarket.

Our system may contain errors or defects, especially when newproducts are introduced or when new versions are released. Despite internalsystem testing, we have in the past discovered software errors in some of theversions of our system after their introduction. Errors in new systems orversions could be found after commencement of commercial shipments, and thiscould result in additional development costs, diversion of technical and otherresources from our other development efforts or the loss of credibility withcurrent or future customers. Any of these events could result in a loss ofrevenue or a delay in market acceptance of our system, and could harm ourreputation.

In addition, we have warranted to some of our customers thatour software is free of viruses. If a virus infects a customer’s computersoftware, the customer could assert claims against us, which, regardless oftheir merits, could be costly to defend and could require us to pay damages andpotentially harm our reputation.

Our license agreements with our customers typically containprovisions designed to limit our exposure to potential product liability andcertain contract claims. Our license agreements also typically limit acustomer’s entire remedy to either a refund of the price paid or modification ofour system to satisfy our warranty. However, these provisions vary as to theirterms and may not be effective under the laws of some jurisdictions. Although wemaintain product liability (“errors and omissions”) insurance coverage, wecannot assure you that such coverage will be adequate. A product liability,warranty or other claim could harm our business, financial condition and/orresults of operations. Performance interruptions at a customer’s site couldnegatively affect the demand for our system or give rise to claims againstus.

The third party software we license with our system may alsocontain errors or defects for which we do not maintain insurance. Typically, ourlicense agreements transfer any warranty from the third party to our customersto the extent permitted. Product liability, warranty or other claims broughtagainst us with respect to such warranties could, regardless of their merits,harm our business, financial condition or results ofoperations.

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

To increase our revenue, we must increase the size and/or theproductivity of our direct sales force and add indirect distribution channels,such as systems integrators, product partners and/or value-added resellers,which isa focus of our go-to market strategy, and/or effect sales through ourcustomers. If we are unable to maintain or increase our direct sales force oradd indirect distribution channels due to our own cost constraints, limitedavailability of qualified personnel or other reasons, our future revenue growthmay be limited and our future operating results may suffer. We cannot assure youthat we will be successful in attracting, integrating, motivating and retainingsales personnel and channel partners. Furthermore, it can take several monthsbefore a new hire or channel partner becomes a productive member of our salesforce effort. The loss of existing salespeople, or the failure of newsalespeople and/or indirect sales partners to develop the necessary skills in atimely manner, could impact our revenue growth.

We may not be able to retain our existing key personnel, orhire and retain the additional personnel that we need to sustain and grow ourbusiness.

We depend on the continued services of our executive officersand other key personnel. We do not have long-term employment agreements with ourexecutive officers or other key personnel and we do not carry any “key man” lifeinsurance. The loss of the services of any of our executive officers or keypersonnel could harm our business, financial condition and results ofoperations.

Our products and technologies are complex, and tosuccessfully implement our business strategy and manage our business, anin-depth understanding of video communication and collaboration technologies andtheir potential uses is required. We need to attract and retain highly skilledtechnical and managerial personnel for whom there is intense competition. If weare unable to attract and retain qualified technical and managerial personneldue to our own cost constraints, limited availability of qualified personnel orother reasons, our results of operations could suffer and we may never achieveprofitability. The failure of new personnel to develop the necessary skills in atimely manner could harm our business.

Our plans call for growth in our business, and our inabilityto achieve or manage growth could harm our business.

Failure to achieve or effectively manage growth will harm ourbusiness, financial condition and operating results. Furthermore, in order toremain competitive or to expand our business, we may find it necessary ordesirable in the future to acquire other businesses, products or technologies.If we identify an appropriate acquisition candidate, we may not be able tonegotiate the terms of the acquisition successfully, to finance the acquisitionor to integrate the acquired businesses, products or technologies into ourexisting business and operations. In addition, completing a potentialacquisition and integrating an acquired business may strain our resources andrequire significant management time.

Our international operations expose us to potential tariffsand other trade barriers, unexpected changes in foreign regulatory requirementsand laws and economic and political instability, as well as other risks thatcould adversely affect our results of operations.

International revenue, which consists of sales to customerswith operations principally in Western Europe and Asia, comprised 52% and78% of total revenues for the six months ended June 30, 2008 and 2007,respectively.  International revenue comprised 72% and 75% of totalrevenues for the years ended December 31, 2007 and 2006, respectively. Some ofthe risks we may encounter in conducting international business activitiesinclude the following:

| ·   | tariffs and other trade  barriers; |
|--------------------|------------------------------------|

|   | · | unexpected changes in foreign regulatory requirements      and laws; |
|--------|--------|----------------------------------------------------------------------|

|   | · | economic and political  instability; |
|--------|--------|--------------------------------------|

|   | · | increased risk of infringement    claims; |
|--------|--------|-------------------------------------------|

|   | · | protection of our intellectual      property; |
|--------|--------|-----------------------------------------------|

|   | · | restrictions on the repatriation of      funds; |
|--------|--------|-------------------------------------------------|

|   | · | potentially adverse tax    consequences; |
|--------|--------|------------------------------------------|

|   | · | timing, cost and potential difficulty of adapting our      system to the local language standards in those foreign countries that do      not use the English language; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | fluctuations in foreign currencies;    and |
|--------|--------|--------------------------------------------|

|   | · | limitations in communications infrastructures in some      foreign countries. |
|--------|--------|-------------------------------------------------------------------------------|

        Some of ourproducts are subject to various federal, state and international laws governingsubstances and materials in products, including those restricting the presenceof certain substances in electronics products. We could incur substantial costs,including fines and sanctions, or our products could be enjoined from enteringcertain jurisdictions, if we were to violate environmental laws or if ourproducts become non-compliant with environmental laws. We also face increasingcomplexity in our product design and procurement operations as we adjust to newand future requirements relating to the materials composition of our products,including the restrictions on lead and certain other substances that apply tospecified electronics products sold in the European Union (Restriction ofHazardous Substances Directive). The ultimate costs under environmental laws andthe timing of these costs are difficult to predict. Similar legislation has beenor may be enacted in other regions, including in the United States, thecumulative impact of which could be significant.

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        International political instability may increase our cost of doing business anddisrupt our business.

        Increasedinternational political instability, evidenced by the threat or occurrence ofterrorist attacks, enhanced national security measures and/or sustained militaryaction may halt or hinder our ability to do business, may increase our costs andmay adversely affect our stock price. This increased instability has had and maycontinue to have negative effects on financial markets, including significantprice and volume fluctuations in securities markets. If this internationalpolitical instability continues or escalates, our business and results ofoperations could be harmed and the market price of our common stock coulddecline.

Item 2. Unregistered Sales of Equity Securities and Use ofProceeds

        Notapplicable.

Item 3. Defaults Upon Senior Securities

        Notapplicable.

Item 4. Submission of Matters to a Vote of SecurityHolders

At our Annual Meeting of Stockholders held June 3, 2008 at ouroffice in San Mateo, California, our stockholders approved the following twomatters:

1. A proposal to elect seven (7) directors of the Company to servefor the ensuing year and until their successors are elected or until suchdirector’s earlier resignation or removal.

| Nominee              |   | For        |   | Against |
|----------------------|--------|------------|--------|---------|
| Gerald J. Burnett    |   | 26,511,126 |   | 684,514 |
| William L. Campbell  |   | 26,506,852 |   | 688,788 |
| Craig F. Heimark     |   | 27,145,926 |   | 49,714  |
| R. Stephen Heinrichs |   | 61,985,999 |   | 436,105 |
| Robert M. Metcalfe   |   | 27,138,952 |   | 56,688  |
| Simon B. Moss        |   | 26,865,728 |   | 329,914 |
| James W. Zeigon      |   | 27,145,926 |   | 49,714  |

2. A proposal to ratify the appointment of Burr, Pilger &Mayer LLP as our independent auditors for the fiscal year ending December 31,2008.

| For        |   | Against |   | Withheld |   |
|------------|--------|---------|--------|----------|--------|
| 32,109,468 |   | 111,670 |   | 6,854    |   |

Item 5. OtherInformation

On January 1, 2008, Simon Moss succeeded Dr. Gerald J. Burnett asChief Executive Officer of Avistar.  Dr. Burnett will continue in hisrole as Chairman of the Board of Directors of Avistar.

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|  Exhibit No. |   | Description                                                                                                                                                                                             |
|------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                                                                                                                    |
| 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.                                                                                                                        |
|                   |   |                                                                                                                                                                                                    |
| 32.1                   |   | Certification      of 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. |

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|   | AVISTAR      COMMUNICATIONS CORPORATION |                                              |
|--------|-----------------------------------------|---------------------------------------------------|
|   |                                    |                                              |
|   |                                    |                                              |
|   | By:                                     |   /s/      SIMON B. MOSS                |
|   |                                    | Simon      B. Moss                                |
|   |                                    | Chief      Executive Officer                      |
|   |                                    | (Principal      Executive Officer)                |
|   |                                    |                                              |
|   | By:                                     |  /s/      ROBERT J. HABIG                    |
|   |                                    | Robert      J. Habig                              |
|   |                                    | Chief      Financial Officer                      |
|   |                                    | (Principal      Financial and Accounting Officer) |
|   |                                    |                                              |   |

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|  Exhibit No. |   | Description                                                                                                                                                                                             |
|------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                                                                                                                    |
| 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.                                                                                                                        |
|                   |   |                                                                                                                                                                                                    |
| 32.1                   |   | Certification      of 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. |