**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**




**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**





**x**
            
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
              **SECURITIES
                AND EXCHANGE ACT OF 1934****For
                the quarterly period ended September 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
      COMMUNICATIONS CORPORATION**




(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 the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(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 registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
      one):**





**Large
                accelerated filer****o**
            
            **Accelerated
                filer****o**
            
            **Non-accelerated
                filer****x**






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




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




**At
      November 5, 2007, 34,420,932 shares of common stock of the Registrant were
      outstanding.**





















**AVISTAR
      COMMUNICATIONS CORPORATION**




**INDEX**




PART
                  I.
              FINANCIAL
                  INFORMATION
              3Item
                  1.
              Financial
                  Statements (unaudited)
              3Condensed
                  Consolidated Balance Sheets
              3Condensed
                  Consolidated Statements of
                  Operations
              4Condensed
                  Consolidated Statements of Cash
                  Flows
              5Notes
                  to Condensed Consolidated Financial
                  Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              15Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              23Item
                  4T.
              Controls
                  and Procedures
              23PART
                  II.
              OTHER
                  INFORMATION
              24Item
                  1A.
              Risk
                  Factors
              24Item
                  5.
              Other
                  Information
              32Item
                  6.
              Exhibits
              33SIGNATURES
              
              34


2








**PART
      I - FINANCIAL INFORMATION**




**Item
      1.*****Financial
      Statements***






**AVISTAR
      COMMUNICATIONS CORPORATION AND
      SUBSIDIARIES**




**CONDENSED
      CONSOLIDATED BALANCE SHEETS**




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




**(in
      thousands, except share and per share data)**





**September 30,**
              **2007**
            
            
            **December 31,**
              **2006****(unaudited)****Assets:**Current
                assets:Cash
                and cash equivalents
            
            $
            5,332
            
            
            $
            7,854Short-term
                investments
            
            
            795
            
            
            
            —Total
                cash, cash equivalents and short-term investments
            
            
            6,127
            
            
            
            7,854Accounts
                receivable, net of allowance for doubtful accounts of $54 and $51
                at
                September 30, 2007 and December 31, 2006,
                respectively
            
            
            1,269
            
            
            
            1,409Inventories,
                including inventory shipped to customers’ sites, not yet installed of $43
                and $70 at September 30, 2007 and December 31, 2006,
                respectively
            
            
            490
            
            
            
            712Deferred
                settlement and patent licensing costs
            
            
            1,256
            
            
            
            1,256Prepaid
                expenses and other current assets
            
            
            471
            
            
            
            534Total
                current assets
            
            
            9,613
            
            
            
            11,765Property
                and equipment, net
            
            
            777
            
            
            
            256Long-term
                deferred settlement and patent licensing costs
            
            
            1,436
            
            
            
            2,391Other
                assets
            
            
            289
            
            
            
            287Total
                assets
            
            $
            12,115
            
            
            $
            14,699**Liabilities
                and Stockholders’ Equity (Deficit):**
            
            ****
            
            
            
            ****Current
                liabilities:Line
                of credit
            
            $
            3,000
            
            
            $
            3,000Accounts
                payable
            
            
            1,614
            
            
            
            1,578Deferred
                income from settlement and patent licensing
            
            
            5,520
            
            
            
            5,520Deferred
                services revenue and customer deposits
            
            
            1,214
            
            
            
            1,979Accrued
                liabilities and other
            
            
            1,456
            
            
            
            2,263Total
                current liabilities
            
            
            12,804
            
            
            
            14,340Long-term
                liabilities:Long-term
                deferred income from settlement and patent licensing
            
            
            6,189
            
            
            
            10,308Total
                liabilities
            
            
            18,993
            
            
            
            24,648Commitments
                and contingencies (Note 7)Stockholders’
                equity (deficit):Common
                stock, $0.001 par value; 250,000,000 shares authorized at
                September 30, 2007 and December 31, 2006; 35,603,807 and
                35,219,768 shares issued at September 30, 2007 and December 31, 2006,
                respectively
            
            
            36
            
            
            
            35Less:
                treasury common stock, 1,182,875 shares at September 30, 2007 and
                December 31, 2006, at cost
            
            
            (53
            )
            
            
            (53
            )Additional
                paid-in-capital
            
            
            95,180
            
            
            
            92,865Accumulated
                deficit
            
            
            (102,041
            )
            
            
            (102,796
            )Total
                stockholders’ equity (deficit)
            
            
            (6,878
            )
            
            
            (9,949
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            12,115
            
            
            $
            14,699






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









3








**AVISTAR
      COMMUNICATIONS CORPORATION AND
      SUBSIDIARIES**




**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**




**for
      the three and nine months ended September 30, 2007 and
      2006**




**(in
      thousands, except per share data)**





**Three Months Ended**
            
            
            **Nine Months Ended****September 30,**
              **2007**
            
            
            **September 30,**
              **2006**
            
            
            **September 30,**
              **2007**
            
            
            **September 30,**
              **2006****(unaudited)**
            
            
            **(unaudited)**Revenue:Product
            
            $
            555
            
            
            $
            1,448
            
            
            $
            2,517
            
            
            $
            3,295Licensing
            
            
            313
            
            
            
            5,000
            
            
            
            4,866
            
            
            
            5,071Services,
                maintenance and support
            
            
            883
            
            
            
            828
            
            
            
            2,658
            
            
            
            2,522Total
                revenue
            
            
            1,751
            
            
            
            7,276
            
            
            
            10,041
            
            
            
            10,888Costs
                and Expenses:Cost
                of product revenue*
            
            
            658
            
            
            
            998
            
            
            
            2,098
            
            
            
            2,351Cost
                of services, maintenance and support revenue*
            
            
            493
            
            
            
            374
            
            
            
            1,740
            
            
            
            1,366Income
                from settlement and patent licensing
            
            
            (1,057
            )
            
            
            (1,057
            )
            
            
            (15,171
            )
            
            
            (3,171
            )Research
                and development*
            
            
            2,020
            
            
            
            1,517
            
            
            
            5,517
            
            
            
            4,234Sales
                and marketing*
            
            
            1,583
            
            
            
            1,394
            
            
            
            4,619
            
            
            
            4,173General
                and administrative*
            
            
            2,217
            
            
            
            2,280
            
            
            
            10,628
            
            
            
            7,106Total
                costs and expenses
            
            
            5,914
            
            
            
            5,506
            
            
            
            9,431
            
            
            
            16,059Income
                (loss) from operations
            
            
            (4,163
            )
            
            
            1,770
            
            
            
            610
            
            
            
            (5,171
            )Other
                Income (Expense):Interest
                income
            
            
            93
            
            
            
            54
            
            
            
            307
            
            
            
            234Other
                (expense) income, net
            
            
            (56
            )
            
            
            (6
            )
            
            
            (162
            )
            
            
            (21
            )Total
                other income (expense), net
            
            
            37
            
            
            
            48
            
            
            
            145
            
            
            
            213Net
                income (loss)
            
            $
            (4,126
            )
            
            $
            1,818
            
            
            $
            755
            
            
            $
            (4,958
            )Net
                income (loss) per share - basic and diluted
            
            $
            (0.12
            )
            
            $
            0.05
            
            
            $
            0.02
            
            
            $
            (0.15
            )Weighted
                Average Shares Used in CalculatingBasic
                net income (loss) per share
            
            
            34,379
            
            
            
            33,965
            
            
            
            34,238
            
            
            
            33,893Diluted
                net income (loss) per share
            
            
            34,379
            
            
            
            34,860
            
            
            
            35,018
            
            
            
            33,893*Including
                Stock Based Compensation of:Cost
                of product, services, maintenance and support revenue
            
            $
            29
            
            
            $
            40
            
            
            $
            142
            
            
            $
            113Research
                and development
            
            
            246
            
            
            
            164
            
            
            
            630
            
            
            
            461Sales
                and marketing
            
            
            176
            
            
            
            133
            
            
            
            469
            
            
            
            365General
                and administrative
            
            
            254
            
            
            
            200
            
            
            
            722
            
            
            
            571$
            705
            
            
            $
            537
            
            
            $
            1,963
            
            
            $
            1,510






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





4








**AVISTAR
      COMMUNICATIONS CORPORATION AND
      SUBSIDIARIES**




**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**




**for
      the nine months ended September 30, 2007 and 2006**




**(in
      thousands)**


**Nine Months Ended****September 30,**
            
            
            **September 30,****2007**
            
            
            **2006****(unaudited)**Cash
                Flows from Operating Activities:Net
                income (loss)
            
            $
            755
            
            
            $
            (4,958
            )Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Depreciation
            
            
            279
            
            
            
            285Compensation
                on options issued to consultants and employees
            
            
            1,963
            
            
            
            1,510Provision
                for doubtful accounts
            
            
            3
            
            
            
            (55
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            137
            
            
            
            247Inventories
            
            
            222
            
            
            
            (198
            )Prepaid
                expenses and other current assets
            
            
            63
            
            
            
            43Deferred
                settlement and patent licensing costs
            
            
            955
            
            
            
            976Other
                assets
            
            
            (2
            )
            
            
            184Accounts
                payable
            
            
            36
            
            
            
            598Deferred
                income from settlement and patent licensing
            
            
            (4,119
            )
            
            
            (4,108
            )Deferred
                services revenue and customer deposits
            
            
            (765
            )
            
            
            357Accrued
                liabilities and other
            
            
            (807
            )
            
            
            1,345Net
                cash used in operating activities
            
            
            (1,280
            )
            
            
            (3,774
            )Cash
                Flows from Investing Activities:Purchase
                of short-term investments
            
            
            (795
            )
            
            
            —Maturities
                of short-term investments
            
            
            —
            
            
            
            3,067Purchase
                of property and equipment
            
            
            (800
            )
            
            
            (279
            )Net
                cash (used in) provided by investing activities
            
            
            (1,595
            )
            
            
            2,788Cash
                Flows from Financing Activities:Proceeds
                from issuance of common stock, net
            
            
            353
            
            
            
            290Net
                cash provided by financing activities
            
            
            353
            
            
            
            290Net
                decrease in cash and cash equivalents
            
            
            (2,522
            )
            
            
            (696
            )Cash
                and cash equivalents, beginning of period
            
            
            7,854
            
            
            
            8,216Cash
                and cash equivalents, end of period
            
            $
            5,332
            
            
            $
            7,520






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





5








**AVISTAR
      COMMUNICATIONS CORPORATION AND SUBSIDIARIES**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**(UNAUDITED)**




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




**Business**




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




**Basis
      of Presentation**




The
      unaudited condensed consolidated balance sheet as of September 30, 2007 presents
      the consolidated financial position of Avistar and its two wholly-owned
      operating subsidiaries, Avistar Systems U.K. Limited (“ASUK”) and CPI, after the
      elimination of all intercompany accounts and transactions. The unaudited
      condensed consolidated balance sheet of Avistar as of December 31, 2006 was
      derived from audited financial statements, but does not contain all disclosures
      required by accounting principles generally accepted in the United States of
      America, and certain information and footnote disclosures normally included
      have
      been condensed, or omitted, pursuant to the rules and regulations of the
      Securities and Exchange Commission (“SEC”).  The consolidated results are
      referred to, collectively, as those of Avistar or the Company in these
      notes.




The
      functional currency of ASUK is the United States dollar. Accordingly, all gains
      and losses resulting from transactions denominated in currencies other than
      the
      United States dollar are included in the statements of operations and have
      not
      been material.




The
      Company’s fiscal year end is December 31.




**Risks
      and Uncertainties**




The
      markets for the Company’s products and services are in the early stages of
      development. Some of the Company’s products utilize changing and emerging
      technologies. As is typical in industries of this nature, demand and market
      acceptance are subject to a high level of uncertainty, particularly when there
      are adverse conditions in the economy. Acceptance of the Company’s products,
      over time, is critical to the Company’s success. The Company’s prospects must be
      evaluated in light of difficulties encountered by it and its competitors in
      further developing this evolving marketplace. The Company has generated annual
      losses since inception and had an accumulated deficit of $102 million as of
      September 30, 2007. The Company’s operating results may fluctuate
      significantly in the future as a result of a variety of factors, including,
      but
      not limited to, the economic environment, the adoption of different distribution
      channels, the timing of new product announcements by the Company or its
      competitors and the timing of the Company’s licensing and settlement
      activities.




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





**2.
      Summary of Significant Accounting Policies**




**Unaudited
      Interim Financial Information**




The
      financial statements filed in this report have been prepared by the Company,
      without audit, pursuant to the rules and regulations of the SEC. Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America have been condensed or omitted pursuant to such rules
      and regulations.




6


In
      the
      opinion of management, the unaudited financial statements furnished in this
      report reflect all adjustments (consisting of normal recurring adjustments)
      necessary for a fair presentation of the results of operations for the interim
      periods covered and of the Company’s financial position as of the interim
      balance sheet date. The results of operations for the interim periods are not
      necessarily indicative of the results for the entire year. These financial
      statements should be read in conjunction with the Company’s audited consolidated
      financial statements and the accompanying notes for the year ended
      December 31, 2006, included in the Company’s annual report on Form 10-K
      filed with the Securities and Exchange Commission on March 22,
      2007.




**Use
      of Estimates**




The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, and disclosure of
      contingent assets and liabilities at the date of the financial statements,
      and
      the reported amounts of revenues and expenses during the period. Actual results
      could differ from those estimates.




**Cash
      and Cash Equivalents and Short and Long-term Investments**




The
      Company considers all investment instruments purchased with an
      original maturity of three months or less to be cash equivalents.
      Investment securities with original or remaining maturities of more than three
      months but less than one year are considered short-term investments. Auction
      rate securities with original or remaining maturities of more than three months
      are considered short-term investments even if they are subject to re-pricing
      within three months. Investment securities held with intent to reinvest or
      hold
      for longer than a year or with remaining maturities of one year or more are
      considered long-term investments. The Company’s cash equivalents at December 31,
      2006 and September 30, 2007 consisted of money market funds and short-term
      commercial paper with original maturities of three months or less, and are
      therefore classified as cash and cash equivalents in the accompanying balance
      sheets.




The
      Company accounts for its short-term and long-term investments in accordance
      with
      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 as available-for-sale and
      are
      reported at fair value, with unrealized gains and losses, net of tax, recorded
      in other comprehensive income (loss). Realized gains or losses and declines
      in
      value judged to be other than temporary, if any, on available-for-sale
      securities are reported in other income (expense), net. The Company reviews
      the
      securities for impairments considering current factors including the economic
      environment, market conditions, and the operational performance and other
      specific factors relating to the businesses underlying the securities. The
      Company records impairment charges equal to the amount that the carrying value
      of its available-for-sale securities exceeds the estimated fair market value
      of
      the securities as of the evaluation date. The fair value for publicly held
      securities is determined based on quoted market prices as of the evaluation
      date. In computing realized gains and losses on available-for-sale securities,
      the Company determines cost based on amounts paid, including direct costs such
      as commissions, to acquire the security using the specific identification
      method. The Company did not have any short or long-term investments at December
      31, 2006. The Company had no net unrealized losses on its short-term investment
      securities at September 30, 2007.




Cash,
      cash equivalents and short-term investments consisted of the following at
      September 30, 2007 and December 31, 2006 (in thousands):





**September 30,**
              **2007**
            
            
            **December 31,**
              **2006****(Unaudited)**Cash
                and cash equivalents:Cash
            
            $
            738
            
            
            $
            4,224Commercial
                paper cash equivalents
            
            
            4,594
            
            
            
            3,630Total
                cash and cash equivalents
            
            
            5,332
            
            
            
            7,854Short-term
                investments:Short-term
                investments (average 35 remaining days to maturity as of September
                30,
                2007)
            
            
            795
            
            
            
            —Total
                cash, cash equivalents and short-term investments
            
            $
            6,127
            
            
            $
            7,854




7


**Significant
      Concentrations**




A
      relatively small number of customers accounted for a significant percentage
      of
      the Company’s revenues for the three and nine months ended September 30, 2007
      and 2006. Revenues to these customers as a percentage of total revenues were
      as
      follows for the three and nine months ended September 30, 2007 and
      2006:





**Three Months Ended September 30,**
            
            
            **Nine Months Ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****(Unaudited)**
            
            
            **(Unaudited)**Customer
                A
            
            
            34
            %
            
            
            15
            %
            
            
            19
            %
            
            
            22
            %Customer
                B
            
            
            30
            %
            
            
            *
            %
            
            
            19
            %
            
            
            18
            %Customer
                C
            
            
            18
            %
            
            
            69
            %
            
            
            *
            %
            
            
            46
            %Customer
                D
            
            
            *
            %
            
            
            *
            %
            
            
            40
            %
            
            
            *
            %


________________




*
      Less
      than 10%




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




Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist primarily of temporary cash investments and trade receivables.
      The
      Company has cash and investment policies that limit the amount of credit
      exposure to any one financial institution or restrict placement of these
      investments to financial institutions evaluated as highly credit worthy. As
      of
      September 30, 2007, the Company had cash and cash equivalents on deposit with
      a
      major financial institution that were in excess of FDIC insured limits.
      Historically, the Company has not experienced any loss of its cash and cash
      equivalents due to such concentration of credit risk. Concentrations of credit
      risk with respect to trade receivables relate to those trade receivables from
      both United States and foreign entities, primarily in the financial services
      industry. As of September 30, 2007, approximately 82% of gross accounts
      receivable were concentrated with three customers, each of whom represented
      more
      than 10% of the Company’s total gross accounts receivable balance. As of
      December 31, 2006, approximately 84% of accounts receivable were
      concentrated with three customers, each of whom represented more than 10% of
      the
      Company’s total gross accounts receivable balance. No other customers
      individually accounted for greater than 10% of total accounts receivable as
      of
      September 30, 2007 and December 31, 2006.




**Inventories**




Inventories
      are stated at the lower of cost (first-in, first-out method) or market. When
      required, provisions are made to reduce excess and obsolete inventories to
      their
      estimated net realizable value. Inventories consisted of the following (in
      thousands):





**September
                30,**
              **2007**
            
            
            **December 31,**
              **2006****(Unaudited)**Raw
                materials and subassemblies
            
            $
            5
            
            
            $
            59Finished
                goods
            
            
            442
            
            
            
            583Inventory
                shipped to customer sites, not yet installed
            
            
            43
            
            
            
            70$
            490
            
            
            $
            712






Inventory
      shipped to customer sites,
      not yet installed, represents product shipped to customer sites pending
      completion of the installation process by the Company. As of September 30,
      2007 and December 31, 2006, the Company had billedapproximately $43,000
      and $70,000,
      respectively, to customers related to these shipments, but did not record the
      revenue, as the installations had not been completed and confirmed by the
      customer. Although customers are billed in accordance with customer agreements,
      these deferred revenue amounts are netted against accounts receivable until
      the
      customer confirms installation.




**Revenue
      Recognition and Deferred Revenue**




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




8


Arrangements
      that include multiple product and service elements may include software and
      hardware products, as well as installation services, post-contract customer
      support and training. Pursuant to SOP 97-2, the Company recognizes revenue
      when all of the following criteria are met: (i) persuasive evidence of an
      arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed
      or determinable, and (iv) collectibility is probable. The Company applies
      these criteria as discussed below:




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




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




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




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




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




Payment
      for product is due upon
      shipment, subject to specific payment terms. Payment for installation and
      professional services is due upon providing the services, subject to specific
      payment terms. Reimbursements received for out-of-pocket expenses and shipping
      costs incurred during installation and support services, which have not been
      significant to date, arerecognized as revenue
      in accordance
      with Emerging Issues Task Force (“EITF”) Issue No. 01-14,*Income Statement
      Characterization
      of Reimbursements Received for “Out of Pocket” Expenses
      Incurred*.




The
      price
      charged for maintenance and/or support is defined in the contract, and is based
      on a fixed price for both hardware and software components as stipulated in
      the
      customer agreement. Customers have the option to renew the maintenance and/or
      support arrangement in subsequent periods at the same or similar rate as paid
      in
      the initial year subject to contractual adjustments for inflation in some cases.
      Revenue from maintenance and support services is deferred and recognized
      pro-rata over the maintenance and/or support term, which is typically one year
      in length. Payments for services made in advance of the provision of services
      are recorded as deferred revenue and customer deposits in the accompanying
      balance sheets. Training services are offered independently of the purchase
      of
      product. The value of these training services is determined based on the price
      charged when such services are sold separately. Training revenue is recognized
      upon performance of the service.




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




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




9


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


**Income
        from Settlement and Patent Licensing**
 The
        Company recognizes the proceeds from settlement and patent licensing agreements
        based on the terms involved. When litigation has been filed prior to a
        settlement and patent licensing agreement, and insufficient historical evidence
        exists for the determination of fair value of the patents licensed to support
        the segregation of the proceeds between a gain on litigation settlement and
        patent license revenues, the Company reports all proceeds in “income from
        settlement and patent licensing” within operating costs and expenses. The gain
        portion of the proceeds, when sufficient historical evidence exists to segregate
        the proceeds, would be reported in other income according to FASB SFAS No.
        5,
*Accounting for Contingencies*. When a patent license agreement is
        entered into prior to the commencement of litigation, the Company reports
        the
        proceeds of such transaction as licensing revenue in the period in which
        such
        proceeds are received, subject to the revenue recognition criteria described
        above.




On
      November 12, 2004, the Company
      entered into a settlement and a patent cross-license agreement with Polycom,
      thus ending litigation against Polycom for patent infringement. As part of
      the
      settlement and patent cross-license agreement with Polycom, Avistar granted
      Polycom a non-exclusive, fully paid-up license to its entire patent portfolio.
      The settlement and patent cross-license agreement includes a five year capture
      period from the date of the settlement, adding all new patents witha priority date extending
      up to five
      years from the date of execution of the agreement. Polycom, as part of the
      settlement and patent cross-licensing agreement, made a one time payment to
      the
      Company of $27.5 million and Avistar paid $6.4 million in contingent legal
      fees
      to Avistar’s litigation counsel upon completion of the settlement and patent
      cross-licensing agreement. The contingent legal fees were payable only in the
      event of a favorable outcome from the litigation with Polycom. The Company
      expects to recognize the gross proceeds of $27.5 million from the settlement
      and
      patent cross-license agreement as income from settlement and patent licensing
      within operations over the five-year capture period, due to a lack of evidence
      necessary to apportion the proceeds between an implied punitive gain element
      in
      the settlement of the litigation, and software license revenues from the
      cross-licensing of Avistar’s patented technologies for prior and future use by
      Polycom. Additionally, the $6.4 million in contingent legal fees was deferred
      and is expected to be amortized to income from settlement and patent licensing
      over the five year capture period, resulting in a net of $21.1 million being
      recognized as income within operations over the five year capture
      period.




On
      February 15, 2007, the Company entered into a Patent License Agreement with
      Tandberg ASA, Tandberg Telecom AS and Tandberg, Inc.  Under this agreement,
      CPI dismissed its infringement suit against Tandberg, Tandberg dismissed its
      infringement suit against Avistar, and the companies cross-licensed each other’s
      patent portfolios.  The agreement resulted in a payment of $12.0 million to
      the Company from Tandberg.**** The Company recognized the
      gross proceeds of $12.0 million from the patent license agreement as income
      from
      settlement and patent licensing within operations in the three months ended
      March 31, 2007.  To recognize the proceeds as revenue, the Company would
      have required sufficient history of transactions in order to isolate the aspect
      of the settlement attributable to the gain associated with the process of
      litigation, separate from commercial compensation for the use of the Company’s
      intellectual property.  Sufficient evidence was not available to allow this
      distinction.   The Patent License Agreement with Tandberg includes a
      ten year capture period, extending from the date of the agreement, during which
      patents filed with a priority date within the capture period would be licensed
      in addition to existing patents on the agreement date.  However, such
      additional patents would be licensed under the agreement solely for purposes
      of
      the manufacture, sale, license or other transfer of existing products of
      Tandberg and products that are closely related enhancements of such products
      based primarily and substantially on the existing products.  The Company
      reviewed the existing products of Tandberg and considered the likelihood that
      future patent filings by Avistar or CPI would relate to or otherwise affect
      existing Tandberg products and closely related enhancements thereto.  The
      Company concluded that the filing for such additional patents was unlikely,
      and
      therefore concluded that the ten year capture period was not material from
      an
      accounting perspective related to recognition.




The
      presentation within operating expenses of the Polycom and Tandberg transactions
      is supported by a determination that the transactions are central to the
      activities that constitute Avistar’s ongoing major or central operations, but
      may contain a gain element related to the settlement, which is not considered
      as
      revenue under FASB CON No. 6 *.* The Company did not have sufficient
      historical evidence to support a reasonable determination of value for the
      purposes of segregating the transaction into revenue related to the patent
      licensing and an operating or non-operating gain upon settlement of litigation,
      resulting in the determination that the entire transaction is more appropriately
      classified as “income from settlement and patent licensing” within operations,
      as opposed to revenue.




10


**Stock-Based
      Compensation**




Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123
      (R), *Share-Based Payment*. (“SFAS No. 123R”) which establishes
      accounting for stock-based awards exchanged for employee services. Accordingly,
      stock-based compensation cost is measured at grant date, based on the fair
      value
      of the award, and is recognized as expense over the employee’s vesting
      period. The effect of recording stock-based compensation for the three and
      nine
      months ended September 30, 2007 and 2006 was as follows (in thousands, except
      per share data):





**Three Months Ended September 30,**
            
            
            **Nine Months Ended September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****(Unaudited)**
            
            
            **(Unaudited)**Stock-based
                compensation expense by type of award:Employee
                stock options
            
            $
            668
            
            
            $
            481
            
            
            $
            1,807
            
            
            $
            1,344Non-employee
                stock options
            
            
            7
            
            
            
            26
            
            
            
            66
            
            
            
            66Employee
                stock purchase plan
            
            
            30
            
            
            
            30
            
            
            
            90
            
            
            
            100Total
                stock-based compensation
            
            
            705
            
            
            
            537
            
            
            
            1,963
            
            
            
            1,510Tax
                effect on stock-based compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
                effect of stock-based compensation on net (loss) income
            
            $
            705
            
            
            $
            537
            
            
            $
            1,963
            
            
            $
            1,510




As
      of
      September 30, 2007, the Company had an unrecognized deferred stock-based
      compensation balance related to stock options of approximately $6.3 million
      before estimated forfeitures. SFAS No. 123R requires forfeitures to be
      estimated at the time of grant and revised if necessary in subsequent periods
      if
      actual forfeitures differ from those estimates. Based on the Company’s
      historical experience of option pre-vesting cancellations, the Company has
      assumed an annualized forfeiture rate of 3% for its executive options and 20%
      for non-executive options. Accordingly, as of September 30, 2007, the Company
      estimated that the stock-based compensation for the awards not expected to
      vest
      was approximately $1.2 million, and therefore, the unrecognized deferred
      stock-based compensation balance related to stock options was adjusted to
      approximately $5.1 million after estimated forfeitures and this net amount
      will
      be recognized over an estimated weighted average amortization period of 2.4
      years. During the three and nine months ended September 30, 2007, the Company
      granted 1,152,000 and 2,671,500 stock options, with an estimated total
      grant-date fair value of $1.5 million and $3.7 million, respectively.  The
      Company granted 37,000 and 1,403,000 stock options to employees, with an
      estimated total grant-date fair value of $56,000 and $1.8 million, during the
      three and nine months ended September 30, 2006, respectively




**Valuation
      Assumptions**




The
      Company estimated the fair value of stock options granted during the three
      and
      nine months ended September 30, 2007 and 2006 using a Black-Scholes-Merton
      valuation model, consistent with the provisions of SFAS No. 123R and SEC
      Staff Accounting Bulletin (SAB) No. 107. The fair value of each option
      grant is estimated on the date of grant using the Black-Scholes-Merton option
      valuation model and the straight-line attribution approach with the following
      weighted-average of the assumptions of both the three and nine month periods
      ended September 30, 2007:




**Employee Stock Option Plan**





**Three and Nine Months Ended September
                30,****2007**
            
            
            **2006**Expected
                dividend
            
            
            —
            %
            
            
            —
            %Risk-free
                interest rate
            
            
            4.6
            %
            
            
            4.8
            %Expected
                volatility
            
            
            134
            %
            
            
            141
            %Expected
                term (years)
            
            
            6.1
            
            
            
            6.1






**Employee Stock Purchase Plan**





**Three and Nine Months Ended September 30,****2007**
            
            
            **2006**Expected
                dividend
            
            
            —
            %
            
            
            —
            %Risk-free
                interest rate
            
            
            5.0
            %
            
            
            4.0
            %Expected
                volatility
            
            
            154
            %
            
            
            89
            %Expected
                term (months)
            
            
            6.0
            
            
            
            6.0






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




11


**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 Company from February 2001 until June 2007. Mr.
      Latta and WSGR have represented the Company andits predecessors as
      corporate counsel
      since 1997. During the nine months ended September 30, 2007 and 2006,
      payments of approximately $150,000 and $99,000, respectively were made to 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 is presented 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 has been
      computed using the weighted average number of shares of common stock outstanding
      during the period, less shares subject to repurchase. Diluted net income (loss)
      per share is computed on the basis of the weighted average number of shares
      and
      potential common shares outstanding during the period. Potential common shares
      result from the assumed exercise of outstanding stock options that have a
      dilutive effect when applying the treasury stock method. For the nine months
      ended September 30, 2007 and the three months ended September 30, 2006, due
      to
      the Company’s net income for the periods, the Company included the net effect of
      the weighted average number of shares and potential common shares outstanding
      during the period in the calculation of diluted net income per
      share.   The Company excluded all outstanding stock options from the
      calculation of diluted net loss per share for the three months ended September
      30, 2007 and the nine months ended September 30, 2006, because all such
      securities are anti-dilutive (owing to the fact that the Company was in a loss
      position during the time periods). Accordingly, diluted net loss per share
      is
      equal to basic net loss per share for the three months ended September 30,
      2007
      and the nine months ended September 30, 2006.




The
      following table set forth the computation of basic and diluted net income (loss)
      per share (in thousands, except per share data):





**Three Months Ended September 30,**
            
            
            **Nine Months Ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****(Unaudited)**
            
            
            **(Unaudited)**Numerator:Net
                income (loss)
            
            $
            (4,126
            )
            
            $
            1,818
            
            
            $
            755
            
            
            $
            (4,958
            )Denominator:Basic
                weighted average shares outstanding
            
            
            34,379
            
            
            
            33,965
            
            
            
            34,238
            
            
            
            33,893Add:
                dilutive employee and non employee stock options
            
            
            —
            
            
            
            895
            
            
            
            780
            
            
            
            —Diluted
                weighted average shares outstanding
            
            
            34,379
            
            
            
            34,860
            
            
            
            35,018
            
            
            
            33,893Basic
                and diluted net income (loss) per share
            
            $
            (0.12
            )
            
            $
            0.05
            
            
            $
            0.02
            
            
            $
            (0.15
            )






The
      total
      number of potential common shares excluded from the calculations of diluted
      net
      loss per share was 2,162,198 and 2,982,082 for the three months ended September
      30, 2007 and the nine months ended September 30, 2006,
      respectively.




**5.
      Income Taxes**




Income
      taxes are accounted for using an asset and liability approach in accordance
      with
      SFAS No. 109, *Accounting for Income Taxes*, which requires the
      recognition of taxes payable or refundable for the current year and deferred
      tax
      liabilities and assets for the future tax consequences of events that have
      been
      recognized in the Company’s financial statements and tax returns. The
      measurement of current and deferred tax liabilities and assets are based on
      the
      provisions of enacted tax law. The effects of future changes in tax laws or
      rates are not anticipated. The measurement of deferred tax assets is reduced,
      if
      necessary, by the amount of any tax benefits that, based on available evidence,
      are not expected to be realized.




Deferred
      tax assets and liabilities are determined based on the difference between the
      financial statement, and the tax basis of assets and liabilities using enacted
      tax rates in effect for the year in which the differences are expected to affect
      taxable income. Valuation allowances are provided if, based upon the weight
      of
      available evidence, it is considered more likely than not that some or all
      of
      the deferred tax assets will not be realized.




12


Effective
      January 1, 2007, we adopted
      the provisions of FASB Financial Accounting Standards Interpretation No. 48,*Accounting for
      Uncertainty in Income Taxes*, or FIN No. 48.
      FIN No. 48 contains a
      two-step approach for recognizing and measuring uncertain tax positions
      accounted for in accordance with SFAS No. 109. Tax positions are evaluated
      for
      recognition by determining if the weight of available evidence indicates it
      probable that the position will be sustained on audit, including resolution
      of
      related appeals or litigation. Tax benefits are then measured as the largest
      amount which is more than 50% likely of being realized upon ultimate settlement.
      The Company considers many factors when evaluating andestimating tax positions
      and tax
      benefits, which may require periodic adjustments and which 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 for
      unrecognized tax benefits that existed at December 31, 2006. As such, there
      is
      no change recorded to accumulated deficit as a result of the
      adoption.




**6.
      Segment Reporting**




Disclosure
      of segments 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 operating segments,
      products and services, geographic areas and major customers. The Company is
      organized and operates as two operating segments: (1) the design,
      development, manufacturing, sale and marketing of networked video communications
      products (Avistar) and (2) the prosecution, 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
      Avistar for purposes of reporting and decision-making. Avistar also engages
      in
      corporate 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 the
      following table (in thousands). The table includes a reconciliation of the
      revenue and expense classification used by the Company’s CEO with the
      classification of revenue, other income and expenses as set forth in the
      Company’s condensed consolidated financial statements included elsewhere herein.
      The reconciliation for the revenue category reflects the fact that the CEO
      views
      activity recorded in the account “income from settlement and patent licensing
      activity” as revenue within the CPI subsidiary.





**CPI**
            
            **Avistar**
            
            **Reconciliation**
            
            **Total****Three
                Months Ended September 30, 2007**Revenue
            
            $
            1,370
            
            $
            1,438
            
            $
            (1,057
            )
            $
            1,751Depreciation
                expense
            
            —
            
            (131
            )
            —
            
            (131
            )Total
                costs and expenses
            
            (962
            )
            (6,009
            )
            1,057
            
            (5,914
            )Interest
                income
            
            —
            
            93
            
            —
            
            93Net
                income (loss)
            
            408
            
            (4,534
            )
            —
            
            (4,126
            )Assets
            
            3,280
            
            8,835
            
            —
            
            12,115**Three
                Months Ended September 30, 2006**Revenue
            
            $
            6,057
            
            $
            2,276
            
            $
            (1,057
            )
            $
            7,276Depreciation
                expense
            
            —
            
            (95
            )
            —
            
            (95
            )Total
                costs and expenses
            
            (1,334
            )
            (5,229
            )
            1,057
            
            (5,506
            )Interest
                income
            
            —
            
            54
            
            —
            
            54Net
                income (loss)
            
            4,723
            
            (2,905
            )
            —
            
            1,818Assets
            
            4,699
            
            10,706
            
            —
            
            15,405**Nine
                Months Ended September 30, 2007**Revenue
            
            $
            19,957
            
            $
            5,255
            
            $
            (15,171
            )
            $
            10,041Depreciation
                expense
            
            —
            
            (279
            )
            —
            
            (279
            )Total
                costs and expenses
            
            (6,882
            )
            (17,720
            )
            15,171
            
            (9,431
            )Interest
                income
            
            —
            
            307
            
            —
            
            307Net
                income (loss)
            
            13,075
            
            (12,320
            )
            —
            
            755Assets
            
            3,280
            
            8,835
            
            —
            
            12,115**Nine
                Months Ended September 30, 2006**Revenue
            
            $
            8,242
            
            $
            5,817
            
            $
            (3,171
            )
            $
            10,888Depreciation
                expense
            
            —
            
            (285
            )
            —
            
            (285
            )Total
                costs and expenses
            
            (4,120
            )
            (15,110
            )
            3,171
            
            (16,059
            )Interest
                income
            
            —
            
            234
            
            —
            
            234Net
                income (loss)
            
            4,122
            
            (9,080
            )
            —
            
            (4,958
            )Assets
            
            4,699
            
            10,706
            
            —
            
            15,405






International
      revenue, which consists of sales to customers with operations principally in
      Western Europe and Asia, comprised 62% and 88% of total revenues for the three
      months ended September 30, 2007 and 2006,
      respectively.  International revenue, which consists of sales to
      customers with operations principally in Western Europe and Asia, comprised
      75%
      and 77% of total revenues for the nine months ended September 30, 2007 and
      2006, respectively. For the three months ended September 30, 2007 and 2006,
      international revenues from customers in the United Kingdom accounted for 14%
      and 12% of total product and services revenue, respectively. For the nine months
      ended September 30, 2007 and 2006, international revenues from customers in
      the United Kingdom accounted for 48% and 15%, of total product and services
      revenue, respectively. The Company had no significant long-lived assets in
      any
      country other than in the United States for any period presented.


13
 **7.
        Commitments and Contingencies**




**Legal
      Proceeding**




On
      May 11, 2005, CPI, Avistar’s 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. 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 Avistar in the United
      States District Court for the Eastern District of Texas. The suit alleged that
      Avistar videoconferencing products infringe one patent purchased by Tandberg
      Telecom AS.




On
      February 15, 2007, CPI 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 Avistar, and the companies agreed to
      cross-license each other’s patent portfolios. The agreement resulted in a
      payment to CPI from Tandberg in the amount of $12.0 million.




**Software
      Indemnifications**




Avistar
      enters into standard indemnification agreements in the ordinary course of
      business. Pursuant to these agreements, Avistar indemnifies, holds harmless,
      and
      agrees to reimburse the indemnified party for losses suffered or incurred by
      the
      indemnified party, generally Avistar’s business partners or customers, in
      connection with any patent, copyright or other intellectual property
      infringement claim by any third party with respect to its products. The term
      of
      these indemnification agreements is generally perpetual. The maximum potential
      amount of future payments Avistar could be required to make under these
      indemnification agreements is generally limited to the cost of products
      purchased per customer, but may be material when customer purchases since
      inception are considered in aggregate. Avistar has never incurred costs to
      defend lawsuits or settle claims related to these indemnification agreements.
      Accordingly, Avistar has no liabilities recorded for these agreements as of
      September 30, 2007.




**Commitments**




In
      May
      2007, Avistar added 7,900 square feet of office space to its existing lease
      at
      its headquarters in San Mateo, California to house engineering staff.  The
      new office space requires 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 Accounting Pronouncements**


In
      September 2006, the FASB issued Statement No. 157, *Fair Value
      Measurements* (“SFAS No. 157”). The standard provides guidance for
      using fair value to measure assets and liabilities and responds to investors’
requests for expanded information about the extent to which companies measure
      assets and liabilities at fair value, the information used to measure fair
      value, and the effect of fair value measurements on earnings. The standard
      applies whenever other standards require or permit assets or liabilities to
      be
      measured at fair value. The standard does not expand the use of fair value
      in
      any new circumstances. SFAS No.  157 must be adopted prospectively as
      of the beginning of the year it is initially applied. SFAS 157 is effective
      for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      Company is evaluating the impact this standard will have on its financial
      position or results of operations.





In
      February 2007, the FASB issued Statement No. 159, *The Fair Value Option
      for Financial Assets and Financial Liabilities, including an amendment of FASB
      Statement No. 115* (“SFAS No. 159”). The standard allows an entity the
      irrevocable option to elect fair value for the initial and subsequent
      measurement for certain financial assets and liabilities under an
      instrument-by-instrument election. Subsequent measurements for the financial
      assets and liabilities an entity elects to fair value will be recognized in
      earnings. SFAS No. 159 also establishes additional disclosure requirements.
      SFAS
      No. 159 is effective for fiscal years beginning after November 15,
      2007.  The Company is evaluating the impact this standard will have on its
      financial position or results of operations.




14


**9.
          Subsequent Events**




On
      September 27, 2007, the Board of Directors of the Company approved the merger
      of
      CPI, the Company's wholly-owned subsidiary, with and into the Company, with
      the
      Company being the surviving corporation with an effective date of October 1,
      2007.  Following this merger, the Company will succeed to the assets
      and liabilities of CPI, including CPI's intellectual property portfolio.




On
      November 2, 2007, the Board of Directors of Avistar accepted Dr. Burnett’s
      resignation and approved the appointment of Mr. Moss to the position of Chief
      Executive Officer of Avistar effective January 1, 2008.  The Board of
      Directors also approved the appointment of Mr. Moss to the Board of Directors
      of
      Avistar effective January 1, 2008.   Dr. Burnett is expected to
      continue in his role as a director and Chairman of the Board of
      Avistar.




On
      November 6, 2007, Avistar, received a deficiency letter from The NASDAQ Stock
      Market indicating that Avistar does not comply with Marketplace Rule 4310(c)(3),
      which requires the company to have a minimum of $2,500,000 in stockholders’
equity or $35,000,000 in market value of listed securities or $500,000 of net
      income from continuing operations for the most recently completed fiscal year
      or
      two of the three most recently completed fiscal years.  The NASDAQ
      Staff noted that as of November 1, 2007, the market value of Avistar’s listed
      securities was $27,791,539, Avistar reported net losses from continuing
      operations for the years ended December 31, 2006, 2005 and 2004 and Avistar
      reported a stockholders deficit as of June 30, 2007 of
      $3,514,000.  Accordingly, the NASDAQ Staff is reviewing Avistar’s
      eligibility for continued listing on The NASDAQ Capital Market.  The
      NASDAQ Staff has requested that on or before November 21, 2007, Avistar submit
      a
      plan for regaining and sustaining compliance with all applicable continued
      listing requirements of The NASDAQ Capital Market.




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




The
      following discussion should be read in conjunction with the unaudited Condensed
      Consolidated Financial Statements and the Notes to Condensed Consolidated
      Financial Statements elsewhere herein, and the Audited Consolidated Financial
      Statements and the Notes thereto contained in our Annual Report on Form 10-K
      for
      the year ended December 31, 2006, as filed with the Securities and Exchange
      Commission on March 22, 2007.




Certain
      statements in this “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” are forward looking statements. These statements
      relate to future events or our future financial performance and involve known
      and unknown risks, uncertainties and other factors that may cause our or our
      industry’s actual results, levels of activity, performance or achievements to be
      materially different from any future results, levels of activity, performance
      or
      achievements expressed or implied by the forward looking statements. These
      risks
      and other factors include those listed under “Risk Factors” elsewhere in this
      Quarterly Report on Form 10-Q. In some cases, you can identify forward looking
      statements by terminology such as “may”, “will”, “should”, “expects”, “intends”,
“plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”,
“continue” or the negative of these terms, or other comparable terminology.
      These statements are only predictions. Actual events or results may differ
      materially. In evaluating these statements, you should specifically consider
      various factors, including the risks outlined under “Risk Factors.” These
      factors may cause our actual results to differ materially from any
      forward-looking statement.   Although we believe that the expectations
      reflected in the forward-looking statements are reasonable, we cannot guarantee
      future results, levels of activity, performance or achievements.




**Overview**




We
      develop, market and support an integrated suite of vBusiness—video-enabled
      eBusiness—applications, all powered by the AvistarVOSTM software. From the
      desktop, we deliver business-quality interactive video calling, content creation
      and publishing, broadcast origination and distribution, video-on-demand, and
      integrated data sharing. The Avistar video and data collaboration applications
      are all managed by the AvistarVOS video operating system. By integrating video
      tightly into the way they work, our customers can use our system to help save
      costs and improve productivity and communication within the enterprise and
      between enterprises, and to enhance relationships with customers, suppliers
      and
      partners. Using AvistarVOS software and leveraging video, telephony and Internet
      networking standards, Avistar applications are designed to be scalable,
      reliable, cost effective, easy to use, and capable of evolving with
      communications networks as bandwidth increases and as new standards and
      protocols emerge. We currently sell our system directly to enterprises in
      selected strategic vertical markets, and have focused initially on the financial
      services industry. Additionally, we have licensed our technology and patents
      to
      companies in the video conferencing market. Our objective is to establish our
      technology as the standard for networked video through direct sales, indirect
      channel sales/partnerships and the licensing of our technology to
      others.





15


We
      operate in two segments. Avistar Communications Corporation engages in the
      design, development, manufacture, sale and marketing of networked video
      communications products and associated support services. Collaboration
      Properties, Inc., or CPI, our wholly owned subsidiary, engages in the
      prosecution, maintenance, support and licensing of the intellectual property
      that we have developed, some of which is used in our products.  On
      September 27, 2007, our board of directors approved the merger of CPI with
      and
      into our company, Avistar, with Avistar being the surviving
      corporation.  Following this merger, we expect to continue to operate
      in the two segments described above as we continue to focus  on
      sales, distribution and licensing of our products and technology and the
      licensing of our intellectual property.




Since
      inception, we have recognized the innovative value of our research and
      development efforts, and have invested in securing protection for these
      innovations through domestic and foreign patent application and issuance. As
      of
      September 30, 2007, we hold 76 U.S. and foreign patents, all of which have
      been
      licensed to certain third parties. We continue to pursue opportunities to
      license these patents to others in the collaboration technology
      marketplace.




In
      September 2007, we announced an intensive set of corporate initiatives aimed
      at
      increasing our product sales, expanding our customer deployments and support,
      improving our corporate efficiency and increasing our development
      capacity.  The first components of this initiative
      include:




·
            Implementing
                changes in our management team and centering our sales and marketing
                activities, and associated management functions in our New York City
                offices;




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




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




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




·
            Pursuing
                multiple distribution, services and technology
                partners.




These
      and
      other changes in our business are aimed at reducing our structural costs,
      increasing our organizational and partner-driven capacity, and leveraging our
      reputation for innovation and intellectual property leadership, to grow and
      expand our business.  However, these organizational changes and
      initiatives involve transitional costs and expenses and result in uncertainty
      in
      terms of their implementation and their impact on our business and there can
      be
      no assurance that these initiatives will achieve our intended
      objectives.




**Critical
      Accounting Policies**




The
      preparation of our Consolidated Financial Statements in accordance with
      accounting principles generally accepted in the United States requires us to
      make estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses, and related disclosure of contingent assets
      and liabilities.  We base our estimates on historical experience and
      assumptions that we believe to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
       Actual results may differ from these estimates.




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




·
                Revenue recognition;




·
                Income from settlement and patent
                licensing;




·
                Valuation of accounts receivable;




·
                Valuation of inventories; and




·
                Stock based compensation.




**Revenue
      Recognition**




We
      derive
      product revenue from the sale and licensing of our video-enabled networked
      communications system, consisting of a suite of Avistar-designed software and
      hardware products, including desktop and infrastructure devices that include
      third party components. We also derive revenue from fees for installation,
      maintenance, support, training services and software development. In addition,
      we derive revenue from the licensing of our intellectual property portfolio.
      Product revenue as a percentage of total revenue was 32% and 20% for the three
      months ended September 30, 2007 and 2006, respectively.  Product revenue as
      a percentage of total revenue was 25% and 30% for the nine months ended
      September 30, 2007 and 2006, respectively.  We recognize product and
      services revenue in accordance with Statement of Position (“SOP”)  97-2
      (“SOP 97-2”), *Software Revenue Recognition* , as amended by
      SOP 98-9, *Modification of SOP 97-2, Software Revenue Recognition,
      With Respect to Certain Transactions* . Services revenue includes revenue
      from installation services, post-contract customer support, training, out of
      pocket expenses, freight and software development. The installation services
      that we offer to customers relate to the physical set-up and configuration
      of
      desktop and infrastructure components of our solution. The fair value of all
      product, installation services, post-contract customer support and training
      offered to customers is determined based on the price charged when such products
      or services are sold separately.




16


Arrangements
      that include multiple product and service elements may include software and
      hardware products, as well as installation services, 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 has occurred, (iii) the fee is fixed
      or determinable, and (iv) collectibility is probable. We apply these
      criteria as discussed below:




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




·*Delivery
                has occurred.* We deliver software and hardware to our customers
                physically. Our standard delivery terms are FOB shipping
                point.




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




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




If
      there
      are any undelivered elements, we defer revenue for those elements, as long
      as
      Vendor Specific Objective Evidence (“VSOE”) exists for the undelivered elements.
      Additionally, when we provide installation services, the product and
      installation revenue is recognized upon completion of the installation process
      and receipt of customer confirmation, subject to the satisfaction of the revenue
      recognition criteria described above. We believe that the fee associated with
      the delivered product elements does not meet the collectibility criteria if
      the
      installation services have not been completed. Customer confirmation is obtained
      and documented by means of a standard form indicating the installation services
      were provided and the hardware and software components were installed. When
      the
      customer or a third party provides installation services, the product revenue
      is
      recognized upon shipment, subject to satisfaction of the revenue recognition
      criteria described above.




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




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




17


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




We
      also recognize revenue from the
      licensing of our intellectual property portfolio, according to SOP 97-2,
      based on the terms of the royalty, partnership and cross-licensing agreements
      involved. In the event that a license to our intellectual property is granted
      after the commencement of litigation between us and the licensee, the proceeds
      of such transaction arerecognized as licensing
      revenue by us
      only if sufficient historical evidence exists for the determination of fair
      value of the licensed patents to support the segregation of the proceeds between
      a gain on litigation settlement and patent license revenues, consistent with
      Financial Accounting Standards Board (“FASB”) Concepts Statement No. 6,*Elements of Financial
      Statements*. As of
      September 30, 2007, these criteria for recognizing license revenue following
      the
      commencement of litigation have not been met, and proceeds received after
      commencement of litigation have therefore been recorded in “income from
      settlement and patent licensing” activities.




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




To
      date,
      a significant portion of our revenue has resulted from sales to a limited number
      of customers, particularly Deutsche Bank AG and UBS AG and their affiliates.
      Collectively, Deutsche Bank AG and UBS AG and their affiliates accounted for
      approximately 38% and 40% of total revenue for the nine month periods ended
      September 30, 2007 and 2006, respectively. Additionally, Radvision Ltd.
      accounted for approximately 40% of our revenues for the nine months ended
      September 30, 2007 and Sony Corporation accounted for approximately 46% of
      our
      revenues for the nine months ended September 30 2006.  As of
      September 30, 2007, approximately 82% of our gross accounts receivable was
      concentrated with three customers, each of whom represented more than 10% of
      our
      gross accounts receivable. As of September 30, 2006, approximately 77% 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 to customers with operations principally in
      Western Europe and Asia, comprised 75% and 77% of total revenue for the nine
      months ended September 30, 2007 and 2006, respectively.




**Income
      from Settlement and Patent Licensing**




We
      recognize the proceeds from settlement and patent licensing agreements based
      on
      the terms involved. When litigation has been filed prior to a settlement and
      patent licensing agreement, and insufficient historical evidence exists for
      the
      determination of fair value of the patents licensed to support the segregation
      of the proceeds between a gain on litigation settlement and patent license
      revenues, we report all proceeds in “income from settlement and patent
      licensing” within operating costs and expenses. The gain portion of the
      proceeds, when sufficient historical evidence exists to segregate the proceeds,
      would be reported in other income according to Statement of Financial Accounting
      Standards (“SFAS”) No. 5, *Accounting for Contingencies* . To date,
      all proceeds from settlement and patent licensing agreements entered into
      following the commencement of litigation have been reported as income from
      settlement and patent licensing. When a patent license agreement is entered
      into
      prior to the commencement of litigation, we report the proceeds of such
      transaction as licensing revenue in the period in which such proceeds are
      received, subject to the revenue recognition criteria described
      above.




On
      February 15, 2007, we entered into a Patent License Agreement with Tandberg
      ASA,
      Tandberg Telecom AS and Tandberg, Inc.  Under this agreement, CPI dismissed
      its infringement suit against Tandberg, Tandberg dismissed its infringement
      suit
      against us, and we cross-licensed each other’s patent portfolios.  The
      agreement resulted in a payment of $12.0 million to us from
      Tandberg**.** We recognized the gross proceeds of $12.0
      million from the patent license agreement as income from settlement and patent
      licensing within operations in the three months ended March 30, 2007.  To
      recognize the proceeds as revenue, we would have required sufficient history
      of
      transactions to allow us to isolate the aspect of the settlement attributable
      to
      the gain associated with the process of litigation, separate from commercial
      compensation for the use of the our intellectual property.  Sufficient
      evidence was not available to allow this distinction.   The Patent
      License Agreement with Tandberg includes a ten year capture period, extending
      from the date of the agreement, during which patents filed with a priority
      date
      within the capture period would be licensed in addition to existing patents
      on
      the agreement date.  However, such additional patents would be licensed
      under the agreement solely for purposes of the manufacture, sale, license or
      other transfer of existing products of Tandberg and products that are closely
      related enhancements of such products based primarily and substantially on
      the
      existing products.  We reviewed the existing products of Tandberg and
      considered the likelihood that future patent filings by us would relate to
      or
      otherwise affect existing Tandberg products and closely related enhancements
      thereto.  We concluded that the filing for such additional patents was
      unlikely, and therefore concluded that the ten year capture period was not
      material from an accounting perspective related to recognition.




18
 **Valuation
        of Accounts Receivable**




Estimates
      are used in determining our allowance for doubtful accounts and are based on
      our
      historical collection experience, historical write-offs, current trends, the
      credit quality of our customer base and the characteristics of our accounts
      receivable by aging category. If the allowance for doubtful accounts were to
      be
      understated, our operating results would be negatively affected by the
      correction. The impact of any such change or deviation may be increased by
      our
      reliance on a relatively small number of customers for a large portion of our
      total revenue. As of September 30, 2007, three customers represented 40%, 23%
      and 19% of our accounts receivable balance, each of whom represented more than
      10% of our gross accounts receivable. As of December 31, 2006, three customers
      represented 44%, 20% and 20% of our accounts receivable balance, each of whom
      represented more than 10% of our gross accounts receivable.




**Valuation
      of Inventories**




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




**Stock
      Compensation**




We
      account for stock based compensation to employees according to the FASB SFAS
      No. 123 (R), *Share-Based Payment* (SFAS No. 123R), which is a
      very complex accounting standard, the application of which requires significant
      judgment and the use of estimates, particularly surrounding Black-Scholes-Merton
      assumptions such as stock price volatility and expected option terms, as well
      as
      expected option forfeiture rates. There is little experience or guidance with
      respect to developing these assumptions and models. SFAS No. 123R requires
      the
      recognition of the fair value of stock compensation in net income (loss). Refer
      to Note 2 — Stock-Based Compensation in the Notes to our Unaudited Condensed
      Consolidated Financial Statements included elsewhere in this Quarterly Report
      of
      Form 10-Q for more information.




**Results
      of Operations**




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





**Percentage of Total Revenue**
            
            
            **Percentage of Total Revenue****Three Months Ended**
              **September 30,**
            
            
            **Nine Months Ended**
              **September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenue:Product
            
            
            32
            %
            
            
            20
            %
            
            
            25
            %
            
            
            30
            %Licensing
            
            
            18
            
            
            
            69
            
            
            
            48
            
            
            
            47Services,
                maintenance and support
            
            
            50
            
            
            
            11
            
            
            
            27
            
            
            
            23Total
                revenue
            
            
            100
            
            
            
            100
            
            
            
            100
            
            
            
            100Costs
                and Expenses:Cost
                of product revenue
            
            
            38
            
            
            
            14
            
            
            
            21
            
            
            
            22Cost
                of services, maintenance and support revenue
            
            
            28
            
            
            
            5
            
            
            
            17
            
            
            
            12Income
                from settlement and patent licensing
            
            
            (60
            )
            
            
            (14
            )
            
            
            (151
            )
            
            
            (29
            )Research
                and development
            
            
            115
            
            
            
            21
            
            
            
            55
            
            
            
            39Sales
                and marketing
            
            
            90
            
            
            
            19
            
            
            
            46
            
            
            
            38General
                and administrative
            
            
            127
            
            
            
            31
            
            
            
            106
            
            
            
            65Total
                costs and expenses
            
            
            338
            
            
            
            76
            
            
            
            94
            
            
            
            147(Loss)
                income from operations
            
            
            (238
            )
            
            
            24
            
            
            
            6
            
            
            
            (47
            )Other
                income (expense):Interest
                income
            
            
            5
            
            
            
            1
            
            
            
            3
            
            
            
            2Other
                expense, net
            
            
            (3
            )
            
            
            —
            
            
            
            (2
            )
            
            
            —Total
                other income, net
            
            
            2
            
            
            
            1
            
            
            
            1
            
            
            
            2Net
                income (loss)
            
            
            (236
            )%
            
            
            25
            %
            
            
            7
            %
            
            
            (45
            )%






19


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




***Revenue***




Total
      revenue decreased by $5.5 million or 76%, to $1.8 million for the three month
      period ended September 30, 2007, from $7.3 million for the three months ended
      September 30, 2006. The decrease was due primarily to the lack of  new
      licensing transactions during the three months ended September 30, 2007 compared
      to $5.0 million in new licensing revenue during the same period in
      2006.




·  
                Product revenue decreased by $893,000, or 62%, to $555,000 for the
                three
                months ended September 30, 2007, from $1.4 million for the three
                months
                ended September 30, 2006. The decrease was due to lower new customer
                revenue in the three month period ended September 30, 2007, as compared
                to
                the same period in 2006.




·  
                Licensing revenue, relating to the licensing of our patent portfolio,
                decreased by $4.7 million, or 94%, for the three months ended September
                30, 2007, from $5.0 million for the three months ended September
                30, 2006
                due primarily to the lack of new licensing transactions during the
                three
                months ended September, 2007 compared $5.0 million in new licensing
                revenue in the same period in
                2006.




·  
                Services, maintenance and support revenue, which includes our installation
                services, funded software development and maintenance and support,
                remained fairly flat at $883,000 for the three months ended September
                30,
                2007, as compared to $828,000 for the three months ended September
                30,
                2006.




For
      the
      three months ended September 30, 2007, revenue from three customers accounted
      for 82% of total revenue, each of whom accounted for greater than 10% of total
      revenue.  The level of sales to any customer may vary from quarter to
      quarter. We expect that there will be significant customer concentration in
      future quarters. The loss of any one of those customers would have a materially
      adverse impact on our financial condition and operating results.




***Costs
      and Expenses***




*Cost
      of product revenue.* Cost of product revenue decreased by $340,000, or 34%,
      to $658,000 for the three months ended September 30, 2007, from $998,000 for
      the
      three months ended September 30, 2006. This decrease in cost of product revenue
      was due to the decrease in product sales for the three months ended September
      30, 2007.




*Cost
      of services, maintenance and support revenue.* Cost of services, maintenance
      and support revenue increased by $119,000, or 32%, to $493,000 for the three
      months ended September 30, 2007, from $374,000 for the three months ended
      September 30, 2006. The increase was due primarily to an increase in personnel
      and personnel-related expenses during the quarter ended September 30,
      2007.  We expect cost of services, maintenance and support revenue to vary
      in the future due to labor costs associated with funded software
      projects.




*Income
      from settlement and patent licensing.* Income from settlement and patent
      licensing was $1.1 million for the three month periods ended September 30,
      2007
      and September 30, 2006, reflecting the amortization of the net proceeds from
      the
      November 2004 Polycom settlement and cross-license agreement over a five year
      period, beginning in November 2004 and ending in November 2009.




*Research
      and development.* Research and development expenses increased by $503,000,
      or 33%, to $2.0 million for the three months ended September 30, 2007 from
      $1.5
      million for the three months ended September 30, 2006.  This increase was
      primarily due to an increase in personnel and personnel-related
      expenses.




*Sales
      and marketing.* Sales and marketing expenses increased by $189,000, or 14%
      to $1.6 million for the three months ended September 30, 2007 from $1.4 million
      for the three months ended September 30, 2006.  This increase was
      primarily due to an increase in personnel and personnel-related
      expenses.




*General
      and administrative.* General and administrative expenses were consistent, at
      $2.2 million and $2.3 million for the three months ended September 30, 2007,
      and
      September 30, 2006, respectively.




***Other
                Income***




Other
      income, net decreased by $11,000, or 23%, to $37,000 for the three months ended
      September 30, 2007, from $48,000 for the three months ended September 30, 2006.
      The decrease was due to increased interest expense on our line of credit
      advance, partially offset by increased interest income from our marketable
      securities classified as cash equivalents and short-term
      investments.




20


**COMPARISON
      OF THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**




***Revenue***




Total
      revenue decreased by $847,000, or 8%, to $10.0 million for the nine months
      ended
      September 30, 2007 from $10.9 million for the nine months ended September 30,
      2006.  For the nine months ended September 30, 2007, revenue from
      three customers accounted for 78% of total revenue, each of whom accounted
      for
      greater than 10% of total revenue. For the nine months ended September 30,
      2006,
      revenue from three customers accounted for 86% of total revenue, each of whom
      accounted for greater than 10% of total revenue. We expect that there will
      be
      significant customer concentration in future quarters.  The loss of any one
      of those customers would have a material adverse impact on our financial
      condition and operating results.




·  
                Product revenue decreased by $778,000, or 24%, to $2.5 million for
                the
                nine months ended September 30, 2007, from $3.3 million for the nine
                months ended September 30, 2006. The decrease was due to lower new
                customer sales for the nine month period ending September 30,
                2007.




·  
                Licensing revenue remained relatively stable at $4.9 million for
                the nine
                months ended September 30, 2007, as compared to $5.1 million for
                the nine
                months ended September 30, 2006.




·  
                Services, maintenance and support revenue, which includes our installation
                services, funded software development and maintenance and support,
                remained relatively flat at $2.7 million for the nine months ended
                September 30, 2007, as compared to $2.5 million for the nine months
                ended
                September 30, 2006.




*Cost
      of product revenue*.  Cost of product revenues decreased by
      $253,000, or 11%, to $2.1 million for the nine months ended September 30, 2007,
      from $2.4 million for the nine months ended September 30, 2006.  The
      decrease was primarily attributable to a decrease in sales of our
      products.




*Cost
      of services, maintenance and support revenues*. Cost of services,
      maintenance and support revenues increased by $374,000 or 27% to $1.7 million
      for the nine months ended September 30, 2007, from $1.4 million for the nine
      months ended and September 30, 2006.  This increase was attributable to an
      increase in funded software development project costs for the nine months ended
      September 30, 2007.




*Income
      from settlement and patent licensing.* Income from settlement and patent
      licensing increased by $12.0 million, or 378% to $15.2 million for the nine
      months ended September 30, 2007, from $3.2 million for the nine month period
      ended September 30, 2006. The increase was due to the Settlement and Patent
      License Agreement entered into with Tandberg ASA and its subsidiaries in
      February 2007, which resulted in a cash payment to us of $12.0 million. The
      nine
      months ended September 30, 2007 and 2006 each also reflect $3.2 million of
      amortization of the net proceeds from the November 2004 Polycom settlement
      and
      cross-license agreement over a five year period, beginning in November 2004
      and
      ending in November 2009.




*Research
      and development.* Research and development expenses increased by $1.3
      million, or 30%, to $5.5 million for the nine months ended September 30, 2007
      from $4.2 million for the nine months ended September 30, 2006. The increase
      was
      primarily attributable to increases in the use of external resources, and
      partially due to increases in personnel and personnel-related expenses, and
      stock based compensation charges.




*Sales
      and marketing.* Sales and marketing expenses increased by $446,000, or 11%,
      to $4.6 million for the nine months ended September 30, 2007 from $4.2 million
      for the nine months ended September 30, 2006. The increase was primarily
      attributable to an increase in personnel and personnel-related expenses, and
      partially due to an increase in stock based compensation.




*General
      and administrative.* General and administrative expenses increased by $3.5
      million, or 50% to $10.6 million for the nine months ended September 30, 2007
      from $7.1 million for the nine months ended September 30, 2006. The increase
      was
      due primarily to the legal fees associated with our litigation against Tandberg
      for patent infringement, and to a lesser extent, to an increase in our patent
      prosecution expense during the nine months ended September 30,
      2007.




*Other
      income, net.* Other income, net decreased by $68,000, or 32% to $145,000 for
      the nine months ended September 30, 2007 from $213,000 for the nine months
      ended
      September 30, 2006.  The decrease was due to interest expense on our
      line of credit advance, partially offset by increased interest income from
      our
      marketable securities classified as cash equivalents and short-term
      investments.




21


**Liquidity
      and Capital Resources**




We
      had
      cash, cash equivalents and short-term investments of $6.1 million as of
      September 30, 2007, and $7.9 million as of December 31, 2006. For the nine
      months ended September 30, 2007, we had a net decrease in cash, cash equivalents
      and short-term investments of $1.8 million. The net cash used by operations
      of
      $1.3 million resulted primarily from non-cash expenses of $2.2 million, which
      included $2.0 million in non-cash stock based compensation, a decrease in
      deferred settlement and patent licensing costs of $955,000 and net income of
      $755,000, offset by a decrease in deferred income from settlement and patent
      licensing of $4.1 million, deferred services revenue of $765,000 and accrued
      liabilities and other of $807,000.  The net cash used in investing
      activities of $1.6 million was due to the purchases of $800,000 of property
      and
      equipment and the purchases of $795,000 of short-term investments.  The net
      cash provided by financing activities of $353,000 related to the net
      proceeds from the issuance of common stock through our employee stock option
      and
      purchase plans.




At
      September 30, 2007, we had open purchase orders and other contractual
      obligations of approximately $1.0 million primarily related to inventory
      purchase commitments. We also have commitments that consist of obligations
      under
      our operating leases. These purchase order commitments and contractual
      obligations are reflected in our financial statements once goods or services
      have been received or payments related to the obligations become due. A table
      summarizing our minimum purchase commitments to our contract manufacturers
      and
      our minimum commitments under non-cancelable operating leases as of December
      31,
      2006 (in thousands) is included in 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.




In
      May
      2007, we added 7,900 square feet of office space to our existing lease at our
      headquarters in San Mateo, California to house engineering staff.  The
      additional office space requires 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.




As
      of
      September 30, 2007, we had no material off-balance sheet arrangements, other
      than the operating leases described in the contractual obligations table
      referenced above.   We enter into indemnification provisions
      under our agreements with other companies in our ordinary course of business,
      typically with our contractors, customers, landlords and our agreements with
      investors. Under these provisions, we generally indemnify and hold harmless
      the
      indemnified party for losses suffered or incurred by the indemnified party
      as a
      result of our activities or, in some cases, as a result of the indemnified
      party's activities under the agreement. These indemnification provisions
      generally survive termination of the underlying agreement. The maximum potential
      amount of future payments we could be required to make under these
      indemnification provisions is generally unlimited. As of September 30, 2007,
      we
      have not incurred material costs to defend lawsuits or settle claims related
      to
      these indemnifications agreements and therefore, we have no liabilities recorded
      for these agreements as of September 30, 2007.




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




**Recent
                Accounting Pronouncements**




In
      September 2006, the FASB issued FASB Statement No. 157, *Fair Value
      Measurements* (“SFAS No. 157”). The standard provides guidance for
      using fair value to measure assets and liabilities and responds to investors’
requests for expanded information about the extent to which companies measure
      assets and liabilities at fair value, the information used to measure fair
      value, and the effect of fair value measurements on earnings. The standard
      applies whenever other standards require or permit assets or liabilities to
      be
      measured at fair value. The standard does not expand the use of fair value
      in
      any new circumstances. SFAS No. 157 must be adopted prospectively as of the
      beginning of the year it is initially applied. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. We are evaluating the
      impact this standard will have on our financial position or results of
      operations.




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





22







**Item
      3.*****Quantitative and Qualitative
      Disclosures About Market Risk***




We
      develop products primarily in the United States and sell those products
      primarily in North America, Europe and Asia. International revenue, which
      consists of sales to customers with operations principally in Western Europe
      and
      Asia, comprised 62% of total revenue for the three months ended September 30,
      2007 and 88% for the three months ended September 30, 2006.  International
      revenue comprised 75% and 77% of total revenues for the nine months ended
      September 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
      marketable securities classified as cash equivalents and 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. The following table provides information about
      our
      investment portfolio. For investment securities, the table presents cash, cash
      equivalents and short-term investments, and related weighted average interest
      rates by category at September 30, 2007.





**Amounts**
            
            
            **Weighted
                Average Interest Rate****(in
                thousands)*****Description***Cash
                and cash equivalents:Cash
            
            $
            738
            
            
            
            
            
            
            —Commercial
                paper cash equivalents
            
            
            4,594
            
            
            
            4.9
            %Short-term
                investments
            
            
            795
            
            
            
            5.2
            %Total
                cash, cash equivalents and short-term investments
            
            $
            6,127




**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.





23







**PART
      II - OTHER INFORMATION**




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




**Factors
                Affecting Future Operating
                Results**




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




We
      recorded net income of $755,000 for the nine months ended September 30, 2007,
      a
      net loss of $8.1 million for fiscal year 2006, and a net loss of $5.2 million
      for fiscal year 2005. As of September 30, 2007, our accumulated deficit was
      $102.0 million.  Our net income for the nine months ended September 30,
      2007 was primarily due to the $12.0 million in income from settlement and patent
      licensing we received from Tandberg ASA in settlement of our litigation with
      Tandberg, and $4.0 million from a Patent License Agreement with Radvision
      Ltd.   Our revenue and income from settlement and patent licensing may
      not increase, or even remain at its current level. In addition, our operating
      expenses may increase as we continue to develop our business and pursue
      licensing opportunities. As a result, to become profitable, we will need to
      increase our revenue, and income from settlement and patent licensing by
      increasing sales to existing customers and by attracting additional new
      customers and licensees. If our expenses increase more rapidly than our revenue,
      we may not remain profitable. Due to the volatility of our product and licensing
      revenue and our income from settlement and patent licensing activities, we
      may
      not be able to sustain or increase profitability on a quarterly or annual basis.
      If we fail to maintain profitability or to sustain or grow our profits within
      the time frame expected by investors, the market price of our common stock
      may
      be adversely impacted.




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




We
      may
      need to arrange for the availability of additional funding in addition to our
      existing line of credit in order to meet our future business requirements.
      If we
      are unable to obtain additional funding when needed on acceptable terms, we
      may
      not be able to develop or enhance ourproducts, take advantage
      of future opportunities, respond to competitive pressures or unanticipated
      requirements, or finance our efforts to protect and enforce our intellectual
      property rights, which could seriously harm our business, financial condition,
      results of operations and ability to continue operations.




**We
      are in the
      process of implementing changes in our organizational structure, sales,
      marketing and distribution strategy, licensing efforts and strategic direction,
      which, if unsuccessful, could adversely affect our business and results of
      operations.**




In
      July
      2007, Simon Moss was appointed as President of our company.  In
      September 2007, William Campbell resigned from the position of Chief Operating
      Officer and in November 2007 we announced that Gerald Burnett was resigning
      from
      his position as our Chief Executive Officer effective January 1, 2008 and would
      be replaced in that position by Simon Moss.  In addition John Carlson,
      Vice President of Marketing resigned effective October 2007 and Robert Garrigan,
      Vice President of Sales resigned effective in November 2007 and was replaced
      by
      Darren Innes who joined the company as General Manager and Global Head of Sales
      on November 1, 2007.  In September 2007, we announced an intensive set
      of corporate initiatives aimed at increasing our product sales, expanding our
      customer deployments and support, improving our corporate efficiency and
      increasing our development capacity.  The first components of this
      initiative include:





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


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


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


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


·
            Pursuing
                multiple distribution, services and technology
                partners.





These
      and other changes in our business
      are aimed at reducing our structural costs, increasing our organizational and
      partner-driven capacity, and leveraging our reputation for innovation and
      intellectual property leadership, to grow and expand our
      business.  However, these organizational changes and initiatives
      involve transitional costs and expenses and result in uncertainty in terms
      of
      their implementation and their impact on our business.  As with any
      significant organizational change, our initiatives will take time to implement
      and the results of these initiatives will not be apparent in the near
      term.  If our initiatives are unsuccessful in achieving our stated
      objectives, our business could be harmed and our results of operations and
      financial condition could be adversely affected.




24


**Changes
      in
      stock option accounting rules enacted have and will continue to adversely
      impact our reported operating results prepared in accordance with generally
      accepted accounting principles, which may in turn adversely impact our stock
      price and our ability to attract and retain employees.**




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




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




On
      November 6, 2007, we received a deficiency letter from The NASDAQ Stock Market
      indicating that we do not comply with Marketplace Rule 4310(c)(3), which
      requires that we have a minimum of $2,500,000 in stockholders’ equity or
      $35,000,000 in market value of listed securities or $500,000 of net income
      from
      continuing operations for the most recently completed fiscal year or two of
      the
      three most recently completed fiscal years.  The NASDAQ staff noted
      that as of November 1, 2007, the market value of our listed securities was
      $27,791,539, we reported net losses from continuing operations for the years
      ended December 31, 2006, 2005 and 2004 and we reported a stockholders deficit
      as
      of June 30, 2007 of $3,514,000.  Accordingly, the NASDAQ staff is
      reviewing our eligibility for continued listing on The NASDAQ Capital
      Market.  The NASDAQ staff has requested that on or before November 21,
      2007, we submit a plan for regaining and sustaining compliance with all
      applicable continued listing requirements of The NASDAQ Capital
      Market.  If, after the conclusion of the NASDAQ staff review process,
      the staff determines that our plan does not adequately address the issues noted,
      it is expected that we would receive a notice from the NASDAQ staff of its
      determination that our securities are subject to delisting, which determination
      could be appealed by us to the NASDAQ Listing Qualifications Panel. In the
      event
      of such an appeal, the Panel would have authority to grant us a further
      extension of time in which to regain compliance with the Marketplace Rules,
      though there can be no assurance that the Panel will grant such extension of
      time.




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




**Our
      common stock has been and will likely continue to be subject to substantial
      price and volume fluctuations due to a number of factors, many of which will
      be
      beyond our control, which may prevent our stockholders from reselling our common
      stock at a profit.**




The
      trading price of our common stock has in the past been and could in the future
      be subject to significant fluctuations in response to:




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




·
                quarterly variations in our results of
                operations;




·
                announcements regarding our product
                developments;




·
                the size and timing of agreements to license our patent
                portfolio;




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




·
                announcements of competitive product introductions by our
                competitors;




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




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




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





25


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




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




**Provisions
      of our certificate of incorporation, our bylaws and Delaware law may make it
      difficult for a third party to acquire us, despite the possible benefits to
      our
      stockholders.**




Our
      certificate of incorporation, our bylaws, and Delaware law contain provisions
      that may inhibit changes in our control that are not approved by our Board
      of
      Directors. For example, the Board of Directors has the authority to issue up
      to
      10,000,000 shares of preferred stock and to determine the terms of this
      preferred stock, without any further vote or action on the part of the
      stockholders.




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




**Our
      principal stockholders can exercise a controlling influence over our business
      affairs and they may make business decisions with which you disagree that will
      affect the value of your investment.**




Our
      executive officers, directors and entities affiliated with them, in the
      aggregate, beneficially owned approximately 62% of our common stock as of
      September 30, 2007. If they were to act together, these stockholders would
      be able to exercise control over most matters requiring approval by our
      stockholders, including the election of directors and approval of significant
      corporate transactions. These actions may be taken even if they are opposed
      by
      other investors. This concentration of ownership may also have the effect of
      delaying or preventing a change in control of Avistar, which could cause the
      market price of our common stock to decline.




**Our
      lengthy sales cycle to acquire new customers or large follow-on orders may
      cause
      our operating results to vary significantly and make it more difficult to
      forecast our revenue.**




We
      have
      generally experienced a product sales cycle of four to nine months for new
      customers or large follow-on orders from existing customers.   This
      sales cycle is due to the time needed to educate customers about the uses and
      benefits of our system, and the time needed to process the investment decisions
      that our prospective customers must make when they decide to buy our system.
      Many of our prospective customers have neither budgeted expenses for networked
      video communications systems, nor for personnel specifically dedicated to the
      procurement, installation or support of these systems. As a result, our
      customers spend a substantial amount of time before purchasing our system in
      performing internal reviews and obtaining capital expenditure approvals.
      Economic conditions over the last several years have contributed to additional
      deliberation and an associated delay in the sales cycle.




Our
      lengthy sales cycle is one of the factors that has caused, and may continue
      to
      cause our operating results to vary significantly from quarter-to-quarter and
      year-to-year in the future. This makes it difficult for us to forecast revenue,
      and could cause volatility in the market price of our common stock. A lost
      or
      delayed order could result in lower than expected revenue in a particular
      quarter or year. There is also a tendency in the technology industry to close
      business deals at the end of a quarter, thereby increasing the likelihood that
      a
      possible material deal would not be concluded in a current quarter, but slip
      into a subsequent reporting period. This kind of delay may result in a given
      quarter’s performance being below shareholder expectations.




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




Our
      customers typically place limited initial orders for our networked video
      communications system, as they seek to evaluate its utilization and resultant
      value. Our strategy is to pursue additional and larger follow-on orders after
      these initial orders. Product revenue generated from follow-on orders accounted
      for approximately 99%, and 93% of our product revenue for the nine months ended
      September 30, 2007 and 2006, respectively. Our future product revenue depends
      on
      the adoption of our products by new customers and successful generation of
      follow-on orders as the Avistar network expands within a customer’s
      organization. If our system does not meet the needs and expectations of
      customers, we may not be able to generate follow-on orders.




26


**Because
      we depend on a few customers for a majority of our product revenue, services
      revenue, and income from settlement and patent licensing, the loss of one or
      more of them could cause a significant decrease in our operating
      results.**




To
      date,
      a significant portion of our revenue and income from settlement and patent
      licensing has resulted from sales or licenses to a limited number of customers,
      particularly Deutsche Bank AG, UBS AG, Polycom, Inc., Tandberg ASA, Sony,
      Radvision and their affiliates.  Collectively, Deutsche Bank AG, UBS AG,
      Polycom, Inc., Tandberg ASA, Sony Corporation, Radvision Ltd. and their
      affiliates accounted for approximately 95% of combined revenues and income
      from
      settlement and patent licensing for the nine months ended September 30, 2007,
      and, when excluding Radvision Ltd., they accounted for 89% of combined revenues
      and income from settlement and patent licensing for the nine months ended,
      September 30, 2006. As of September 30, 2007, approximately 82% of our gross
      accounts receivable was concentrated with three customers, each of whom
      represented more than 10% of our gross accounts receivable. As of
      December 31, 2006, approximately 84% of our gross accounts receivable was
      concentrated with three customers, each of whom represented more than 10% of
      our
      gross accounts receivable.




The
      loss
      of a major customer or the reduction, delay or cancellation of orders from
      one
      or more of our significant customers could cause our revenue to decline and
      our
      losses to increase.  For example, income from settlement and patent
      licensing activities from Tandberg, which was $12.0 million in the first quarter
      of 2007, was a one-time payment. We expect to complete the amortization of
      the
      Polycom proceeds in 2009. If we are unable to license our patent portfolio
      to
      additional parties on terms equal to or better than our agreements with Polycom
      and Tandberg, our licensing revenue and our income from settlement and patent
      licensing will decline, which could cause our losses to increase. We currently
      depend on a limited number of customers with lengthy budgeting cycles and
      unpredictable buying patterns, and as a result, our revenue from
      quarter-to-quarter or year-to-year may be volatile. Adverse changes in our
      revenue or operating results as a result of these budgeting cycles or any other
      reduction in capital expenditures by our large customers could substantially
      reduce the trading price of our common stock.




**We
      may not be able to modify and improve our products in a timely and cost
      effective manner to respond to technological change and customer
      demands.**




Future
      hardware and software platforms embodying new technologies and the emergence
      of
      new industry standards and customer requirements could render our system
      non-competitive or even obsolete. The market for our system is characterized
      by:




·
                rapid technological change;




·
                the emergence of new competitors;




·
                significant development costs;




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




·
                evolving industry standards; and




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




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




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




We
      recognize product and installation revenue upon the installation of our system
      in those cases where we are responsible for installation, which often entails
      working with sophisticated software, computing and communications systems.
      If we
      experience difficulties with installation or do not meet deadlines due to delays
      caused by our customers or ourselves, we could be required to devote more
      customer support, technical and other resources to a particular installation.
      If
      we encounter delays in installing our products for new or existing customers
      or
      installation requires significant amounts of our professional services support,
      our revenue recognition could be delayed, our costs could increase and our
      margins could suffer.




27


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




Our
      system may contain errors or defects, especially when new products are
      introduced or when new versions are released. Despite internal system testing,
      we have in the past discovered software errors in some of the versions of our
      system after their introduction. Errors in new systems or versions could be
      found after commencement of commercial shipments, and this could result in
      additional development costs, diversion of technical and other resources from
      our other development efforts or the loss of credibility with current or future
      customers. Any of these events could result in a loss of revenue or a delay
      in
      market acceptance of our system and could harm our reputation.




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




Our
      license agreements with our customers typically contain provisions designed
      to
      limit our exposure to potential product liability and certain contract claims
      and typically limit a customer’s entire remedy to either a refund of the price
      paid or modification of our system. However, these provisions vary as to their
      terms and may not be effective under the laws of some jurisdictions. Although
      we
      maintain product liability (“errors and omissions”) insurance coverage, we
      cannot assure you that such coverage will be adequate. A product liability,
      warranty or other claim could harm our business, financial condition and/or
      results of operations. Performance interruptions at a customer’s site could
      negatively affect the demand for our system or give rise to claims against
      us.




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




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




We
      believe that establishing and
      maintaining brand and name recognition is critical for attracting and expanding
      our targeted customer base. We also believe that the importance of reputation
      and name recognition will increase as competition in our market increases.
      Promotion and enhancement of our name will depend on the success of our
      marketing efforts, and on our ability to continue to provide high quality
      systems and services, neither of which can be assured. If our customers do
      notperceive our system
      or
      services to be effective or of high quality, our brand and name recognition
      will
      suffer, which would harm our business.




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




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




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




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




·
                the likelihood that, if particular components or human resources
                were not
                available, we would suffer an interruption in the manufacture and
                shipment
                of our systems until these components or alternatives become
                available;




·
                reduced control by us over the quality and cost of our system and
                over our
                ability to respond to unanticipated changes and increases in customer
                orders, and conversely, price changes from suppliers if committed
                volumes
                are not met;




·
                the possible unavailability of, or interruption in, access to some
                technologies due to infringement claims, production/supply issues
                or other
                hindrances; and




·
                the possible misappropriation of our source code through reverse
                engineering or other means by contract developers or other
                parties.




28


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





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




Because
      our licensing cycle is a lengthy process, our future revenues and income from
      settlement and patent licensing from new licensees are difficult to predict.
      The
      process of persuading companies to adopt our technologies or convincing them
      that their products infringe upon our intellectual property rights can be
      lengthy.  This is especially the case when there is a significant disparity
      in the financial resources between the companies, and enforcement of our rights
      requires us to resort to the juridical process.  The proceeds of our
      intellectual property licensing and enforcement efforts tend to be sporadic
      and
      difficult to predict and may not increase or even remain at their current levels
      in the future. In addition, our ability to recognize the proceeds of our
      licensing efforts as licensing revenue currently depends upon whether a
      settlement and licensing agreement is entered into prior to or after the
      commencement of formal legal proceedings.  To date, the criteria for
      recognizing license revenue following the commencement of litigation have not
      been met, and proceeds received after commencement of litigation have therefore
      been recorded as “income from settlement and patent licensing”
activities.




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




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




**Others
      may bring infringement claims against us, which could be time-consuming and
      expensive to defend.**




In
      recent
      years, there has been significant litigation in the United States involving
      patents and other intellectual property rights, and we have been a party to
      such
      litigation. The prosecution and defense of these lawsuits where we are involved
      may require us to expend significant financial and managerial resources, and
      therefore may have a material negative impact on our financial position and
      results of operations. The duration and ultimate outcome of these proceedings
      are uncertain. We may be a party to additional litigation in the future, to
      protect our intellectual property or as a result of an alleged infringement
      of
      the intellectual property of others. These claims and any resulting lawsuit
      could subject us to significant liability for damages and invalidation of our
      proprietary rights. These lawsuits, regardless of their merit or success, would
      likely be time-consuming and expensive to resolve and would divert management’s
      time and attention. Any potential intellectual property litigation also could
      force us to do one or more of the following:




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




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




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




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




29


**Our
      inability to protect the intellectual property created by us would cause our
      business to suffer.**




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




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




To
      increase our revenue, we must increase the size of our direct sales force and
      add indirect distribution channels, such as systems integrators, product
      partners and/or value-added resellers, and/or effect sales through our
      customers. If we are unable to maintain or increase our direct sales force
      or
      add indirect distribution channels due to our own cost constraints, limited
      availability of qualified personnel or other reasons, our future revenue growth
      may be limited and our future operating results may suffer. We cannot assure
      you
      that we will be successful in attracting, integrating, motivating and retaining
      sales personnel. Furthermore, it can take several months before a new hire
      becomes a productive member of our sales force. The loss of existing
      salespeople, or the failure of new salespeople and/or indirect sales partners
      to
      develop the necessary skills in a timely manner, could impact our revenue
      growth.




**We
      may not be able to retain our existing key personnel, or hire and retain the
      additional personnel that we need to sustain and grow our
      business.**




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




Our
      products and technologies are complex, and to successfully implement our
      business strategy and manage our business, an in-depth understanding of video
      communication and collaboration technologies and their potential uses is
      required. We need to attract and retain highly skilled technical and managerial
      personnel for whom there is intense competition. If we are unable to attract
      and
      retain qualified technical and managerial personnel due to our own cost
      constraints, limited availability of qualified personnel or other reasons,
      our
      results of operations could suffer and we may never achieve profitability.
      The
      failure of new personnel to develop the necessary skills in a timely manner
      could harm our business.




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




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




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




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




**General
      economic conditions have and may impact our revenues and harm our business
      in
      the future.**




The
      international economic slowdown and the downturn in the investment banking
      industry that began in 2000 negatively affected our business, and a reoccurrence
      of a difficult economic environment may do so in the future. During this most
      recent economic downturn, the investment banking industry suffered a sharp
      decline, which caused many of our existing and potential customers to cancel
      or
      delay orders for our products. Although the U.S. economy has improved, our
      customers and potential customers may continue to delay ordering our products,
      and we could fall short of our revenue expectations for 2007 and beyond. Slower
      growth among our customers, tightening of customers’ operating budgets,
      retrenchment in the capital markets and other general economic factors all
      have
      had, and could in the future have, a materially adverse effect on our revenue,
      capital resources, financial condition and results of operations.




30


**Competition
      could reduce our market share and decrease our revenue.**




The
      market in which we operate is
      highly competitive. In addition, because our industry is relatively new and
      is
      characterized by rapid technological change, evolving user needs, developing
      industry standards and protocols and the introduction of new products and
      services, it is difficult for us to predict whether or when new competing
      technologies or new competitors will enter our market. Currently, our
      competition comes from many other kinds of companies, including communication
      equipment, integrated solution, broadcast video and stand-alone “point solution”
providers. Within the video-enabled network communications market, we compete
      primarily against Polycom, Tandberg ASA, Sony Corporation, Apple Inc., Radvision
      and Emblaze-VCON Ltd.  Many of these companies, including Polycom,
      Tandberg, Sony, Radvision and Emblaze-VCON have acquired rights to use our
      patented technology through licensing agreements with us, which, in some cases
      include rights to use future patents filed by us.  With increasing interest
      in the power of video collaboration and the establishment of communities of
      users, we believe we face increasing competition from alternative video
      communicationssolutions
      that employ new technologies or new combinations of technologies from companies
      such as Cisco Systems, Inc., Avaya, Inc., Microsoft Corporation,
      Nortel Networks Corporation and WebEx Communications, Inc. that enable
      web-based or network-based video communications with low-cost digital camera
      systems.




We
      expect
      competition to increase in the future from existing competitors, partnerships
      of
      competitors, and from new market entrants with products that may be less
      expensive than ours, or that may provide better performance or additional
      features not currently provided by our products. Many of our current and
      potential competitors have substantially greater financial, technical,
      manufacturing, marketing, distribution and other resources, greater name
      recognition and market presence, longer operating histories, lower cost
      structures and larger customer bases than we do. As a result, they may be able
      to adapt more quickly to new or emerging technologies and changes in customer
      requirements.




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





**Our
      international operations expose us to potential tariffs and other trade
      barriers, unexpected changes in foreign regulatory requirements and laws and
      economic and political instability, as well as other risks that could adversely
      affect our results of operations.**




International
      revenue, which consists of sales to customers with operations principally in
      Western Europe and Asia, comprised 62% and 88% of total revenues for the three
      months ended September 30, 2007 and 2006, respectively.  International
      revenue comprised 75% and 77% of total revenues for the nine months ended
      September 30, 2007 and 2006, respectively. Some of the risks we may encounter
      in
      conducting international business activities include the following:




·
                tariffs and other trade barriers;




·
                unexpected changes in foreign regulatory requirements and
                laws;




·
                economic and political instability;




·
                increased risk of infringement
                claims;




·
                protection of our intellectual
                property;




·
                restrictions on the repatriation of
                funds;




·
                potentially adverse tax
                consequences;




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




·
                fluctuations in foreign currencies;
                and




·
                limitations in communications infrastructures in some foreign
                countries.




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




31


**International
      political instability may increase our cost of doing business and disrupt our
      business.**




Increased
      international political instability, evidenced by the threat or occurrence
      of
      terrorist attacks, enhanced national security measures and/or sustained military
      action may halt or hinder our ability to do business, may increase our costs
      and
      may adversely affect our stock price. This increased instability has had and
      may
      continue to have negative effects on financial markets, including significant
      price and volume fluctuations in securities markets. If this international
      political instability continues or escalates, our business and results of
      operations could be harmed and the market price of our common stock could
      decline.




**Item
      5 *. Other Information***




In
      July 2007,
      Simon Moss was appointed as President of our company.  In September
      2007, William Campbell resigned from the position of Chief Operating Officer
      and
      transitioned to the position of Director of Strategic Development and in
      November 2007 we announced that Gerald Burnett was resigning from his position
      as our Chief Executive Officer effective January 1, 2008 and would be replaced
      in that position by Simon Moss.  Dr. Burnett will continue in his role
      as Chief Executive Officer and Chairman of the Board of Directors of
      Avistar.


32


**Item 6.*****Exhibits***





**Exhibit No.**
            
            **Description**10.22
            
            Employment
                Agreement between Avistar Communications Corporation and Simon Moss
                effective July 16, 200731.1
            
            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.




33





**SIGNATURES**




Pursuant
      to the requirements of the Securities and Exchange Act of 1934, the registrant
      has duly caused this report to be signed on its behalf by the undersigned
      thereunto duly authorized, on the 13th day of November 2007.





AVISTAR
                COMMUNICATIONS CORPORATIONBy:
            /s/
                GERALD J. BURNETTGerald
                J. BurnettChief
                Executive Officer andChairman
                (Principal Executive Officer)By:
            /s/
                ROBERT J. HABIGRobert
                J. HabigChief
                Financial Officer(Principal
                Financial and Accounting Officer)









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**EXHIBIT
      INDEX**





**Exhibit No.**
            
            **Description**10.22
            
            Employment
                Agreement between Avistar Communications Corporation and Simon Moss
                effective July 16, 200731.1
            
            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.




35