**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM10-Q**

| **x**                                                                                                                                                             |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES AND EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                        |
| **For the  quarterly period ended June 30, 2007**                                                                                                                 |
| ** **                                                                                                                                                        |
| **OR**                                                                                                                                                            |
| ** **                                                                                                                                                        |
| **o**                                                                                                                                                             |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES AND EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                        |
| **For the  transition period from              to          ** |
| ** **                                                                                                                                                        |
| **Commission  file number: 000-31121**                                                                                                                            |

 

**AVISTAR COMMUNICATIONSCORPORATION**

(Exact name of registrant as specified in its charter)

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

**Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months(or for shorter period that the registrant was required to file such reports);and (2) has been subject to such filing requirements for the past 90 days.**

**Yes ****x      No  ****o**

**Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (check one):**
| **Large accelerated filer    ****o** | ** ** | **Accelerated  filer   ****o** | ** ** | **Non-accelerated  filer   ****x** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|

 

**Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).**

**Yes ****o      No ****x**

**At July 25, 2007, 34,310,542 sharesof common stock of the Registrant were outstanding.**

 

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**AVISTAR COMMUNICATIONS CORPORATION**

**INDEX**
| 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.    | Quantitative  and Qualitative Disclosures About Market Risk                                 | 24     |
| Item 4T.   | Controls and  Procedures                                                                    | 25     |
|       |                                                                                        |   |
| PART II.   | OTHER INFORMATION                                                                           | 25     |
|       |                                                                                        |   |
| Item 1.    | Legal Proceedings                                                                           | 25     |
| Item 1A.   | Risk Factors                                                                                | 26     |
| Item 4.    | Submission of  Matters to a Vote of Security Holders                                        | 34     |
| Item 6.    | Exhibits                                                                                    | 35     |
|       |                                                                                        |   |
| SIGNATURES | 36                                                                                          |

 

2

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**`PART I - FINANCIAL INFORMATION**

**Item 1. *FinancialStatements***

**AVISTAR COMMUNICATIONS CORPORATION ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**as of June 30, 2007 and December 31, 2006**

**(in thousands, except share and per share data)**
| ** **                                                                                                                                                                                                           | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                           | ** ** | **(unaudited)**         | ** ** |
| **Assets:**                                                                                                                                                                                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                      |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                           |       | $                       | 10,138     |                        | $          | 7,854 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $53 and $51 at June 30,  2007 and December 31, 2006, respectively                                                                               |       | 1,102                   |       | 1,409                       |       |
| Inventories,  including inventory shipped to customers’ sites, not yet installed of $3 and  $70 at June 30, 2007 and December 31, 2006, respectively                                                  |       | 559                     |       | 712                         |       |
| Deferred  settlement and patent licensing costs                                                                                                                                                                      |       | 1,256                   |       | 1,256                       |       |
| Prepaid expenses  and other current assets                                                                                                                                                                           |       | 453                     |       | 534                         |       |
| Total current  assets                                                                                                                                                                                                |       | 13,508                  |       | 11,765                      |       |
| Property and  equipment, net                                                                                                                                                                                         |       | 583                     |       | 256                         |       |
| Long-term  deferred settlement and patent licensing costs                                                                                                                                                            |       | 1,754                   |       | 2,391                       |       |
| Other assets                                                                                                                                                                                                         |       | 289                     |       | 287                         |       |
| Total assets                                                                                                                                                                                                         |       | $                       | 16,134     |                        | $          | 14,699 |   |
|                                                                                                                                                                                                                 |       |                    |       |                        |       |
| **Liabilities and Stockholders’  Equity (Deficit):**                                                                                                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                                |       |                    |       |                        |       |
| Line of credit                                                                                                                                                                                                       |       | $                       | 3,000      |                        | $          | 3,000 |   |
| Accounts payable                                                                                                                                                                                                     |       | 1,138                   |       | 1,578                       |       |
| Deferred income  from settlement and patent licensing                                                                                                                                                                |       | 5,520                   |       | 5,520                       |       |
| Deferred  services revenue and customer deposits                                                                                                                                                                     |       | 861                     |       | 1,979                       |       |
| Accrued  liabilities and other                                                                                                                                                                                       |       | 1,565                   |       | 2,263                       |       |
| Total current  liabilities                                                                                                                                                                                           |       | 12,084                  |       | 14,340                      |       |
| Long-term  liabilities:                                                                                                                                                                                              |       |                    |       |                        |       |
| Long-term  deferred income from settlement and patent licensing                                                                                                                                                      |       | 7,564                   |       | 10,308                      |       |
| Total  liabilities                                                                                                                                                                                                   |       | 19,648                  |       | 24,648                      |       |
| Commitments and  contingencies (Note 7)                                                                                                                                                                              |       |                    |       |                        |       |
| Stockholders’  equity (deficit):                                                                                                                                                                                |       |                    |       |                        |       |
| Common stock,  $0.001 par value; 250,000,000 shares authorized at June 30, 2007 and  December 31, 2006; 35,487,167 and 35,219,768 shares issued at  June 30, 2007 and December 31, 2006, respectively |       | 35                      |       | 35                          |       |
| Less: treasury  common stock, 1,181,625 shares at June 30, 2007 and December 31,  2006, at cost                                                                                                            |       | (53                     | )          | (53                         | )          |
| Additional  paid-in-capital                                                                                                                                                                                          |       | 94,419                  |       | 92,865                      |       |
| Accumulated  deficit                                                                                                                                                                                                 |       | (97,915                 | )          | (102,796                    | )          |
| Total  stockholders’ equity (deficit)                                                                                                                                                                           |       | (3,514                  | )          | (9,949                      | )          |
| Total liabilities and  stockholders’ equity (deficit)                                                                                                                                                           |       | $                       | 16,134     |                        | $          | 14,699 |   |

 

The accompanying notes are anintegral part of these financial statements.

3

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**AVISTAR COMMUNICATIONS CORPORATION ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**for the three and six months ended June 30, 2007and 2006**

**(in thousands, except per share data)**
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **June 30,  2007**          | ** ** | **June 30,  2006**        | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | ** ** |
| ** **                                                  | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                | ** ** |
| ** **                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                    |       |                             |       |                           |       |   |   |   |   |
| Product                                                     |       | $                                | 704        |                           | $          | 970 |   | $ | 1,962 |   | $ | 1,847 |   |
| Licensing                                                   |       | 4,321                            |       | 39                             |       | 4,553 |   | 71 |   |
| Services, maintenance and support                           |       | 873                              |       | 745                            |       | 1,775 |   | 1,694 |   |
| Total revenue                                               |       | 5,898                            |       | 1,754                          |       | 8,290 |   | 3,612 |   |
| Costs and  Expenses:                                        |       |                             |       |                           |       |   |   |   |   |
| Cost of product revenue*                                    |       | 711                              |       | 721                            |       | 1,440 |   | 1,353 |   |
| Cost of services, maintenance and support revenue*          |       | 571                              |       | 385                            |       | 1,247 |   | 992 |   |
| Income from settlement and patent licensing                 |       | (1,057                           | )          | (1,057                         | )          | (14,114 | ) | (2,114 | ) |
| Research and development*                                   |       | 1,840                            |       | 1,445                          |       | 3,497 |   | 2,717 |   |
| Sales and marketing*                                        |       | 1,547                            |       | 1,479                          |       | 3,036 |   | 2,779 |   |
| General and administrative*                                 |       | 1,948                            |       | 2,570                          |       | 8,411 |   | 4,826 |   |
| Total costs and expenses                                    |       | 5,560                            |       | 5,543                          |       | 3,517 |   | 10,553 |   |
| Income (loss) from operations                               |       | 338                              |       | (3,789                         | )          | 4,773 |   | (6,941 | ) |
| Other Income  (Expense):                                    |       |                             |       |                           |       |   |   |   |   |
| Interest income                                             |       | 101                              |       | 77                             |       | 214 |   | 180 |   |
| Other (expense) income, net                                 |       | (51                              | )          | (8                             | )          | (106 | ) | (15 | ) |
| Total other income (expense), net                           |       | 50                               |       | 69                             |       | 108 |   | 165 |   |
| Net income  (loss)                                          |       | $                                | 388        |                           | $          | (3,720 | ) | $ | 4,881 |   | $ | (6,776 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss) per share - basic and diluted            |       | $                                | 0.01       |                           | $          | (0.11 | ) | $ | 0.14 |   | $ | (0.20 | ) |
| Weighted Average  Shares Used in Calculating                |       |                             |       |                           |       |   |   |   |   |
| Basic net income (loss) per share                           |       | 34,230                           |       | 33,880                         |       | 34,166 |   | 33,857 |   |
| Diluted net income (loss) per share                         |       | 35,008                           |       | 33,880                         |       | 35,072 |   | 33,857 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| *Including Stock  Based Compensation of:                    |       |                             |       |                           |       |   |   |   |   |
| Cost of product, services, maintenance and support  revenue |       | $                                | 53         |                           | $          | 37 |   | $ | 113 |   | $ | 73 |   |
| Research and development                                    |       | 180                              |       | 150                            |       | 384 |   | 297 |   |
| Sales and marketing                                         |       | 108                              |       | 120                            |       | 293 |   | 232 |   |
| General and administrative                                  |       | 235                              |       | 191                            |       | 468 |   | 371 |   |
|                                                        |       | $                                | 576        |                           | $          | 498 |   | $ | 1,258 |   | $ | 973 |   |

 

The accompanying notes are anintegral part of these financial statements.

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**AVISTAR COMMUNICATIONS CORPORATION ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**for the six months ended June 30, 2007 and 2006**

**(in thousands)**
| ** **                                                                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30,  2007**        | ** ** | **June 30,  2006** | ** ** |
| ** **                                                                                          | ** ** | **(unaudited)**                | ** ** |
| Cash Flows from  Operating Activities:                                                              |       |                           |       |   |   |
| Net income (loss)                                                                                   |       | $                              | 4,881      |   | $ | (6,776 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation                                                                                        |       | 148                            |       | 190 |   |
| Stock based compensation for options issued to  consultants and employees                           |       | 1,258                          |       | 973 |   |
| Provision for doubtful accounts                                                                     |       | 2                              |       | (64 | ) |
| Changes in assets and liabilities:                                                                  |       |                           |       |   |   |
| Accounts receivable                                                                                 |       | 305                            |       | 635 |   |
| Inventories                                                                                         |       | 153                            |       | (153 | ) |
| Prepaid expenses and other current assets                                                           |       | 81                             |       | 88 |   |
| Deferred settlement and patent licensing costs                                                      |       | 637                            |       | 658 |   |
| Other assets                                                                                        |       | (2                             | )          | 196 |   |
| Accounts payable                                                                                    |       | (440                           | )          | 195 |   |
| Deferred income from settlement and patent licensing  and other                                     |       | (2,744                         | )          | (2,735 | ) |
| Deferred services revenue and customer deposits                                                     |       | (1,118                         | )          | 284 |   |
| Accrued liabilities and other                                                                       |       | (698                           | )          | 979 |   |
| Net cash provided by (used in) operating activities                                                 |       | 2,463                          |       | (5,530 | ) |
|                                                                                                |       |                           |       |   |   |
| Cash Flows from  Investing Activities:                                                              |       |                           |       |   |   |
| Maturities of short-term investments                                                                |       | —                         |       | 1,680 |   |
| Purchase of property and equipment                                                                  |       | (475                           | )          | (234 | ) |
| Net cash (used in) provided by investing activities                                                 |       | (475                           | )          | 1,446 |   |
|                                                                                                |       |                           |       |   |   |
| Cash Flows from  Financing Activities:                                                              |       |                           |       |   |   |
| Proceeds from issuance of common stock                                                              |       | 296                            |       | 139 |   |
| Net cash provided by financing activities                                                           |       | 296                            |       | 139 |   |
| Net increase (decrease) in cash and cash equivalents                                                |       | 2,284                          |       | (3,945 | ) |
| Cash and cash equivalents, beginning of period                                                      |       | 7,854                          |       | 8,216 |   |
| Cash and cash  equivalents, end of period                                                           |       | $                              | 10,138     |   | $ | 4,271 |   |

 

The accompanying notes are anintegral part of these financial statements.

5

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**AVISTAR COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1. Business, Basis of Presentation, and Risks and Uncertainties**

# **Business**

AvistarCommunications Corporation (“Avistar” or the “Company”) provides theAvistar vBusiness integrated suite of video-enabled applications, including networked video communications software andhardware products and services. Avistar’s products include applications forinteractive video calling, content creation and publishing, broadcast video andvideo-on-demand, as well as data sharing, directory services and networkmanagement. Avistar designs, develops, markets, sells, manufactures and/orassembles and installs and supports its products. Avistar’s real-time andnon-real-time products are based upon its architecture and AvistarVOS softwareplatform, which facilitates distribution over local and wide area networksusing Internet or telephony services as appropriate. Avistar’s services includesoftware development, consulting, implementation, training, maintenance andsupport. In addition, Avistar seeks to prosecute, maintain, support and licensethe intellectual property developed by the Company through its wholly-ownedsubsidiary, Collaboration Properties, Inc., a Nevada corporation (“CPI”).

# **Basis of Presentation**

The unauditedcondensed consolidated balance sheet as of June 30, 2007 presents theconsolidated financial position of Avistar and its two wholly-owned operatingsubsidiaries, Avistar Systems U.K. Limited (“ASUK”) and CPI, after theelimination of all intercompany accounts and transactions. The unauditedcondensed consolidated balance sheet of Avistar as of December 31, 2006 was derivedfrom audited financial statements, but does not contain all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica, and certain information and footnote disclosures normally includedhave been condensed, or omitted, pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). The consolidated results are referred to, collectively, as those ofAvistar or the Company in these notes.

The functional currencyof ASUK is the United States dollar. Accordingly, all gains and lossesresulting from transactions denominated in currencies other than the UnitedStates dollar are included in the statements of operations and have not beenmaterial.

TheCompany’s fiscal year end is December 31.

# **Risks and Uncertainties**

The markets for theCompany’s products and services are in the early stages of development. Some ofthe Company’s products utilize changing and emerging technologies. As istypical in industries of this nature, demand and market acceptance are subjectto a high level of uncertainty, particularly when there are adverse conditionsin the economy. Acceptance of the Company’s products, over time, is critical tothe Company’s success. The Company’s prospects must be evaluated in light ofdifficulties encountered by it and its competitors in further developing thisevolving marketplace. The Company has generated losses since inception and hadan accumulated deficit of $97.9 million as of June 30, 2007. The Company’soperating results may fluctuate significantly in the future as a result of avariety of factors, including, but not limited to, the economic environment,the adoption of different distribution channels, and the timing of new productannouncements by the Company or its competitors.

The Company’s futureliquidity and capital requirements will depend upon numerous factors,including, but not limited to, the costs and timing of its expansion of productdevelopment efforts and the success of these development efforts, the costs andtiming of its expansion of sales and marketing activities, the extent to whichits existing and new products gain market acceptance, competing technologicaland market developments, the costs involved in maintaining, enforcing anddefending patent claims and other intellectual property rights, the level andtiming of revenue, and other factors.

6

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**2. Summary of Significant Accounting Policies**

# **Unaudited Interim Financial Information**

The financialstatements filed in this report have been prepared by the Company, withoutaudit, pursuant to the rules and regulations of the SEC. Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations.

In the opinion of management, the unaudited financial statementsfurnished in this report reflect all adjustments (consisting of normalrecurring adjustments) necessary for a fair presentation of the results ofoperations for the interim periods covered and of the Company’s financialposition as of the interim balance sheet date. The results of operations forthe interim periods are not necessarily indicative of the results for theentire year. These financial statements should be read in conjunction with theCompany’s audited consolidated financial statements and the accompanying notesfor the year ended December 31, 2006, included in the Company’s annualreport on Form 10-K filed with the Securities and Exchange Commission on March22, 2007.

**Use of Estimates**

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during theperiod. Actual results could differ from those estimates.

# **Cash and Cash Equivalents and Short and Long-termInvestments**

The Companyconsiders all investment instruments purchased with an original maturityof three months or less to be cash equivalents. Investment securities withoriginal or remaining maturities of more than three months but less than oneyear are considered short-term investments. Auction rate securities withoriginal or remaining maturities of more than three months are consideredshort-term investments even if they are subject to re-pricing within threemonths. Investment securities held with intent to reinvest or hold for longerthan a year or with remaining maturities of one year or more are consideredlong-term investments. The Company’s cash equivalents at December 31, 2006 andJune 30, 2007 consisted of money market funds and short-term commercial paperwith original maturities of three months or less, and are therefore classifiedas cash and cash equivalents in the accompanying balance sheets.

TheCompany accounts for its short-term and long-term investments in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.The Company’s short and long-term investments in securities are classified asavailable-for-sale and are reported at fair value, with unrealized gains andlosses, net of tax, recorded in other comprehensive income (loss). Realizedgains or losses and declines in value judged to be other than temporary, ifany, on available-for-sale securities are reported in other income, net. TheCompany reviews the securities for impairments considering current factorsincluding the economic environment, market conditions, and the operationalperformance and other specific factors relating to the businesses underlyingthe securities. The Company records impairment charges equal to the amount thatthe carrying value of its available-for-sale securities exceeds the estimatedfair market value of the securities as of the evaluation date. The fair valuefor publicly held securities is determined based on quoted market prices as ofthe evaluation date. In computing realized gains and losses onavailable-for-sale securities, the Company determines cost based on amountspaid, including direct costs such as commissions, to acquire the security usingthe specific identification method. The Company did not have any shortor long-term investments at June 30, 2007 or December 31, 2006.

7

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Cashand cash equivalents consisted of the following at June 30, 2007 and December31, 2006 (in thousands):
|                                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(Unaudited)**         | ** ** |
| ** **                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash equivalents:         |       |                    |       |                        |       |
| Cash                               |       | $                       | 4,819      |                        | $          | 4,224 |   |
| Commercial paper cash  equivalents |       | 5,319                   |       | 3,630                       |       |
| Total cash and cash equivalents    |       | $                       | 10,138     |                        | $          | 7,854 |   |

# **SignificantConcentrations**

A relatively small number of customers accounted for a significantpercentage of the Company’s revenues for the three and six months ended June30, 2007 and 2006. Revenues to these customers as a percentage of totalrevenues were as follows for the three and six months ended June 30, 2007 and2006:
|             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **  | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **  | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| Customer A  |       | 68                                                  | %          | *                                                 | %          | 48 | % | * | % |
| Customer B  |       | 11                                                  | %          | 41                                                | %          | 16 | % | 39 | % |
| Customer C  |       | 10                                                  | %          | 32                                                | %          | 16 | % | 36 | % |
| Customer  D |       | *                                                   | %          | 12                                                | %          | * | % | * | % |

 

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* Less than 10%

Any change in the relationship with these customers could have apotentially adverse effect on the Company’s financial position.

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of temporary cash investments and trade receivables. TheCompany has cash and investment policies that limit the amount of creditexposure to any one financial institution or restrict placement of theseinvestments to financial institutions evaluated as highly credit worthy. As ofJune 30, 2007, the Company had cash and cash equivalents on deposit with amajor financial institution that were in excess of FDIC insured limits.Historically, the Company has not experienced any loss of its cash and cashequivalents due to such concentration of credit risk. Concentrations of creditrisk with respect to trade receivables relate to those trade receivables fromboth United States and foreign entities, primarily in the financial servicesindustry. As of June 30, 2007, approximately 71% of gross accountsreceivable were concentrated with three customers, each of whom representedmore than 10% of the Company’s total gross accounts receivable balance. As ofDecember 31, 2006, approximately 84% of accounts receivable wereconcentrated with three customers, each of whom represented more than 10% ofthe Company’s total gross accounts receivable balance. No other customersindividually accounted for greater than 10% of total accounts receivable as ofJune 30, 2007 and December 31, 2006.

# **Inventories**

Inventoriesare stated at the lower of cost (first-in, first-out method) or market. Whenrequired, provisions are made to reduce excess and obsolete inventories totheir estimated net realizable value. Inventories consisted of the following(in thousands):
|                                                         | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**         | ** ** |
| Raw materials and subassemblies                         |       | $                       | 42         |                        | $          | 59 |   |
| Finished goods                                          |       | 514                     |       | 583                         |       |
| Inventory  shipped to customer sites, not yet installed |       | 3                       |       | 70                          |       |
|                                                    |       | $                       | 559        |                        | $          | 712 |   |

 

Inventory shippedto customer sites, not yet installed, represents product shipped to customersites pending completion of the installation process by the Company. As ofJune 30, 2007 and December 31, 2006, the Company had billed 

8

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approximately $3,000 and$70,000, respectively, to customers related to these shipments, but did notrecord the revenue, as the installations had not been completed and confirmedby the customer. Although customers are billed in accordance with customeragreements, these deferred revenue amounts are netted against accountsreceivable until the customer confirms installation.

**Revenue Recognition and Deferred Revenue**

The Companyrecognizes product and services revenue in accordance with Statement ofPosition (“SOP”) 97-2(“SOP 97-2”), *SoftwareRevenue Recognition*, as amended by SOP 98-9, *Modification of SOP 97-2, Software RevenueRecognition*, *With Respect to Certain Transactions*.The Company derives product revenue from the sale and licensing of a set ofdesktop (endpoint) products (hardware and software) and infrastructure products(hardware and software) that combine to form an Avistar video-enabledcollaboration solution. Services revenue includes revenue from installationservices, post-contract customer support, training and software development.The installation services that the Company offers to customers relate to thephysical set-up and configuration of desktop and infrastructure components ofthe Company’s solution. The fair value of all product, installation services,post-contract customer support and training offered to customers is determinedbased on the price charged when such products or services are sold separately.

Arrangements thatinclude multiple product and service elements may include software and hardwareproducts, as well as installation services, post-contract customer support andtraining. Pursuant to SOP 97-2, the Company recognizes revenue whenall of the following criteria are met: (i) persuasive evidence of anarrangement exists, (ii) delivery has occurred, (iii) the fee isfixed or determinable, and (iv) collectibility is probable. The Companyapplies these criteria as discussed below:

·      *Persuasive evidence of anarrangement exists*. The Company requires a written contract, signedby both the customer and the Company, or a purchase order from those customersthat have previously negotiated a standard end-user license arrangement orvolume purchase agreement, prior to recognizing revenue on an arrangement.

·      *Delivery has occurred*.The Company delivers software and hardware to customers physically. Thestandard delivery terms are FOB shipping point.

·      *The fee is fixed ordeterminable*. The Company’s determination that an arrangement fee isfixed or determinable depends principally on the arrangement’s payment terms.The Company’s standard terms generally require payment within 30 to 90 days ofthe date of invoice. Where these terms apply, the Company regards the fee asfixed or determinable, and recognizes revenue upon delivery (assuming otherrevenue recognition criteria are met). If the payment terms do not meet thisstandard, but rather, involve “extended payment terms,” the fee may not beconsidered to be fixed or determinable and the revenue would then be recognizedwhen customer installments are due and payable.

·      *Collectibility is probable*.To recognize revenue, the Company judges collectibility of the arrangement feeson a customer-by-customer basis pursuant to a credit review policy. The Companytypically sells to customers with which it has had a history of successfulcollections. For new customers, the Company evaluates the customer’s financialposition and ability to pay. If the Company determines that collectibility isnot probable based upon the credit review process or the customer’s paymenthistory, revenue is recognized when cash is collected.

If there are anyundelivered elements, the Company defers revenue for those elements, as long asVendor Specific Objective Evidence (“VSOE”) exists for the undeliveredelements. Additionally, per paragraph 14 of SOP 97-2, when the Companyprovides installation services, the product and installation revenue isrecognized upon completion of the installation process and receipt of customerconfirmation, subject to the satisfaction of the revenue recognition criteriadescribed above. The Company believes that the fee associated with thedelivered product elements does not meet the collectibility criteria if theinstallation services have not been completed. Customer confirmation isobtained and documented by means of a standard form indicating the installationservices have been provided and the hardware and software components installed.When the customer or a third party provides installation services, the productrevenue is recognized upon shipment, subject to satisfaction of the revenuerecognition criteria described above.

Payment forproduct is due upon shipment, subject to specific payment terms. Payment forinstallation and professional services is due upon providing the services,subject to specific payment terms. Reimbursements received for out-of-pocketexpenses and shipping costs incurred during installation and support services,which have not been significant to date, are 

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recognized as revenue inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 01-14,*Income Statement Characterization ofReimbursements Received for “Out of Pocket” Expenses Incurred*.

The price chargedfor maintenance and/or support is defined in the contract, and is based on afixed price for both hardware and software components as stipulated in thecustomer agreement. Customers have the option to renew the maintenance and/orsupport arrangement in subsequent periods at the same or similar rate as paid inthe initial year subject to contractual adjustments for inflation in somecases. Revenue from maintenance and support services is deferred and recognizedpro-rata over the maintenance and/or support term, which is typically one yearin length. Payments for services made in advance of the provision of servicesare recorded as deferred revenue and customer deposits in the accompanyingbalance sheets. Training services are offered independently of the purchase ofproduct. The value of these training services is determined based on the pricecharged when such services are sold separately. Training revenue is recognizedupon performance of the service.

The Companyrecognizes service revenue from software development contracts in accordancewith SOP 81-1, Accounting forPerformance of Construction-Type and Certain Production-Type Contracts. Revenuerelated to contracts for software development is recognized using thepercentage of completion method, when all of the following conditions are met:a contract exists with the customer at a fixed price, the Company has fulfilledall of its material contractual obligations to the customer for eachdeliverable of the contract, verification of completion of the deliverable hasbeen received, and collection of the receivable is probable. The amounts billedto customers in excess of revenues recognized to date are deferred and recordedas deferred revenue and customer deposits in the accompanying balance sheets.Assumptions used for recording revenue and earnings are adjusted in the periodof change to reflect revisions in contract value and estimated costs tocomplete the contract. Any anticipated losses on contracts in progress arecharged to earnings when identified.

The Company alsorecognizes revenue from the licensing of its intellectual property portfolioaccording to SOP 97-2, based on the terms of the royalty,partnership and cross-licensing agreements involved. In the event that alicense to the Company’s intellectual property is granted after thecommencement of litigation between the Company and the licensee, the proceedsof such transaction are recognized as licensing revenue by the Company only ifsufficient historical evidence exists for the determination of fair value ofthe licensed patents to support the segregation of the proceeds between a gainon litigation settlement and patent license revenues, consistent with FinancialAccounting Standards Board (“FASB”) Concepts Statement No. 6, *Elements of Financial Statements*(“CON No. 6”). As of June 30,2007, these criteria for recognizing license revenue following the commencementof litigation had not been met, and proceeds received after commencement oflitigation have therefore been recorded in “income from settlement and patentlicensing” activities.

In June 2007, theCompany entered into a Patent License Agreement with Radvision Ltd.  Under the license agreement, the Company andits subsidiaries granted Radvision and its subsidiaries a license in the fieldof videoconferencing to all of CPI’s patents, patent applications and patentsissuing therefrom with a filing date on or before May 15, 2007.  Also under the license agreement, Radvisiongranted to the Company and its subsidiaries a license in the field ofvideoconferencing to all of Radvision’s patents, patent applications andpatents issuing therefrom with a filing date on or before May 15, 2007.  As partial consideration for the licenses andreleases granted under the agreement, Radvision made a one-time license paymentto the Company of $4.0 million, which was recognized as licensing revenue inthe three months ended June 30, 2007.

**Income from Settlement and Patent Licensing**

The Companyrecognizes the proceeds from settlement and patent licensing agreements basedon the terms involved. When litigation has been filed prior to a settlement andpatent licensing agreement, and insufficient historical evidence exists for thedetermination of fair value of the patents licensed to support the segregationof the proceeds between a gain on litigation settlement and patent licenserevenues, the Company reports all proceeds in “income from settlement andpatent licensing” within operating costs and expenses. The gain portion of theproceeds, when sufficient historical evidence exists to segregate the proceeds,would be reported in other income according to FASB SFAS No. 5, *Accounting for Contingencies*. When apatent license agreement is entered into prior to the commencement oflitigation, the Company reports the proceeds of such transaction as licensingrevenue in the period in which such proceeds are received, subject to therevenue recognition criteria described above.

On November 12, 2004, the Company entered into a settlement and apatent cross-license agreement with Polycom, thus ending litigation againstPolycom for patent infringement. As part of the settlement and patentcross-license agreement with Polycom, Avistar granted Polycom a non-exclusive,fully paid-up license to its entire patent portfolio. The settlement and patentcross-license agreement includes a five year capture period from the date ofthe settlement, adding all new patents with 

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apriority date extending up to five years from the date of execution of theagreement. Polycom, as part of the settlement and patent cross-licensingagreement, made a one time payment to the Company of $27.5 million and Avistarpaid $6.4 million in contingent legal fees to Avistar’s litigation counsel uponcompletion of the settlement and patent cross-licensing agreement. Thecontingent legal fees were payable only in the event of a favorable outcomefrom the litigation with Polycom. TheCompany expects to recognize the gross proceeds of $27.5 million from thesettlement and patent cross-license agreement as income from settlement andpatent licensing within operations over the five-year capture period, due to alack of evidence necessary to apportion the proceeds between an impliedpunitive gain element in the settlement of the litigation, and software licenserevenues from the cross-licensing of Avistar’s patented technologies for priorand future use by Polycom. Additionally, the $6.4 million in contingentlegal fees was deferred and is expected to be amortized to income fromsettlement and patent licensing over the five year capture period, resulting ina net of $21.1 million being recognized asincome within operations over the five year capture period.

On February 15, 2007, the Company entered into a Patent License Agreementwith Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc.  Under this agreement, CPI dismissed its infringementsuit against Tandberg, Tandberg dismissed its infringement suit againstAvistar, and the companies cross-licensed each other’s patent portfolios.  The agreement resulted in a payment of $12.0million to the Company from Tandberg**. **The Company recognized the grossproceeds of $12.0 million from the patent license agreement as income fromsettlement and patent licensing within operations in the three months endedMarch 31, 2007.  To recognize theproceeds as revenue, the Company would have required sufficient history oftransactions in order to isolate the aspect of the settlement attributable tothe gain associated with the process of litigation, separate from commercialcompensation for the use of the Company’s intellectual property.  Sufficient evidence was not available toallow this distinction.   The PatentLicense Agreement with Tandberg includes a ten year capture period, extendingfrom the date of the agreement, during which patents filed with a priority datewithin the capture period would be licensed in addition to existing patents onthe agreement date.  However, suchadditional patents would be licensed under the agreement solely for purposes ofthe manufacture, sale, license or other transfer of existing products ofTandberg and products that are closely related enhancements of such productsbased primarily and substantially on the existing products.  The Company reviewed the existing products ofTandberg and considered the likelihood that future patent filings by Avistar orCPI would relate to or otherwise affect existing Tandberg products and closelyrelated enhancements thereto.  TheCompany concluded that the filing for such additional patents was unlikely, andtherefore concluded that the ten year capture period was not material from anaccounting perspective related to recognition.

The presentation within operating expenses of the Polycom and Tandbergtransactions is supported by a determination that the transactions are centralto the activities that constitute Avistar’s ongoing major or centraloperations, but may contain a gain element related to the settlement, which isnot considered as revenue under FASB CONNo. 6*.* The Company did not have sufficienthistorical evidence to support a reasonable determination of value for thepurposes of segregating the transaction into revenue related to the patentlicensing and an operating or non-operating gain upon settlement of litigation,resulting in the determination that the entire transaction is moreappropriately classified as “income from settlement and patent licensing”within operations, as opposed to revenue.

**Stock-Based Compensation**

Effective January 1, 2006, the Company adopted the provisions ofSFAS No. 123 (R), *Share-Based Payment*.(“SFAS No. 123R”) establishes accounting for stock-based awardsexchanged for employee services. Accordingly, stock-based compensation cost ismeasured at grant date, based on the fair value of the award, and is recognizedas expense over the employee’s service period. The effect of recordingstock-based compensation for the three and six months ended June 30, 2007and 2006 was as follows (in thousands, except per share data):
| ** **                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                   | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| Stock-based compensation expense by type of award:           |       |                                                |       |                                              |       |   |   |   |   |
| Employee stock options                                       |       | $                                                   | 503        |                                              | $          | 450 |   | $ | 1,139 |   | $ | 863 |   |
| Non-employee stock options                                   |       | 43                                                  |       | 22                                                |       | 59 |   | 40 |   |
| Employee stock purchase plan                                 |       | 30                                                  |       | 26                                                |       | 60 |   | 70 |   |
| Total stock-based compensation                               |       | 576                                                 |       | 498                                               |       | 1,258 |   | 973 |   |
| Tax effect on stock-based compensation                       |       | —                                              |       | —                                            |       | — |   | — |   |
| Net  effect of stock-based compensation on net income (loss) |       | $                                                   | 576        |                                              | $          | 498 |   | $ | 1,258 |   | $ | 973 |   |

 

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As ofJune 30, 2007, the Company had an unrecognized deferred stock-basedcompensation balance related to stock options of approximately$5.6 million before estimated forfeitures. SFASNo. 123R requires forfeitures to be estimated at the time of grantand revised if necessary in subsequent periods if actual forfeitures differfrom those estimates. Based on the Company’s historical experience of optionpre-vesting cancellations, the Company has assumed an annualized forfeiturerate of 3% for its executive options and 20% for non-executive options.Accordingly, as of June 30, 2007, the Company estimated that the stock-based compensationfor the awards not expected to vest was approximately $1.1 million, andtherefore, the unrecognized deferred stock-based compensation balance relatedto stock options was adjusted to approximately $4.5 million after estimatedforfeitures and will be recognized over an estimated weighted averageamortization period of 2.2 years. During the three months ended June 30, 2007,the Company granted 1,231,500 stock options, with an estimated total grant-datefair value of $1.8 million.  During thesix month ended June 30,2007,the Company granted 1,519,500 stock options, with an estimated total grant-datefair value of $2.3 million.

**Valuation Assumptions**

The Companyestimated the fair value of stock options granted during the three and sixmonths ended June 30, 2007 and 2006 using a Black-Scholes-Merton valuationmodel, consistent with the provisions of SFAS No. 123R and SEC StaffAccounting Bulletin (SAB) No. 107. The fair value of each option grant isestimated on the date of grant using the Black-Scholes-Merton option valuationmodel and the straight-line attribution approach with the followingweighted-average assumptions:

**Employee Stock Option Plan**
|                                 | ** ** | **Three and Six Months Ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| Expected dividend               |       | —                                                                | %          | — | % |
| Average risk-free interest rate |       | 4.7                                                                   | %          | 4.8 | % |
| Expected volatility             |       | 136                                                                   | %          | 144 | % |
| Expected  term (years)          |       | 6.1                                                                   |       | 6.1 |   |

 

**Employee Stock Purchase Plan**
|                                 | ** ** | **Three and Six Months Ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| Expected dividend               |       | —                                                                | %          | — | % |
| Average risk-free interest rate |       | 5.1                                                                   | %          | 2.8 | % |
| Expected volatility             |       | 96                                                                    | %          | 113 | % |
| Expected  term (months)         |       | 6.0                                                                   |       | 6.0 |   |

 

The dividend yieldof zero is based on the fact that the Company has never paid cash dividends andhas no present intention to pay cash dividends. The risk-free interest ratesare taken from the Daily Federal Yield Curve Rates as of the grant dates aspublished by the Federal Reserve, and represent the yields on actively tradedTreasury securities for terms that approximate the expected term of theoptions. Expected volatility is based on the historical volatility of theCompany’s common stock over a period consistent with the expected term of thestock-option. The expected term calculation is based on an average prescribedby SAB No. 107, based on the weighted average of the vesting periods, which isgenerally one quarter vesting after one year and one sixteenth vestingquarterly for 12 quarters, and adding the term of the option, which isgenerally 10 years, and dividing by 2.

**3. Related Party Transactions**

Robert P. Latta, a member of the law firm Wilson Sonsini Goodrich &Rosati, Professional Corporation (WSGR), served as a director of the Companyfrom February 2001 until June 2007. Mr. Latta and WSGR have representedthe Company and 

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itspredecessors as corporate counsel since 1997. During each of the six monthsended June 30, 2007 and 2006, payments of approximately $86,000 were madeto WSGR for legal services provided to the Company.

**4. Net Income (Loss) Per Share**

Basic and diluted net income (loss) per share of common stock ispresented in conformity with SFAS No. 128 (“SFAS No. 128”), *Earnings Per Share*, for all periods presented.

In accordance with SFAS No. 128, basic net income (loss) per share hasbeen computed using the weighted average number of shares of common stockoutstanding during the period, less shares subject to repurchase. Diluted net income(loss) per share is computed on the basis of the weighted average number ofshares and potential common shares outstanding during the period. Potentialcommon shares result from the assumed exercise of outstanding stock optionsthat have a dilutive effect when applying the treasury stock method. For thethree and six months ended June 30, 2007, due to the Company’s net income forthe periods, the Company included the net effect of the weighted average numberof shares and potential common shares outstanding during the period in thecalculation of diluted net income per share.  The Company excluded all outstanding stock options from the calculationof diluted net loss per share for the three and six months ended June 30, 2006,because all such securities are antidilutive (owing to the fact that theCompany was in a loss position during the time periods). Accordingly, dilutednet loss per share is equal to basic net loss per share for the three and sixmonths ended June 30, 2006.

The followingtable set forth the computation of basic and diluted net income (loss) pershare (in thousands, except per share data):
| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| Numerator:                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)                                      |       | $                                                   | 388        |                                              | $          | (3,720 | ) | $ | 4,881 |   | $ | (6,776 | ) |
| Denominator:                                           |       |                                                |       |                                              |       |   |   |   |   |
| Basic weighted  average shares outstanding             |       | 34,230                                              |       | 33,880                                            |       | 34,166 |   | 33,857 |   |
| Add: dilutive employee and non employee stock  options |       | 778                                                 |       | —                                            |       | 906 |   | — |   |
| Diluted weighted  average shares outstanding           |       | 35,008                                              |       | 33,880                                            |       | 35,072 |   | 33,857 |   |
| Basic and diluted net  income (loss) per share         |       | $                                                   | .01        |                                              | $          | (0.11 | ) | $ | 0.14 |   | $ | (0.20 | ) |

 

The total numberof potential common shares excluded from the calculations of diluted net lossper share was 2,450,073 and 2,794,151 for the three and six months endedJune 30, 2006.

**5. Income Taxes**

Income taxes are accounted for using an asset and liability approach inaccordance with SFAS No. 109, *Accounting for IncomeTaxes*, which requires the recognition of taxes payable or refundablefor the current year and deferred tax liabilities and assets for the future taxconsequences of events that have been recognized in the Company’s financialstatements and  tax returns. Themeasurement of current and deferred tax liabilities and assets are based on theprovisions of enacted tax law. The effects of future changes in tax laws orrates are not anticipated. The measurement of deferred tax assets is reduced,if necessary, by the amount of any tax benefits that, based on availableevidence, are not expected to be realized.

Deferred tax assets and liabilities are determined based on thedifference between the financial statement, and the tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to affect taxable income. Valuation allowances areprovided if, based upon the weight of available evidence, it is considered morelikely than not that some or all of the deferred tax assets will not berealized.

Effective January 1, 2007, we adopted the provisions of FASB FinancialAccounting Standards Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes*, or FIN No. 48. FIN No. 48 contains a two-stepapproach for recognizing and measuring uncertain tax positions accounted for inaccordance with SFAS No. 109. Tax positions are evaluated for recognition bydetermining if the weight of available evidence indicates it probable that theposition will be sustained on audit, including resolution of related appeals orlitigation. Tax benefits are then measured as the largest amount which is morethan 50% likely of being realized upon ultimate settlement. The Company considersmany factors when evaluating and 

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estimatingtax positions and tax benefits, which may require periodic adjustments andwhich may not accurately anticipate actual outcomes.

As of December 31, 2006, the Company’s unrecognized tax benefits totaled$24.6 million. The adoption of FIN 48 resulted in no change to the reserve forunrecognized tax benefits that existed at December 31, 2006. As such, there isno change recorded to retained earnings as a result of the adoption.

**6. Segment Reporting**

Disclosure ofsegments is presented in accordance with SFAS No. 131 (“SFAS No. 131”), *Disclosures About Segments of an Enterprise and Related Information*.SFAS No. 131 establishes standards for disclosures regarding operatingsegments, products and services, geographic areas and major customers. The Company is organized and operates as twooperating segments: (1) the design, development, manufacturing, sale andmarketing of networked video communications products (Avistar) and (2) theprosecution, maintenance, support and licensing of the intellectual property,some of which is used in the Company’s products (CPI). Service revenue relates mainly to the maintenance, support, training,software development and installation of products, and is included in Avistarfor purposes of reporting and decision-making. Avistar also engages incorporate functions, and provides financing and services to its subsidiaries.The Company’s chief operating decision-maker, its Chief Executive Officer,monitors the Company’s operations based upon the information reflected in thefollowing table (in thousands). The table includes a reconciliation of therevenue and expense classification used by the Company’s CEO with theclassification of revenue, other income and expenses as set forth in theCompany’s audited financial statements included elsewhere herein. Thereconciliation for the revenue category reflects the fact that the CEO viewsactivity recorded in the account “income from settlement and licensing activity”as revenue within the CPI subsidiary.
| ** **                           | ** ** | **CPI**    | ** ** | **Avistar** | ** ** | **Reconciliation** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|------------|------------|-------------|------------|--------------------|------------|------------|------------|
| **Three Months Ended June 30, 2007** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** |
| 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        |       |
| Net income (loss)                    |       | 4,533      |       | (4,145      | )          | —             |       | 388        |       |
| Assets                               |       | 3,624      |       | 12,510      |       | —             |       | 16,134     |       |
| **Three Months Ended June 30, 2006** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** |
| Revenue                              |       | $          | 1,096      |        | $          | 1,715              |       | $          | (1,057     | ) | $ | 1,754 |   |
| Depreciation expense                 |       | —     |       | (76         | )          | —             |       | (76        | )          |
| Total costs and expenses             |       | (1,573     | )          | (5,027      | )          | 1,057              |       | (5,543     | )          |
| Interest income                      |       | —     |       | 77          |       | —             |       | 77         |       |
| Net loss                             |       | (477       | )          | (3,243      | )          | —             |       | (3,720     | )          |
| Assets                               |       | 4,318      |       | 9,107       |       | —             |       | 13,425     |       |
| **Six Months Ended June 30, 2007**   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** |
| 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        |       |
| Net income (loss)                    |       | 12,667     |       | (7,786      | )          | —             |       | 4,881      |       |
| Assets                               |       | 3,624      |       | 12,510      |       | —             |       | 16,134     |       |
| **Six Months Ended June 30, 2006**   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** |
| Revenue                              |       | $          | 2,185      |        | $          | 3,541              |       | $          | (2,114     | ) | $ | 3,612 |   |
| Depreciation expense                 |       | —     |       | (190        | )          | —             |       | (190       | )          |
| Total costs and expenses             |       | (2,786     | )          | (9,881      | )          | 2,114              |       | (10,553    | )          |
| Interest income                      |       | —     |       | 180         |       | —             |       | 180        |       |
| Net loss                             |       | (601       | )          | (6,175      | )          | —             |       | (6,776     | )          |
| Assets                               |       | 4,318      |       | 9,107       |       | —             |       | 13,425     |       |

 

International revenue, which consists of sales tocustomers with operations principally in Western Europe and Asia, comprised 89%and 57% of total product and services revenue for the three months endedJune 30, 2007 and 2006,

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respectively.International revenue, which consists of sales to customers with operationsprincipally in Western Europe and Asia, comprised 78% and 53% of total productand services revenue for the six months ended June 30, 2007 and 2006,respectively. For the three months ended June 30, 2007 and 2006,international revenues from customers in the United Kingdom accounted for 74%and 22%, of total product and services revenue, respectively. For the sixmonths ended June 30, 2007 and 2006, international revenues from customersin the United Kingdom accounted for 55% and 16%, of total product and servicesrevenue, respectively. The Company had no significant long-lived assets in anycountry other than in the United States for any period presented.

**7.****              Commitments andContingencies**

**LegalProceeding**

On May 11, 2005, CPI, Avistar’s wholly-ownedpatent prosecution and licensing subsidiary, commenced a patent infringementlawsuit against Tandberg ASA and Tandberg, Inc., alleging that numerousTandberg videoconferencing products infringe three patents held by CPI. Thesuit was filed in the United States District Court for the Northern District ofCalifornia. Both of the Tandberg entities answered the complaint onJuly 15, 2005, at which time they asserted that they did not infringe thepatents and that the patents were invalid and unenforceable.

On January 30, 2006, Tandberg Telecom AS, awholly-owned subsidiary of Tandberg ASA, filed a patent infringement lawsuitagainst Avistar in the United States District Court for the Eastern District ofTexas. The suit alleged that Avistar videoconferencing products infringe onepatent purchased by Tandberg Telecom AS.

On February 15, 2007, CPI entered into a PatentLicense Agreement with Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc.Under this agreement, CPI agreed to dismiss its infringement suit againstTandberg, Tandberg agreed to dismiss its infringement suit against Avistar, andthe companies agreed to cross-license each other’s patent portfolios. Theagreement resulted in a payment to CPI from Tandberg in the amount of $12.0million.

**SoftwareIndemnifications**

Avistar entersinto standard indemnification agreements in the ordinary course of business.Pursuant to these agreements, Avistar indemnifies, holds harmless, and agreesto reimburse the indemnified party for losses suffered or incurred by theindemnified party, generally Avistar’s business partners or customers, inconnection with any patent, copyright or other intellectual propertyinfringement claim by any third party with respect to its products. The term ofthese indemnification agreements is generally perpetual. The maximum potentialamount of future payments Avistar could be required to make under theseindemnification agreements is generally limited to the cost of productspurchased per customer, but may be unlimited when customer purchases areconsidered in aggregate. Avistar has never incurred costs to defend lawsuits orsettle claims related to these indemnification agreements. Accordingly, Avistarhas no liabilities recorded for these agreements as of June 30, 2007.

**Commitments**

In May 2007, Avistar added 7,900 square feet of officespace to its existing lease at its headquarters in San Mateo, California tohouse engineering staff.  The newfacilities require minimum payments of approximately $114,000, $281,000,$288,000, $296,000, $303,000 and $76,000 for fiscal years 2007, 2008, 2009,2010, 2011 and 2012, respectively.

**8.****              Recent AccountingPronouncements**

In September 2006, the FASB issued StatementNo. 157, *Fair Value Measurements* (“SFAS No.157”). The standard provides guidance for using fair value to measure assetsand liabilities and responds to investors’ requests for expanded informationabout the extent to which companies measure assets and liabilities at fairvalue, the information used to measure fair value, and the effect of fair valuemeasurements on earnings. The standard applies whenever other standards requireor permit assets or liabilities to be measured at fair value. The standard doesnot expand the use of fair value in any new circumstances. SFAS No.  157 must be adopted prospectively as of thebeginning of the year it is initially applied. SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The Company is evaluatingthe impact this standard will have on its financial position or results ofoperations.

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In February 2007, the FASB issued StatementNo. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment of FASBStatement No. 115*(“SFASNo. 159”). The standard allows an entity the irrevocable option to electfair value for the initial and subsequent measurement for certain financialassets and liabilities under an instrument-by-instrument election. Subsequentmeasurements for the financial assets and liabilities an entity elects to fairvalue will be recognized in earnings. SFAS No. 159 also establishes additionaldisclosure requirements. Statement No. 159 is effective for fiscal yearsbeginning after November 15, 2007.  The Company is evaluating theimpact this standard will have on its financial position or results ofoperations.

**9.     SubsequentEvent**

On July 16, 2007, Simon Moss was appointed as Presidentof the Company with global responsibility for all of the Company’s products andservices.   The Employment Agreementbetween the Company and Mr. Moss, provides for (a) a base salary of $250,000per year, (b) an option to purchase 1,100,000 shares of Avistar’s Common Stockat an exercise price per share equal to the fair market value of such stock onthe date of grant, which option will vest over four years, subject to continuedemployment, (c) additional option grants upon achievement of certain performancemilestones to be set by the Company’s compensation committee, (d) an annualcash bonus, which will be subject to achievement of performance milestones tobe set by the compensation committee, with a maximum total bonus of $87,500 for2007, and $175,000 for 2008, (e) employee benefits made available by theCompany to its executive officers, (f) severance benefits if Mr. Moss isterminated without cause prior to a change of control equal to (i) six monthsof base salary, (ii) six months of health and life insurance coverage, and(iii) a pro rata portion of his annual bonus earned through the date oftermination, and (g) if a change of control occurs prior to July 16, 2009, 50%of the shares subject to the Option will become fully vested and exercisable.

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

The following discussion should be read in conjunctionwith the 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, 2006, as filed withthe Securities and Exchange Commission on March 22, 2007.

Certain statements in this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” areforward looking statements. These statements relate to future events or ourfuture financial performance and involve known and unknown risks, uncertaintiesand other factors that may cause our or our industry’s actual results, levelsof activity, performance or achievements to be materially different from anyfuture results, levels of activity, performance or achievements expressed orimplied by the forward looking statements. These risks and other factorsinclude those listed under “Risk Factors” elsewhere in this Quarterly Report onForm 10-Q. In some cases, you can identify forward looking statements byterminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”,“believes”, “estimates”, “predicts”, “potential”, “continue” or the negative ofthese terms, or other comparable terminology. These statements are onlypredictions. Actual events or results may differ materially. In evaluatingthese statements, you should specifically consider various factors, includingthe risks outlined under “Risk Factors.” These factors may cause our actualresults to differ materially from any forward-looking statement.  Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements. We are under no duty to update any of theforward-looking statements after the date of this Quarterly Report on Form 10-Qto conform our prior statements to actual results.

**Overview**

We develop, market and support an integrated suite ofvBusiness—video-enabled eBusiness—applications, all powered by the AvistarVOSTMsoftware. From the desktop, we deliver business-quality interactive videocalling, content creation and publishing, broadcast origination anddistribution, video-on-demand, and integrated data sharing. The Avistar videoand data collaboration applications are all managed by the AvistarVOS videooperating system. By integrating video tightly into the way they work, ourcustomers can use our system to save costs and improve productivity andcommunication within the enterprise and between enterprises, and to enhancerelationships with customers, suppliers and partners. Using AvistarVOS softwareand leveraging video, telephony and Internet networking standards, Avistarapplications are designed to be scalable, reliable, cost effective, easy touse, and capable of evolving with communications networks as bandwidthincreases and as new standards and protocols emerge. We currently sell oursystem directly to enterprises in selected strategic vertical markets, and havefocused initially on the financial services industry. Additionally, we havelicensed our technology and patents to companies in the video conferencingmarket. Our objective is to establish our technology as the standard fornetworked video through direct sales, indirect channel sales/partnerships andthe licensing of our technology to others.

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We operate in two segments. Avistar CommunicationsCorporation engages in the design, development, manufacture, sale and marketingof networked video communications products and associated support services.Collaboration Properties, Inc., or CPI, our wholly owned subsidiary, engages inthe prosecution, maintenance, support and licensing of the intellectualproperty that we have developed, some of which is used in our products.

Since inception, we have recognized the innovativevalue of our research and development efforts, and have invested in securingprotection for these innovations through domestic and foreign patentapplication and issuance. As of June 30, 2007, we hold 76 U.S. and foreignpatents, all of which have been licensed to third parties. We continue topursue opportunities to license these patents to others in the collaborationtechnology marketplace.

**CriticalAccounting Policies**

The preparation of our Consolidated FinancialStatements in accordance with accounting principles generally accepted in theUnited States requires us to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  We base our estimates on historicalexperience and assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results maydiffer from these estimates.

We believe the following critical accounting policies,among others, affect our more significant judgments and estimates used in thepreparation of our Consolidated Financial Statements:

·                  Revenuerecognition;

·                  Income fromsettlement and patent licensing;

·                  Valuation ofaccounts receivable;

·                  Valuation ofinventories; and

·                  Stock basedcompensation.

**RevenueRecognition**

We derive product revenue from the sale and licensingof our video-enabled networked communications system, consisting of a suite ofAvistar-designed software and hardware products, including third partycomponents. We also derive revenue from fees for installation, maintenance,support, training services and software development. In addition, we deriverevenue from the licensing of our intellectual property portfolio. Productrevenue as a percentage of total revenue was 12% and 55% for the three monthsended June 30, 2007 and 2006, respectively. We recognize product and services revenue in accordance with Statementof Position (“SOP”)  97-2(“SOP 97-2”), *SoftwareRevenue Recognition*, as amended by SOP 98-9, *Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions*.We derive product revenue from the sale and licensing of a set of desktop(endpoint) products (hardware and software) and infrastructure products(hardware and software) that combine to form an Avistar video-enabledcollaboration solution. Services revenue includes revenue from installationservices, post-contract customer support, training, out of pocket expenses,freight and software development. The installation services that we offer tocustomers relate to the physical set-up and configuration of desktop andinfrastructure components of our solution. The fair value of all product,installation services, post-contract customer support and training offered tocustomers is determined based on the price charged when such products orservices 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 to SOP 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:

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·       *Persuasiveevidence of an arrangement exists.* We require a written contract, signedby both the customer and us, or a purchase order from those customers that havepreviously negotiated a standard end-user license arrangement or volumepurchase agreement with us prior to recognizing revenue on an arrangement.

·       *Delivery hasoccurred.* We deliver software and hardware to our customersphysically. Our standard delivery terms are FOB shipping point.

·       *The fee isfixed or determinable.* Our determination that an arrangement fee isfixed or determinable depends principally on the arrangement’s payment terms.Our standard terms generally require payment within 30 to 90 days of the dateof invoice. Where these terms apply, we regard the fee as fixed ordeterminable, and we recognize revenue upon delivery (assuming other revenuerecognition 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 befixed or determinable and would then recognize revenue when customerinstallments are due and payable.

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

If there are any undelivered elements, we deferrevenue for those elements, as long as Vendor Specific Objective Evidence (“VSOE”)exists for the undelivered elements. Additionally, when we provide installationservices, the product and installation revenue is recognized upon completion ofthe installation 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 described above.

Payment for product is due upon shipment, subject tospecific payment terms. Payment for installation and professional services isdue upon providing the services, subject to specific payment terms.Reimbursements received for out of pocket expenses and shipping costs incurredduring installation and support services have not been significant to date.These expenses are recognized as revenue in accordance with Emerging IssuesTask Force (“EITF”) Issue No. 01-14, *Income Statement Characterization of Reimbursements Received for “Outof Pocket” Expenses Incurred.*

The price charged for maintenance and/or support isdefined in the product sale contract, and is based on a fixed price for bothhardware and software components as stipulated in the customer agreement.Customers have the option to renew the maintenance and/or support services insubsequent periods at the same or similar rate as paid in the initial yearsubject to contractual adjustments for inflation in some cases. Revenue frommaintenance and support is recognized pro-rata over the maintenance and/orsupport term, which is typically one year in length. Payments for services madein advance of the provision of services are recorded as deferred revenue andcustomer deposits in the accompanying balance sheets. Training services are offeredindependently of the purchase of product. The value of these training servicesis determined based on the price charged when such services are soldseparately. Training revenue is recognized upon performance of the service.

We recognize service revenue from software developmentcontracts in accordance with SOP 81-1, *Accounting for Performance of Construction-Type and CertainProduction-Type Contracts.*Revenue related to contracts for softwaredevelopment is recognized using the percentage of completion method, when allof the following conditions are met: a contract exists with the customer at afixed price, we have fulfilled all of our material contractual obligations tothe customer for each deliverable of the contract, verification of completionof the deliverable has been received, and collection of the receivable isprobable. Amounts billed to customers in excess of revenues recognized to dateare deferred and recorded as deferred revenue and customer deposits in theaccompanying balance sheets. Assumptions used for recording revenue andearnings are adjusted in the period of change to reflect revisions in contractvalue and estimated costs to complete the contract. Any anticipated losses oncontracts in progress are charged to earnings when identified.

We also recognize revenuefrom the licensing of our intellectual property portfolio, according toSOP 97-2, based on the terms of the royalty, partnership andcross-licensing agreements involved. In the event that a license to ourintellectual property is granted after the commencement of litigation betweenus and the licensee, the proceeds of such transaction are 

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recognizedas licensing revenue by us only if sufficient historical evidence exists forthe determination of fair value of the licensed patents to support thesegregation of the proceeds between a gain on litigation settlement and patentlicense revenues, consistent with Financial Accounting Standards Board (“FASB”)Concepts Statement No. 6, *Elements ofFinancial Statements*. As of June 30, 2007, these criteria forrecognizing license revenue following the commencement of litigation have notbeen met, and proceeds received after commencement of litigation have thereforebeen recorded in “income from settlement and licensing” activities.

In June 2007, we entered into a Patent LicenseAgreement with Radvision Ltd.  Under thelicense agreement, we granted Radvision and its subsidiaries a license in thefield of videoconferencing to all of CPI’s patents, patent applications andpatents issuing therefrom with a filing date on or before May 15, 2007.  Also under the license agreement, Radvisiongranted to us a license in the field of videoconferencing to all of Radvision’spatents, patent applications and patents issuing therefrom with a filing dateon or before May 15, 2007.  The licenseagreement includes mutual releases of the parties from claims of pastinfringement of the licensed patents.  Aspartial consideration for the licenses and releases granted under theagreement, Radvision made a one-time license payment to us of $4.0 million,which was recognized as licensing revenue in the three months ended June 30,2007.

To date, a significant portion of our revenue hasresulted from sales to a limited number of customers, particularly DeutscheBank AG and UBS AG and their affiliates. Collectively, Deutsche Bank AG and UBSAG and their affiliates accounted for approximately 32% and 75% of totalrevenue for the six month periods ended June 30, 2007 and 2006,respectively. 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. As of June 30, 2006,approximately 50% of our gross accounts receivable was concentrated with two customers,each of whom represented more than 10% of our gross accounts receivable.

International revenue, which consists of sales tocustomers with operations principally in Western Europe and Asia, comprised 89%and 57% of total revenue for the three months ended June 30, 2007 and 2006,respectively.

**Incomefrom Settlement and Patent Licensing**

We recognize the proceedsfrom settlement and patent licensing agreements based on the terms involved.When litigation has been filed prior to a settlement and patent licensingagreement, and insufficient historical evidence exists for the determination offair value of the patents licensed to support the segregation of the proceedsbetween a gain on litigation settlement and patent license revenues, we reportall proceeds in “income from settlement and patent licensing” within operatingcosts and expenses. The gain portion of the proceeds, when sufficienthistorical evidence exists to segregate the proceeds, would be reported inother income according to Statement ofFinancial Accounting Standards (“SFAS”) No. 5, *Accountingfor Contingencies*. To date, all proceeds from settlement and patentlicensing agreements entered into following the commencement of litigation havebeen reported as income from settlement and patent licensing. When a patentlicense agreement is entered into prior to the commencement of litigation, wereport the proceeds of such transaction as licensing revenue in the period inwhich such proceeds are received, subject to the revenue recognition criteria describedabove.

On February 15, 2007, we enteredinto a Patent License Agreement with Tandberg ASA, Tandberg Telecom AS andTandberg, Inc.  Under this agreement, CPIdismissed its infringement suit against Tandberg, Tandberg dismissed itsinfringement suit against us, and the we cross-licensed each other’s patentportfolios.  The agreement resulted in apayment of $12.0 million to the us from Tandberg**. **We recognized the gross proceedsof $12.0 million from the patent license agreement as income from settlementand patent licensing within operations in the three months ended March 30,2007.  To recognize the proceeds asrevenue, we would have required sufficient history of transactions in order toisolate the aspect of the settlement attributable to the gain associated withthe process of litigation, separate from commercial compensation for the use ofthe our intellectual property. Sufficient evidence was not available to allow this 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 belicensed under the agreement solely for purposes of the manufacture, sale,license or other transfer of existing products of Tandberg and products thatare closely related enhancements of such products based primarily andsubstantially on the existing products.  We reviewed the existing products of Tandbergand considered the likelihood that future patent filings by us would relate toor otherwise affect existing Tandberg products and closely related enhancementsthereto.  We concluded that the filingfor such additional patents was unlikely, and therefore concluded that the tenyear capture period was not material from an accounting perspective related torecognition.

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**Valuationof Accounts Receivable**

Estimates are used in determining our allowance fordoubtful accounts and are based on our historical collection experience,historical write-offs, current trends, the credit quality of our customer baseand the characteristics of our accounts receivable by aging category. If theallowance for doubtful accounts were to be understated, our operating resultswould be negatively affected by the correction. The impact of any such changeor deviation may be increased by our reliance on a relatively small number ofcustomers for a large portion of our total revenue. As of June 30, 2007,three customers represented 28%, 25% and 18% of our accounts receivablebalance, each of whom represented more than 10% of our gross accountsreceivable. As of December 31, 2006, three customers represented 44%, 20% and20% of our accounts receivable balance, each of whom represented more than 10%of our gross accounts receivable.

**Valuationof Inventories**

We record a provision for obsolete or excess inventoryfor systems and components that are no longer manufactured or are at risk ofbeing replaced with new versions of our product. In determining the allowancefor obsolete or excess inventory, we look at our forecasted demand versusquantities on hand and commitments. Any significant unanticipated changes indemand or technological developments could have a significant impact on thevalue of our inventory, commitments, and our reported results. If actual marketconditions are less favorable than those projected, additional inventorywrite-downs, provision for purchase commitments and charges against earningsmay be required, which would negatively affect our operating results for thatperiod.

**Stock Compensation**

We account for stock based compensation to employeeand non-employees according to the FASBSFAS No. (R), *Share-Based Payment*(SFAS No. 123R), which is a very complex accounting standard, theapplication of which requires significant judgment and the use of estimates,particularly surrounding Black-Scholes-Merton assumptions such as stock pricevolatility and expected option terms, as well as expected option forfeiturerates to value equity-based compensation. There is little experience orguidance with respect to developing these assumptions and models. SFAS No. 123Rrequires the recognition of the fair value of stock compensation in net income(loss). Refer to Note 2 — Stock-Based Compensation in the Notes to ourUnaudited Condensed Consolidated Financial Statements included elsewhere inthis Quarterly Report of Form 10-Q for more information.

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**Results of Operations**

The following table sets forth data expressed as apercentage of total revenue for the periods indicated.
| ** **                                         | ** ** | **Percentage of Total Revenue**  | ** ** | **Percentage of Total Revenue** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,**  | ** ** |
| ** **                                         | ** ** | **2007**                                        | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                           |       |                                            |       |                                           |       |   |   |   |   |
| Product                                            |       | 12                                              | %          | 55                                             | %          | 24 | % | 51 | % |
| Licensing                                          |       | 73                                              |       | 2                                              |       | 55 |   | 2 |   |
| Services, maintenance and  support                 |       | 15                                              |       | 43                                             |       | 21 |   | 47 |   |
| Total revenue                                      |       | 100                                             |       | 100                                            |       | 100 |   | 100 |   |
| Costs and Expenses:                                |       |                                            |       |                                           |       |   |   |   |   |
| Cost of product revenue                            |       | 12                                              |       | 41                                             |       | 17 |   | 37 |   |
| Cost of services, maintenance  and support revenue |       | 10                                              |       | 22                                             |       | 15 |   | 28 |   |
| Income from settlement and  patent licensing       |       | (18                                             | )          | (60                                            | )          | (170 | ) | (59 | ) |
| Research and development                           |       | 31                                              |       | 82                                             |       | 42 |   | 75 |   |
| Sales and marketing                                |       | 26                                              |       | 84                                             |       | 37 |   | 77 |   |
| General and administrative                         |       | 33                                              |       | 147                                            |       | 101 |   | 134 |   |
| Total costs and expenses                           |       | 94                                              |       | 316                                            |       | 42 |   | 292 |   |
| Net income  (loss)                                 |       | 6                                               |       | (216                                           | )          | 58 |   | (192 | ) |
| Other income (expense):                            |       |                                            |       |                                           |       |   |   |   |   |
| Interest income                                    |       | 2                                               |       | 4                                              |       | 2 |   | 5 |   |
| Other expense, net                                 |       | (1                                              | )          | —                                         |       | (1 | ) | (1 | ) |
| Total other income, net                            |       | 1                                               |       | 4                                              |       | 1 |   | 4 |   |
| Net income (loss)                                  |       | 7                                               | %          | (212                                           | )%         | 59 | % | (188 | )% |

 

**COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2007AND 2006**

***Revenue***

Total revenue increased by $4.1 million or 236%, to$5.9 million for the three month period ended June 30, 2007, from $1.8 millionfor the three months ended June 30, 2006. This increase was due primarily to a$4.0 million increase in licensing revenue associated with our licenseagreement with Radvision, entered into during the three month period ended June30, 2007.  

·   Productrevenue decreased by $266,000, or 27%, to $704,000 for the months endedJune 30, 2007, from $970,000 for the three months ended June 30, 2006. Thedecrease was due to lower new customer revenue in the three month period endedJune 30, 2007, as compared to the same period in 2006.  

·   Licensingrevenue, relating to the licensing of our patent portfolio, increased to $4.3million for the three months ended June 30, 2007, from $39,000 for the threemonths ended June 30, 2006. The increase was primarily attributable to newlicensing agreements signed in 2007, including the license agreement withRadvision which resulted in $4.0 million in licensing revenue for the threemonths ended June 30, 2007.

·   Services,maintenance and support revenue, which includes our installation services,funded software development and maintenance and support, increased by $128,000,or 17%, to $873,000 for the three months ended June 30, 2007, from$745,000 for the three months ended June 30, 2006. The increase was primarilydue to increased funded software development revenue, offset by a slightdecrease in renewals of annual maintenance and support contracts andinstallation revenues.

For the three months ended June30, 2007, revenue from three customersaccounted for 89% of total revenue, each of whom accounted for greater than 10%of total revenue.  The level of sales toany customer may vary from quarter to quarter. We expect that there will besignificant customer concentration in future quarters. The loss of any one ofthose customers would have a material adverse impact on our financial conditionand operating results.

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***Costs and Expenses***

*Cost ofproduct revenue.*****Cost of product revenue decreased by $10,000, or 1%, to $711,000 for thethree months ended June 30, 2007, from $721,000 for the three months ended June 30,2006. This decrease in cost of product revenue was due to the associateddecrease in product sales for the three months ended June 30, 2007.

*Cost ofservices, maintenance and support revenue.*****Cost of services,maintenance and support revenue increased by $186,000, or 48%, to $571,000 forthe three months ended June 30, 2007, from $385,000 for the three months endedJune 30, 2006. The increase was due primarily to the allocation of labor coststo a funded software project during the quarter ended June 30, 2007.  We expect cost of services, maintenance andsupport revenue to vary in the future due to labor costs associated with fundedsoftware projects.

*Income fromsettlement and patent licensing.*****Incomefrom settlement and patent licensing was $1.1 million for the three monthperiods ended June 30, 2007 and June 30, 2006, reflecting the amortization ofthe net proceeds from the November 2004 Polycom settlement and cross-licenseagreement over a five year period beginning in November 2004 and ending inNovember 2009.

*Research anddevelopment.*****Research and developmentexpenses increased by $395,000, or 27%,to $1.8 million for the three months ended June 30, 2007 from $1.4 million forthe three months ended June 30, 2006. This increase was primarily due to an increase in personnel and personnelrelated expenses.

*Sales andmarketing.* Sales andmarketing expenses were consistent at $1.5 million for each of the three monthsended June 30, 2007 and 2006.

*General andadministrative.* Generaland administrative expenses decreased by $622,000 or 24% to $1.9 million forthe three months ended June 30, 2007, from $2.6 million for the three monthsended June 30, 2006. The decrease was due primarily to a reduction in legalexpenses associated with the settlement of litigation against Tandberg ASA andits subsidiaries for patent infringement in February 2007, partiallyoffset  by an increase in our patent filing expense in the three months ended June30, 2007.

***Other Income***

Other income, netdecreased by $19,000, or 28%, to $50,000 for the three months ended June 30, 2007,from $69,000 for the three months ended June 30, 2006. The decrease was due tointerest expense on our line of credit advance, partially offset by increasedinterest income from our marketable securities classified as cash equivalentsand short and long-term investments.

**COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2007AND 2006**

***Revenue***

Total revenue increasedby $4.7 million, or 130%, to $8.3 million for the six months endedJune 30, 2007, from $3.6 million for the six months ended June 30, 2006.The increase was primarily the result of the $4.0 million increase in licensingrevenue associated with our license to Radvision in the six months ended June30, 2007. For the six months ended June 30,2007, revenue from three customers accounted for 80% of total revenue, each ofwhom accounted for greater than 10% of total revenue. For the six months endedJune 30, 2006, revenue from two customers accounted for 75% of total revenue,each of whom accounted for greater than 10% of total revenue. We expect that therewill be significant customer concentration in future quarters.  The loss of any one of those customers wouldhave a material adverse impact on our financial condition and operatingresults.

·   Product revenue increased by $115,000, or 6%,to $2.0 million for the six months ended June 30, 2007, from $1.8 millionfor the six months ended June 30, 2006. The increase was due to increasedpurchasing of products to  upgradeexisting infrastructure among our existing customer base, and increased salesof products to new customers in the six month period ended June 30, 2007 ascompared to the same period in 2006.  

·   Licensingrevenue, relating to the licensing of our patent portfolio, increased to $4.5million for the six months ended June 30, 2007, from $71,000 for the six monthsended June 30, 2006. The increase was primarily attributable 

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     to the new licensing agreement signed in 2007 withRadvision, which resulted in $4.0 million in licensing revenue for the sixmonths ended June 30, 2007.

·   Services,maintenance and support revenue, which includes our installation services,funded software development and maintenance and support, increased by $81,000,or 5%, to $1.8 million for the six months ended June 30, 2007, from $1.7million for the six months ended June 30, 2006. The increase was primarily dueto increased funded software development revenue, offset by a decrease inrenewals of annual maintenance and support contracts and installation revenues.

*Cost of product revenue*. Cost ofproduct revenues increased by $87,000, or 6%, to $1.4 million for the sixmonths ended June 30, 2007, from $1.4 million for the six months endedJune 30, 2006.  The increase was primarily attributable to increased sales of ourproducts and an increase in personnel and related expenses for the assembly andtesting of such products.

*Cost of services, maintenance andsupport revenues*. Cost of services, maintenance and support revenues increased by $255,000or 26% to $1.2 million for the six months ended June 30, 2007, from$992,000 for the six months ended and June 30, 2006.  This increase was attributable in part to anincrease in software development costs associated with increased fundedsoftware revenue.

*Income from settlement and patent licensing.*****Income from settlement and patent licensingincreased by $12.0 million, or 568% to $14.1 million for the six months endedJune 30, 2007, from $2.1 million for the six month period ended June 30, 2006.The increase was due to the settlement and Patent License Agreemententered into with Tandberg ASA and its subsidiaries in February 2007, whichresulted in a cash payment to us of $12.0 million. The six months ended June30, 2007 and 2006 also reflects $2.1million of amortization of the net proceeds from the November 2004 Polycomsettlement and cross-license agreement over a five year period beginning inNovember 2004 and ending in November 2009.

*Research and development.*****Research and development expenses increased by$780,000, or 29%, to $3.5 million for the six months ended June 30, 2007 from$2.7 million for the six months ended June 30, 2006. The increase was primarilyattributable to an increase in personnel and related expenses.

*Sales and marketing.* Sales and marketing expenses increased by$257,000, or 9%, to $3.0 million for the six months ended June 30, 2006 from$2.8 million for the six months ended June 30, 2006. The increase was primarilyattributable to an increase in personnel and related expenses.

*General and administrative.* General and administrative expenses increased by$3.6 million, or 74% to $8.4 million for the six months ended June 30, 2007from $4.8 million for the six months ended June 30, 2006. The increasewas due primarily to the legal fees associated with our litigation againstTandberg for patent infringement, and to a lesser extent, an increase in ourpatent filing expense in the six months ended June 30, 2007.

*Other income, net.* Other income,net decreased by $57,000, or 35% to $108,000 for the six months ended June 30,2007 from $165,000 for the six months ended June 30, 2006.  The decrease was due to a decrease in the balances of cash equivalents onwhich we earned interest, offset in part by increased interest rates earned onour balances of cash equivalents.

**Liquidity and Capital Resources**

We had cash and cash equivalents of $10.1 million asof June 30, 2007, and $7.9 million as of December 31, 2006. For the six monthsended June 30, 2007, we had an increase in cash and cash equivalents of $2.3million. The net cash provided by operations of $2.5 million resulted primarilyfrom net income of $4.9 million, non-cash expense of $1.4 million, whichincluded $1.3 million in non-cash stock based compensation, deferred settlementand patent licensing costs of $637,000 and accounts receivable of $305,000,offset by deferred income from settlement and patent licensing of $2.7 million,deferred services revenue of $1.1 million and accrued liabilities and other of$698,000.  The net cash used in investingactivities of $475,000 was due to the purchases of property and equipment.  The net cash provided by  financing activities was $296,000, related tothe proceeds from the issuance of common stock through our employee stockoption and purchase plans.

At June 30, 2007, we had open purchase orders andother contractual obligations of approximately $951,000, 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.

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In May 2007, we added 7,900 square feet of officespace to our existing lease at our headquarters in San Mateo, California tohouse engineering staff.  The newfacilities require minimum payments of approximately $114,000, $281,000,$288,000, $296,000, $303,000 and $76,000 for fiscal years 2007, 2008, 2009,2010, 2011 and 2012, respectively.

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 numerousfactors, including without limitation, general economic conditions andconditions in the financial services industry in particular, the level andtiming of product, services and patent licensing revenues and income, the costsand timing of our product development efforts and the success of thesedevelopment efforts, the costs and timing of our sales and marketingactivities, the extent to which our existing and new products gain marketacceptance, competing technological and market developments, and the costsinvolved in maintaining and enforcing patent claims and other intellectualproperty rights, all of which may impact our ability to achieve and maintainprofitability or generate positive cash flows.

**RecentAccounting Pronouncements**

In September 2006, the FASB issued FASB StatementNo. 157, *Fair Value Measurements* (“SFAS No.157”). The standard provides guidance for using fair value to measure assetsand liabilities and responds to investors’ requests for expanded informationabout the extent to which companies measure assets and liabilities at fairvalue, the information used to measure fair value, and the effect of fair valuemeasurements on earnings. The standard applies whenever other standards requireor permit assets or liabilities to be measured at fair value. The standard doesnot expand the use of fair value in any new circumstances. SFAS No. 157must be adopted prospectively as of the beginning of the year it is initiallyapplied. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. We are evaluating the impact this standard will have on ourfinancial position or results of operations.

In February 2007, the FASB issued StatementNo. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment of FASBStatement No. 115*(“SFASNo. 159”)**, The standardallows an entity the irrevocable option to elect fair value for the initial andsubsequent measurement for certain financial assets and liabilities under aninstrument-by-instrument election. Subsequent measurements for the financialassets and liabilities an entity elects to fair value will be recognized inearnings. SFAS No. 159 also establishes additional disclosure requirements.Statement No. 159 is effective for fiscal years beginning afterNovember 15, 2007.  We are evaluating the impact this standard willhave on our financial position or results of operations.

**Item 3. *Quantitativeand Qualitative Disclosures About Market Risk***

We develop products primarily in the United States and sell those products primarily in North America, Europe and Asia. International revenue, which consists of sales to customers with operations principally in Western Europe and Asia, comprised 89% of total product and services revenue for the three months ended June 30, 2007 and 57% for the three months ended June 30, 2006.  International revenue comprised 78% and 53% of total revenues for the six months ended June 30, 2007 and 2006, respectively.  Our financial condition could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all of our sales are currently transacted in United States dollars, a strengthening of the United States dollar could make our products less competitive in foreign markets. We do not use derivative financial instruments for speculative or trading purposes, nor do we engage in any foreign currency hedging transactions.

Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term instruments. There has not been a material change in our exposure to interest rate and foreign currency risk since the date of our annual report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission on March 22, 2007.

**Cash, Cash Equivalents and Short-term investments**

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

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The following table provides information about our investment portfolio. For investment securities, the table presents cash, cash equivalents and short-term investment, and related weighted average interest rates by category at June 30, 2007 and December 31, 2006.
| ** **                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                         | ** ** | **(Unaudited)**   | ** ** |
| ***Description***                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and cash equivalents:         |       |              |       |                  |       |
| Cash                               |       | $                 | 4,819      |                  | $          | 4,224 |   |
| Commercial paper cash  equivalents |       | 5,319             |       | 3,630                 |       |
| Total cash and cash equivalents    |       | $                 | 10,138     |                  | $          | 7,854 |   |

# **Item 4T.*****Controls and Procedures***

(a) Evaluation of disclosure controls and procedures: Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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

**PART II - OTHER INFORMATION**

**Item 1. *Legal Proceedings***

On May 11, 2005, CPI, our wholly-owned patent prosecution and licensing subsidiary, commenced a patent infringement lawsuit against Tandberg ASA and Tandberg, Inc., alleging that numerous Tandberg videoconferencing products infringe three patents held by CPI. The suit was filed in the United States District Court for the Northern District of California. The three patents involved were U.S. Patent Nos. 5,867,654; 5,896,500; and 6,212,547. Both of the Tandberg entities answered the complaint on July 15, 2005, at which time they asserted that they did not infringe the patents and that the patents were invalid and unenforceable.

On January 30, 2006, Tandberg Telecom AS, a wholly-owned subsidiary of Tandberg ASA, filed a patent infringement lawsuit against us in the United States District Court for the Eastern District of Texas. The suit alleged that our videoconferencing products infringe one patent purchased by Tandberg Telecom AS. The patent involved was U.S. Patent No. 6,621,515, which claims a method and system for routing video calls. We responded to the complaint on March 23, 2006, at which time we asserted that we did not infringe the patent, that the patent was invalid, and that the claim was without merit.

On February 15, 2007, we entered into a Patent License Agreement with Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc. Under this agreement, CPI agreed to dismiss its infringement suit against Tandberg, Tandberg agreed to dismiss its infringement suit against us, and the companies agreed to cross-license each other’s patent portfolios. The agreement resulted in a payment to us from Tandberg in the amount of $12.0 million.

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**Item 1A*.Risk Factors***

**Factors Affecting Future Operating Results**

**Wehave incurred substantial losses in the past and may not be profitable in thefuture.**

Werecorded net income of $4.9 million for the six months ended June 30, 2007, anet loss of $8.1 million for fiscal year 2006, and a net loss of $5.2 millionfor fiscal year 2005. As of June 30, 2007, our accumulated deficit was $97.9million.  Our net income for the sixmonths ended June 30, 2007 was primarily due to the $12.0 million in incomefrom settlement and patent licensing we received from Tandberg ASA insettlement of our litigation with Tandberg and $4.0 million from a PatentLicense Agreement with Radvision Ltd.   Ourrevenue and income from settlement and patent licensing may not increase, oreven remain at its current level. In addition, our operating expenses mayincrease as we continue to develop our business and pursue licensingopportunities. As a result, to become profitable, we will need to increase ourrevenue and income from settlement and patent licensing by increasing sales toexisting customers, by attracting additional new customers and licensees. Ifour expenses increase more rapidly than our revenue, we may not remainprofitable. Due to the volatility of our product and licensing revenue and ourincome from settlement and licensing activities, we may not be able to sustainor increase profitability on a quarterly or annual basis. If we fail to maintainprofitability or to sustain or grow our profits within the time frame expectedby investors, the market price of our common stock may be adversely impacted.

**Ourmarket is in the early stages of development, and our system may not be widelyaccepted.**

Ourability to achieve profitability depends in part on the widespread adoption ofnetworked video communications systems and the sale and adoption of our videosystem in particular. If the market for our system fails to grow or grows moreslowly than we anticipate, we may not be able to increase revenue or achieveprofitability. The market for our system is relatively new and evolving. Wehave to devote substantial resources to educate prospective customers about theuses and benefits of our system. Our efforts to educate potential customers maynot result in our system achieving broad market acceptance. In addition,businesses that have invested or may invest substantial resources in othervideo products may be reluctant or slow to adopt our system. Consequently, theconversion from traditional methods of communication to the extensive use ofnetworked video may not occur as rapidly as we wish.

**Ourlengthy sales cycle to acquire new customers or large follow-on orders maycause our operating results to vary significantly and make it more difficult toforecast our revenue.**

We have generallyexperienced a product sales cycle of four to nine months for new customers orlarge follow-on orders from existing customers.   This sales cycle is due to the time neededto educate customers about the uses and benefits of our system, and the timeneeded to process the investment decisions that our prospective customers mustmake when they decide to buy our system. Many of our prospective customers haveneither budgeted expenses for networked video communications systems, nor forpersonnel specifically dedicated to the procurement, installation or support ofthese 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 thesales cycle.

Our lengthy sales cycleis one of the factors that has caused, and may continue to cause our operatingresults to vary significantly from quarter-to-quarter and year-to-year in thefuture. This makes it difficult for us to forecast revenue, and could causevolatility in the market price of our common stock. A lost or delayed ordercould result in lower than expected revenue in a particular quarter or year.

**General economicconditions have and may impact our revenues and harm our business in thefuture.**

Theinternational economic slowdown and the downturn in the investment bankingindustry that began in 2000 negatively affected our business, and areoccurrence of a difficult economic environment may do so in the future.During this most recent economic downturn, the investment banking industrysuffered a sharp decline, which caused many of our existing and potentialcustomers to cancel or delay orders for our products. Although the U.S. economyhas improved, our customers and potential customers may continue to delayordering our products, and we could fall short of our revenue expectations for2007 and beyond. Slower growth among our customers, tightening of customers’operating budgets, retrenchment in the capital markets and other generaleconomic factors all have had, and could in the future have, a materially adverseeffect on our revenue, capital resources, financial condition and results ofoperations.

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**Futurerevenues and income from settlement and licensing activities are difficult topredict for several reasons, including our lengthy and costly licensing cycle.Our failure to predict revenues and income accurately may cause us to missanalysts’ estimates and result in our stock price declining.**

Becauseour licensing cycle is a lengthy process, our future revenues and income fromsettlement and patent licensing from new licensees are difficult to predict.The process of persuading companies to adopt our technologies or convincingthem that their products infringe upon our intellectual property rights can belengthy.  This is especially the casewhen there is a significant disparity in the financial resources between thecompanies, and enforcement of our rights requires us to resort to the juridicalprocess.  The proceeds of ourintellectual property licensing and enforcement efforts tend to be sporadic anddifficult to predict and may not increase or even remain at their currentlevels in the future. There is also a tendency in the technology industry toclose business deals at the end of a quarter, thereby increasing the likelihoodthat a possible material deal would not be concluded in a current quarter, butslip into a subsequent reporting period. This kind of delay may result in agiven quarter’s performance being below analyst or shareholder expectations.

**Sincea majority of our product revenue has come from follow-on orders, our financialperformance could be harmed if we fail to obtain follow-on orders in thefuture.**

Ourcustomers typically place limited initial orders for our networked videocommunications system, as they seek to evaluate its utilization and resultantvalue. Our strategy is to pursue additional and larger follow-on orders afterthese initial orders. Product revenue generated from follow-on orders accountedfor approximately 96%, and 92% of our product revenue for the six months endedJune 30, 2007 and 2006, respectively. Our future product revenue depends on theadoption of our products by new customers and successful generation offollow-on orders as the Avistar network expands within a customer’sorganization. If our system does not meet the needs and expectations ofcustomers, we may not be able to generate follow-on orders.

**Becausewe depend on a few customers for a majority of our product revenue, servicesrevenue, and income from settlement and patent licensing, the loss of one ormore of them could cause a significant decrease in our operating results.**

To date, a significant portion of our revenue andincome from settlement and patent licensing has resulted from sales or licensesto a limited number of customers, particularly Deutsche Bank AG, UBS AG,Polycom, Inc., Tandberg ASA, Sony, Radvision and their affiliates.  For the six month period ended June 30, 2007,collectively, Deutsche Bank AG, UBS AG, Polycom, Inc., Tandberg ASA, Sony,Radvision and their affiliates accounted for approximately 95% and 85% of totalrevenues and income from settlement and patent licensing.  As of June 30, 2007, approximately 71%of our gross accounts receivable was concentrated with three customers, each ofwhom represented more than 10% of our gross accounts receivable. As ofDecember 31, 2006, approximately 84% of our gross accounts receivable wasconcentrated with three customers, each of whom represented more than 10% ofour gross accounts receivable.

Theloss of a major customer or the reduction, delay or cancellation of orders fromone or more of our significant customers could cause our revenue to decline andour losses to increase.  Income fromsettlement and licensing activities from Tandberg, which was $12.0 million inthe first quarter of 2007, was a one-time payment from Tandberg and we expectto complete the amortization of the Polycom proceeds in 2009. If we are unableto license our patent portfolio to additional parties on terms equal to orbetter than our agreements with Polycom and Tandberg, our licensing revenue andour income from settlement and licensing will decline, which could cause ourlosses to increase. We currently depend on a limited number of customers withlengthy budgeting cycles and unpredictable buying patterns, and as a result,our revenue from quarter-to-quarter or year-to-year may be volatile. Adversechanges in our revenue or operating results as a result of these budgetingcycles or any other reduction in capital expenditures by our large customerscould substantially reduce the trading price of our common stock.

**Ourexpected future working capital needs may require that we seek additional debtor equity funding which, if not available on acceptable terms, could cause ourbusiness to suffer.**

Asof June 30, 2007, our accumulateddeficit was $97.9 million. Our revenue and income from settlement andpatent licensing may not increase, or even remain at its current level. Inaddition, our operating expenses may increase as we continue to develop ourbusiness and pursue licensing opportunities. As a result, we may need toarrange for the availability of additional funding in addition to our existingline of credit in order to meet our future business requirements. If we areunable to obtain additional funding when needed on acceptable terms, we may notbe able to develop or enhance our 

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products, take advantageof future opportunities, respond to competitive pressures or unanticipatedrequirements, or finance our efforts to protect and enforce our intellectualproperty rights, which could seriously harm our business, financial condition,results of operations and ability to continue operations.

**Wemay not be able to modify and improve our products in a timely and costeffective manner to respond to technological change and customer demands.**

Future hardware and software platforms embodying newtechnologies and the emergence of new industry standards and customerrequirements could render our system non-competitive or even obsolete. Themarket for our system is characterized by:

·       rapid technological change;

·       the emergence of newcompetitors;

·       significant development costs;

·       changes in the requirements of our customers andtheir communities of users;

·       evolving industry standards; and

·       transition to Internet protocol connectivity forvideo at the desktop, with increasing availability of bandwidth and improvingquality of service.

Oursystem is designed to work with a variety of hardware and softwareconfigurations and data networking infrastructures used by our customers. Themajority of these customer networks rely on Microsoft Windows servers. However,our software may not operate correctly on other hardware and software platformsor with other programming languages, database environments and systems that ourcustomers use. Also, we must constantly modify and improve our system to keeppace 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 or improve our system in response to evolvingindustry standards or customers’ demands, our system could become lesscompetitive, which would harm our financial condition and reputation.

**Difficultiesor delays in installing our products could harm our revenue and margins.**

Werecognize product and installation revenue upon the installation of our systemin those cases where we are responsible for installation, which often entailsworking with sophisticated software, computing and communications systems. Ifwe experience difficulties with installation or do not meet deadlines due todelays caused by our customers or ourselves, we could be required to devotemore customer support, technical and other resources to a particularinstallation. If we encounter delays in installing our products for new orexisting customers, or installation requires significant amounts of ourprofessional services support, our revenue recognition could be delayed, ourcosts could increase and our margins could suffer.

**Competitioncould reduce our market share and decrease our revenue.**

The market in which weoperate is highly competitive. In addition, because our industry is relativelynew and is characterized by rapid technological change, evolving user needs,developing industry standards and protocols and the introduction of newproducts and services, it is difficult for us to predict whether or when newcompeting technologies or new competitors will enter our market. Currently, ourcompetition comes from many other kinds of companies, including communicationequipment, integrated solution, broadcast video and stand-alone “point solution”providers. Within the video-enabled network communications market, we competeprimarily against Polycom, Tandberg ASA, Sony Corporation, Apple Inc.,Radvision and Emblaze-VCON Ltd.  Many ofthese companies, including Polycom, Tandberg, Sony, Radvision and Emblaze-VCONhave acquired rights to use our patented technology through licensingagreements with us, which, in some cases include rights to use future patentsfiled by us.  With increasing interest in the power of video collaboration and theestablishment of communities of users, we believe we face increasingcompetition from alternative video communications 

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solutions that employ newtechnologies or new combinations of technologies from companies such as CiscoSystems, Inc., Avaya, Inc., Microsoft Corporation, Nortel NetworksCorporation and WebEx Communications, Inc. (in the process of beingacquired by Cisco Systems, Inc.) that enable web-based or network-based videocommunications with low-cost digital camera systems.

We expect competition toincrease in the future from existing competitors, partnerships of competitors,and from new market entrants with products that may be less expensive thanours, or that may provide better performance or additional features notcurrently provided by our products. Many of our current and potentialcompetitors have substantially greater financial, technical, manufacturing,marketing, distribution and other resources, greater name recognition and marketpresence, longer operating histories, lower cost structures and larger customerbases than we do. As a result, they may be able to adapt more quickly to new oremerging technologies and changes in customer requirements.

We may be required toreduce prices or increase spending in response to competition in order toretain or attract customers, pursue new market opportunities or invest inadditional research and development efforts. As a result, our revenue, marginsand market share may be harmed. We cannot assure 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.

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

Weregard our system as open but proprietary. In an effort to protect ourproprietary rights, we rely primarily on a combination of patent, copyright,trademark and trade secret laws, as well as licensing, non-disclosure and otheragreements with our consultants, suppliers, customers and employees. However,these laws and agreements provide only limited protection of our proprietaryrights. In addition, we may not have signed agreements in every case, and thecontractual provisions that are in place and the protection they produce maynot provide us with adequate protection in all circumstances. Although CPIholds patents and has filed patent applications covering some of the inventionsembodied in our systems, our means of protecting our proprietary rights may notbe adequate. It may be possible for a third party to copy or otherwise obtainand use our technology without authorization and without our detection. Inthe event that we believe a third party is infringing our intellectual propertyrights, an infringement claim brought by us could, regardless of the outcome,result in substantial cost to us, divert our management’s attention andresources, be time consuming to prosecute and result in unpredictable damageawards. A third party may also developsimilar technology independently, without infringing upon our patents andcopyrights. In addition, the laws of some countries in which we sell our systemmay not protect our software and intellectual property rights to the sameextent as the laws of the United States or other countries where we holdpatents. As we move to more of a software based system, inadequate licensingcontrols, unauthorized copying, and use, or reverse engineering of our systemcould harm our business, financial condition or results of operations.

**Othersmay bring infringement claims against us, which could be time-consuming andexpensive to defend.**

Inrecent years, there has been significant litigation in the United Statesinvolving patents and other intellectual property rights, and we have been aparty to such litigation. The prosecution and defense of these lawsuits wherewe are involved may require us and CPI to expend significant financial andmanagerial resources, and therefore may have a material negative impact on ourfinancial position and results of operations. The duration and ultimate outcomeof these proceedings are uncertain. We may be a party to additional litigation inthe future, to protect our intellectual property or as a result of an allegedinfringement of the intellectual property of others. These claims and anyresulting lawsuit could subject us to significant liability for damages andinvalidation of our proprietary rights. These lawsuits, regardless of theirmerit or success, would likely be time-consuming and expensive to resolve andwould divert management’s time and attention. Any potential intellectualproperty litigation also could force us to do one or more of the following:

·  stopselling, incorporating or using products or services that use the challengedintellectual property;

·  obtainfrom the owner of the infringed intellectual property a license to the relevantintellectual property, which may require us to license our intellectualproperty to such owner, or may not be made available on reasonable terms or atall; and

·  redesignthose products or services that use technology that is the subject of aninfringement claim.

If we are forced to takeany of the foregoing actions, we may be unable to manufacture, use, sell,import and export our products, which would reduce our revenues.

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**Ourinability to protect the intellectual property created by us would cause ourbusiness to suffer.**

We rely on a combinationof license, development and nondisclosure agreements, trademark, trade secretand copyright law, and contractual provisions to protect our other,non-patentable intellectual property rights. If we fail to protect theseintellectual property rights, our licensees, potential licensees and others mayseek to use our technology without the payment of license fees and royalties,which could weaken our competitive position, reduce our operating results andincrease the likelihood of costly litigation. The growth of our businessdepends in part on the applicability of our intellectual property to theproducts of third parties, and our ability to enforce intellectual propertyrights against them. In addition, effective trade secret protection may beunavailable or limited in certain foreign countries. Although we intend toprotect our rights vigorously, if we fail to do so, our business will suffer.

**Oursystem could have defects for which we could be held liable for, and whichcould result in lost revenue, increased costs, and loss of our credibility ordelay in the further acceptance of our system in the market.**

Oursystem may contain errors or defects, especially when new products areintroduced or when new versions are released. Despite internal system testing,we have in the past discovered software errors in some of the versions of oursystem after their introduction. Errors in new systems or versions could befound after commencement of commercial shipments, and this could result inadditional development costs, diversion of technical and other resources fromour other development efforts or the loss of credibility with current or futurecustomers. Any of these events could result in a loss of revenue or a delay inmarket acceptance of our system and could harm our reputation.

Inaddition, we have warranted to some of our customers that our software is freeof viruses. If a virus infects a customer’s computer software, the customercould assert claims against us, which, regardless of their merits, could be costlyto defend and could require us to pay damages and potentially harm ourreputation.

Ourlicense agreements with our customers typically contain provisions designed tolimit our exposure to potential product liability and certain contract claimsand typically limit a customer’s entire remedy to either a refund of the pricepaid or modification of our system. However, these provisions vary as to theirterms and may not be effective under the laws of some jurisdictions. Althoughwe maintain 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 against us.

Thethird party software we license with our system may also contain errors ordefects for which we do not maintain insurance. Typically, our license agreementstransfer any warranty from the third party to our customers to the extentpermitted. Product liability, warranty or other claims brought against us withrespect to such warranties could, regardless of their merits, harm ourbusiness, financial condition or results of operations.

**Theloss of any of our outside contract manufacturers or third party equipmentsuppliers that produce key components of our system could significantly disruptour manufacturing and new product development process.**

We depend on outside contract manufacturers to producecomponents of our systems, such as cameras, microphones, gateway, speakers andmonitors that we install at desktops and in conference rooms. One supplier,Pacific Corporation, is a single source supplier for a key component of ourproduct. Another supplier, Pixelworks Inc., is our only current source of acomponent used in our IP gateway product. In addition, during 2006, we beganusing an offshore contract resource in China for product development work. Ourreliance on these third parties involves a number of risks, including:

·       the possible unavailability of critical servicesand components on a timely basis, on commercially reasonable terms or at all;

·       if the components necessary for our system wereto become unavailable, the need to qualify new or alternative components forour use or reconfigure our system and manufacturing process could be lengthyand expensive;

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·       the likelihood that, if particular components orhuman resources were not available, we would suffer an interruption in themanufacture and shipment of our systems until these components or alternativesbecome available;

·       reduced control by us over the quality and costof our system and over our ability to respond to unanticipated changes andincreases in customer orders, and conversely, price changes from suppliers ifcommitted volumes are not met;

·       the possible unavailability of, or interruptionin, access to some technologies due to infringement claims, production/supplyissues or other hindrances; and

·       the possible misappropriation of our source codethrough reverse engineering or other means by contract developers or otherparties.

Ifthese manufacturers or suppliers cease to provide us with the assistance or thecomponents necessary for the operation of our business, we may not be able toidentify alternate sources in a timely fashion. Any transition to alternatemanufacturers or suppliers would likely result in operational problems andincreased expenses, and could cause delays in the shipment of or otherwiselimit our ability to provide our products. We cannot assure you that we wouldbe able to enter into agreements with new manufacturers or suppliers oncommercially reasonable terms, or at all. Any disruption in product flow maylimit our revenue, delay our product development, seriously harm ourcompetitive position and/or result in additional costs or cancellation oforders by our customers.

**Ifwe are unable to expand our direct sales force and/or add distributionchannels, our business will suffer.**

Toincrease our revenue, we must increase the size of our direct sales force andadd indirect distribution channels, such as systems integrators, productpartners and/or value-added resellers, 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 assureyou that we will be successful in attracting, integrating, motivating andretaining sales personnel. Furthermore, it can take several months before a newhire becomes a productive member of our sales force. The loss of existingsalespeople, or the failure of new salespeople and/or indirect sales partnersto develop the necessary skills in a timely manner, could impact our revenuegrowth.

**Wemay not be able to retain our existing key personnel, or hire and retain theadditional personnel that we need to sustain and grow our business.**

We depend on thecontinued services of our executive officers and other key personnel. We do nothave long-term employment agreements with our executive officers or other keypersonnel and we do not carry any “key man” life insurance. The loss of theservices of any of our executive officers or key personnel could harm ourbusiness, financial condition and results of operations.

Our products andtechnologies are complex, and to successfully implement our business strategyand manage our business, an in-depth understanding of video communication andcollaboration technologies and their potential uses is required. We need toattract and retain highly skilled technical and managerial personnel for whomthere is intense competition. If we are unable to attract and retain qualifiedtechnical and managerial personnel due to our own cost constraints, limitedavailability of qualified personnel or other reasons, our results of operationscould suffer and we may never achieve profitability. The failure of newpersonnel to develop the necessary skills in a timely manner could harm ourbusiness.

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

Failureto achieve or effectively manage growth will harm our business, financialcondition and operating results. Furthermore, in order to remain competitive orto expand our business, we may find it necessary or desirable in the future toacquire other businesses, products or technologies. If we identify anappropriate acquisition candidate, we may not be able to negotiate the terms ofthe acquisition successfully, to finance the acquisition or to integrate theacquired businesses, products or technologies into our existing business andoperations. In addition, completing a potential acquisition and integrating anacquired business may strain our resources and require significant managementtime.

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**Ourinternational operations expose us to potential tariffs and other tradebarriers, unexpected changes in foreign regulatory requirements and laws andeconomic and political instability, as well as other risks that could adverselyaffect our results of operations.**

Internationalrevenue, which consists of sales to customers with operations principally inWestern Europe and Asia, comprised 89% and 57% of total revenues for thethree months ended June 30, 2007 and 2006, respectively.  International revenue comprised 78% and 53%of total revenues for the six months ended June 30, 2007 and 2006,respectively. Some of the risks we mayencounter in conducting international business activities include thefollowing:

·       tariffs and other trade barriers;

·       unexpected changes in foreign regulatoryrequirements 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 adaptingour system to the local language standards in those foreign countries that donot use the English language;

·       fluctuations in foreign currencies; and

·       limitations in communications infrastructures insome foreign countries.

Someof our products are subject to various federal, state and international lawsgoverning substances and materials in products, including those restricting thepresence of certain substances in electronics products. We could incursubstantial costs, including fines and sanctions, or our products could beenjoined from entering certain jurisdictions, if we were to violateenvironmental laws or if our products become non-compliant with environmentallaws. We also face increasing complexity in our product design and procurementoperations as we adjust to new and future requirements relating to thematerials composition of our products, including the restrictions on lead andcertain other substances that apply to specified electronics products sold inthe European Union (Restriction of Hazardous Substances Directive). Theultimate costs under environmental laws and the timing of these costs aredifficult to predict. Similar legislation has been or may be enacted in otherregions, including in the United States, the cumulative impact of which couldbe significant.

**Internationalpolitical instability may increase our cost of doing business and disrupt ourbusiness.**

Increased internationalpolitical instability, evidenced by the threat or occurrence of terroristattacks, enhanced national security measures and/or sustained military actionmay halt or hinder our ability to do business, may increase our costs and mayadversely 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.

**Ifour customers do not perceive our system or services to be effective or of highquality, our brand and name recognition would suffer.**

We believe thatestablishing and maintaining brand and name recognition is critical forattracting and expanding our targeted customer base. We also believe that theimportance of reputation and name recognition will increase as competition inour market increases. Promotion and enhancement of our name will depend on thesuccess of our marketing efforts, and on our ability to continue to providehigh quality systems and services, neither of which can be assured. If ourcustomers do not

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perceive our system orservices to be effective or of high quality, our brand and name recognitionwill suffer, which would harm our business.

**Wemay not meet the continued listing criteria for The NASDAQ Capital Market,which could materially and adversely affect the price and liquidity of ourstock, our business and our financial condition.**

For continued listing ofour common stock on The NASDAQ Capital Market, we are required to, among otherthings (i) maintain stockholders’ equity of at least $2.5 million, or amarket value of listed securities of at least $35 million, or annual net incomefrom continuing operations of at least $500,000, and (ii) maintain aminimum closing bid price of our common stock of at least $1.00. If we do notmeet the continued listing requirements, our common stock could be subject todelisting from trading on The NASDAQ Capital Market. There can be no assurancethat we will continue to meet all requirements for continued listing on TheNASDAQ Capital Market.

If we are unable to continueto list our common stock for trading on The NASDAQ Capital Market, there may beadverse impact on the market price and liquidity of our common stock, and ourstock may be subject to the “penny stock rules” contained inSection 15(g) of the Securities Exchange Act of 1934, as amended, andthe rules promulgated thereunder. Delisting of our common stock from TheNASDAQ Capital Market could also have a materially adverse effect on ourbusiness, including, among other things: our ability to raise additionalfinancing to fund our operations; our ability to attract and retain customers;and our ability to attract and retain personnel, including managementpersonnel. In addition, if we were unable to list our common stock for tradingon NASDAQ, many institutional investors would no longer be able to retain theirinterests in and/or make further investments in our common stock because oftheir internal rules and protocols.

**Ourcommon stock has been and will likely continue to be subject to substantialprice and volume fluctuations due to a number of factors, many of which will bebeyond our control, which may prevent our stockholders from reselling ourcommon stock at a profit.**

Thetrading price of our common stock has in the past been and could in the future besubject to significant fluctuations in response to:

·       general trends in the equities market, and/ortrends in the technology sector;

·       quarterly variations in our results ofoperations;

·       announcements regarding our product developments;

·       the size and timing of agreements to license ourpatent portfolio;

·       announcements of technological innovations or newproducts by us, our customers or competitors;

·       announcements of competitive productintroductions by our competitors;

·       sales, or the perception in the market ofpossible sales, of a large number of shares of our common stock by ourdirectors, officers, employees or principal stockholders; and

·       developments or disputes concerning patents orproprietary rights, or other events.

If our revenue and resultsof operations are below the expectations of public market securities analystsor investors, then significant fluctuations in the market price of our commonstock could occur. In addition, the securities markets have, from time to time,experienced significant price and volume fluctuations, which have particularlyaffected the market prices for high technology companies, and which often areunrelated and disproportionate to the operating performance of particularcompanies. These broad market fluctuations, as well as general economic,political and market conditions, may negatively affect the market price of ourcommon stock.

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**Ifour share price is volatile, we may be the target of securities litigation,which is costly and time-consuming to defend.**

Inthe past, following periods of market volatility in the price of a company’ssecurities, security holders have often instituted class action litigation.Many technology companies have been subject to this type of litigation. Ourshare price has, in the past, experienced price volatility, and may continue todo so in the future. If the market value of our common stock experiencesadverse fluctuations and we become involved in this type of litigation,regardless of the merits or outcome, we could incur substantial legal costs andour management’s attention could be diverted, causing our business, financialcondition and operating results to suffer.

**Provisionsof our certificate of incorporation, our bylaws and Delaware law may make itdifficult for a third party to acquire us, despite the possible benefits to ourstockholders.**

Ourcertificate of incorporation, our bylaws, and Delaware law contain provisionsthat may inhibit changes in our control that are not approved by our Board ofDirectors. For example, the Board of Directors has the authority to issue up to10,000,000 shares of preferred stock and to determine the terms of thispreferred stock, without any further vote or action on the part of thestockholders.

Theseprovisions may have the effect of delaying, deferring or preventing a change inthe control of Avistar despite possible benefits to our stockholders, maydiscourage bids at a premium over the market price of our common stock, and mayadversely affect the market price of our common stock and the voting and otherrights of our stockholders.

**Our principalstockholders can exercise a controlling influence over our business affairs andthey may make business decisions with which you disagree that will affect thevalue of your investment.**

Ourexecutive officers, directors and entities affiliated with them, in theaggregate, beneficially owned approximately 62% of our common stock as of June 30, 2007. If they were to act together, thesestockholders would be able to exercise control over most matters requiringapproval by our stockholders, including the election of directors and approvalof significant corporate transactions. These actions may be taken even if theyare opposed by other investors. This concentration of ownership may also havethe effect of delaying or preventing a change in control of Avistar, whichcould cause the market price of our common stock to decline.

**Changes in stock optionaccounting rules enacted have and will continue to adversely impact ourreported operating results prepared in accordance with generally acceptedaccounting principles, which may in turn adversely impact our stock price andour ability to attract and retain employees.**

OnJanuary 1, 2006, we adopted SFAS No. 123R, which  requires employee stock options and rights to purchaseshares under stock participation plans to be accounted for under the fair valuemethod, and eliminates the ability to account for these instruments under theintrinsic value method prescribed by Accounting Principles Board OpinionNo. 25, and allowed under the original provisions of SFAS No. 123.SFAS No. 123R requires the use of an option pricing model for estimatingfair value, which is amortized to expense over the service periods.  We expect to continue to grant stockoptions to employees. The adoption of SFAS No. 123R had, and is expectedto continue to have, a material impact on our results of operations.

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

At our Annual Meeting ofStockholders held June 1, 2007 at our offices in San Mateo, California, ourstockholders approved the following two matters:

1. A proposal to electsix (6) directors of the Company to serve for the ensuing year and until theirsuccessors are elected or until such director’s earlier resignation or removal.
| Nominee               | ** ** | **For**    | ** ** | **Against** | ** ** |
|-----------------------|------------|------------|------------|-------------|------------|
| Gerald J.  Burnett    |       | 20,219,462 |       | 3,167,141   |       |
| William L.  Campbell  |       | 19,878,812 |       | 3,507,791   |       |
| R. Stephen  Heinrichs |       | 50,082,024 |       | 3,498,691   |       |
| Robert M.  Metcalfe   |       | 23,338,643 |       | 47,960      |       |
| Craig F. Heimark      |       | 23,343,912 |       | 42,691      |       |
| James W. Zeigon       |       | 23,343,912 |       | 42,691      |       |

 

2. A proposal to ratifythe appointment of Burr, Pilger & Mayer LLP as our independent auditors forthe fiscal year ending December 31, 2007.
| For        | ** ** | **Against** | ** ** | **Withheld** | ** ** |
|------------|------------|-------------|------------|--------------|------------|
| 28,382,455 |       | 15,741      |       | 120,759      |       |

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**Item 6. *Exhibits***
| Exhibit No. | ** ** | **Description**                                                                                                                                                                            |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                       |
| 10.21+           |       | Patent License Agreement dated May 15, 2007 by and  among the Registrant, Avistar Systems (UK) Limited, and Radvision LTD.                                                                 |
|             |       |                                                                                                                                                                                       |
| 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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+ Portions of this exhibit have been omitted pursuant toa request for confidential treatment and the omitted portions have beenseparately filed with the Commission.

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**SIGNATURES**

Pursuant to the requirements ofthe Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized,on this 3rd day of August 2007.
|        | AVISTAR COMMUNICATIONS  CORPORATION |                                          |
|--------|-------------------------------------|-----------------------------------------------|
|   |                                |                                          |
|   |                                |                                          |
|   | By:                                 | /s/ GERALD J. BURNETT                         |
|   |                                | Gerald J. Burnett                             |
|   |                                | Chief Executive Officer and                   |
|   |                                | Chairman (Principal Executive  Officer)       |
|   |                                |                                          |
|   | By:                                 | /s/ ROBERT J. HABIG                           |
|   |                                | Robert J. Habig                               |
|   |                                | Chief Financial Officer                       |
|   |                                | (Principal Financial and  Accounting Officer) |
|        |                                     |                                               |  |

 

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**EXHIBITINDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                            |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                       |
| 10.21+           |       | Patent License  Agreement dated May 15, 2007 by and among the Registrant, Avistar Systems  (UK) Limited, and Radvision LTD.                                                                |
|             |       |                                                                                                                                                                                       |
| 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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+ Portions of this exhibit have been omitted pursuant toa request for confidential treatment and the omitted portions have beenseparately filed with the Commission.

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