UNITED
      STATES
              SECURITIES
      AND EXCHANGE COMMISSION
              Washington,
      D.C. 20549FORM
      10-Q(Mark
      One)x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended March 31, 2010oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from _________________ to
      _______________________Commission
      file number: 000-31121AVISTAR
      COMMUNICATIONS CORPORATION(Exact
      name of registrant as specified in its charter)DELAWARE
            88-0463156(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      Number)1875
      South Grant Street,
              10THFloor, San Mateo, CA
            94402(Address
      of principal executive offices)
            (Zip
      Code))Registrant's
      telephone number, including area code: (650) 525-3300Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.Yes 
      xNo  oIndicate by check mark whether the registrant has
      submitted electronically and posted on its corporate Web site, if any,
      every Interactive Data File required to be submitted and posted pursuant
      to Rule 405 of Regulation S-T during the preceding 12 months (or for such
      shorter period that the registrant was required to submit and post such
      files).Yes  oNo  oIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company.  See definition of "accelerated filer," "large
      accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
      Exchange Act.  (check one):Large
      accelerated filer  o
              Non-accelerated
      filer  o
              (Do
      not check if a small reporting company)
            Accelerated
      filer  o
              Smaller
      reporting company  xIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).
              Yes 
      o    No 
      xAt
      April 12, 2010, 39,022,344 shares of common stock of the Registrant were
      outstanding.










AVISTAR
COMMUNICATIONS CORPORATION




INDEX







PagePART
      I.
            FINANCIAL
      INFORMATION
            
            
            1Item
      1.
            Financial
      Statements
      (unaudited)
            
            
            1Condensed
      Consolidated Balance
      Sheets
            
            
            1Condensed
      Consolidated Statements of
      Operations
            
            
            2Condensed
      Consolidated Statements of Cash
      Flows
            
            
            3Notes
      to Condensed Consolidated Financial
      Statements
            
            
            4Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            14Item
      3.
            Quantitative
      and Qualitative Disclosures about Market
      Risk
            
            
            19Item
      4T.
            Controls
      and
      Procedures
            
            
            19PART
      II.
            OTHER
      INFORMATION
            
            
            19Item
      1.
            Legal
      Proceedings
            
            
            19Item
      1A.
            Risk
      Factors
            
            
            19Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
      Proceeds
            
            
            19Item
      3.
            Defaults
      Upon Senior
      Securities
            
            
            28Item
      4.
            Submissions
      of Matters to a Vote of Security
      Holders
            
            
            28Item
      5.
            Other
      Information
            
            
            28Item
      6.
            Exhibits
            
            
            28SIGNATURES
            
            
            
            29





-i-





PART I - FINANCIAL
INFORMATION




Item 1.Financial
Statements







AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY




CONDENSED
CONSOLIDATED BALANCE SHEETS


as
of March 31, 2010 and December 31, 2009


(in
thousands, except share and per share data)





March
      31,
              2010
            
            
            December 31,
              2009(unaudited)Assets:Current
      assets:Cash
      and cash equivalents
            
            $
            688
            
            
            $
            294Accounts
      receivable, net of allowance for doubtful accounts of $16 and $13 at March
      31, 2010 and December 31, 2009, respectively
            
            
            812
            
            
            
            1,027Inventories
            
            
            36
            
            
            
            56Prepaid
      expenses and other current assets
            
            
            193
            
            
            
            300Total
      current assets
            
            
            1,729
            
            
            
            1,677Property
      and equipment, net
            
            
            208
            
            
            
            147Other
      assets
            
            
            133
            
            
            
            132Total
      assets
            
            $
            2,070
            
            
            $
            1,9566Liabilities
      and Stockholders’ Equity (Deficit):Current
      liabilities:Line
      of credit
            
            $
            1,100
            
            
            $
            11,250Accounts
      payable
            
            
            698
            
            
            
            807Deferred
      services revenue and customer deposits
            
            
            1,635
            
            
            
            2,008Income
      taxes payable
            
            
            360
            
            
            
            23Accrued
      liabilities and other
            
            
            1,254
            
            
            
            1,409Total
      current liabilities
            
            
            5,047
            
            
            
            15,497Long-term
      liabilities:Other
      liabilities
            
            
            73
            
            
            
            73Total
      liabilities
            
            
            5,120
            
            
            
            15,570Commitments
      and contingencies (Note 9)Stockholders’
      equity (deficit):Common
      stock, $0.001 par value; 250,000,000 shares authorized at March 31, 2010
      and December 31, 2009; 40,205,219 and 40,159,466 shares issued and
      outstanding at March 31, 2010 and December 31, 2009,
      respectively
            
            
            40
            
            
            
            40Less:
      treasury common stock, 1,182,875 shares at March 31, 2010 and
      December 31, 2009, at cost
            
            
            (53
            )
            
            
            (53
            )Additional
      paid-in-capital
            
            
            102,839
            
            
            
            102,504Accumulated
      deficit
            
            
            (105,876
            )
            
            
            (116,105
            )Total
      stockholders’ equity (deficit)
            
            
            (3,050
            )
            
            
            (13,614
            )Total
      liabilities and stockholders’ equity (deficit)
            
            $
            2,070
            
            
            $
            1,956







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


-1-







AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY




CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


for
the three months ended March 31, 2010 and 2009


(in
thousands, except per share data)





Three
      Months Ended March 31,2010
              
              
              2009(unaudited)Revenue:Product
              
              $
              82
              
              
              $
              1,347Licensing
      and sale of patents
              
              
              14,149
              
              
              
              120Services,
      maintenance and support
              
              
              545
              
              
              
              1,163Total
      revenue
              
              
              14,776
              
              
              
              2,630Costs
      and expenses:Cost
      of product revenues*
              
              
              153
              
              
              
              375Cost
      of services, maintenance and support revenues*
              
              
              383
              
              
              
              802Income
      from settlement and patent licensing
              
              
              —
              
              
              
              (1,057
              )Research
      and development*
              
              
              1,939
              
              
              
              911Sales
      and marketing*
              
              
              613
              
              
              
              723General
      and administrative*
              
              
              1,114
              
              
              
              1,223Total
      costs and expenses
              
              
              4,202
              
              
              
              2,977Income
      (loss) from operations
              
              
              10,574
              
              
              
              (347
              )Other
      income (expense):Interest
      income
              
              
              1
              
              
              
              6Other
      expense, net
              
              
              (9
              )
              
              
              (132
              )Total
      other income (expense), net
              
              
              (8
              )
              
              
              (126
              )Income
      (loss) before provision for (benefit from) income taxes
              
              
              10,566
              
              
              
              (473
              )Provision
      for (benefit from) income taxes
              
              
              337
              
              
              
              (58
              )Net
      income (loss)
              
              $
              10,229
              
              
              $
              (415
              )Net
      income (loss) per share – basic
              
              $
              0.26
              
              
              $
              (0.01
              )Net
      income (loss) per share –diluted
              
              $
              0.26
              
              
              $
              (0.01
              )Weighted
      average shares used in calculating basic net income (loss) per
      share
              
              
              39,008
              
              
              
              34,698Weighted
      average shares used in calculating diluted net income (loss) per
      share
              
              
              39,297
              
              
              
              34,698*Including
      stock based compensation of:Cost
      of product, services, maintenance and support revenue
              
              
              23
              
              
              
              60Research
      and development
              
              
              101
              
              
              
              167Sales
      and marketing
              
              
              42
              
              
              
              56General
      and administrative
              
              
              153
              
              
              
              199


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


-2-







AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


for
the three months ended March 31, 2010 and 2009


(in
thousands)


Three Months Ended
      March 31,2010
              
              
              2009(unaudited)Cash
      Flows from Operating Activities:Net
      income (loss)
              
              $
              10,229
              
              
              $
              (415
              )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
              
              
              50
              
              
              
              59Compensation
      on equity awards issued to consultants and employees
              
              
              319
              
              
              
              482Provision
      for doubtful accounts
              
              
              3
              
              
              
              —Changes
      in assets and liabilities:Accounts
      receivable
              
              
              212
              
              
              
              1,394Inventories
              
              
              20
              
              
              
              44Prepaid
      expenses and other current assets
              
              
              107
              
              
              
              62Deferred
      settlement and patent licensing costs
              
              
              —
              
              
              
              318Other
      assets
              
              
              (1
              )
              
              
              —Accounts
      payable
              
              
              (109
              )
              
              
              114Deferred
      income from settlement and patent licensing and other
              
              
              —
              
              
              
              (1,371
              )Deferred
      services revenue and customer deposits
              
              
              (373
              )
              
              
              (1,781
              )Income
      taxes payable
              
              
              337
              
              
              
              (58
              )Accrued
      liabilities and other
              
              
              (155
              )
              
              
              (11
              )Net
      cash provided by (used in) operating activities
              
              
              10,639
              
              
              
              (1,163
              )Cash
      Flows from Investing Activities:Purchase
      of property and equipment
              
              
              (111
              )
              
              
              (20
              )Net
      cash used in investing activities
              
              
              (111
              )
              
              
              (20
              )Cash
      Flows from Financing Activities:Line
      of credit payments
              
              
              (11,250
              )
              
              
              (3,900
              )Proceeds
      from line of credit
              
              
              1,100
              
              
              
              500Net
      proceeds from issuance of common stock
              
              
              16
              
              
              
              160Net
      cash used in financing activities
              
              
              (10,134
              )
              
              
              (3,240
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              394
              
              
              
              (4,423
              )Cash
      and cash equivalents, beginning of period
              
              
              294
              
              
              
              4,898Cash
      and cash equivalents, end of period
              
              $
              688
              
              
              $
              475




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


-3-







AVISTAR
COMMUNICATIONS CORPORATION AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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




Business




Avistar
Communications Corporation (Avistar or the Company) was founded as a Nevada
limited partnership in 1993. The Company filed articles of incorporation in
Nevada in December 1997 under the name Avistar Systems Corporation. The Company
reincorporated in Delaware in March 2000 and changed the Company name to Avistar
Communications Corporation in April 2000. The operating assets and liabilities
of the business were then contributed to the Company’s wholly owned subsidiary,
Avistar Systems Corporation, a Delaware corporation. In July 2001, the Company’s
Board of Directors and the Board of Directors of Avistar Systems approved the
merger of Avistar Systems with and into Avistar Communications Corporation. The
merger was completed in July 2001.   In October 2007, the Company
merged Collaboration Properties, Inc., the Company's wholly-owned subsidiary,
with and into the Company, with the Company being the surviving
corporation.  Avistar has one wholly-owned subsidiary, Avistar Systems
U.K. Limited (ASUK).




Basis
of Presentation




The
unaudited condensed consolidated balance sheet as of March 31, 2010, the
unaudited condensed consolidated results of operations for the three months
ended March 31, 2010 and 2009 and the unaudited condensed consolidated cash
flows for the three months ended March 31, 2010 and 2009 present the
consolidated financial position of Avistar and ASUK after the elimination of all
intercompany accounts and transactions. The unaudited condensed consolidated
balance sheet of Avistar as of December 31, 2009 was derived from audited
financial statements, but does not contain all disclosures required by
accounting principles generally accepted in the United States of America (GAAP),
and certain information and footnote disclosures normally included have been
condensed or omitted pursuant to the rules and regulations of the SEC. 
Because all of the disclosures required by GAAP are not included, as permitted
by the rules of the SEC these interim condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009.  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. 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, services and patented technologies are in
the early stages of development. Some of the Company’s products and patented
technologies 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 and patented technologies, 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 $105.9 million as of
March 31, 2010. The Company’s operating results may fluctuate significantly
in the future as a result of a variety of factors, including, but not limited
to, the economic environment, the adoption of different distribution channels,
and the timing of new product announcements by the Company or its
competitors.




The Company’s
future liquidity and capital requirements will depend upon numerous factors,
including, but not limited to, the ability to become profitable or generate
positive cash flow from operations, the Company’s cost reduction
efforts,  Dr. Burnett’s personal guarantee to Avistar to support an
extension of the revolving line of credit through March 31, 2011, the Company’s
ability to obtain a renewal of its existing line of credit or a new line of
credit with another bank, the costs and timing of its expansion of product
development efforts and the success of these development efforts, the costs and
timing of its expansion of sales and marketing activities, the extent to which
its existing and new products gain market acceptance, competing technological
and market developments, the costs involved in maintaining, enforcing and
defending patent claims and other intellectual property rights, the level and
timing of revenue, and other factors.If adequate
funds are not available on acceptable terms or at all, the Company’s ability to
achieve or sustain positive cash flows, maintain current operations, fund any
potential expansion, take advantage of unanticipated opportunities, develop or
enhance products or services, or otherwise respond to competitive pressures
would be significantly limited.




-4-


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 GAAP have been condensed or omitted pursuant to such
rules and regulations.




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, 2009, included in the Company’s Annual Report on Form 10-K
filed with the SEC on March 30, 2010.




Use
of Estimates




The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, 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.  The Company was not invested in any auction rate securities
as of March 31, 2010 and December 31, 2009. Investment securities held with the
intent to reinvest or hold for longer than a year, or with remaining maturities
of one year or more, are considered long-term investments. The Company’s cash
equivalents at March 31, 2010 and December 31, 2009 consisted of money market
funds with original maturities of three months or less, and are therefore
classified as cash and cash equivalents in the accompanying balance
sheets.




Cash and
cash equivalents consisted of cash and money market funds of $688,000 and
$294,000 at March 31, 2010 and December 31, 2009, respectively.




See Note
3 for further information on fair value.





Significant
Concentrations




A
relatively small number of customers accounted for a significant percentage of
the Company’s revenues for the three months ended March 31, 2010 and 2009.
Revenues from these customers as a percentage of total revenues were as follows
for the three months ended March 31, 2010 and 2009:




Three
      Months Ended March 31,2010
            
            2009(Unaudited)Customer
      A
            
            
            74
            %
            
            
            —Customer
      B
            
            
            20
            %
            
            
            —Customer
      C
            
            
            *
            %
            
            
            40
            %Customer
      D
            
            
            *
            %
            
            
            14
            %Customer
      E
            
            
            *
            %
            
            
            12
            %Customer
      F
            
            
            *
            %
            
            
            12
            %




* Less
than 10%




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




-5-




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
March 31, 2010, the Company had cash and cash equivalents on deposit with a
major financial institution that were above the Federal Deposit Insurance
Corporation (FDIC) insured limits. Concentrations of credit risk with respect to
trade receivables relate to those trade receivables from both United States and
foreign entities. As of March 31, 2010, approximately 77% of the Company’s gross
accounts receivable was concentrated with two customers, each of whom
represented more than 10% of the total gross accounts receivable. As of December
31, 2009, approximately 87% of the Company’s gross accounts receivable was
concentrated with four customers, each of whom represented more than 10% of the
total gross accounts receivable. No other customer individually accounted for
greater than 10% of total accounts receivable as of March 31, 2010 and December
31, 2009.




Allowance
for Doubtful Accounts




The
Company uses estimates in determining the allowance for doubtful accounts based
on historical collection experience, historical write-offs, current trends and
the credit quality of the Company’s customer base, and the characteristics of
accounts receivable by aging category. Accounts are generally considered
delinquent when they are thirty days past due. Uncollectible accounts are
written off directly to the allowance for doubtful accounts. If the allowance
for doubtful accounts was understated, operating income could be significantly
reduced. The impact of any such change or deviation may be increased by the
Company’s reliance on a relatively small number of customers for a large portion
of its total revenue.


Fair Value of
      Financial Instruments





The
carrying amounts of the Company’s financial assets and liabilities, including
cash and cash equivalents, accounts receivable, line of credit, and accounts
payable at March 31,
2010and December 31, 2009, approximate fair value because of the
short maturity of these instruments.




Inventories




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




March
      31,
              2010
            
            
            December 31,
              2009(unaudited)Raw
      materials and subassemblies
            
            $
            —
            
            
            $
            1Finished
      goods
            
            
            36
            
            
            
            55Total
      inventories
            
            $
            36
            
            
            $
            56





-6-


Revenue
Recognition and Deferred Revenue




The
Company recognizes product and services revenue in accordance with Accounting
Standards Codification (ASC) 985-605, Revenue Recognition - Software,or ASC 605-25, Revenue Recognition –
Multiple-Element Arrangements. The Company derives product revenue from
the sale and licensing of a set of desktop (endpoint) products (hardware and
software) and infrastructure products (hardware and software) that combine to
form an Avistar video-enabled collaboration solution. Services revenue includes
revenue from post-contract customer support, training and software development.
The fair value of all product, post-contract customer support and training
offered to customers is determined based on the price charged when such products
or services are sold separately.





Arrangements
that include multiple product and service elements may include software and
hardware products, as well as post-contract customer support and training.
Pursuant to ASC 985-605, the Company recognizes revenue when all of the
following criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv)
collectibility is probable. The Company applies these criteria as discussed
below:





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




·
            Delivery has
      occurred.  The Company delivers software and hardware to
      customers either electronically or physically and has no further
      obligations with respect to the agreement. 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 which have
      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 of fair value (VSOE) exists for the
undelivered elements. Payment for product is due upon shipment, subject to
specific payment terms. Payment for professional services is due upon providing
the services, subject to specific payment terms. Reimbursements received for
out-of-pocket expenses and shipping costs, which have not been significant to
date, are recognized as revenue in accordance with ASC 605-45, Revenue Recognition – Principal
Agent Considerations.





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





The
Company recognizes service revenue from software development contracts in
accordance with ASC 605-35, Revenue Recognition –
Construction-Type and Production-Type Contracts. Product and
implementation revenue related to contracts for software development is
recognized using the percentage of completion method, in accordance with the
“Input Method”, when all of the following conditions are met: a contract exists
with the customer at a fixed price, the Company expects to fulfill all of its
material contractual obligations to the customer for each deliverable of the
contract, a reasonable estimate of the costs to complete the contract can be
made, and collection of the receivable is probable. The amount of revenue
recognized is based on the total project fee under the agreement and the
percentage of completion achieved.  The percentage of completion is
measured by monitoring progress using records of actual time incurred to date in
the project compared to the total estimated project requirements, which
corresponds to the costs related to the earned revenues. Changes in estimates
are recognized in the periods affected by the changes. Any anticipated losses on
contracts in progress are charged to earnings when identified. The amounts
billed to customers in excess of revenues recognized to date are deferred and
recorded as deferred revenue and customer deposits in the accompanying balance
sheets. The amount of revenue recognized in excess of billings is recorded as
unbilled accounts receivable.






-7-


The
Company recognizes revenue from the licensing or sale of its intellectual
property portfolio according to ASC 985-605, Revenue Recognition –
Software, based on the terms of the royalty,
partnership, cross-licensing and purchase agreements involved. In the
event that a license to the Company’s intellectual property is granted after the
commencement of litigation proceedings between the Company and the licensee, the
proceeds of such transaction are recognized as licensing revenue only if
sufficient historical evidence exists for the determination of fair value of the
licensed patents to support the segregation of the proceeds between a gain on
litigation settlement and patent license revenues consistent with Financial
Accounting Standards Board (FASB) Concepts Statement No. 6, Elements of Financial
Statements (CON 6). As of March 31, 2010, these criteria for recognizing
license revenue following the commencement of litigation had not been
met.





In July
2006, the Company entered into a Patent License Agreement with Sony Corporation
(Sony) and Sony Computer Entertainment, Inc. (SCEI). Under the license
agreement, the Company granted Sony and its subsidiaries, including SCEI, a
license to all of the Company’s patents with a filing date on or before January
1, 2006 for a specific field of use relating to video conferencing. The license
covers Sony’s video conferencing apparatus as well as other products, including
video-enabled personal computer products and certain SCEI PlayStation products.
Future royalties under this license are being recognized as estimated
royalty-based sales occur in accordance with ASC 985-605, Revenue Recognition -
Software.  The Company uses historical and forward looking
sales forecasts provided by SCEI and third party sources, in conjunction with
past actual royalty reports provided periodically by SCEI directly to the
Company, to develop an estimate of royalties recognized for each quarterly
reporting period.  The royalty reports the Company receives directly
from SCEI are delayed beyond the period in which the actual royalties are
generated, and thus the estimate of current period royalties requires
significant management judgment and is subject to corrections in a future period
once actual royalties become known.





On
September 8, 2008 and on September 9, 2008, the Company entered into a Licensed
Works Agreement, Licensed Works Agreement Statement of Work and a Patent License
Agreement with International Business Machines Corporation, or IBM, under which
the Company agreed to integrate the Company’s bandwidth management technology
and related intellectual property into future Lotus Unified Communications
offerings by IBM, and to provide maintenance support services. An initial cash
payment of $3.0 million was made by IBM to the Company on November 7, 2008, and
a second non-refundable payment of $1.5 million was made on August 31,
2009.   The Company expects IBM to make one additional
non-refundable payment of $1.5 million associated with scheduled phases of
delivery.  IBM has agreed to make future royalty payments to us equal
to two percent of the world-wide net revenue derived by IBM from Lotus Unified
Communications products sold that exceeds a contractual base amount, and
maintenance payments received from existing customers, which incorporate the
Company’s technology.  The agreements have a five year term and are
non-cancelable except for material default by either party.  The
agreements convey to IBM a non-exclusive world-wide license to the Company’s
patent portfolio existing at the time of the agreements and for all subsequent
patents issued with an effective filing date of up to five years from the date
of the agreements.  The agreements also provide for a release of each
party for any and all claims of past infringement.  In April 2009, the
agreements were amended to extend the initial term from five years to six
years.  The Company has determined the value of maintenance based on
VSOE, and allocated the residual portion of the initial $6.0 million to the
integration project.  The residual portion is being recognized under
the percentage of completion method, in accordance with the “Input Method”, and
the maintenance revenue will be recognized over the future maintenance service
period.  As the Company believes there are no future deliverables
associated with the intellectual property patent licenses, no additional
provision for this element has been made.  The Company did not
recognize any revenue related to the IBM agreement during the three months ended
March 31, 2010 since no additional work was performed. For the year ended
December 31, 2009, the Company recognized $2.4 million in product revenue and
$655,000 in service revenue. The remaining $676,000 is expected to be recognized
in product and service revenue under the percentage of completion method over
the remaining projected development time. As of March 31, 2010 the Company had
$110,000 in unbilled accounts receivable which represents revenue recognized in
excess of billings. The estimate of current period percentage of completion
requires significant management judgment and is subject to updates in future
periods until the project is complete.




On January 19, 2010, the Company entered into a patent
license agreement with Springboard Group S.A.R.L. ("SKYPE").  Under the
agreement, the Company granted to SKYPE for the lives of the patents, a
royalty-free, irrevocable, non-exclusive license under certain patents to make,
have made (subject to certain limitations), use, import or export, offer to
sell, sell, lease, license, or otherwise transfer or distribute certain licensed
products.  These granted rights and license include rights for authorized
entities and end users of SKYPE to form combinations with other products for
certain authorized purposes.  As consideration for the license, the Company
received a payment of $3.0 million from SKYPE on January 25,
2010.




On
January 21, 2010, the Company completed the sale of substantially all of its
U.S.
patents and patent applications, and related foreign patents and patent
applications to Intellectual Ventures Fund 61 LLC (“Intellectual Ventures”)
related to an agreement that was entered into on December 18, 2009.  The Company received the
purchase price of $11.0 million from Intellectual
Ventures on January 21, 2010.  The Company also obtained a full
grant-back royalty-free, irrevocable
license to the patent portfolio from Intellectual Ventures to make, use and sell
any Avistar product or service covered by the patents sold.


-8-
  Income
      from Settlement and Patent
Licensing
  The
Company recognizes the proceeds from settlement and patent licensing agreements
based on the terms involved. When litigation has been filed prior to a
settlement and patent licensing agreement, and insufficient historical evidence
exists for the determination of fair value of the patents licensed to support
the segregation of the proceeds between a gain on litigation settlement and
patent license revenues, the Company reports all proceeds in “income from
settlement and patent licensing” within operating costs and expenses. The gain
portion of the proceeds, when sufficient historical evidence exists to segregate
the proceeds, would be reported according to ASC 450, Contingencies. When a patent
license agreement is entered into prior to the commencement of litigation, the
Company reports the proceeds of such transaction as licensing revenue in the
period in which such proceeds are received, subject to the revenue recognition
criteria described above.
  On
November 12, 2004, the Company entered into a settlement and a patent
cross-license agreement with Polycom Inc., thus ending litigation against
Polycom, Inc. for patent infringement. As part of the settlement and patent
cross-license agreement with Polycom, Inc, the Company granted Polycom, Inc. a
non-exclusive, fully paid-up license to its entire patent portfolio. The
settlement and patent cross-license agreement includes a five-year capture
period from the date of the settlement, adding all new patents with a priority
date extending up to five years from the date of execution of the agreement.
Polycom, Inc., as part of the settlement and patent cross-licensing agreement,
made a one-time payment to the Company of $27.5 million and the Company paid
$6.4 million in contingent legal fees to the Company’s litigation counsel upon
completion of the settlement and patent cross-licensing agreement. The
contingent legal fees were payable only in the event of a favorable outcome from
the litigation with Polycom, Inc.  The Company recognized the gross
proceeds of $27.5 million from the settlement and patent cross-license agreement
as income from settlement and patent licensing within operations over the
five-year capture period, due to a lack of evidence necessary to apportion the
proceeds between an implied punitive gain element in the settlement of the
litigation, and software license revenues from the cross-licensing of the
Company’s patented technologies for prior and future use by Polycom, Inc.
Additionally, the $6.4 million in contingent legal fees was deferred and was
amortized to income from settlement and patent licensing over the five year
capture period, resulting in a net of $21.1 million being recognized as income
within operations over the five year capture period. As of December 31, 2009,
the deferred net income from settlement and patent licensing with Polycom, Inc.
was fully recognized.
  Warranty
  The
Company accrues the estimated costs of fulfilling the warranty provisions of its
contracts over the warranty period, which is typically 90 days. There was no
warranty accrual as of March 31, 2010 and December 31, 2009.
  Research and
Development
  Research
and development costs include engineering expenses, such as salaries and related
benefits, depreciation, professional services and overhead expenses related to
the general development of the Company’s products, and are expensed as incurred.
Software development costs are capitalized beginning when a product’s
technological feasibility has been established and ending when a product is
available for general release to customers. The Company has not capitalized any
software development costs since the period between establishing technological
feasibility and general release of the product is relatively short, and these
costs have not been significant.
  Stock-Based
Compensation
  The
Company accounts for stock-based compensation in accordance with ASC 718,Compensation
– Stock Compensation(ASC 718)which establishes accounting for stock-based awards exchanged for
employee services. Accordingly, stock-based compensation cost is measured at
grant date, based on the fair value of the award, and is recognized as expense
over the service period.
  The
effect of recording stock-based compensation for the three months ended March
31, 2010 and 2009 was as follows (in thousands):
 Three Months Ended
      March 31,2010
                
                
                2009(unaudited)Stock-based
      compensation expense by type of award:Employee
      stock options
                
                $
                234
                
                
                $
                476Employee
      restricted stock units
                
                
                74
                
                
                
                —Non-employee
      stock options
                
                
                —
                
                
                
                1Non-employee
      restricted stock units
                
                
                3
                
                
                
                —Employee
      stock purchase plan
                
                
                8
                
                
                
                5Total
      stock-based compensation
                
                
                319
                
                
                
                482Tax
      effect of stock-based compensation
                
                
                —
                
                
                
                —Net
      effect of stock-based compensation on net loss
                
                $
                319
                
                
                $
                482
 -9-
  Valuation
Assumptions for Stock-Based Compensation
  The
Company estimated the fair value of stock options and rights to acquire stock
granted under the employee stock purchase plan (“ESPP”) using a
Black-Scholes-Merton valuation model, consistent with the provisions of ASC 718
and SEC Staff Accounting Bulletin (SAB) No. 107. The following
weighted-average assumptions and the straight-line attribution approach were
used in estimating the fair value of employee stock option grants and ESPP
shares for the three months ended March 31, 2010 and 2009,
respectively:
 Three Months Ended
      March 31,2010
                
                
                2009(unaudited)Employee Stock Option PlanExpected
      dividend
                
                
                —
                %
                
                
                —
                %Average
      risk-free interest rate
                
                
                2.1
                %
                
                
                1.4
                %Expected
      volatility
                
                
                136
                %
                
                
                109
                %Expected
      term (years)
                
                
                4.1
                
                
                
                4.0Employee Stock Purchase PlanExpected
      dividend
                
                
                —
                %
                
                
                —
                %Average
      risk-free interest rate
                
                
                0.2
                %
                
                
                0.4
                %Expected
      volatility
                
                
                241
                %
                
                
                148
                %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. Expected term of employee stock options represents the weighted
average period the stock options are expected to remain outstanding and is based
on the entire history of exercises and cancellations on all past option grants
made by the Company during which its equity shares have been publicly traded,
the contractual term, the vesting period and the expected remaining term of the
outstanding options.
  The
Company recognizes the estimated compensation expense of restricted stock units,
net of estimated forfeitures, over the vesting term.  The estimated
compensation expense is based on the fair value of the Company’s common stock on
the date of grant.
  Summary
of Stock Options
  Information
regarding the stock options outstanding at March 31, 2010 is summarized
below:
  Number
      of Shares
              
              
              Weighted
      Average Exercise price
              
              
              Weighted
      Average Remaining Contractual Life (years)
              
              
              Aggregate
      Intrinsic Value (thousands)As
      of March 31,2010Options
      outstanding
              
              
              11,060,618
              
              
              $
              1.42
              
              
              
              5.04
              
              
              $
              37Options
      vested and expected to vest
              
              
              10,388,917
              
              
              $
              1.45
              
              
              
              4.79
              
              
              $
              33Options
      exercisable
              
              
              7,712,071
              
              
              $
              1.65
              
              
              
              3.41
              
              
              $
              17
  The
pretax intrinsic value of outstanding options is the difference between the
closing price of Avistar shares as quoted on the Pink Sheets, an
over-the-counter securities market, on March 31, 2010 and the exercise price,
multiplied by the number of in-the-money options. The intrinsic value of options
changes based on the fair market value of Avistar stock.
  As of
March 31, 2010, the Company had an unrecognized stock-based compensation balance
related to stock options of approximately $1.9 million before estimated
forfeitures and after actual cancellations. ASC 718 requires forfeitures to be
estimated at the time of grant and revised if necessary in subsequent periods if
actual forfeitures differ from those estimates. Based on the Company’s
historical experience of option pre-vesting cancellations, the Company has
assumed an annualized forfeiture rate of 14% for its executive options and 25%
for non-executive options. Accordingly, as of March 31, 2010, the Company
estimated that the stock-based compensation for the awards not expected to vest
was approximately $738,000 and therefore, the unrecognized deferred stock-based
compensation balance related to stock options was adjusted to approximately $1.2
million after estimated forfeitures and after actual cancellations. This amount
will be recognized over an estimated weighted average period of 2.8 years. For
the three months ended March 31, 2010 and 2009, the Company granted 160,000 and
378,000 stock options to employees, with an estimated total grant-date fair
value of $63,000 and $255,000, or $0.39 and $0.67 per share,
respectively.
  -10-
 Summary
of Restricted Stock Units
  Information
regarding the restricted stock units outstanding as of March 31, 2010 is
summarized below:
  Number
      of Shares
              
              
              Weighted
      Average Remaining Contractual Life (years)
              
              
              Aggregate
      Intrinsic Value (thousands)As
      of March 31, 2010Restricted
      stock units outstanding
              
              
              1,680,000
              
              
              
              1.66
              
              
              $
              840Restricted
      stock units vested and expected to vest
              
              
              1,512,016
              
              
              
              1.66
              
              
              $
              756
 
  The
intrinsic value of the restricted stock units is calculated as the market value
at end of the fiscal period, based on the closing price of Avistar shares as
quoted on the Pink Sheets as of March 31, 2010 of $0.50.
  As of
March 31, 2010, the Company had an unrecognized stock-based compensation balance
related to restricted stock units to employees and a non-employee consultant of
approximately $537,000, adjusted for estimated forfeitures, which will be
recognized over a weighted average period of 1.66 years. The Company granted
80,000 restricted stock units to a non-employee consultant for the three months
ended March 31, 2010. There were no restricted stock units granted to employees
for the three months ended March 31, 2010 and 2009.
 
 3.
Fair Value Measurement
  ASC 820,
Fair Value Measurements and
Disclosures(ASC 820) defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
Fair value is defined under ASC 820 as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used
to measure fair value under ASC 820 must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value,
which are the following:
  Level
      1 – Quoted prices in active markets for identical assets or
      liabilities.
  Level
      2 – Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable, or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.
  Level
      3 – Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.
  In
accordance with ASC 820, the following table represents the Company’s fair value
hierarchy for its financial assets (cash equivalents) as of March 31, 2010 (in
thousands):
  Fair
      Value
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Cash
      Equivalents (unaudited):Money
      market funds
              
              $
              5
              
              
              $
              5
              
              
              $
              —
              
              
              $
              —Total
      cash equivalents
              
              $
              5
              
              
              $
              5
              
              
              $
              —
              
              
              $
              —
 
 4.
Related Party Transactions
  UBS
Warburg LLC, which is an affiliate of UBS AG, is a stockholder of the Company
and is also a customer of the Company. As of March 31, 2010 and December 31,
2009, UBS Warburg LLC held less than 5% of the Company’s stock. Revenue from UBS
Warburg LLC and its affiliates represented 1% and 8% of the Company’s total
revenue for the three months ended March 31, 2010 and 2009,
respectively.  Management believes the transactions with UBS Warburg
LLC and its affiliates are at terms comparable to those provided to unrelated
third parties. As of March 31, 2010 and December 31, 2009, the Company had
accounts receivable outstanding from UBS Warburg LLC and its affiliates of
approximately $27,000 and $191,000, respectively.
   -11-
  
 5.
      Net Income (Loss) Per Share
  Basic and
diluted net income (loss) per share of common stock is presented in conformity
with ASC 260, Earnings Per
Share (ASC 260), for all periods presented. In accordance with ASC 260,
basic net 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 and vesting of restricted stock units that
have a dilutive effect when applying the treasury stock method.
  For the
three months ended March 31, 2010, due to the Company’s net income for the
period, 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.  Approximately 11.2
million weighted average stock options and 25,000 weighted average restricted
stock units were antidilutive (owing to the fact that the exercise prices of the
options were in excess of the average market price of the Company's common stock
during the three months ended March 31, 2010) and thus were excluded from the
diluted net income per share calculation for the three months ended March 31,
2010. The Company excluded all outstanding stock options from the calculation of
diluted net loss per share for the three months ended March 31, 2009, because
all such securities are anti-dilutive (owing to the fact that the Company was in
a loss position during the time period). Accordingly, diluted net loss per share
is equal to basic net loss per share for the three months ended March 31, 2009.
The total number of potential dilutive common shares excluded from the
calculation of diluted net loss per share for the three months ended March 31,
2009 was 290,044.
  The
following table sets forth the computation of basic and diluted net loss per
share (in thousands, except per share data):
 Three Months Ended March
      31,2010
                
                
                2009(unaudited)Numerator:Net
      income (loss) – basic and diluted
                
                $
                10,229
                
                
                $
                (415
                )Denominator:Basic
      weighted average shares outstanding
                
                
                39,008
                
                
                
                34,698Add:
      dilutive employee stock options
                
                
                17
                
                
                
                —Add:
      dilutive employee restricted stock units
                
                
                272
                
                
                
                —Diluted
      weighted average shares outstanding
                
                
                39,297
                
                
                
                34,698Net
      income (loss) per share – basic
                
                $
                0.26
                
                
                $
                (0.01
                )Net
      income (loss) per share - diluted
                
                $
                0.26
                
                
                $
                (0.01
                )
  6.
Income Taxes
  Income
taxes are accounted for using an asset and liability approach in accordance with
ASC 740, Income Taxes
(ASC 740), which requires the recognition of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company’s financial
statements. The measurement of current and deferred tax liabilities and assets
are based on the provisions of enacted tax law. The effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
  Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and the tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are provided if based upon the weight of
available evidence, it is considered more likely than not that some or all of
the deferred tax assets will not be realized.
  The
Company accounts for uncertain tax positions according to the provisions of ASC
740.  ASC 740 contains a two-step approach for recognizing and
measuring uncertain tax positions. Tax positions are evaluated for recognition
by determining if the weight of available evidence indicates that it is probable
that the position will be sustained on audit, including resolution of related
appeals or litigation. Tax benefits are then measured as the largest amount
which is more than 50% likely of being realized upon ultimate settlement. The
Company considers many factors when evaluating and estimating tax positions and
tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes.  No material changes have
occurred in the Company’s tax positions taken as of December 31, 2009 during the
three months ended March 31, 2010. As of December 31, 2009, the Company had a
net deferred tax asset of $27.5 million and unrecognized tax benefit under ASC
740 of $913,000.  A valuation allowance has been provided for the
entire net deferred tax assets.
  The
provision for income taxes was $337,000 for the three months ended March 31,
2010 which consists primarily of federal and state alternative minimum taxes due
to the Company’s profitability for the quarter as a result of the sale of
substantially all of the Company’s patents and patent applications to
Intellectual Ventures for $11.0 million. The benefit from income taxes of
$58,000 for the three months ended March 31, 2009 reflected the realization of
foreign corporate income tax benefit related to prior tax years for Avistar
Systems U.K. Limited, the Company’s wholly-owned subsidiary in United
Kingdom.
  -12-
 7.
Segment Reporting
  Disclosure
of segments is presented in accordance with ASC 280, Segment Reporting (ASC 280).
ASC 280 establishes standards for disclosures regarding operating segments,
products and services, geographic areas and major customers. The Company is
organized and operates as two operating segments: (1) the design, development,
manufacturing, sale and marketing of networked video communications products
(products division) and (2) the prosecution, maintenance, support and generation
of licensing revenue through license or sale of the Company’s intellectual
property and technology, some of which is used in the Company’s products
(intellectual property division). Service revenue relates mainly to the
maintenance, support, training and software development, and is included in the
products division for purposes of reporting and decision-making. The products
division also engages in corporate functions, and provides financing and
services to its intellectual property division. The Company’s chief operating
decision-maker, its Chief Executive Officer (CEO), monitors the Company’s
operations based upon the information reflected in the following table (in
thousands). The table includes a reconciliation of the revenue and expense
classification used by the CEO with the revenue, other income and expenses
reported in the Company’s 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” as revenue within the intellectual property
division.
  Intellectual
      Property Division
              
              
              Products
      Division
              
              
              Reconciliation
              
              
              TotalThree
      Months Ended March 31, 2010 (unaudited)Revenue
              
              $
              14,149
              
              
              $
              627
              
              
              $
              —
              
              
              $
              14,776Depreciation
      expense
              
              
              —
              
              
              
              (50
              )
              
              
              —
              
              
              
              (50
              )Stock-based
      compensation
              
              
              63
              
              
              
              256
              
              
              
              —
              
              
              
              319Total
      costs and expenses
              
              
              802
              
              
              
              3,400
              
              
              
              —
              
              
              
              4,202Interest
      income
              
              
              —
              
              
              
              1
              
              
              
              —
              
              
              
              1Interest
      expense
              
              
              —
              
              
              
              (9
              )
              
              
              —
              
              
              
              (9
              )Net
      income (loss)
              
              
              13,347
              
              
              
              (3,118
              )
              
              
              —
              
              
              
              10,229Assets
              
              
              532
              
              
              
              1,538
              
              
              
              —
              
              
              
              2,070Three
      Months Ended March 31, 2009 (unaudited)Revenue
              
              $
              1,177
              
              
              $
              2,510
              
              
              $
              (1,057
              )
              
              $
              2,630Depreciation
      expense
              
              
              —
              
              
              
              (59
              )
              
              
              —
              
              
              
              (59
              )Stock-based
      compensation
              
              
              87
              
              
              
              395
              
              
              
              —
              
              
              
              482Total
      costs and expenses
              
              
              (360
              )
              
              
              (3,674
              )
              
              
              1,057
              
              
              
              (2,977
              )Interest
      income
              
              
              —
              
              
              
              6
              
              
              
              —
              
              
              
              6Interest
      expense
              
              
              —
              
              
              
              (132
              )
              
              
              —
              
              
              
              (132
              )Net
      income (loss)
              
              
              817
              
              
              
              (1,232
              )
              
              
              —
              
              
              
              (415
              )Assets
              
              
              1,394
              
              
              
              2,119
              
              
              
              —
              
              
              
              3,513
  International
revenue, which consists of sales to customers with operations principally in
Western Europe and Asia, comprised 25% and 29% of total revenues for the three
months ended March 31, 2010 and 2009, respectively. For the three months ended
March 31, 2010 and 2009, international revenues from customers in the United
Kingdom accounted for 3% and 24% 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.
  8. 
Borrowings
  Line
of Credit
  On
December 23, 2006, the Company entered into a Revolving Credit and
Promissory Note and a Security Agreement with a financial institution to borrow
up to $10.0 million under a revolving line of credit subject to annual renewal
with the consent of the Company and the lender. The Revolving Credit and
Promissory Note was renewed and amended on December 22, 2009 which extended the
maturity date of the facility by one year to December 21, 2010, and increased
the line of credit from $10.0 million to $11.25 million through and including
March 31, 2010 and then decreased the line of credit to $6.0
million.  The maximum facility amount was further reduced to $5.0
million in March 2010 for the remainder of the period through the maturity
date.   The amended security agreement, that was further amended
on January 12, 2010, granted the lender a security interest in and right of
setoff against substantially all of the Company’s assets, tangible and
intangible, except for substantially all of Avistar’s patents and patent
applications sold to Intellectual Ventures pursuant to a patent purchase
agreement dated as of December 18, 2009. Gerald Burnett, the Company’s Chairman,
provided a collateralized guarantee to the financial institution, assuring
payment of the Company’s obligations under the agreement and as a consequence,
there are no restrictive covenants, allowing the Company greater access to the
full amount of the facility. Dr. Burnett also provided a personal guarantee to
the Company assuring the Company a line of credit of $7.0 million with the same
terms and mechanisms as the existing revolving line of credit in the event the
existing revolving line of credit from the financial institution was unavailable
for any reason during the period from its termination on December 21, 2010 to
March 31, 2011.
  -13-
 The
renewed line of credit requires monthly interest-only payments based on Adjusted
LIBOR plus 0.90% or Prime Rate plus 1.00%. The Company elected Adjusted LIBOR
plus 0.90% or 1.15% at December 31, 2009. The Company repaid $11.25 million from
the proceeds of the sale of substantially all of the Company’s patents and
patent applications to Intellectual Ventures and subsequently borrowed $1.1
million under the revolving line of credit during the three months ended March
31, 2010, and had a balance of $1.1 million outstanding as of March 31,
2010.
  9.  Commitments and Contingencies
 
 Software
Indemnifications
  The
Company enters into standard indemnification agreements in the ordinary course
of business. Pursuant to these agreements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally the Company’s business partners or
customers, in connection with any patent, copyright or other intellectual
property infringement claim by any third party with respect to its products. The
term of these indemnification agreements is generally perpetual. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is generally limited to the cost of products
purchased per customer, but may be material when customer purchases since
inception are considered in aggregate. The Company has never incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.
Accordingly, the Company has no liabilities recorded for these agreements as of
March 31, 2010.
  10.
Recent Accounting Pronouncements
 
 In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
Revenue Recognition (Topic
605) – Multiple-Deliverable Revenue Arrangements, a consensus of the FASB
Emerging Issue Task Force (ASU 2009-13), and ASU No. 2009-14, Software (Topic 985) – Certain
Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU
2009-13 requires companies to allocate revenue in multiple-element arrangements
based on an element’s estimated selling price if vendor-specific or other third
party evidence of value is not available.  ASU 2009-14 modifies the
software revenue recognition guidance to exclude from its scope tangible
products that contain both software and non-software components that function
together to deliver a product’s essential functionality.  Both
statements are effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The Company plans to adopt these statements on their effective date.
The Company does not expect the adoption of these statements to have a material
impact of the Company’s financial condition and results of
operations.
  In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value
Measurements. This ASU requires new disclosures and clarifies certain
existing disclosure requirements about fair value measurements. ASU 2010-06
requires a reporting entity to disclose significant transfers in and out of
Level 1 and Level 2 fair value measurements, to describe the reasons for the
transfers and to present separately information about purchases, sales,
issuances and settlements for fair value measurements using significant
unobservable inputs. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements, which is effective for interim and annual
reporting periods beginning after December 15, 2010; early adoption is
permitted. The
Company adopted this statement on January 1, 2010. The adoption of this
statement did not have a material impact on the Company’s financial condition
and results of operation.  The Company does not expect the adoption of
this statement relating to disclosures about purchases, sales, issuances and
settlements in the roll forward of activity in Level 3 fair value measurements
to have a material impact of the Company’s financial condition and results of
operations.
 In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events – Amendments to
Certain Recognition and Disclosure Requirements (ASU
2010-09).  The update removes the requirement for an SEC filer to
disclose the date through which subsequent events have been
evaluated.  The change alleviates potential conflicts between ASC
855-10 and the SEC’s requirements.  ASU 2010-09 is effective upon
issuance of the final update.  The Company adopted this statement upon
its issuance. The adoption of this statement did not have a material impact on
the Company’s financial condition and results of operations.
 
 11.
Subsequent Events
  The
Company has evaluated subsequent events and has concluded that no subsequent
events have occurred since the quarter ended March 31, 2010 that required
additional disclosure in the financial statements.
  Item 2.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The
following discussion and analysis should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and the related Notes
thereto included in this Quarterly Report on Form 10-Q and with Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC on March 30, 2010.
   -14-
 
 This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contains both historical information and forward-looking statements.
These forward-looking 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. 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 the
various risks and other factors that were discussed  under “Risk
Factors” and elsewhere in the 2009 Annual Report on Form 10-K and this Quarterly
Report on Form 10-Q. 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. Moreover, we are under no duty to update any of the
forward-looking statements after the date of this Quarterly Report on Form 10-Q
to conform these statements to actual results.  These forward-looking
statements are made in reliance upon the safe harbor provision of The Private
Securities Litigation Reform Act of 1995.  In addition, historical
information should not be considered an indicator of future
performance.
  Overview
  Avistar
creates technology that provides the missing critical element in unified
communications: bringing people in organizations face-to-face, through enhanced
communications for true collaboration anytime, anyplace. Our latest product,
Avistar C3TM, draws on over a decade of market experience to deliver a
single-click desktop videoconferencing and collaboration experience that moves
business communications into a new era. Available as a stand-alone solution, or
integrated with existing unified communications software from other vendors,
Avistar C3TM users gain an instant messaging-style ability to initiate video
communications across and outside the enterprise. Patented bandwidth management
enables thousands of users to access desktop videoconferencing, Voice over IP
(VoIP) and streaming media without requiring substantial new network investment
or impairing network performance.  By integrating Avistar C3TM tightly
into the way they work, our customers can use our solutions to help reduce costs
and improve productivity and communications within their enterprise and between
enterprises, and to enhance their relationships with customers, suppliers and
partners. Using Avistar C3TM software and leveraging video, telephony and
Internet networking standards, Avistar solutions are designed to be scalable,
reliable, cost effective, easy to use, and capable of evolving with
communications networks as bandwidth increases and as new standards and
protocols emerge. We currently sell our system directly and indirectly to the
small and medium sized business, or SMB, and globally distributed organizations,
or Enterprise, markets comprising the Global 5000. Our objective is to establish
our technology as the standard for networked visual unified communications and
collaboration through limited direct sales, indirect channel sales/partnerships,
and the licensing of our technology and patents to others.
  We have
three go-to-market strategies. Product and Technology Sales involves direct and
channel sales of video and unified communications and collaboration solutions
and associated support services to the Global 5000. Partner and Technology
Licensing involves co-marketing, sales and development, embedding, integration
and interoperability to enterprises. IP Licensing involves the prosecution,
maintenance, support and generation of licensing revenue through either license
or sale of the intellectual property that we have developed, some of which is
used in our products.
  Since
inception, we have recognized the innovative value of our research and
development efforts, and have invested in securing protection for these
innovations through domestic and foreign patent applications and issuance. On January 19, 2010, we licensed our patents to
Springboard Group S.A.R.L., or SKYPE, for an upfront license payment of $3.0
million. On January 21, 2010, we sold substantially all of our patent portfolio
and associated patent applications to Intellectual Ventures Fund 61
LLC  for a one time cash payment of $11.0
million.  Nevertheless, we retained royalty rights under our existing
patent license agreements as well as a grant back license to the patents and
patent applicationsfor our current and
future products.  As a result of this sale, we expect our efforts and
expenditures on patent prosecution, licensing and settlement activities in
future periods to be reduced.  As of March 31, 2010, we held 1 issued
Canadian patent, as well as 7 U.S. patent applications and 1 European patent
application. We continue an active program to strategically grow and protect our
intellectual property portfolio, primarily through the filing of patent
applications.In the future, we also plan to generate licensing revenue through the license or
sale of our existing patent portfolio and patent
applications.
  Critical
Accounting Policies
  The
preparation of our Condensed 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.
  Management
believes that there have been no significant changes to our critical accounting
policies during the three months ended March 31, 2010 from those disclosed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009.
  -15-
 Results
of Operations
  The
following table sets forth data expressed as a percentage of total revenue for
the periods indicated.
  Percentage
      of Total RevenueThree
      Months Ended March 31,2010
              
              
              2009Revenue:Product
              
              
              1
              %
              
              
              51
              %Licensing
      and sale of patents
              
              
              96
              
              
              
              5Services,
      maintenance and support
              
              
              3
              
              
              
              44Total
      revenue
              
              
              100
              
              
              
              100Costs
      and Expenses:Cost
      of product revenues
              
              
              1
              
              
              
              14Cost
      of services, maintenance and support revenues
              
              
              3
              
              
              
              30Income
      from settlement and patent licensing
              
              
              —
              
              
              
              (40
              )Research
      and development
              
              
              13
              
              
              
              35Sales
      and marketing
              
              
              4
              
              
              
              27General
      and administrative
              
              
              8
              
              
              
              47Total
      costs and expenses
              
              
              29
              
              
              
              113Income
      (loss) from operations
              
              
              71
              
              
              
              (13
              )Other
      income (expense):Other
      expense, net
              
              
              —
              
              
              
              (5
              )Total
      other income (expense), net
              
              
              —
              
              
              
              (5
              )Income
      (loss) before provision for (benefit from) income taxes
              
              
              71
              
              
              
              (18
              )Provision
      for (benefit from) income taxes
              
              
              2
              
              
              
              (2
              )Net
      income (loss)
              
              
              69
              %
              
              
              (16
              )%
 
 COMPARISON
OF THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
  Revenue
  Total
revenue increased by $12.1 million or 462%, to $14.8 million for the three month
period ended March 31, 2010, from $2.6 million for the three months ended March
31, 2009, primarily due to the sale of substantially all of our patents to
Intellectual Ventures for $11.0 million and licensing revenue from SKYPE for
$3.0 million, partially offset by a decrease in hardware sales revenue and
software revenue.
  ·
              Product
      revenue decreased by $1.3 million or 94%, to $82,000 for the three month
      period ended March 31, 2010 from $1.3 million for the three months ended
      March 31, 2009. This was primarily due to a decrease in software product
      revenue recognized on our agreement with IBM, and lower software and
      hardware product sales during the quarter ended March 31, 2010, compared
      to the same period in 2009.
  ·
              Licensing and patent sale
      revenue, relating to the licensing and sale of our patent portfolio,
      increased by $14.0 million, to $14.1 million for the three month period
      ended March 31, 2010 from $120,000 for the three months ended March 31,
      2009.  This was due to the sale of substantially all of our
      patents to Intellectual Ventures for $11.0 million and licensing revenue
      from SKYPE for $3.0 million. As a result of the sale of substantially all
      of our patent portfolio, we expect our efforts and expenditures on patent
      prosecution, licensing and settlement activities in future periods to be
      reduced.
  ·
              Services,
      maintenance and support revenue, which includes funded software
      development and maintenance and support, decreased by $618,000, or 53%, to
      $545,000 for the three months ended March 31, 2010, from $1.2 million for
      the three months ended March 31, 2009. This was primarily due to a
      decrease in service revenue from software implementation and enhancement
      services and a decrease in revenue from maintenance contracts with
      existing customers in the quarter ended March 31,
  2010.
  For the
three months ended March 31, 2010, revenue from two customers accounted for 94%
of total revenue compared to four customers and 78% for the three months ended
March 31, 2009. No other customer accounted for greater than 10% of total
revenue in either period.  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
revenues.Cost of product revenues
decreased by $222,000 or 59%, to $153,000 for the three months ended March 31,
2010 from $375,000 for the three months ended March 31, 2009.  The
decrease was mainly attributable to lower hardware product sales, reduced
headcount and a reduction in personnel related expense in the quarter ended
March 31, 2010.
  -16-
 Cost of services, maintenance and
support revenues.Cost of services,
maintenance and support revenues decreased by $419,000, or 52%, to $383,000 for
the three months ended March 31, 2010, from $802,000 for the three months ended
March 31, 2009, primarily due toa decrease in software
implementation and enhancement services for customers in the quarter ended March
31, 2010.
  Income from settlement and patent
licensing.Income from settlement
and patent licensing decreased $1.1 million or 100%, to $0 for the three months
ended March 31, 2010 from $1.1 million for the three months ended March 31,
2009. The decrease was due to the completion of recognition of the net proceeds
from the Polycom settlement and cross-license agreement in November
2009.
  Research and
development.Research and development
expenses increased by $1.0 million, or 113%, to $1.9 million for the three
months ended March 31, 2010 from $911,000 for the three months ended March 31,
2009.  The increase was primarily due to the bonus payout to employees
of our Intellectual Property division totaling $470,000 as a result of the
completion of the sale of substantially all of our  patents to
Intellectual Ventures,  an increase in engineering headcount and
deployment of external labor to accelerate the delivery of our product
roadmap,  and a lower allocation of engineering employee and external
labor expenses to cost of services, maintenance and support revenue associated
with software implementation and enhancement services  during the
three months ended March 31, 2010, compared to the same period of the prior
year.
  Sales and marketing. Sales
and marketing expenses decreased $110,000 or 15%, to $613,000 for the three
months ended March 31, 2010, from $723,000 for the three months ended March 31,
2009, primarily due to a reduction in personnel and personnel related
expenses.
  General and administrative.
General and administrative expenses decreased by $109,000, or 9% to $1.1 million
for the three months ended March 31, 2010, from $1.2 million for the three
months ended March 31, 2009, primarily due reduced headcount, a reduction in
personnel related expenses and the ongoing cost optimization
effort.
  Other
      income (expense)
  Interest income. Interest
income decreased $5,000 or 83%, to $1,000 for the three months ended March 31,
2010, from $6,000 for the three months ended March 31, 2009. The decrease was
primarily due to lower average outstanding balance of cash and cash equivalents
that earned interest and lower interest rates in the three months ended March
31, 2010 compared to the same period in 2009.
  Other expense, net. Other
expense, net, decreased by $123,000, or 93%, to $9,000 for the three months
ended March 31, 2010, from $132,000 for the three months ended March 31, 2009,
primarily due to a decrease in interest expense as a result of a lower average
debt balance and lower interest rates.
  Provision
      for (benefit from) income taxes
  The
provision for income taxes was $337,000 for the three months ended March 31,
2010 which consists primarily of federal and state alternative minimum taxes due
to our profitability for the quarter as a result of the sale of substantially
all of our patents and patent applications to Intellectual Ventures for $11.0
million. The benefit from income taxes of $58,000 for the three months ended
March 31, 2009 reflected the realization of foreign corporate income tax benefit
related to prior tax years for Avistar Systems U.K. Limited, our wholly-owned
subsidiary in the United Kingdom.
  Liquidity
and Capital Resources
  We had
cash and cash equivalents of $688,000 and $294,000 as of March 31, 2010 and
December 31, 2009, respectively. For the three months ended March 31, 2010, we
had a net increase in cash and cash equivalents of $394,000. The net cash
provided by operations of $10.6 million for the three months ended March 31,
2010 resulted primarily from the net income of $10.2 million. The net cash used
in investing activities of $111,000 for the three months ended March 31, 2010
was related to the purchase of property and equipment.  The net cash used
in financing activities of $10.1 million for the three months ended March
31, 2010 related primarily to payments made on our line of credit of $11.25
million, offset by $1.1 million of borrowings on our line of
credit.
  At March
31, 2010, we had approximately $1.9 million in minimum commitments under
non-cancelable operating leases net of sublease proceeds related to our office
space facilities in California and New York.
   -17-
  
 On
December 23, 2006, we entered into a Revolving Credit and Promissory Note
and a Security Agreement with a financial institution to borrow up to $10.0
million under a revolving line of credit subject to annual renewal with the
consent of the Company and the lender. The Revolving Credit and Promissory Note
was renewed and amended on December 22, 2009 which extended the maturity date of
the facility by one year to December 21, 2010, and increased the line of credit
from $10.0 million to $11.25 million through and including March 31, 2010 and
then decreased the line of credit to $6.0 million. The maximum facility amount
was further reduced to $5.0 million in March 2010 for the remainder of the
period through the maturity date.   The amended security
agreement, that was further amended on January 12, 2010, granted the lender a
security interest in and right of setoff against substantially all of our
assets, tangible and intangible, except for substantially all of our patents and
patent applications which we sold to Intellectual Ventures Fund 61 LLC pursuant
to a patent purchase agreement dated as of December 18, 2009. Gerald Burnett,
our Chairman, provided a collateralized guarantee to the financial institution,
assuring payment of our obligations under the agreement and as a consequence,
there are no restrictive covenants, allowing us greater access to the full
amount of the facility. Dr. Burnett also provided a personal guarantee to us
assuring us a line of credit of $7.0 million with the same terms and mechanisms
as the existing revolving line of credit in the event the existing revolving
line of credit from the financial institution was unavailable for any reason
during the period from its termination on December 21, 2010 to March 31, 2011.
The renewed line of credit requires monthly interest-only payments based on
Adjusted LIBOR plus 0.90% or Prime Rate plus 1.00%. We elected Adjusted LIBOR
plus 0.90% or 1.15% at December 31, 2009. We repaid $11.25 million from the
proceeds of the sale of substantially all of our patents and patent applications
to Intellectual Ventures and subsequently borrowed $1.1 million under the
revolving line of credit during the three months ended March 31, 2010, and had a
balance of $1.1 million outstanding as of March 31, 2010.
  On January 19, 2010, we entered into a patent license
agreement with Springboard Group S.A.R.L., or SKYPE.  Under the agreement,
we granted to SKYPE for the lives of the patents, a royalty-free, irrevocable,
non-exclusive license under certain patents to make, have made (subject to
certain limitations), use, import or export, offer to sell, sell, lease,
license, or otherwise transfer or distribute certain licensed products. 
These granted rights and license include rights for authorized entities and end
users of SKYPE to form combinations with other products for certain authorized
purposes.  As consideration for the license, we received a payment of $3.0
million from SKYPE on January 25, 2010.
 On
January 21, 2010, we completed the sale of substantially all of our U.S. patents and patent applications, and related
foreign patents and patent applications to Intellectual Ventures related to an
agreement that was entered into on December 18, 2009.  We received the purchase price
of $11.0 million from Intellectual Ventures on
January 21, 2010.  We also obtained a full grant-back royalty-free, irrevocable license to the
patent portfolio from Intellectual Ventures to make, use and sell any Avistar
product or service covered by the patents sold.
 As of March 31, 2010, we had no material off-balance
sheet arrangements, other than the operating lease described
above.   We enter into indemnification provisions under
agreements with other companies in our ordinary course of business, typically
with our contractors, customers, landlords and our investors. Under these
provisions, we generally indemnify and hold harmless the indemnified party for
losses suffered or incurred by the indemnified party as a result of our
activities or, in some cases, as a result of the indemnified party's activities
under the agreement. These indemnification provisions generally survive
termination of the underlying agreement. The maximum potential amount of future
payments we could be required to make under these indemnification provisions is
generally unlimited. As of March 31, 2010, 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 March
31, 2010.
  Based on
the proceeds we received from the license of our patents and the sale of the
majority of our patents and patent applications in January 2010, the results of
our ongoing cost reduction efforts and Dr. Burnett’s personal guarantee to
Avistar to support an extension of the revolving line of credit, we believe that
our existing cash and cash equivalents balance and line of credit will provide
us with sufficient funds to finance our operations for the next 12 months. We
intend to continue to invest in the development of new products and enhancements
to our existing products. Our future liquidity and capital requirements will
depend upon numerous factors, including without limitation, general economic
conditions and conditions in the financial services industry in particular, the
level and timing of product, the maintenance of our cost control measures
structured to align operations with predictable revenues, the costs and timing
of our product development efforts and the success of these development efforts,
the costs and timing of our sales, partnering and marketing activities, the
extent to which our existing and new products gain market acceptance and
competing technological and market developments, all of which may impact our
ability to achieve and maintain profitability or generate positive cash
flows.
  From time to time, we may be required to raise
additional funds through public or private financing, strategic relationships or
other arrangements. There can be no assurance that such funding, if needed, will
be available on terms attractive to us, or at all. Furthermore, any additional
debt or equity financing arrangements may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. Strategic
arrangements, if necessary to raise additional funds, may require us to
relinquish some or all of our rights to certain of our technologies or products.
Our potential inability to raise capital when needed could have a material
adverse effect on our business, operating results and financial
condition.
 -18-
  Recent
Accounting Pronouncements
  See Note 10 to our unaudited condensed consolidated
financial statements included in this report for recently issued accounting
standards, including the expected dates of adoption and estimated effects on our
condensed consolidated financial statements.
  Item 3.Quantitative and
Qualitative Disclosures about Market Risk
  As a
“smaller reporting company” as defined by Regulation S-K, the Company is not
required to provide information required by this item.
  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 (the Evaluation Date).
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded as of the Evaluation Date that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) were effective such that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act (i) is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure, and
(ii) is recorded, processed, summarized and reported within the time
periods specified in 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 executed, 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 have been no changes in our
internal control over financial reporting that occurred during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
  PART II - OTHER INFORMATION
 
 Item
1.  Legal
Proceedings
  From time
to time we may encounter other claims in the normal course of business that are
not expected to have a material effect on our business.  However,
dispute resolution is inherently unpredictable, and the costs and other effects
of pending or future claims, litigation, legal and administrative cases and
proceedings, and changes in any such matters, and developments or assertions by
or against us relating to intellectual property rights and intellectual property
licenses, could have a material adverse effect on our business, financial
condition and operating results.
  Item 1A.Risk
Factors
  This
Quarterly Report on Form 10-Q, or Form 10-Q, including any information
incorporated by reference herein, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, referred to as
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, referred to as the Exchange Act.  In some cases, you can
identify forward-looking statements by terms such as “may,” “will,” “should,”
“expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” “continue” or the negative of these terms or other
comparable terminology.  The forward-looking statements contained in
this Form 10-Q involve known and unknown risks, uncertainties and situations
that may cause our or our industry’s actual results, level of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
statements.  These factors include those listed below in this Item 1A
and those discussed elsewhere in this Form 10-Q.  We encourage
investors to review these factors carefully.  We may from time to time
make additional written and oral forward-looking statements, including
statements contained in our filings with the SEC.  However, we do not
undertake to update any forward-looking statement that may be made from time to
time by or on behalf of us.
  Before
you invest in our securities, you should be aware that our business faces
numerous financial and market risks, including those described below, as well as
general economic and business risks.  The following discussion
provides information concerning the material risks and uncertainties that we
have identified and believe may adversely affect our business, our financial
condition and our results of operations.  Before you decide whether to
invest in our securities, you should carefully consider these risks and
uncertainties, together with all of the other information included in this
Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended
December 31, 2009 and in our other public filings.
  This
risks set forth below supersede the description of the risk factors associated
with our business previously disclosed in Part I, Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2009.
  -19-
 Risks
Relating to Our Common Stock
  Our
stock is quoted on the Pink Sheets, which may decrease the liquidity of our
common stock.
  On June
24, 2009, the NASDAQ Stock Market, Inc. suspended our common stock from trading
on NASDAQ because we did not evidence a market value of listed securities above
$35.0 million for ten consecutive trading days, or otherwise demonstrate
compliance with alternative continued listing standards, during the period from
April 2, 2009 to June 22, 2009.  Since that time our common stock has
been quoted on the Pink Sheets under the symbol AVSR.PK.  On August 6,
2009, we withdrew our appeal to the NASDAQ Listing and Hearing Review Council.
On August 31, 2009, the NASDAQ Stock Market, Inc. officially delisted our common
stock.
  Broker-dealers
often decline to trade in Pink Sheet stocks given that the market for such
securities is often limited, the stocks are more volatile, and the risk to
investors is greater than with stocks listed on other national securities
exchanges. Consequently, selling our common stock can be difficult because
smaller quantities of shares can be bought and sold, transactions can be delayed
and news media coverage of our Company may be reduced. These factors could
result in lower prices and larger spreads in the bid and ask prices for shares
of our common stock as well as lower trading volume. Investors should realize
that they may be unable to sell shares of our common stock that they purchase.
Accordingly, investors must be able to bear the financial risks associated with
losing their entire investment in our common stock.
  Our
common stock may be subject to penny stock rules, which may make it more
difficult for our stockholders to sell their common stock.
  Our
common stock may be considered a “penny stock” pursuant to Rule 3a51-1 of the
Exchange Act. Broker-dealer practices in connection with transactions in penny
stocks are regulated by certain penny stock rules adopted by the SEC. Penny
stocks generally are defined as equity securities with a price of less than
$5.00 per share. The penny stock rules require a broker-dealer, prior to
purchase or sale of a penny stock not otherwise exempt from the rules, to
deliver to the customer a standardized risk disclosure document that provides
information about penny stocks and the risks associated with the penny stock
market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer account. In addition, the
penny stock rules generally require that, prior to a transaction in a penny
stock, the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market of a
stock that becomes subject to the penny stock rules.
  Our
common stock has been and will likely continue to be subject to substantial
price and volume fluctuations due to a number of factors, many of which will be
beyond our control, which may prevent our stockholders from reselling our common
stock at a profit.
  The
trading price of our common stock has in the past been and could in the future
be subject to significant fluctuations in response to:
  •
                    General
      trends in the equities market, and/or trends in the technology
      sector;
  •
                    Quarterly
      variations in our results of
operations;
  •
                    Announcements
      regarding our product developments;
  •
                    The
      size and timing of agreements to license our remaining and future patent
      portfolio or enter into technology or distribution
      partnerships;
  •
                    Developments
      in the examination of our patent applications by the U.S. Patent and
      Trademark Office;
  •
                    Announcements
      of technological innovations or new products by us, our customers or
      competitors;
  •
                    Announcements
      of competitive product introductions by our
  competitors;
  •
                    Limited
      trading volume of shares; and,
  •
                    Developments
      or disputes concerning patents or proprietary rights, or other
      events.
  If our
revenue and results of operations are below the expectations of public market
securities analysts or investors, then significant fluctuations in the market
price of our common stock could occur. In addition, the securities markets have
recently experienced significant price and volume fluctuations, which have
particularly affected the market prices for high technology and micro-cap
companies, and which often are unrelated and disproportionate to the operating
performance of specific companies. These broad market fluctuations, as well as
general economic, political and market conditions, may negatively affect the
market price of our common stock.
  -20-
 Provisions
of our certificate of incorporation, our bylaws and Delaware law may make it
difficult for a third party to acquire us, despite the possible benefits to our
stockholders.
  Our
certificate of incorporation, our bylaws, and Delaware law contain provisions
that may inhibit changes in our control that are not approved by our Board of
Directors. For example, the Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the terms of this
preferred stock, without any further vote or action on the part of the
stockholders.
  These
provisions may have the effect of delaying, deferring or preventing a change in
the control of Avistar despite possible benefits to our stockholders, may
discourage bids at a premium over the market price of our common stock, and may
adversely affect the market price of our common stock and the voting and other
rights of our stockholders.
  Our
principal stockholders can exercise a controlling influence over our business
affairs and they may make business decisions with which you disagree and which
may affect the value of your investment.
  Our
executive officers, directors and entities affiliated with them, in the
aggregate, beneficially owned approximately 64% of our common stock as of March
31, 2010. If they were to act together, these stockholders would be able to
exercise control over most matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. These actions may be taken even if they are opposed by other
investors. This concentration of ownership may also have the effect of delaying
or preventing a change in control of Avistar, which could cause the market price
of our common stock to decline.
  If
our share price is volatile, we may be the target of securities litigation,
which is costly and time-consuming to defend.
  In the
past, following periods of market volatility in the price of a company’s
securities, security holders have often instituted class action litigation. Many
technology companies have been subject to this type of litigation. Our share
price has, in the past, experienced price volatility, and may continue to do so
in the future. If the market value of our common stock experiences adverse
fluctuations and we become involved in this type of litigation, regardless of
the merits or outcome, we could incur substantial legal costs and our
management’s attention could be diverted, causing our business, financial
condition and operating results to suffer.
  Risks
Related to Our Business
  We
have incurred substantial losses in the past and may not be profitable in the
future.
  We
recorded a net income of $10.2 million for the three months ended March 31,
2010, a net loss of $4.0 million for fiscal year 2009 and a net loss of $6.4
million for fiscal year 2008. As of March 31, 2010, our accumulated deficit was
$105.9 million. Our revenue and income from settlement and patent licensing may
not increase, or even remain at its current level. In addition, our operating
expenses may increase as we continue to develop our business and pursue
licensing opportunities. As a result, to remain profitable, we will need to
increase our revenue from product sales and patent licensing or sales by
increasing sales to existing customers and by attracting additional new
customers, distribution partners and patent licensees. If our revenue does not
increase adequately, we may not become profitable. Due to the volatility of our
product and licensing revenue and our income from settlement and patent
licensing activities, we may not be able to achieve, sustain or increase
profitability on a quarterly or annual basis. If we fail to maintain
profitability or to sustain or grow our profits within the time frame expected
by investors, the market price of our common stock may be adversely
impacted.
  Our
expected future working capital needs may require that we seek additional debt
or equity funding which, if not available on acceptable terms, could cause our
business to suffer.
  We may
need to arrange for the availability of additional funding in order to meet our
future business requirements. We have a revolving credit facility that matures
on December 21, 2010, which provides us with a maximum line of credit amount of
$5.0 million as of March 31, 2010. If we are unable to obtain additional funding
when needed on acceptable terms, we may not be able to develop or enhance our
products, take advantage of opportunities, respond to competitive pressures or
unanticipated requirements, or finance our efforts to protect and enforce our
intellectual property rights, which could seriously harm our business, financial
condition, results of operations and ability to continue
operations.  We have in the past, and may in the future, reduce our
expenditures by reducing our employee headcount in order to better align our
expenditures with our available resources.  Any such reductions may
adversely affect our ability to maintain or grow our business.
   -21-
  We
have implemented significant changes in our organizational structure, sales,
marketing and distribution strategies, licensing efforts and strategic
direction, which, if unsuccessful, could adversely affect our business and
results of operations.
  We have
experienced significant changes in our management structure and
composition.  In September 2007, William Campbell resigned from the
position of Chief Operating Officer.  Simon Moss was appointed as
President of our products division in July 2007 and was appointed as our Chief
Executive Officer in January 2008 when Gerald Burnett resigned from his position
as our Chief Executive Officer.  In January 2009, Bob Habig resigned
from the position of Chief Financial Officer and he was replaced in that
position by Elias MurrayMetzger, our Corporate Controller.  In July
2009, Simon Moss resigned from his positions as Chief Executive Officer and
board member.  Shortly thereafter, Robert Kirk was appointed to
replace Simon Moss as our Chief Executive Officer.  In August 2009,
Darren Innes resigned from the position of General Manager and Vice President,
Global Sales.
  These and
other changes in our business are aimed at reducing our structural costs,
increasing our organizational and partner-driven capacity, leveraging our
reputation for innovation and intellectual property leadership, and growing and
expanding our business.  However, these organizational changes and
initiatives involve transitional costs and expenses and result in uncertainty in
terms of their implementation and their impact on our business. For example, our
efforts to expand our market focus to additional verticals through the use of
distribution partners has proven challenging as such distribution partners work
to better understand our product and service offerings and integrate them into
their own marketing and sales strategies.   As with any
significant organizational change, our initiatives will take time to implement,
and the results of these initiatives may not be fully apparent in the near
term.  If our initiatives are unsuccessful in achieving our stated
objectives, our business could be harmed and our results of operations and
financial condition could be adversely affected.
  Our
market is in the early stages of development, and our system may not be widely
accepted.
  Our
ability to achieve profitability depends in part on the widespread adoption of
networked video communications systems and the sale and adoption of our video
system in particular, either as a separate solution or as a technology
integrated into a unified communications platform. If the market for our system
and technology fails to grow or grows more slowly than we anticipate, we may not
be able to increase revenue or achieve profitability. The market for our system
is relatively new and evolving. We have to devote substantial resources to
educating prospective customers, distributors and technology partners about the
uses and benefits of our system and the value added through the adoption of our
technology. Our efforts to educate potential customers and partners may not
result in our system achieving broad market acceptance. In addition, businesses
that have invested or may invest substantial resources in other video products
may be reluctant or slow to adopt our system or technology. Consequently, the
conversion from traditional methods of communication to the extensive use of
networked video and unified communications may not occur as rapidly as we
wish.
  Our
lengthy sales cycle to acquire new customers, large follow-on orders,
distributors and technology partners may cause our operating results to vary
significantly and make it more difficult to forecast our revenue.
  We have
generally experienced a product sales cycle of four to nine months for new
customers or large follow-on orders from existing customers through direct
sales.   This sales cycle is due to the time needed to educate
customers about the uses and benefits of our system, and the time needed to
process the investment decisions that our prospective customers must make when
they decide to buy our system. Many of our prospective customers have neither
budgeted expenses for networked video communications systems, nor for personnel
specifically dedicated to the procurement, installation or support of these
systems. As a result, our customers spend a substantial amount of time before
purchasing our system in performing internal reviews and obtaining capital
expenditure approvals. Economic conditions over the last several years have
contributed to additional deliberation and an associated delay in the sales
cycle.
  Our
lengthy sales cycle is one of the factors that has caused, and may continue to
cause our operating results to vary significantly from quarter-to-quarter and
year-to-year in the future. This makes it difficult for us to forecast revenue,
and could cause volatility in the market price of our common
stock.  Our shift to indirect distribution partners further limits the
visibility we have on the progress and timing of large initial or follow-on
orders. A lost or delayed order could result in lower than expected revenue in a
particular quarter or year. There is also a tendency in the technology industry
to close business deals at the end of a quarter, thereby increasing the
likelihood that a possible material deal would not be concluded in a current
quarter, but slip into a subsequent reporting period. This kind of delay may
result in a given quarter’s performance being below shareholder
expectations.
   -22-
  Because
we still depend on a few customers for a majority of our license revenue,
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.
  As of
March 31, 2010, approximately 77% of our gross accounts receivable was
concentrated with two customers, each of whom represented more than 10% of our
gross accounts receivable. As of December 31, 2009, approximately 87% of
our gross accounts receivable was concentrated with four customers, each of whom
represented more than 10% of our gross accounts receivable.
  The loss
of a major customer or the reduction, delay or cancellation of orders from one
or more of our significant customers could cause our revenue to decline and our
losses to increase.  Additionally, we completed the amortization of
the Polycom, Inc. proceeds in 2009. If we are unable to license our current and
future patent portfolio to additional parties on terms equal to or better than
our agreements with Polycom, Inc. and others, our licensing revenue and our
income from settlement and licensing will decline, which could cause our losses
to increase. We currently depend on a limited number of customers with lengthy
budgeting cycles and unpredictable buying patterns, and as a result, our revenue
from quarter-to-quarter or year-to-year may be volatile. Adverse changes in our
revenue or operating results as a result of these budgeting cycles or any other
reduction in capital expenditures by our large customers could substantially
reduce the trading price of our common stock.
  We
may not be able to modify and improve our products in a timely and cost
effective manner to respond to technological change and customer
demands.
  Future
hardware and software platforms embodying new technologies and the emergence of
new industry standards and customer requirements could render our system
non-competitive or even obsolete.  Additionally, communication and
collaboration products and technologies are moving towards integrated platforms
characterized as unified communications. The market for our system
reflects:
  •      Rapid
technological change;
  •      The
emergence of new competitors;
  •      Significant
development costs;
  •      Changes
in the requirements of our customers and their communities of
users;
  •      Integration
of joint solutions in collaboration platforms;
  •      Evolving
industry standards;
  •      Transition
from hardware appliances and infrastructure to software; and
  •
                    Transition
      to Internet protocol connectivity for video at the desktop, with
      increasing availability of bandwidth and quality of
    service.
  Our
system is designed to work with a variety of hardware and software
configurations, and be integrated with commoditized components (example: “web
cams”) of data networking infrastructures used by our customers. The majority of
these customer networks rely on Microsoft Windows servers. However, our software
may not operate correctly on other hardware and software platforms or with other
programming languages, database environments and systems that our customers use.
Also, we must constantly modify and improve our system to keep pace with changes
made to our customers’ platforms, data networking infrastructures, and their
evolving ability to integrate video with other applications. This may result in
uncertainty relating to the timing and nature of our new release announcements,
introductions or modifications, which in turn may cause confusion in the market,
with a potentially harmful effect on our business. If we fail to promptly
modify, integrate, or improve our system in response to evolving industry
standards or customers’ demands, our system could become less competitive, which
would harm our financial condition and reputation.
  Difficulties
or delays in integrating our products with technology partners’ products could
harm our revenue and margins.
  We
generally recognize initial product and installation revenue upon the
installation of our system in those cases where we are responsible for
installation, which often entails working with sophisticated software and
computing and communications systems. Under certain circumstances initial
product and installation revenue is recognized under the percentage of
completion method. The estimate of current period percentage of completion
requires significant management judgment and is subject to updates in future
periods until the project is complete. If we experience difficulties with
installations or do not meet deadlines due to delays caused by our customers or
ourselves, we could be required to devote more customer support, technical,
engineering and other resources to a particular installation, modification or
enhancement project, and revenue may be delayed.
   -23-
  Competition
could reduce our market share and decrease our revenue.
  The
market in which we operate is highly competitive. In addition, because our
industry is relatively new and is characterized by rapid technological change,
evolving user needs, developing industry standards and protocols and the
introduction of new products and services, it is difficult for us to predict
whether or when new competing technologies or new competitors will enter our
market. Currently, our competition comes from many other kinds of companies,
including communication equipment, integrated solution, broadcast video and
stand-alone “point solution” providers. Within the video-enabled network
communications market, we compete primarily against Polycom, Inc., Cisco
Systems, Inc., Sony Corporation, Apple Inc., Radvision Ltd. and Emblaze-VCON
Ltd.  Many of these companies, including Polycom, Inc., Cisco, Sony,
Radvision and Emblaze-VCON have acquired rights to use our patented technology
through licensing agreements with us, which, in some cases, include rights to
use future patents filed by us.  With increasing interest in the power
of video collaboration and the establishment of communities of users, we believe
we face increasing competition from alternative video communications solutions
that employ new technologies or new combinations of technologies from companies
such as Cisco Systems, Inc., Avaya, Inc., Microsoft Corporation and Nortel
Networks Corporation that enable web-based or network-based video communications
with low-cost digital camera systems.
  We
expect competition to increase in the future from existing competitors,
partnerships of competitors, and from new market entrants with products that may
be less expensive than ours, or that may provide better performance or
additional features not currently provided by our products. Many of our current
and potential competitors have substantially greater financial, technical,
manufacturing, marketing, distribution and other resources, greater name
recognition and market presence, longer operating histories, lower cost
structures and larger customer bases than we do. As a result, they may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements.
  We may be
required to reduce prices or increase spending in response to competition in
order to retain or attract customers, pursue new market opportunities or invest
in additional research and development efforts. As a result, our revenue,
margins and market share may be harmed. We cannot assure you that we will be
able to compete successfully against current and future competitors and
partnerships of our competitors, or that competitive pressures faced by us will
not harm our business, financial condition and results of
operations.
  General
economic conditions may impact our revenues and harm our business in the future,
as they have in the past.
  The U.S.
and global economy has entered a recession and our customers and potential
customers, partners and distributors may delay or forego ordering our products,
and we could fall short of our revenue expectations for 2010 and beyond. Slower
growth among our customers, tightening of customers’ operating budgets,
retrenchment in the capital markets and other general economic factors all have
had, and could in the future have, a materially adverse effect on our revenue,
capital resources, financial condition and results of operations.
  The sale of substantially all of our patents and patent
applications in January 2010 is expected to affect our cash, expenses, revenues
and income in future periods.
 
 In prior periods, we have relied on patent licensing
revenues and income from settlement and licensing activities to provide
significant funding for our operations.  We recognized a total of $4.5
million, $5.2 million, and $21.2 million in licensing revenues and income from
settlement and licensing activities for the years ended December 31, 2009, 2008
and 2007, respectively.  In January 2010, we sold substantially all of
our patent portfolio and associated patent applications to Intellectual Ventures
for a one time cash payment of $11.0 million.  We retained royalty
rights under our existing patent license agreements as well as a grant back
license to the patents and patent applications for our current and future
products.  As a result of this sale, we expect our efforts and
expenditures on patent prosecution, licensing and settlement activities in
future periods to be substantially reduced and our prospects for revenues from
the licensing or sale of patents and patent applications and our prospects for
generating new income from settlement and licensing activities to also be
substantially reduced.  Accordingly, our ongoing operations will have
to be funded directly from operations and from debt and equity financing
activities.  Failure to generate cash from operations or from debt or
equity financing activities would have a substantial and adverse affect on our
business, operations and prospects.
  -24-
  Future
revenues and income from settlement and licensing activities are difficult to
predict for several reasons, including our lengthy and costly licensing cycle.
Our failure to predict revenues and income accurately may cause us to miss
analysts’ estimates and result in our stock price declining.
  Because
our licensing cycle is a lengthy process, the accurate prediction of future
revenues and income from settlement and patent licensing from new licensees is
difficult. The process of persuading companies to adopt our technologies can be
lengthy, and other challenges to our patent portfolio may further complicate and
delay our patent licensing efforts.  There is also a tendency in the
technology industry to close business deals at the end of a quarter, thereby
increasing the likelihood that a possible material deal would not be concluded
in a current quarter, but slip into a subsequent reporting period. This kind of
delay may result in a given quarter’s performance being below analyst or
shareholder expectations. The proceeds of our intellectual property licensing
efforts tend to be sporadic and difficult to predict. Recognition of those
proceeds as revenue or income from settlement and licensing activities depends
on the terms of the license agreement involved, and the circumstances
surrounding the agreement. To finance litigation to defend or enforce our
intellectual property rights, we may enter into contingency arrangements and
other strategic transactions with investors, legal counsel or other advisors
that would give such parties a significant portion of any future licensing and
settlement amounts derived from our patent portfolio. As a result, our licensing
and enforcement efforts are expected to result in significant volatility in our
quarterly and annual financial condition and results of operations, which may
result in us missing investor expectations, which may cause our stock price to
decline. As a result of the sale of substantially all of our patents in January
2010, we expect our efforts and expenditures on patent prosecution, licensing,
sale and settlement activities in future periods to be reduced.
  Infringement of our proprietary
rights could affect our competitive position, harm our reputation or cost us
money.
  We regard
our system as open but proprietary. In an effort to protect our proprietary
rights, we rely primarily on a combination of patent, copyright, trademark and
trade secret laws, as well as licensing, non-disclosure and other agreements
with our consultants, suppliers, customers, partners and employees. However,
these laws and agreements provide only limited protection of our proprietary
rights. In addition, we may not have signed agreements in every case, and the
contractual provisions that are in place and the protection they produce may not
provide us with adequate protection in all circumstances. Although we hold
patents and have filed patent applications covering some of the inventions
embodied in our systems, our means of protecting our proprietary rights may not
be adequate. It is possible that a third party could copy or otherwise obtain
and use our technology without authorization and without our detection. In the
event that we believe a third party is infringing our intellectual property
rights, an infringement claim brought by us could, regardless of the outcome,
result in substantial cost to us, divert our management’s attention and
resources, be time consuming to prosecute and result in unpredictable damage
awards. A third party may also develop similar technology independently, without
infringing upon our patents and copyrights. In addition, the laws of some
countries in which we sell our system may not protect our software and
intellectual property rights to the same extent as the laws of the United States
or other countries where we hold patents. As we move to more of a software based
system, inadequate licensing controls, unauthorized copying, and use, or reverse
engineering of our system could harm our business, financial condition or
results of operations.
  Others
may bring infringement claims against us or challenge the legitimacy of our
patents, which could be time-consuming and expensive to defend.
  In recent
years, there has been significant litigation in the United States involving
patents and other intellectual property rights. We have been party to such
litigation in the past and may be again in the future. The prosecution and
defense of such lawsuits would require us to expend significant financial and
managerial resources, and therefore may have a material negative impact on our
financial position and results of operations. The duration and ultimate outcome
of these proceedings are uncertain. We may be a party to additional litigation
in the future to protect our intellectual property, or as a result of an alleged
infringement of the intellectual property of others. These claims and any
resulting lawsuit could subject us to significant liability for damages and
invalidation of our proprietary rights. In addition, the validity of our patents
has been challenged in the past and may be challenged in the future through
reexamination requests or other means. These lawsuits or challenges of our
patents legitimacy in the US or foreign patent offices, regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management’s time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
  •      Stop
selling, incorporating or using products or services that use the challenged
intellectual property;
  •
                    Obtain
      from the owner of the infringed intellectual property a license to the
      relevant intellectual property, which may require us to license our
      intellectual property to such owner, or may not be available on reasonable
      terms or at all; and
  •      Redesign
those products or services that use technology that is the subject of an
infringement claim.
  If we are
forced to take any of the foregoing actions, we may be unable to manufacture,
use, sell, import and export our products, which would reduce our
revenues.
   -25-
  Our
Compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls may be time-consuming, difficult and costly for us.
  It may be time consuming, difficult and costly for us to
fully implement internal controls and reporting procedures required by the
Sarbanes-Oxley Act which relate to auditor attestation.  We may need
to hire additional financial reporting, internal control and other finance staff
in order to support the auditor attestation of appropriate internal controls and
reporting procedures.  If we are unable to comply with these
additional requirements of the Sarbanes-Oxley Act, we may not be able to obtain
the independent accountant certifications/attestations that the Sarbanes-Oxley
Act requires of smaller reporting companies effective for issuers with fiscal
years ending on or after June 15, 2010.
 
 If our
customers do not perceive our system or services to be effective or of high
quality, our brand and name recognition would suffer.
  We
believe that establishing and maintaining brand and name recognition is critical
for attracting and expanding our targeted customer base. We also believe that
the importance of reputation and name recognition will increase as competition
in our market increases. Promotion and enhancement of our name will depend on
the success of our marketing efforts, and on our ability to continue to provide
high quality systems and services, neither of which can be assured. If our
customers do not perceive our system or services to be effective or of high
quality, our brand and name recognition will suffer, which would harm our
business.
  Our
system could have defects for which we could be held liable for, and which could
result in lost revenue, increased costs, and loss of our credibility or delay in
the further acceptance of our system in the market.
  Our
system may contain errors or defects, especially when new products are
introduced or when new versions are released. Despite internal system testing,
we have in the past discovered software errors in some of the versions of our
system after their introduction. Errors in new systems or versions could be
found after commencement of commercial shipments, and this could result in
additional development costs, diversion of technical and other resources from
our other development efforts or the loss of credibility with current or future
customers. Any of these events could result in a loss of revenue or a delay in
market acceptance of our system, and could harm our reputation.
  In
addition, we have warranted to some of our customers that our software is free
of viruses. If a virus infects a customer’s computer software, the customer
could assert claims against us, which, regardless of their merits, could be
costly to defend and could require us to pay damages and potentially harm our
reputation.
  Our
license agreements with our customers typically contain provisions designed to
limit our exposure to potential product liability and certain contract claims.
Our license agreements also typically limit a customer’s entire remedy to either
a refund of the price paid or modification of our system to satisfy our
warranty. However, these provisions vary as to their terms and may not be
effective under the laws of some jurisdictions. Although we maintain product
liability (“errors and omissions”) insurance coverage, we cannot assure you that
such coverage will be adequate. A product liability, warranty or other claim
could harm our business, financial condition and/or results of operations.
Performance interruptions at a customer’s site could negatively affect the
demand for our system or give rise to claims against us.
  The third
party software we license with our system may also contain errors or defects for
which we do not maintain insurance. Typically, our license agreements transfer
any warranty from the third party to our customers to the extent permitted.
Product liability, warranty or other claims brought against us with respect to
such warranties could, regardless of their merits, harm our business, financial
condition or results of operations.
  If
we are unable to expand our indirect distribution channel, our business will
suffer.
  To
increase our revenue, we must increase our indirect distribution channels, such
as systems integrators, product partners and/or value-added resellers, which is
a focus of our go-to market strategy, and/or effect sales through our customers.
If we are unable to increase our indirect distribution channel due to our own
cost constraints, limited availability of qualified partners or other reasons,
our future revenue growth may be limited and our future operating results may
suffer. We cannot assure you that we will be successful in attracting,
integrating, motivating and retaining sales personnel and channel partners.
Furthermore, it can take several months before a new hire or channel partner
becomes a productive member of our sales force effort. The loss of existing
salespeople, or the failure of new salespeople and/or indirect sales partners to
develop the necessary skills in a timely manner, could impact our revenue
growth.
  We
may not be able to retain our existing key personnel, or hire and retain the
additional personnel that we need to sustain and grow our business.
  We depend
on the continued services of our executive officers and other key personnel. We
do not have long-term employment agreements with our executive officers or other
key personnel and we do not carry any “key man” life insurance. The loss of the
services of any of our executive officers or key personnel could harm our
business, financial condition and results of operations.
  -26-
 Our
products and technologies are complex, and to successfully implement our
business strategy and manage our business, an in-depth understanding of video
communication and collaboration technologies and their potential uses is
required. We need to attract and retain highly skilled technical and managerial
personnel for whom there is intense competition. If we are unable to attract and
retain qualified technical and managerial personnel due to our own cost
constraints, limited availability of qualified personnel or other reasons, our
results of operations could suffer and we may never achieve profitability. The
failure of new personnel to develop the necessary skills in a timely manner
could harm our business.
 
 Our plans call for growth in our
business, and our inability to achieve or manage growth could harm our
business.
 
 Failure
to achieve or effectively manage growth will harm our business, financial
condition and operating results. Furthermore, in order to remain competitive or
to expand our business, we may find it desirable in the future to acquire other
businesses, products or technologies. If we identify an appropriate acquisition
candidate, we may not be able to negotiate the terms of the acquisition
successfully, to finance the acquisition or to integrate the acquired
businesses, products or technologies into our existing business and operations.
In addition, completing a potential acquisition and integrating an acquired
business may strain our resources and require significant management
time.
  Our international operations expose
us to potential tariffs and other trade barriers, unexpected changes in foreign
regulatory requirements and laws and economic and political instability, as well
as other risks that could adversely affect our results of
operations.
  International
revenue, which consists of sales to customers with operations principally in
Western Europe and Asia, comprised 25% and 29% of total revenues for the three
months ended March 31, 2010 and 2009, 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.
  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.
   -27-
 
 Item
2.  Unregistered Sales of
Equity Securities and Use of Proceeds
  Not
applicable.
   Item
3.  Defaults Upon Senior
Securities
  Not
applicable.
   Item
4.  Submission of Matters
to a Vote of Security Holders
 
 Not
applicable.
   Item
5.Other
Information
 
 Not
applicable.
  
 Item 6.Exhibits
 
 Exhibit Number
                    
                    Description10.1†
                    
                    Patent
      License Agreement dated January 19, 2010 between Avistar Communications
      Corporation and Springboard Group S.A.R.L.10.2
                    
                    Amendment
      to Second Amended and Restated Revolving Credit Promissory Note issued by
      Avistar Communications Corporation to JPMorgan Chase Bank, N.A. dated
      February 22, 2010.10.3
                    
                    Reaffirmation
      of Guaranty issued by Gerald J. Burnett and Marjorie J. Burnett Revocable
      Trust in favor of JPMorgan Chase Bank, N.A. dated February 22,
      2010.31.1
                    
                    Rule 13a-14(a)/15d-14(a)
      Certification by the Chief Executive Officer.31.2
                    
                    Rule 13a-14(a)/15d-14(a)
      Certification by the Chief Financial Officer.32.1
                    
                    Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 †
                    Portions
      of the exhibit have been omitted pursuant to a request for confidential
      treatment and the omitted portions have been separately filed with the
      Commission.
 
  -28-
  
 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 7th day of May 2010.
  AVISTAR
      COMMUNICATIONS CORPORATIONBy:
                    /s/
      Robert F.
      KirkRobert
      F. KirkChief
      Executive Officer(Principal
      Executive Officer)By:
                    /s/
      Elias A.
      MurrayMetzgerElias
      A. MurrayMetzgerChief
      Financial Officer, Chief Administrative Officer and Corporate
      Secretary(Principal
      Financial and Accounting Officer)
 
  -29-
  
 
  EXHIBIT
INDEX
 
 Exhibit Number
                    
                    Description10.1†
                    
                    Patent
      License Agreement dated January 19, 2010 between Avistar Communications
      Corporation and Springboard Group S.A.R.L.10.2
                    
                    Amendment
      to Second Amended and Restated Revolving Credit Promissory Note issued by
      Avistar Communications Corporation to JPMorgan Chase Bank, N.A. dated
      February 22, 2010.10.3
                    
                    Reaffirmation
      of Guaranty issued by Gerald J. Burnett and Marjorie J. Burnett Revocable
      Trust in favor of JPMorgan Chase Bank, N.A. dated February 22,
      2010.31.1
                    
                    Rule 13a-14(a)/15d-14(a)
      Certification by the Chief Executive Officer.31.2
                    
                    Rule 13a-14(a)/15d-14(a)
      Certification by the Chief Financial Officer.32.1
                    
                    Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 †
                    Portions
      of the exhibit have been omitted pursuant to a request for confidential
      treatment and the omitted portions have been separately filed with the
      Commission.
  -30-