Avistar Communications 2006 Annual Report

AVISTAR COMMUNICATIONS CORP FORM 10-K (Annual Report) Filed 3/22/2007 For Period Ending 12/31/2006 Address Telephone CIK Industry Sector Fiscal Year 555 TWIN DOLPHINS STE 360 REDWOOD SHORES, California 94065 650-610-2900 0001111632 Computer Peripherals Technology 12/31 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 OR TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-31121 . AVISTAR COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 555 Twin Dolphin Drive, Suite 360 Redwood Shores, California (Address of Principal Executive Offices) 88-0463156 (I.R.S. Employer Identification Number) 94065 (Zip Code) Registrant’s telephone number, including area code: (650) 610-2900 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $0.001 par value Name of each exchange on which registered The NASDAQ Stock Market LLC (NASDAQ Capital Market) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No  Indicate by check mark if the registrant is not required to file the reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check One) Large accelerated filer Accelerated filer Non-accelerated filer  Indicate by check mark whether the registrant a shell company (as defied in Rule 12b-2 of the Exchange Act). Yes No  Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on June 30, 2006 was $15,013,914. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 5, 2007, the registrant had outstanding 35,317,717 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE The Registrant incorporates by reference into Part III of this Annual Report on Form 10-K specific portions of its Proxy Statement for its 2007 Annual Meeting of Stockholders. AVISTAR COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 2006 TABLE OF CONTENTS Page PART I Item 1. Business Item 1a. Risk Factors Item 1b. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7a. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9a. Controls and Procedures Item 9b. Other Information PART III Item 10. Directors, Executive Officers of the Registrant and Corporate Governance Matters Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedules Index to Financial Statements 53 F-1 51 51 51 52 52 34 36 37 49 50 50 50 50 3 22 32 32 33 33 2 Forward Looking Statements This Annual Report on Form 10-K, the exhibits hereto and the information incorporated by reference herein contain “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such forward looking statements involve risks and uncertainties. When used in this Annual Report, the words “expects,” “anticipates,” “believes,” “plans,” “intends” and “estimates” and similar expressions are intended to identify forward looking statements. These forward looking statements include predictions regarding our future revenues and profits, income from settlement and patent licensing, customer concentration, customer buying patterns, research and development expenses, sales and marketing expenses, general and administrative expenses, litigation and legal fees, income tax provision and effective tax rate, realization of deferred tax assets, liquidity and sufficiency of existing cash, cash equivalents, and investments for near-term requirements, sufficiency of leased facilities, purchase commitments, product development and transitions, expansion and licensing of our patent portfolio, competition and competing technologies, and financial condition and results of operations as a result of recent accounting pronouncements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include those discussed below and those discussed in “Item 1a. Risk Factors” as well as others incorporated by reference herein. Avistar Communications Corporation (the “Company,” “we,” or “us”) undertakes no obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances after the date this Annual Report is filed with the Securities and Exchange Commission or to reflect the occurrence of unanticipated events. PART I Item 1. Business We were founded as a Nevada limited partnership in 1993. We filed our articles of incorporation in Nevada in December 1997 under the name Avistar Systems Corporation. We reincorporated in Delaware in March 2000 and changed our name to Avistar Communications Corporation in April 2000. The operating assets and liabilities of the business were then contributed to our wholly owned subsidiary, Avistar Systems Corporation, a Delaware corporation. In July 2001, our Board of Directors and the Board of Directors of Avistar Systems approved the merger of Avistar Systems with and into Avistar Communications Corporation (Avistar). The merger was completed in July 2001. Our principal executive offices are located at 555 Twin Dolphin Drive, Suite 360, Redwood Shores, California, 94065. Our telephone number is (650) 610-2900. Our trademarks include Avistar and the Avistar logo, AvistarVOS, Shareboard, vBrief and The Enterprise Video Company. This Annual Report on Form 10-K also includes our and other organizations’ product names, trade names and trademarks. Our corporate website is www.avistar.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website when such reports are available on the U.S. Securities and Exchange Commission (SEC) website (see “Company—Investor Relations—SEC Information”). The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. 3 Overview We develop, market and support an integrated suite of vBusiness—video-enabled eBusiness—applications, all powered by the AvistarVOS™ software. From the desktop, we deliver business-quality interactive video calling, content creation and publishing, broadcast origination and distribution, video-on-demand, and integrated data sharing. The Avistar video and data collaboration applications are all managed by the AvistarVOS software application. By integrating video tightly into the way they work, our customers can use our system to save costs and improve productivity and communications within the enterprise and between enterprises to enhance relationships with customers, suppliers and partners. Using AvistarVOS software and leveraging video, telephony and Internet networking standards, Avistar applications are designed to be scalable, reliable, cost effective, easy to use, and capable of evolving with communications networks as bandwidth increases and as new standards and protocols emerge. We currently sell our system directly to enterprises in selected strategic vertical markets, and have focused initially on the financial services industry. Additionally, we have licensed our technology and patents to companies in the video conferencing market. Our objective is to establish our technology as the standard for networked video through direct sales, indirect channel sales/partnerships and the licensing of our technology to others. We operate in two segments. Avistar Communications Corporation engages in the design, development, manufacture, sale and marketing of networked video communications products and associated support services. Collaboration Properties, Inc., or CPI, our wholly owned subsidiary, engages in the prosecution, maintenance, support and licensing of the intellectual property that we have developed, some of which is used in our products. Since inception, we have recognized the innovative value of our research and development efforts, and have invested in securing protection for these innovations through domestic and foreign patent application and issuance. As of December 31, 2006, we held 74 U.S. and foreign patents, all of which have been licensed by CPI to third parties. We continue to pursue licensing to others in the collaboration technology marketplace. Industry Background Globalization, supported by the near ubiquity of communications networks such as the Internet, has allowed companies to lower costs, reach new markets, change business processes (e.g., eBusiness) and distribute and outsource operations. It also has meant increased competition, a faster business pace and less differentiation. These factors, coupled with the difficulty and cost of travel, increased risks due to socio-political uncertainties and pandemic concerns and the desire to reduce carbon emissions, are causing businesses to look for new tools that will help them increase productivity, take advantage of revenue opportunities, and minimize business continuity risks. Enterprises of all sizes stand to benefit from new and advanced communication and collaboration tools that enable their employees, partners, suppliers and customers to collaborate more effectively and form tighter relationships within and across buildings and over disparate geographies and time zones. Communications tools that speed in decision-making and build trust-based relationships, especially across cultures, are becoming even more critical in today’s increasingly complex business environment. The emergence of the Internet has accelerated the adoption of network-based collaboration applications including email, instant messaging, and web conferencing. The increasing availability and affordability of bandwidth on communication networks is further driving businesses to utilize new communication tools, such as voice and video over IP, and is enabling users to connect from more places including home offices and WiFi hot spots such as airports, and hotels. This is enabling more distributed, mobile and global operations while maintaining communications. 4 Limitations of Current Means of Collaboration As technology advances and becomes more affordable and modes of communication expand, enterprises are seeking widely deployable and cost effective technology to replicate, at the desktop, the impact of visual communication that occurs in a face-to-face meeting. Individuals generally prefer face-to-face encounters to less personal forms of communication because they can see one another and benefit from the nonverbal cues that speed communication and deepen understanding. This is particularly true for more complex interactions such as negotiations, sales, product development, project management and decision making across geography/functions/cultures. However, in today’s globalized, fast-paced business environment, face-to-face interactions are often forgone due to the difficulty and time required for travel, and the need to act quickly. These time and distance challenges become increasingly difficult to deal with as the number of potential participants increase. Beyond traditional teleconferencing, attempts to conduct virtual meetings as an alternative to face-to-face meetings have generally been limited to conference room-based video conferencing and web-based data teleconferences. To address the growing need for collaboration across distance and time, organizations have resorted to using a patchwork of discrete technologies, including video conferencing and teleconferencing, fax, email, instant messaging, Internet audio and video delivery and data sharing applications. Many of these technologies have been widely adopted, and collectively indicate the need for collaboration tools including networked video. However, these discrete technologies are not good substitutes by themselves for face-to-face meetings and presentations because they do not provide an integrated communications solution that fosters team interaction and deliver critical, time-sensitive information quickly and reliably. By providing face-to-face collaboration in an integrated communications solution, video can speed problem resolution and motivate action, trust and understanding. Additionally, users want to leverage knowledge and expertise by being able to create and publish video content from their desktop, either spontaneously, as with email or voicemail, or in a more formal manner for broader distribution through the Internet or corporate data network. Although video technologies are already in use at many enterprises, businesses and other organizations require increasingly comprehensive, integrated and scalable video-enabled communication capabilities. For example, video conferencing is often limited to scheduled point-to-point communication from designated rooms or through the use of “roll-about” products, where call set-up procedures, lack of networking, bandwidth requirements and room availability greatly constrain functionality, usability, reliability and efficiency. Most individuals do not have immediate access to these video technologies, and the reservation and set-up time make them unlikely to be used on a spontaneous basis. Few of these video solutions are deployed widely to individuals to support them where and how they normally work—at their desks, integrated into the business applications they use. Usage and adoption of these systems is thus often limited. Similarly, broadcasting of stored video or television programming at a desktop or in a conference room is of highly varying quality, and generally cannot be added on a real-time basis to a live videoconference. Additionally, the difficulties of creating and publishing video content have limited its use to select groups, if at all. 5 Elements of a Complete Collaboration Solution To become a critical tool in the enterprise, a communications solution must first and foremost provide application functionality that boosts worker productivity. It also has to be “self service” and provide high quality at scale, high reliability, low total cost of ownership, and be available to people where and when they do most of their work, which typically means at their desks but increasingly means from home or while traveling. It must also effectively utilize existing and evolving network infrastructure. We believe a complete collaboration solution must provide the following: Applications and functionality • support the applications people use, in the way they use them, to deliver real-time and non real-time self service personal collaboration and visual communication; • do so in an intuitive, “easy” manner in order to foster expanding usage; Quality • approximate the video and audio quality of television for natural and easy interaction; • make interactions as realistic as possible by minimizing visual artifacts when transmitting and receiving video calls such as latency, jitter, freeze-frame, stutter and small frame size; • seamlessly integrate all forms of audio, video and data communication including interactive video calling, content creation and publishing, broadcast video and video-on-demand retrieval; Scalability • like the Internet and public telephone networks, the communications solution must be designed for size independence and should scale cost-effectively to support a very large numbers of users; Reliability • operate dependably and reliably to avoid user frustration, while minimizing support costs; • provide to video communications the ease of use, speed, quality, functionality, flexibility and global access of the telephone, while easily supporting more complex applications and situations; Adaptability • offer an upgradeable architecture that can evolve as bandwidth availability, protocols, standards and compression technologies change; • include powerful software to manage an integrated suite of collaborative applications, relying on networked infrastructure; • leverage current and future business investments in local and wide area networks, Internet protocol and standards-based infrastructures; • reduce reliance on hardware components through a shift to software-based functionality; Affordability • operate and scale cost effectively; • utilize standard, low cost and widely available hardware components, such as “web-cams”; 6 • be cost-effective compared to other pervasive forms of enterprise communication, such as email; • deliver cost savings through innovations in support, network and resource management; We believe high quality networked video communication allows businesses to improve collaboration and thereby offers them the opportunity to increase productivity, enhance customer service and revenue generation, and facilitate business-to-business interactions that reduce costs, all on an accelerated basis. We also believe that, just as every organization now relies on a telephone network, and most businesses increasingly rely on the Internet, a market is emerging in which businesses and other organizations will choose to rely on fully integrated video, audio and data collaboration, regardless of networks, to make their business applications more effective. The Avistar Solution Our goal is to video-enable enterprises—a concept we refer to as vBusiness—by delivering a suite of video applications which support users where and how they work with a self-serve, easy-to-use system that fosters usage and adoption. It is through a tight coupling of various forms of video into daily work processes that we believe the benefits described above can be realized. To fulfill this, we deliver a video collaboration platform enabled by a unique architecture and powerful software—the AvistarVOS application software. This software provides a comprehensive, integrated suite of video applications that include on-demand access to interactive video calling and conferencing, content creation and publishing, broadcast origination and video distribution, and video-on-demand, as well as data sharing, presence-based directory services and network management. These applications support users within and amongst enterprises over data networks, telephony networks and the Internet. Our system architecture is open and flexible in order to embrace continued technological innovation and standardization. It is designed to use existing and emerging communication and video standards such as session initiation protocol, or SIP. It also provides customers choice and flexibility in designing and implementing network topologies to best deliver high-quality video applications to desktops across the entire enterprise. We have built a complete video collaboration solution that is delivering business-quality video to thousands of desktops across hundreds of buildings. Each of our applications can be used, integrated and managed in conjunction with one another. People often conceive of video in the enterprise only as two-way, real-time conferencing. Our system allows broadcast video to be included in a video call, and allows the entire session to be recorded simultaneously, and made available as stored video. Our system joins users in a high-quality video network to improve their ability to solve complex problems, connect to co-workers, customers and suppliers, manage large projects and quickly act together on opportunities. Our system does this cost effectively and reliably, and is designed to be able to serve the wide range of businesses from a single office operation to global corporations with branch offices and/or geographically dispersed operations. Interactive video calling. Our system allows users to participate in spontaneous interactive video collaborations from their desktops. Users can simultaneously see multiple participants in windows on their workstations or an external monitor. Additionally, our system provides full duplex audio, which allows multiple users to speak and hear each other clearly at the same time. The desktop window can be divided into four quadrants, to permit up to three other video sources. These sources can include other participants in real-time, broadcast content or recorded video. The participants can include individual users or conference-room groups located at multiple sites and/or various enterprises, all without requiring advance reservations or conferencing services. Each participant has the full ability to utilize all the call functions of the system, such as adding or removing participants, focusing the view on one participant, putting anyone or the entire call on hold, and transferring the call. Advanced telephony features such as Caller ID, Do Not Disturb, leave message and multiline calling are also provided. The system supports the communications needs of users by allowing them to add a third or fourth participant into a call 7 spontaneously for a quick conference, and then revert back to a two party call. This ability helps speed decision-making and leverages the knowledge of experts. As an example, a sales trader can be on a video call with a client portfolio manager and spontaneously add a research analyst to the call for added insight on a particular security, then drop the analyst and add a trader to review execution strategy. Video content creation and publishing. With our solution, users can create and publish video content from their desktops by recording themselves, recording a multi-point conference or adding commentary to a broadcast and recording the entire session. Recorded content can be played back on demand, and can be published in various forms inside and outside the enterprise. This includes video emails, called vBriefs, which allow users to easily create video messages which recipients, with common mail clients and browsers, can watch. This helps differentiate and highly personalize the sender’s email. As an example, research analysts can record introductory commentary and distribute their research reports in a way that cuts through the email clutter of their audiences’ inbox. Similarly, video can simply and quickly be published to web sites from a user’s desk. Interactive broadcasts and presentations. Interactive broadcasts allow moderated presentations to an audience of viewers, who have the ability to send questions to the presenters. Moderators can dynamically control who’s presenting, bring audience members into the broadcast, select what views are broadcast, and monitor questions. Sales meetings, training seminars, analyst reports, management presentations and live news broadcasts can be delivered real-time to every user’s workstation and streamed to browser-based users. For example, a customer employed its Avistar video network to maximize the reach and impact of an educational seminar. The customer broadcasted the seminar to an estimated 300 desktops and meeting rooms, with more than 2,000 employees and clients watching in the United States and Europe. As another example, one customer has shifted its international sales meetings to broadcasts and recorded presentations on its Avistar system, thereby saving travel time and costs, while expanding the broadcast to a wider audience. Additionally, video feeds from broadcast TV channels or other video sources can be distributed to users through the Avistar system. Video-on-demand. Users anywhere on the Avistar network can easily retrieve stored videos. For example, a corporation has used our system to record its sales training seminars. Salespeople who are unable to attend these face-to-face presentations are now able to watch the seminars by retrieving and playing the stored videos on their desktops when it is convenient for them. Another customer uses our system to record and broadcast their daily morning meetings so colleagues in other time zones around the world can be updated on the issues of the day when they report to work. The ability to both archive and retrieve stored content can facilitate the establishment of a visual “institutional memory” and support training efforts. Integrated data sharing. In addition to viewing the four quadrants of our video window, multiple users can simultaneously create and annotate a shared document using text or drawing tools color-coded specifically for each user. All participants can access the contents of any shared window and save the marked changes for later reference. Our system can also be utilized in conjunction with other application-sharing programs that utilize data networks or the Internet, including popular web-based data collaboration solutions. As one example, while participating in an interactive video call, users can access Microsoft NetMeeting’s application sharing capabilities through a button on our tool bar, and jointly view and edit a document. Multiple design engineers, for example, can share a technical drawing in order to resolve an issue with a defective part. 8 Our system has the following key features necessary to make integrated video collaboration effective: Easy to use interface. Our applications combine the rich interaction of a face-to-face meeting with a self-service interface that’s intuitive and easy to use. Key features include: • Click-to-connect simplicity. To initiate calls or add another user to a call already underway, a user simply clicks on either a “direct connect” button or a name in the directory. Standard telephone-like features such as hold, hang-up, forward, “leave message” or “begin another call” are all completed with the click of a mouse, or keyboard shortcuts. Additionally, anyone on an Avistar network can initiate a video call to the desktop of colleagues, customers, suppliers and others on other Avistar networks. If the person being called is logged-in but unavailable, users can leave a personalized call back message that allows the person to automatically return the video call without having to look up the address. A portion of this functionality is protected under certain patents held by CPI. • “ Find Me, Follow Me.” Avistar video calling is built on directories and presence-based features referred to as “Find Me, Follow Me.” Using this feature, our system is able to determine the presence and location of any user on an Avistar network at any time. To call any user in the Avistar network, it is not necessary to know their number or current location. As long as the Avistar user is logged into his or her Avistar application, the Find Me, Follow Me application automatically registers where that user is logged in, regardless of site or geography, and routes all calls to the user’s location. Using this Find Me, Follow Me technology, Avistar’s system makes video calling a one-click process and enables what we call “Video Instant Messaging.” A portion of this functionality is protected under certain patents held by CPI. • Comprehensive directory . The presence-based Avistar network directory is a comprehensive list of Avistar numbers that can be called with a click. All users currently logged into an enterprise’s Avistar network will be shown, providing immediate ‘presence’ information as to availability. The global directory can be tailored to include only a subset of a more specific business’ community of users. In addition, a private directory feature allows users to create their own directory and reach frequently called parties with a oneclick “direct connect” tool. Both global and private directories can also include other non-Avistar sites that use standards-based video conferencing systems. Through the Avistar Community Exchange and AvistarVOS Proxy products, presence information can be shared across participating enterprises. The result is one-click, presence-based, cross-enterprise calling which helps form a community of users. A portion of this functionality is protected under certain patents held by CPI. • Consistency across locations. The Avistar user interface is consistent across desktops and conference rooms. Thus, a user who is familiar with the functionality at the desktop requires no additional training or set up to utilize an Avistar system in a conference room setting. This allows conference room systems to be “self-service,” thereby avoiding the support logistics and expense of traditional room-based systems. Seamless integration of system applications. All of our applications are seamlessly integrated with one user interface. As a user adds an additional video source during an ongoing video call—such as an additional live participant, a one-way broadcast or a stored video clip—there is virtually no delay in launching another application or downloading data. In addition, each application is synchronized with the others so that all participants in a video call see and hear the same content simultaneously. Thus, recorded or broadcast video can be added to a live session and shown to all participants. The entire session can also be recorded. Our system enables common network and application management, so the same directory can be used for two-way calls, one-way broadcasts and data sharing in the same session. Usage can be determined with our integrated call-reporting tool that provides summary data for analysis and cost management. A portion of this functionality is protected under certain patents held by CPI. 9 Office tools integration. Our video application can be tightly linked into common collaboration software tools such as Microsoft Office and IBM Lotus Sametime. As a partner with IBM and Microsoft, we have integrated our applications functionality with these products to add video communication options to common applications such as email, instant messaging, contacts, and calendar events. Thus while in the context of reading an email, responding to an instant message or looking up a contact, the user can initiate a video call to that person. Network management. Our network architecture provides system administrators with the ability to flexibly and proactively manage each of the various components of the network. Within our system, the most costly and complex equipment and software applications are shared as networked resources. This arrangement allows for redundancy and dynamic allocation of these resources to users who need them, and ensures that users experience the best video quality possible at the highest reliability and lowest cost of use. Servers and switches can be maintained, installed and repaired centrally, and many network support functions can be performed remotely over the data network, assisted by System Central (our web-based product introduced in 2006), thereby limiting the disruption of service to an individual user. Similarly, additional desktops and meeting rooms can be easily and inexpensively added to the Avistar network, with those new users concurrently added to the Avistar directory. Additionally, our software makes call routing decisions to minimize communications costs and control bandwidth utilization. A portion of this functionality is protected under certain patents held by CPI. We believe our solution includes the following benefits to our customers: • Speed business processes. We provide a fully integrated Internet protocol-based video collaboration solution that seamlessly allows individuals to make video calls, view broadcasts and create, store and access video content or other forms of data from the desktop making visual communications widely and easily available which can speed business processes by enhancing collaboration and communication. • Increased availability of knowledge within the enterprise. At many businesses, individuals who possess valuable knowledge often cannot effectively distribute their knowledge to the rest of the organization. Our system enables these businesses to access these individuals and disseminate their knowledge more efficiently and effectively by offering them the ability to call, broadcast or record from their desktops, and offering other users the ability to receive this information real-time, or access video recordings at a convenient time and location. The ability to spontaneously add additional participants to a call encourages personal communications between individuals who otherwise might not enjoy this access. In addition, our system gives every desktop the ability to create and publish valuable visual content, which can be distributed inside and outside the organization to support employee and customer needs worldwide. • Improved productivity and revenue generation. Our system helps companies increase the productivity of their employees and accelerate time critical decision-making. By creating a network of Avistar users, our customers can have face-to-face meetings within the enterprise and with customers and partners, without the costs and time delays of travel. Negotiations, sales, advisory services, decision-making and other persuasive communications are more effective when done face-to-face. Our solution allows interactions to happen in real-time, speeding up the manner in which business is done, freeing up time for employees, enhancing business-to-business communications, and potentially increasing revenue generation. • Enhanced customer and partner relationships. Our system helps companies to be more responsive to and develop stronger business relationships with their customers, partners and suppliers. An Avistar call is generally as easy and reliable as a telephone call or “instant message”, while being more personal. One of our customers has provided Avistar networks to their clients and business 10 partners, including offshore outsource partners, in order to facilitate interactions and improve relationships. • Opportunity to leverage existing and future communication infrastructures. We provide an open architecture that uses existing standards and is designed to take advantage of emerging standards. Our system integrates into our customers’ existing network communications infrastructure, and supports the protocols a company may choose to use for video broadcasts, data sharing and the transport of information. However, video quality varies depending on the protocol selected. Our system utilizes existing data networks for transporting video, and is designed to support real-time digital networking and video transmission. We have designed our system to continue to work with Internet protocol-based technologies as standards evolve and quality of service improves. We expect this flexibility, together with simplified software and hardware at the desktop, to allow companies to make effective use of their existing local area and wide area networks, as well as their next generation networks. • Better communication to face new business challenges such as globalization, business continuity planning, and distributed locations. Within global corporations, professionals collaborate daily with customers, partners and associates who are often located in different offices and/or different time zones. This has increasingly become the case as firms, due to economic and security concerns, have restricted travel, begun decentralizing their personnel across a more distributed set of locations, taking advantage of lower costs of real estate and increased business resiliency through distributed operations, and shifted more operations to outsourcing providers. In this context, critical information must be delivered on a timely basis and without confusion, as smoothly as if colleagues were working together in person. Avistar’s video product suite enables companies that are reducing travel and/or distributing their operations to easily and quickly connect small, remote offices as well as at-home workers to the central organization and still benefit from face-to-face interaction. Based on our experience in helping existing customers choose their optimal configurations, we are able to advise new customers on setups and configurations that will be most effective for a large central office, a small branch office, an outsourcing provider, or other remote locations. System Architecture and Technology Our networked video system is based on our ninth major release of our open architecture, which enables users to communicate visually using various networking protocols and transport media, including IP networks and the Internet. We developed our architecture to address the necessary elements of a complete video-enabled collaboration solution. We believe that the following technical factors will transform and consolidate the existing video collaboration applications marketplace, creating a strong need for a software platform that will support this consolidation and evolution: • improved compression technologies; • widespread proliferation of broadband infrastructure and virtual private networks, or VPNs (with enhanced tools to optimize bandwidth for video transmission (QOS; quality of service)); • developing availability of converged audio, video and data networks; • improved computer processing speeds; and • adoption of critical digital video and multimedia standards. Our software platform supports this consolidation and evolution by integrating industry standards for audio, video and data transport, but separating them from application functionality and system management. This allows our software application platform to manage the interoperation and transcoding 11 of various standards to seamlessly integrate video, audio and data into complex applications, and not be limited by the functionality built into one particular, application-specific standard. It also allows the system to accommodate new and evolving standards with minimal disruption. Current industry and widely accepted proprietary standards supported include H.263, H.264, H.320, H.323, SIP, NTSC, PAL, MPEG, Microsoft Windows Media Video and Real Networks RealMedia. We believe our AvistarVOS video software platform positions us to lead the transformation described above. Further, we provide a suite of collaboration applications that seamlessly operate with the AvistarVOS system allowing users to access this functionality in an easy and intuitive manner. We expect to make this platform more accessible to developers and to allow integration with other applications and network hardware. Our system uses TCP/IP, the standard Internet protocol, for initiating video calls, scheduling and starting broadcast presentations, and managing the creation and access of stored video materials. In addition, we use TCP/IP for overall systems and network management throughout our software platform. This approach allows us to deliver connectivity throughout an enterprise and allows us to leverage existing Internet infrastructure. For delivery of high-quality video streams in the local area network, including wireless, we primarily utilize video over IP technology but offer a choice of IP or traditional circuit switched technologies, including the ability to mix and match network types. Thus Avistar customers can successfully deploy desktop video across the enterprise, even if portions of their network, in older buildings for example, aren’t capable of supporting real-time video on their data networks. We use our gateways to translate between the various network technologies used in our system. These gateways are managed and controlled by our systems software with TCP/IP-based protocols. Each Avistar endpoint functions as a node on the network, like personal computers, printers or file servers on a local area network. Just as color printers and file servers are often shared network resources on the local area network, the more costly equipment in an Avistar system, such as servers, media servers, switches, and gateways, are centralized and made available to multiple users. Network nodes and resources, like those of a data network, are managed through centralized, Internet protocol-based applications and administration tools, such as web-based reports of video call activity. Because of the tight integration of various video network components, the Avistar Switch, Media Server, Conference Center, and gateways, all controlled by the AvistarVOS software, our architecture has the following key features: • Network management: The AvistarVOS system utilizes open protocols for call set-up, call control and directory services. It also complies with standards and interfaces and connects with video networks through shared Avistar gateways, which are further connected via private or public telephony or TCP/IP networks. Servers communicate through our signaling system for video protocol, SSV, which is based on TCP/IP, the standard Internet protocol. Through this signaling system, servers exchange configuration information and allocate call resources during call set-up, and exchange network status information. The signaling system selects the optimal route for all video calls, helping to minimize call costs and performance demands on wide area network resources. Most videoconferencing equipment using industry standard compression technologies also can communicate with an Avistar network. • Transport standard independence: Our system selects the appropriate transport standards for transmitting information over networks to help deliver the highest quality video possible and full duplex audio in the most efficient manner. For example, the AvistarVOS software automatically exchanges information among servers and switches to determine the best network route for video calls. For the transport of video over a local area network, our system uses either data networks with our IP Endpoints or existing spare Ethernet wires for our legacy product to deliver standards-compliant high quality signals. This allows customers to choose the transport type to best fit their 12 network capabilities in the local area. In a wide area network, we use industry video compression standards across a customer’s private IP network, or VPN’s or the Internet or the public telephony network. Product releases during 2006 enhanced our ability to support mobile and home workers who may have lower bandwidth connections. For the transmission of recorded content on corporate data networks or via the Internet, our system uses standard digital storage formats and transport technologies. • Expandable to thousands of users: Because shared resources, such as servers, are attached to the Avistar switch and are managed through the data network, new users and new capabilities can be added without replacing existing infrastructure, but rather, by simply adding video software and a web-camera at each desktop. Just as local area network switches and public telephony networks can be linked together without the use of routers, Avistar switches can be similarly linked without the use of video network gateways. As a result, customers can easily add capacity as their needs grow. • Evolves with digital technology: Our AvistarVOS software is designed to facilitate utilization of all-digital, local area networks, including Internet protocol video transmission, where sufficient bandwidth and quality of service (QOS) are available. This all-digital system also maintains compatibility with our existing legacy circuit-switched video networks. The AvistarVOS software allows evolution of the transport of audio and video based on the customer’s local area data network capabilities. A simple and inexpensive swap of endpoint software allows customers to migrate to all IP networks, while preserving the same user interface system functionality. System Products and Applications Our system-level products and applications consist of shared resources and a network of desktop, laptop and conference room endpoints which connect to each other and to shared resources. Shared Resources Like the architecture of most data networks, our system is designed to maximize the use of shared resources on the network. Each user can access higher quality software, gateways, multi-point conference centers, media servers and video broadcasts with lower per user acquisition and management costs than is possible with non-networked video solutions. These devices are expected to move to software-only resources over time. These shared resources consist of the following products and applications: Infrastructure, Server and Software Products • AvistarVOS Server. All systems require AvistarVOS Server software. It enables the seamless integration of video applications, comprehensive network and bandwidth management and administration. The AvistarVOS software supports a highly-distributed topology, and multiple instances may be deployed. Digital IP endpoints require network access to servers running AvistarVOS software configured for IP endpoints. Servers in the Avistar Switch also run instances of AvistarVOS Server software as noted below. • Avistar Switch. Each Avistar switch runs the AvistarVOS Server software that provides application services and network management. The Switch hosts shared video services and infrastructure such as Avistar conference centers, media servers, gateways, television broadcasts, VCR’s and other video services which are accessed by both types of endpoints. Where used, it also serves as the video switch for our local area circuit-switched network, connecting video calls placed among Avistar desktop and conference room users. With IP endpoint deployments, a switch is required only for video services beyond point-to-point calling, and may be located anywhere with appropriate network access. 13 • Avistar Gateways. Gateways provide connectivity to the wide area network for circuit-switched endpoints, interoperability with thirdparty video systems that are H.320 or H.323 compliant, interoperability between IP endpoints and circuit-switched endpoints, and access to shared video services for IP endpoints. The gateways support various protocol standards, using public telephony, TCP/IP networks or the customer’s private networks. • Avistar Conference Center. Our conference center enables multi-point conferences for up to four video sources, with continuous presence that allows all participants to see and hear one another continuously and simultaneously. Multiple conference centers can be installed on each switch to support a corresponding number of simultaneous multi-party calls. Conference centers also support interactive broadcast functionality. • Avistar Media Server. Our media server allows users to create, publish and view video content from any desktop or conference room. Any form of video, including a four-way video call, can be saved on the media server in high quality, digital MPEG format. Any user can retrieve and replay video at any time from the media server using the desktop Avistar interface or any industry standard MPEG player. The Avistar Media Server also has a publishing capability, allowing Avistar users to publish video content on intranets, extranets or the Internet, including web servers, video servers or content distribution networks. Publishing to vBrief ™ video email messages is one example. The Media Server software manages format plug-ins to simplify transcoding to other video standards and formats, such as Real Networks and Microsoft Windows Media Video. • Avistar Interactive Broadcast. Our interactive broadcast feature allows Avistar desktop or conference room users to broadcast oneway, real-time presentations to an audience of other Avistar users at both local and remote sites. A Moderator UI panel includes an audience list, a text-based chat-back channel for viewer questions, broadcast view control, and the ability to drag and drop presenters and viewers into and out of the broadcast. An individual or a conference call can be broadcast to thousands of users, and, via third party products, be streamed simultaneously over the Internet. • Avistar Directory Software. Our directories allow a user to place a video call by simply clicking on a name in the presence-based, Avistar network directory. Our system will route the call to the correct location over the local area network or the wide area as appropriate. The user doesn’t need to know phone numbers or IP addresses. The user can also look up addresses in private and global address books, utilize browser style type-in boxes, and access speed-dial ‘direct connect buttons’. This server-based directory integrates with LDAP directories, simplifies administration, and allows users to get started quickly, without having to manually enter many video phone numbers into their desktop directory. • Avistar Community Exchange and AvistarVOS Proxy. These products provide secure, cross-enterprise communications between independent Avistar systems. This provides directory and presence information and system resource reservation for easy and fast connections between firms. These products facilitate the building of communities of video-enabled users across enterprises. • Shareboard® Software. Our Shareboard application allows users to collaborate on graphics, data or text during a video call. By clicking on the “share” button, users are linked to the Shareboard data sharing application. Users can share any application window or image with all conference participants, see all users’ color-keyed pointers and text and paintbrush annotations, and save or print shared images from any desktop or conference room. • Avistar Call Reporting System. With our web-based call reporting system, our customers can track all calls logged by our servers. Reports show call details, device usage and calls by user, all viewable from any Web browser. Reports can be customized and stored for future or specialized analysis. 14 Desktop and Conference Room Endpoint Products Client personal computers, or PCs, run the AvistarVOS Client software applications, including Avistar Conference, the primary user interface to server-based video applications. Endpoints access video services managed by the AvistarVOS Server software through the AvistarVOS Client software and Client Access Licenses. Endpoints are either software only, software plus hardware accelerated IP (digital) or software plus hardware accelerated circuit-switched (analog). Sofware-only endpoints have higher processing power minimums on the client PC than endpoints with hardware assist. The AvistarVOS software detects what, if any, additional hardware is attached and can work in any of three modes. Thus, in the office, a user may have an IP hardware accelerator to minimize processor loading, while on the road or at home, they use the software-only mode to simplify equipment required. Desktop Endpoints. The standard Avistar two-way desktop system consists of the following components: • AvistarVOS client software, which includes video and audio codecs. Optional • Web camera—required for software-only operation; • A hardware-based video codec (used with IP endpoints for signal compression and decompression) or video network interface unit (with circuit-switched endpoints), with ports for camera, microphone, speakers, auxiliary video and audio, headset, built in echocancellation circuitry and full duplex audio, without requiring a headset; • A high quality camera with built-in directional microphone for hardware assisted endpoints; • IP endpoints display video either directly on a computer display or external monitor. Circuit-switched endpoints include a video overlay card that allows video to be viewed from a computer or an external monitor. Avistar Room Systems. We deliver complete video systems for a range of room sizes and layouts. We believe that one key advantage of our system is that the interface used in a conference room system is consistent with the interface used on individual desktops, allowing for all forms of video-enabled communications: interactive video calling, content creation and publishing, broadcasting and video-on-demand. Therefore, desktop users are familiar with the controls used in Avistar room systems and do not need additional training to operate the room system, nor do they need an additional technician to set-up and connect conference room calls (as is common with traditional room systems). In addition, since rooms are simply additional nodes on the network, they can be less expensive than self-contained, traditional room systems. Patent Licensing We derive a significant portion of our annual revenues by licensing our broad portfolio of patents covering, among other areas, video and rich media collaboration technologies, networked real-time text and non-text communications and desktop workstation echo cancellation. This broad suit of patents enables much of the functionality of our AvistarVOS application platform. Licenses to third parties may cover part of or all of our patent portfolio. End-to-end rich media collaborative application companies such as Polycom, Inc., Tandberg ASA, Sony Corporation, Emblaze-VCON Ltd., and others have taken licenses to our patents for use in their own products. Examples of the many patented innovations in our portfolio include: the handling of decentralized video call endpoints, unshielded twisted pair video conferencing with data conferencing and desktop workstation echo cancellation. 15 We maintain and support an active program to protect our intellectual property, primarily through the filing of patent applications and the defense of issued patents against infringement. As of December 31, 2006, we had 74 U.S. and international patents on various aspects of our technology, with expiration dates ranging from 2013 to 2018, and have over 25 pending patent applications. In addition, we attempt to protect our trade secrets and other proprietary information through agreements with licensees, proprietary information agreements with employees and consultants and other security measures. We also rely on trademarks and trade secret laws to protect our intellectual property. Segment Information We operate through two segments: • Avistar Communications Corporation engages in the design, development, manufacture, sale and marketing of networked video communications products. • Collaboration Properties, Inc., our wholly owned subsidiary, engages in the development, prosecution, maintenance, support and licensing of the intellectual property used in our video communications system. Financial information regarding these segments is provided in Note 12 to our consolidated financial statements included in this Annual Report on Form 10-K. Financial information relating to revenues and other operating income, net loss, operating expenses and total assets for the three years ended December 31, 2006, can be found in Item 6 “Selected Financial Data” and also in our Consolidated Financial Statements attached hereto. Customers Video Communications Products As of December 31, 2006, we have licensed and recognized revenue with respect to over 14,000 end-users at over 400 customer sites in approximately 151 cities in over 40 countries. Because many of our customers operate on a decentralized basis, decisions to purchase our systems are often made independently by individual business units. As such, a single company may represent several separate accounts and multiple customer sites may relate to the same company. For the year ended December 31, 2006, Sony Corporation, Deutsche Bank AG and its affiliates, and UBS Warburg LLC and its affiliates accounted for 38%, 25% and 20% of our total revenues, respectively. For the year ended December 31, 2005, UBS Warburg LLC and its affiliates accounted for 45% of our total revenue and Deutsche Bank AG and its affiliates accounted for 39% of our total revenue. For the year ended December 31, 2004, Deutsche Bank AG and its affiliates accounted for 55% of our total revenue and UBS Warburg LLC and its affiliates accounted for 16% of our total revenue. The level of sales to any customer may vary from quarter to quarter, and we expect that significant customer concentration will continue for the foreseeable future. The loss of, or a decrease in the level of sales to, or a change in the ordering pattern of, any one of these customers could have a material adverse impact on our financial condition or results of operations. International revenue, which consists of sales to customers with operations principally in Western Europe and Asia comprised 75%, 63% and 52% of total revenue for 2006, 2005 and 2004, respectively. For 2006, 2005 and 2004, revenues to customers in the United Kingdom accounted for 12%, 23% and 31% of total revenue, respectively. 16 Licensing Activities We derived 39%, or $5.2 million, of our annual revenues in 2006 by licensing our broad portfolio of patents to third parties covering video and rich media collaboration technologies, networked real-time text and non-text communications and desktop workstation echo cancellation. Our license revenue in 2006 was primarily due to a license to Sony Corporation and its subsidiaries. Sony Corporation agreed to make an upfront license payment of $5.0 million and future royalty payments. The $5.0 million upfront payment was recognized by us as licensing revenue in the three months ended September 30, 2006. No license revenue was recorded in 2005 or 2004. Sales and Marketing Sales. We have a direct sales force in the United States and Europe consisting of sales managers located in New York, New York and London, England. Sales managers have direct responsibility for selling and account management and the adoption of our technology at customer sites. Indirect Sales. Through our partnership organization, we seek to build a set of relationships with strategic partners and value added resellers, in order to establish, and then expand an indirect channel of sales for our products. Marketing. Our marketing efforts are directed towards select vertical markets, with a current emphasis on the financial services industry. We have identified specific collaboration needs for enterprises, specific to the vertical market. We then help our customers understand how our system can satisfy these needs, thereby increasing the number of users. We emphasize initiatives to develop market awareness of our system and services, as well as increased usage of our installed systems. We also use marketing programs to build recognition of our corporate brand, foster partnerships, and promote our technology in regards to licensing opportunities. Installation, Maintenance, Training and Support Services We provide a wide variety of services for installation, design and adoption of our video communications products. This may include the analysis of workflows in order to identify patterns of collaboration between workgroups so that the best configuration of networked resources can be designed and implemented for the enterprise. We generally install our systems for new customers. In an increasing number of cases, our customers’ information technology group or services partner install follow-on orders. In the future, we expect our customers or their services partners will increasingly perform the installation of additional systems. The installation that we offer to our customers as a separately-priced service relates to the physical set up and configuration of desktop and infrastructure components of our solution. To accomplish this activity, our staff frequently interface with the customer’s internal information technology (I.T.) staff and external suppliers, in order to provide for connectivity to the customer’s local and wide area networks, and for the physical placement (arranging for rack space and appropriate environmental conditions) and connections between the various components purchased. The effective operation of software and hardware is checked by our staff during this installation process. Although the “work time” of this activity at a single location may be only one or two days, the coordination necessary for accommodating the equipment and establishing connectivity frequently creates cycle times of between two and six weeks from product shipment to installation at the customer’s site. Our maintenance services ensure that customers benefit from the latest networked video technology through software upgrades and expedited repair and replacement services. Our customer support center provides voice and video call assistance to Avistar users and administrators throughout the world. On-site support is also available from each of our major regional offices for a separate fee. In addition, training for 17 users is available onsite or at an Avistar facility, and for system administrators at an Avistar facility, on a for-fee basis. Backlog The estimated backlog of product orders believed to be firm was $87,000 at December 31, 2006 and $100,000 at December 31, 2005. We expect most of the orders as of December 31, 2006 will be shipped in the first quarter of 2007. Backlog is not necessarily indicative of past or future operating results. Research and Development We believe that strong system development capabilities are essential to our strategy. Our research and development efforts focus on enhancing our core technology, developing additional applications, addressing emerging technologies, standards and protocols, and engaging in patent generation activities. Our system development team consists of engineers and software developers with experience in video and data networking, voice communications, video and data compression, email and Internet technologies. We believe that our diverse technical expertise contributes to the highly integrated functionality of our system. Research and development expenses were $5.8 million in 2006, $3.5 million in 2005 and $2.6 million in 2004. We expect to devote a significant amount of our resources to research and development in the foreseeable future. Manufacturing We use contract manufacturers to produce and/or purchase components, and to perform some material assembly. Our operations staff develops manufacturing strategies and qualifies and audits manufacturing processes and suppliers. We work with our contract manufacturers to reduce manufacturing costs and to resolve quality control issues, as we perform the final assembly and testing of our products. We believe our manufacturing strategy enables us to utilize the capabilities of our contract manufacturers, while allowing us to focus on rapid system development and deployment, software architecture and development of video communication applications. We use third party, commercially available camera components, microphones, speakers and monitors for desktop and room systems, as well as third party compression and decompression components for our gateways. Intellectual Property and Proprietary Rights Our ability to compete, and to continue to provide technological innovation depends substantially upon internally developed technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing, non-disclosure and other agreements with our consultants, suppliers, customers and employees, to protect our technology. We believe that other factors such as the technological and creative skills of our personnel, new system developments, frequent system and feature enhancements and reliable system support and maintenance are also essential to maintaining our leadership position in technology. We have pursued registration of our key trademarks and service marks in the United States, the United Kingdom and certain other European countries, and intend to pursue additional registrations in additional countries where we plan to establish a significant business presence. We own several United States, Canadian and United Kingdom trademarks, including Avistar and the Avistar logo, AvistarVOS, Shareboard, vBrief and The Enterprise Video Company. Through Collaboration Properties, Inc., our wholly owned subsidiary we held 27 United States patents and 47 non-United States patents as of December 31, 2006. The patents that have been issued expire at varying dates between 2013 and 2018. In addition, numerous patent applications are pending in the United States and several other jurisdictions. Specifically, these patent applications, some of which relate to and 18 claim priority from an application originally filed in 1993, include both method and apparatus claims. These patents and pending patent applications disclose and/or claim aspects of our analog or digital desktop video conferencing technology, video and multimedia storage technology for messaging and publishing, directory services, and public wide area networking access, switching and architecture. A portion of these technologies is currently utilized in our system. To date, CPI has focused on expanding our patent portfolio, expediting patent issuance and licensing of our patents to reinforce the adoption of our technology. CPI seeks to license its broad portfolio of patents covering, among other areas, video and rich media collaboration technologies, networked real-time text and non-text communications and desktop workstation echo cancellation. The broad suite of patents enables much of the functionality of our AvistarVOS application platform. Licenses to third parties may cover part or all of our patent portfolio. Examples of the many patented innovations in our portfolio include: the handling of decentralized video call endpoints, unshielded twisted pair video conferencing with data conferencing and desktop workstation echo cancellation. We generally enter into confidentiality, license and nondisclosure agreements with our employees, consultants, prospective customers, licensees, and partners that seek to limit the use and distribution of our proprietary materials and prohibit reverse-engineering of our proprietary technologies. In addition, we control access to and distribution of our software, documentation and other proprietary information. Several of our license agreements with our customers require us to place our software source code into escrow. In these cases, these agreements provide that these customers may be entitled to retain copies of the software, and have a limited non-exclusive right to use and/or reproduce, maintain, update, enhance and produce derivative works of the software source code under the terms of the agreements if we fail to cure a contractual breach by us on a timely basis, or if we become the subject of a bankruptcy or similar proceeding. We maintain a strong working relationship with vendors whom we identify as key suppliers, and assign preferred provider status to these vendors under agreements that secure ordering and extended warranty rights for us. Competition The market for video collaboration products and systems is highly competitive. As a result of advances in technology, increases in communications capability and reductions in communications costs in the past several years, the market is now characterized by many competitors, rapidly changing technology, evolving user needs, developing industry standards and protocols and the frequent introduction of new products and services. Within the market for video collaboration products and systems, we compete primarily with Polycom, Inc., Tandberg ASA, Sony Corporation , Apple Inc., Radvision, Ltd., and Emblaze-VCON Ltd. With increasing interest in the power of video collaboration and the establishment of communities of users, 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., Nortel Networks Corporation, Microsoft Corporation, IBM Corporation and WebEx Communications, Inc., that enable web-based or network-based video communications with low-cost digital camera systems. We believe that the principal factors affecting competition in our markets include: • product features, functionality and scalability; • product quality and performance; • product reliability and ease of use; 19 • use of open standards; • quality of service and support; • company reputation, size and financial stability; • price and overall cost of ownership; • integration with other desktop collaboration products; and • document sharing, including internet-based collaboration. Currently, our principal competitors are companies that provide products and services in specific areas where we offer our integrated system, such as: • room-based point-to-point video communications products; • desktop video communications products; • broadcast video products; • video retrieval and viewing products; • desktop content creation products; and • web-based data collaboration products. While a number of companies have marketed applications that enable users to use individual features similar to our system, we do not believe that any single competitor currently offers as comprehensive a set of functionality as our system provides. We believe these companies in many cases can also represent complementary opportunities to extend the reach of our system by potentially expanding the market for video networking. We expect competition to increase significantly in the future from existing providers of specialized video communications products, voice over IP solution providers and companies as they enter our existing or future markets, possibly including major telephone companies or communications equipment providers. These companies may develop similar or substitute solutions, which may be less costly or provide better performance or functionality than our systems. A number of our existing and potential competitors have longer operating histories, significantly greater financial, marketing, service, support, technical and other resources, significantly greater name recognition and a larger installed base of customers than we do. In addition, many of our current or potential competitors have well-established relationships with our current and potential customers, and have extensive knowledge of our industry. It is possible that new competitors or alliances among competitors may emerge and acquire significant market share. To be successful, we must continue to respond promptly and effectively to the challenges of developing customer requirements, technological change and competitors’ innovations. Accordingly, we cannot predict what our relative competitive position will be as the market evolves for video collaboration products and services. Employees As of December 31, 2006, we had 88 employees, including personnel dedicated to research and development, customer service, including installation and support services, sales and marketing, and finance and administration. Our future performance depends in significant part upon the continued service of our key technical, sales and marketing, and senior management personnel, none of whom are obligated to remain with us by an employment agreement. The loss of the services of one or more of our key employees could harm our business. 20 Executive Officers Our officers and their ages as of December 31, 2006 were as follows: Name Age Position Gerald J. Burnett William L. Campbell Robert J. Habig J. Chris Lauwers Anton F. Rodde Gary Stager Robert T. Garrigan Stephen F. Arisco 64 58 52 45 64 54 45 48 Chairman of the Board and Chief Executive Officer Vice Chairman, Chief Operating Officer and Secretary Chief Financial Officer Chief Technology and Product Officer President, Collaboration Properties, Inc. Vice President, Engineering Vice President, Sales Vice President, Operations and Customer Support Gerald J. Burnett is one of our founders and has been Chairman of our Board of Directors and our Chief Executive Officer since March 2000. He served as Chief Executive Officer of Avistar Systems from December 1998 until March of 2000. From 1993 to 1997, he was a director of Avistar Systems or a principal of its predecessor limited partnership. He is a member of the Corporation (Board of Trustees) of the Massachusetts Institute of Technology. Dr. Burnett holds a B.S. and an M.S. from the Massachusetts Institute of Technology in electrical engineering and computer science, and a Ph.D. from Princeton University in computer science and communications. William L. Campbell is one of our founders and has been a member of our Board of Directors and our Executive Vice President since March 2000. He has been our Corporate Secretary since June 2001 and served as our interim Chief Financial Officer from April 2001 to May 2001. He has been Chief Executive Officer of CPI since December 1997. In July 2005 he received the title of Chief Operating Officer. Mr. Campbell holds a B.S. in general engineering from the U.S. Military Academy and an M.S. in management from the Sloan School of the Massachusetts Institute of Technology. Robert J. Habig has been our Chief Financial Officer since May 2001. He had previously served as Chief Financial Officer at think3 Corporation, a private computer-aided design software company from March 1999 to February 2001, as Chief Financial Officer at CrossWorlds Software, Inc., an enterprise software company from July 1998 to February 1999, as Executive Vice President at First Data Corporation, a financial transactions processing company, from May 1997 to June 1998, as a business unit Chief Financial Officer at AlliedSignal Corporation, an automotive, aerospace and chemical manufacturing company from 1994 to 1997, and held a number of positions with PepsiCo from 1979 to 1994. Mr. Habig holds a B.A. in economics and business from Lafayette College and an M.B.A. from the Simon Graduate School of Business at the University of Rochester. J. Chris Lauwers has been our Chief Technology and Product Officer since August 2005. He served as Chief Technology Officer from March 2001 to 2005. He was our Vice President of Engineering from 1996 to 2001 and Director of Engineering from 1994 to 1996. He previously served as Principal Software Architect at Vicor Inc., a private e-business product solutions and engineering consulting company, from 1990 to 1994, and as a research associate at Olivetti Research Center from 1987 to 1990. Dr. Lauwers holds a B.S. in electrical engineering from the Katholieke Universiteit Leuven of Belgium. Dr. Lauwers also holds an M.S. and a Ph.D. in electrical engineering and computer science from Stanford University. Anton F. Rodde has been the President of Collaboration Properties, Inc., since December 2003. Prior to joining CPI, he served as President and CEO of Western Data Systems, an ERP software company, from 1991 to 2002, as Group Vice President at Manugistics from 2002 to 2003, the company which 21 acquired Western Data Systems, as President and General Manager of several subsidiaries of Teknekron Corporation, a technology incubator, from 1984 to 1991, as founder and President of Control Automation, a robotics company, from 1980 to 1984, and held a variety of technical and management positions at AT&T from 1970 to 1980. Dr. Rodde holds a B.S. in physics from Benedictine University and an M.S. and Ph.D. in physics from the Illinois Institute of Technology. Gary Stager joined Avistar in December 2006 as Vice President of Engineering. From 2004 to 2006, Mr. Stager was Senior Vice President of Engineering and Operations for Exavio, Inc. in Santa Clara, California and Beijing, China, where he was responsible for the design, manufacture and support of Exavio’s networked storage products for digital media production and HPC applications. From 2001 to 2003, he served as VP of Engineering at Omneon Video Networks. Mr. Stager holds degrees in Electrical Engineering and Liberal Arts from the University of Florida. Robert Garrigan joined Avistar in April 2005 as Vice President of Sales. Prior to joining Avistar, Mr. Garrigan was senior vice president of sales at The NewsMarket, Incorporated, a broadcast news distribution service delivering video content via an Internet-based platform from September 2004 to May 2005. From 2003 to 2004, Mr. Garrigan served as Senior Vice President of Sales at Thompson Financial in both the US and Europe and, from 1998 to 2001, Mr. Garrigan served as Executive Vice President of Sales and Business Development with IntraLinks in New York. Mr. Garrigan holds a B.A. in Economics from The State University of New York. Stephen F. Arisco has been our Vice President of Operations and Customer Service since February 2000. He previously served as the Director of Operations and Customer Service of Avistar Systems from December 1997 to January 2000. From 1987 through December 1997, he was Director of Customer Service and Operations at TRW Financial Systems, Inc., a systems integration company. Mr. Arisco holds a B.S. in Business from the University of Phoenix, and an Executive MBA from Pepperdine University. Item 1a. Risk Factors Factors Affecting Future Operating Results We have incurred substantial losses in the past and may not be profitable in the future. We incurred net losses of $8.1 million for 2006, $5.2 million for 2005 and $8.7 million for 2004. As of December 31, 2006, our accumulated deficit was $102.8 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 become profitable, we will need to increase our revenue by increasing sales to existing customers and by attracting additional customers and licensees. If our expenses increase more rapidly than our revenue, or if revenue and expense levels remain the same, we may never become profitable. If we do become profitable, as we did during the third quarter of 2006, we may not be able to sustain or increase profitability on a quarterly or annual basis. In addition, if we fail to reach profitability or to sustain or grow our profits within the time frame expected by investors, the market price of our common stock may be adversely impacted. Our market is in the early stages of development, and our system may not be widely accepted. Our ability to achieve profitability depends in part on the widespread adoption of networked video communications systems and the sale and adoption of our video system in particular. If the market for our system fails to grow or grows more slowly than we anticipate, we may not be able to increase revenue or achieve profitability. The market for our system is relatively new and evolving. We have to devote substantial resources to educating prospective customers about the uses and benefits of our system. Our efforts to educate potential customers may not result in our system achieving broad market acceptance. In 22 addition, businesses that have invested or may invest substantial resources in other video products may be reluctant or slow to adopt our system. Consequently, the conversion from traditional methods of communication to the extensive use of networked video may not occur as rapidly as we wish. Our lengthy sales cycle to acquire new customers or large follow-on orders may cause our operating results to vary significantly and make it more difficult to forecast our revenue. We have generally experienced a product sales cycle of four to nine months for new customers or large follow-on orders from existing customers due to the time needed to educate customers about the uses and benefits of our system, and the significant investment decisions that our prospective customers must make when they decide to buy our system. Many of our prospective customers have neither budgeted expenses for networked video communications systems, or for personnel specifically dedicated to the procurement, installation or support of these systems. As a result, our customers spend a substantial amount of time before purchasing our system in performing internal reviews and obtaining capital expenditure approvals. 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 in the future, our operating results to vary significantly from quarter-to-quarter and year-to-year. This makes it difficult for us to forecast revenue, and could cause volatility in the market price of our common stock. A lost or delayed order could result in lower revenue than expected in a particular quarter or year. General economic conditions have and may impact our revenues and harm our business in the future. The international economic slowdown and the downturn in the investment banking industry that began in 2000 negatively affected our business, and a reoccurrence of a difficult economic environment may do so in the future. During this most recent economic downturn, the investment banking industry suffered a sharp decline, which caused many of our existing and potential customers to cancel or delay orders for our products. Although the U.S. economy has improved, our customers and potential customers may continue to delay ordering our products, and we could fall short of our revenue expectations for 2007 and beyond. Slower growth among our customers, tightening of customers’ operating budgets, retrenchment in the capital markets and other general economic factors all have had, and could in the future have, a materially adverse effect on our revenue, capital resources, financial condition and results of operations. 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 or convincing them that their products infringe upon our intellectual property rights can be lengthy. 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 and enforcement efforts tend to be sporadic and difficult to predict. Recognition of such 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. 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. 23 Since a majority of our product revenue has come from follow-on orders, our financial performance could be harmed if we fail to obtain follow-on orders in the future. Our customers typically place limited initial orders for our networked video communications system, as they seek to evaluate its utilization and resultant value. Our strategy is to pursue additional and larger follow-on orders after these initial orders. Excluding licensing revenue, product revenue generated from follow-on orders accounted for approximately 95% of our revenue in 2006, 99% in 2005 and 78% in 2004. Our future financial performance depends on successful initial installations of our system, and successful generation of follow-on orders as the Avistar network expands within a customer’s organization. If our system does not meet the needs and expectations of customers, we may not be able to generate follow-on orders. Because we depend on a few customers for a majority of our 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. We have historically derived the majority of our revenue from a limited number of customers, particularly Deutsche Bank AG and their affiliates and UBS Warburg LLC and their affiliates. In 2006, these customers and Sony Corporation accounted for 83% of our total revenue. Deutsche Bank AG and their affiliates and UBS Warburg LLC and their affiliates accounted for 84% of our revenue for 2005. Deutsche Bank AG and their affiliates and UBS Warburg LLC and their affiliates accounted for 71% of our revenue for 2004. No other customers individually contributed greater than 10% of our total revenue for 2006, 2005 or 2004. As of December 31, 2006, three customers represented 44%, 20% and 20% of gross accounts receivable. As of December 31, 2005, three customers represented 48%, 32% and 17% of gross accounts receivable. As of December 31, 2004, approximately 81% of our accounts receivable were concentrated with one customer. 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. If we are unable to license our patent portfolio to additional parties on terms equal to or better than our agreements with Polycom prior to the completion of our amortization of the Polycom proceeds in 2009, 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. 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. As of December 31, 2006, our accumulated deficit was $102.8 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, we may need to arrange for the availability of additional funding in order to meet our future business requirements. If we are unable to obtain additional funding when needed on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities, respond to competitive pressures or unanticipated requirements, or finance our 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. 24 We may not be able to modify and improve our products in a timely and cost effective manner to respond to technological change and customer demands. Future hardware and software platforms embodying new technologies and the emergence of new industry standards and customer requirements could render our system non-competitive or even obsolete. The market for our system is characterized by: • rapid technological change; • the emergence of new competitors; • significant development costs; • changes in the requirements of our customers and their communities of users; • evolving industry standards; and • transition to Internet protocol connectivity for video at the desktop, with increasing availability of bandwidth and quality of service. Our system is designed to work with a variety of hardware and software configurations and data networking infrastructures used by our customers. The majority of these customer networks rely on Microsoft Windows servers. However, our software may not operate correctly on other hardware and software platforms or with other programming languages, database environments and systems that our customers use. Also, we must constantly modify and improve our system to keep pace with changes made to our customers’ platforms, data networking infrastructures, and their evolving ability to transport video and other applications. This may result in uncertainty relating to the timing and nature of our new release announcements, introductions or modifications, which in turn may cause confusion in the market, with a potentially harmful effect on our business. If we fail to promptly modify or improve our system in response to evolving industry standards or customers’ demands, our system could become less competitive, which would harm our financial condition and reputation. Difficulties or delays in installing our products could harm our revenue and margins. We recognize product and installation revenue upon the installation of our system in those cases where we are responsible for installation, which often entails working with sophisticated software and computing and communications systems. If we experience difficulties with installation or do not meet deadlines due to delays caused by our customers or ourselves, we could be required to devote more customer support, technical and other resources to a particular installation. If we encounter delays in installing our products for new or existing customers or installation requires significant amounts of our professional services support, our revenue recognition could be delayed, our costs could increase and our margins could suffer. Competition could reduce our market share and decrease our revenue. Currently, our competition comes from many other kinds of companies, including communication equipment, integrated solution, broadcast video and stand-alone point solution providers. Within the video-enabled network communications market, we compete primarily against Polycom, Tandberg ASA, Sony Corporation, Apple Inc., Radvision, Ltd. and Emblaze-VCON Ltd. 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, Nortel Networks Corporation and WebEx Communications, Inc., that enable web-based or network-based video communications with low-cost digital camera systems. The market in which we operate is highly competitive. In addition, because our industry is relatively new and one which is characterized by rapid technological change, evolving user needs, developing industry standards and 25 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. 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. Infringement of our proprietary rights could affect our competitive position, harm our reputation or cost us money. We regard our system as open but proprietary. In an effort to protect our proprietary rights, we rely primarily on a combination of patent, copyright, trademark and trade secret laws, as well as licensing, non-disclosure and other agreements with our consultants, suppliers, customers and employees. However, these laws and agreements provide only limited protection of our proprietary rights. In addition, we may not have signed agreements in every case, and the contractual provisions that are in place and the protection they produce may not provide us with adequate protection in all circumstances. Although CPI holds patents and has filed patent applications covering some of the inventions embodied in our systems, our means of protecting our proprietary rights may not be adequate. It may be possible for a third party to copy or otherwise obtain and use our technology without authorization and without our detection. In the event that we believe a third party is infringing our intellectual property rights, an infringement claim brought by us could, regardless of the outcome, result in substantial cost to us, divert our management’s attention and resources, be time consuming to prosecute and result in unpredictable damage awards. A third party may also develop similar technology independently, without infringing upon our patents and copyrights. In addition, the laws of some countries in which we sell our system may not protect our software and intellectual property rights to the same extent as the laws of the United States or other countries where we hold patents. As we move to more of a software based system, unauthorized copying, use or reverse engineering of our system could harm our business, financial condition or results of operations. Others may bring infringement claims against us, which could be time-consuming and expensive to defend. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights and we have been a party to such litigation. The prosecution and defense of these lawsuits where we are involved may require us and CPI 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 proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and 26 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. Our inability to protect the intellectual property created by us would cause our business to suffer. We rely on a combination of license, development and nondisclosure agreements, trademark, trade secret and copyright law, and contractual provisions to protect our other, non-patentable intellectual property rights. If we fail to protect these intellectual property rights, our licensees, potential licensees and others may seek to use our technology without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth of our business depends in part on the applicability of our intellectual property to the products of third parties, and our ability to enforce intellectual property rights against them. In addition, effective trade secret protection may be unavailable or limited in certain foreign countries. Although we intend to protect our rights vigorously, if we fail to do so, our business will suffer. 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 27 customers to the extent permitted. Product liability, warranty or other claims brought against us with respect to such warranties could, regardless of their merits, harm our business, financial condition or results of operations . The loss of any of our outside contract manufacturers or third party equipment suppliers that produce key components of our system could significantly disrupt our manufacturing and new product development process. We depend on outside contract manufacturers to produce components of our systems, such as cameras, microphones, gateway, speakers and monitors that we install at desktops and in conference rooms. One supplier, Pacific Corporation, is a single source supplier for a key component of our product. Another supplier, Equator Technologies Inc., is our only current source of a component used in our IP gateway product. In addition, during the first quarter of 2006, we began using an offshore contract resource in China for product development work. Our reliance on these third parties involves a number of risks, including: • the possible unavailability of critical services and components on a timely basis, on commercially reasonable terms or at all; • if the components necessary for our system were to become unavailable, the need to qualify new or alternative components for our use or reconfigure our system and manufacturing process could be lengthy and expensive; • the likelihood that, if particular components or human resources were not available, we would suffer an interruption in the manufacture and shipment of our systems until these components or alternatives become available; • reduced control by us over the quality and cost of our system and over our ability to respond to unanticipated changes and increases in customer orders, and conversely, price changes from suppliers if committed volumes are not met; • the possible unavailability of, or interruption in, access to some technologies due to infringement claims, production/supply issues or other hindrances; and • the possible misappropriation of our source code through reverse engineering or other means by contract developers or other parties. If these manufacturers or suppliers cease to provide us with the assistance or the components necessary for the operation of our business, we may not be able to identify alternate sources in a timely fashion. Any transition to alternate manufacturers or suppliers would likely result in operational problems and increased expenses, and could cause delays in the shipment of or otherwise limit our ability to provide our products. We cannot assure you that we would be able to enter into agreements with new manufacturers or suppliers on commercially reasonable terms, or at all. Any disruption in product flow may limit our revenue, delay our product development, seriously harm our competitive position and/or result in additional costs or cancellation of orders by our customers. If we are unable to expand our direct sales force and/or add distribution channels, our business will suffer. To increase our revenue, we must increase the size of our direct sales force and add indirect distribution channels, such as systems integrators, product partners and/or value-added resellers, and/or effect sales through our customers. If we are unable to maintain or increase our direct sales force or add indirect distribution channels due to our own cost constraints, limited availability of qualified personnel or other reasons, our future revenue growth may be limited and our future operating results may suffer. We cannot assure you that we will be successful in attracting, integrating, motivating and retaining sales 28 personnel. Furthermore, it can take several months before a new hire becomes a productive member of our sales force. The loss of existing salespeople, or the failure of new salespeople and/or indirect sales partners to develop the necessary skills in a timely manner, could impact our revenue growth. We may not be able to retain our existing key personnel, or hire and retain the additional personnel that we need to sustain and grow our business. We depend on the continued services of our executive officers and other key personnel. We do not have long-term employment agreements with our executive officers or other key personnel and we do not carry any “key man” life insurance. The loss of the services of any of our executive officers or key personnel could harm our business, financial condition and results of operations. Our products and technologies are complex, and to successfully implement our business strategy and manage our business, an in-depth understanding of video communication and collaboration technologies and their potential uses is required. We need to attract and retain highly skilled technical and managerial personnel for whom there is intense competition. If we are unable to attract and retain qualified technical and managerial personnel due to our own cost constraints, limited availability of qualified personnel or other reasons, our results of operations could suffer and we may never achieve profitability. The failure of new personnel to develop the necessary skills in a timely manner could harm our business. Our plans call for growth in our business, and our inability to achieve or manage growth could harm our business. Failure to achieve or effectively manage growth will harm our business, financial condition and operating results. Furthermore, in order to remain competitive or to expand our business, we may find it necessary or desirable in the future to acquire other businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, to finance the acquisition or to integrate the acquired businesses, products or technologies into our existing business and operations. In addition, completing a potential acquisition and integrating an acquired business may strain our resources and require significant management time. Our 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 75% of total revenue for 2006, 63% for 2005 and 52% for 2004. 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 29 • 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 noncompliant 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 as of July 1, 2006 (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. If our customers do not perceive our system or services to be effective or of high quality, our brand and name recognition would suffer. We believe that establishing and maintaining brand and name recognition is critical for attracting and expanding our targeted customer base. We also believe that the importance of reputation and name recognition will increase as competition in our market increases. Promotion and enhancement of our name will depend on the success of our marketing efforts, and on our ability to continue to provide high quality systems and services, neither of which can be assured. If our customers do not perceive our system or services to be effective or of high quality, our brand and name recognition will suffer, which would harm our business. We may not meet the continued listing criteria for the NASDAQ Capital Market, which could materially and adversely affect the price and liquidity of our stock, our business and our financial condition. For continued listing of our common stock on the NASDAQ Capital Market, we are required to, among other things (i) maintain stockholders’ equity of at least $2.5 million, or a market value of listed securities of at least $35 million, or annual net income from continuing operations of at least $500,000, and (ii) maintain a minimum closing bid price of our common stock of at least $1.00. If we do not meet the continued listing requirements, our common stock could be subject to delisting from trading on the NASDAQ Capital Market. There can be no assurance that we will continue to meet all requirements for continued listing on the NASDAQ Capital Market. If we are unable to continue to list our common stock for trading on the NASDAQ Capital Market, there may be adverse impact on the market price and liquidity of our common stock, and our stock may be subject to the “penny stock rules” contained in Section 15(g) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. Delisting of our common stock from the NASDAQ Capital Market could also have a materially adverse effect on our business, including, among other things: our ability to raise additional financing to fund our operations; our ability to attract and retain customers; and our ability to attract and retain personnel, including management personnel. In addition, if we were 30 unable to list our common stock for trading on NASDAQ, many institutional investors would no longer be able to retain their interests in and/or make further investments in our common stock because of their internal rules and protocols. Our common stock has been and will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which will be beyond our control, which may prevent our stockholders from reselling our common stock at a profit. The trading price of our common stock has in the past been and could in the future be subject to significant fluctuations in response to: • general trends in the equities market, and/or trends in the technology sector; • quarterly variations in our results of operations; • announcements regarding our product developments; • the size and timing of agreements to license our patent portfolio; • announcements of technological innovations or new products by us, our customers or competitors; • announcements of competitive product introductions by our competitors; • sales, or the perception in the market of possible sales, of a large number of shares of our common stock by our directors, officers, employees or principal stockholders; and • developments or disputes concerning patents or proprietary rights, or other events. If our revenue and results of operations are below the expectations of public market securities analysts or investors, then significant fluctuations in the market price of our common stock could occur. In addition, the securities markets have, from time to time, experienced significant price and volume fluctuations, which have particularly affected the market prices for high technology companies, and which often are unrelated and disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, political and market conditions, may negatively affect the market price of our common stock. If our share price is volatile, we may be the target of securities litigation, which is costly and time-consuming to defend. In the past, following periods of market volatility in the price of a company’s securities, security holders have often instituted class action litigation. Many technology companies have been subject to this type of litigation. Our share price has, in the past, experienced price volatility, and may continue to do so in the future. If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the merits or outcome, we could incur substantial legal costs and our management’s attention could be diverted, causing our business, financial condition and operating results to suffer. Provisions of our certificate of incorporation, our bylaws and Delaware law may make it difficult for a third party to acquire us, despite the possible benefits to our stockholders. Our certificate of incorporation, our bylaws, and Delaware law contain provisions that may inhibit changes in our control that are not approved by our Board of Directors. For example, the Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the terms of this preferred stock, without any further vote or action on the part of the stockholders. These provisions may have the effect of delaying, deferring or preventing a change in the control of Avistar despite possible benefits to our stockholders, may discourage bids at a premium over the market 31 price of our common stock, and may adversely affect the market price of our common stock and the voting and other rights of our stockholders. Our principal stockholders can exercise a controlling influence over our business affairs and they may make business decisions with which you disagree that will affect the value of your investment. Our executive officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 63% of our common stock as of December 31, 2006. 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. Changes in stock option accounting rules enacted have and will continue to adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, which may in turn adversely impact our stock price and our ability to attract and retain employees. In December 2004, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 123R (revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. The requirements of SFAS No. 123R are effective for fiscal years beginning after June 15, 2005. SFAS No. 123R allows for either a modified prospective recognition of compensation expense or retrospective recognition back to the original issuance of SFAS No. 123. We adopted SFAS No. 123R in the first quarter of 2006 using the modified prospective method. We use the Black-Scholes-Merton model to estimate the fair value of share-based payments to employees, which is then amortized on a ratable basis over the requisite service period and adjusted for estimated forfeiture rates for executives and non-executives. The pro forma impact of the adoption of SFAS No. 123 on our historical financial statements is included in the notes to the consolidated financial statements presented elsewhere in this Annual Report on Form 10-K. We expect to continue to grant stock options to employees. The impact of SFAS No. 123R had a material impact on our results of operations. Item 1b. None. Item 2. Properties Unresolved Staff Comments Our corporate headquarters are located in Redwood Shores, California, where we occupy approximately 17,000 square feet under a lease that expires in March 2007. We have leased new facilities in San Mateo, California for our corporate headquarters totaling approximately 22,000 square feet under a lease that begins February 2007 and expires in March 2012. We believe that our current leased facilities, together with facilities that are available to us or are being negotiated, will be sufficient to meet our needs for the next twelve months. In addition, we lease a combined total of approximately 11,000 square feet of office space in New York, New York, and London, England. As of December 31, 2006, approximately 2,000 square feet of our corporate headquarters was being utilized by CPI, our wholly-owned subsidiary. 32 Item 3. Legal Proceedings On May 11, 2005, CPI, our wholly-owned patent prosecution and licensing subsidiary, commenced a patent infringement lawsuit against Tandberg ASA and Tandberg, Inc., alleging that numerous Tandberg videoconferencing products infringe three patents held by CPI. The suit was filed in the United States District Court for the Northern District of California. The three patents involved were U.S. Patent Nos. 5,867,654; 5,896,500; and 6,212,547. Both of the Tandberg entities answered the complaint on July 15, 2005, at which time they asserted that they did not infringe the patents and that the patents were invalid and unenforceable. On January 30, 2006, Tandberg Telecom AS, a wholly-owned subsidiary of Tandberg ASA, filed a patent infringement lawsuit against us and CPI in the United States District Court for the Eastern District of Texas. The suit alleged that our videoconferencing products infringe one patent purchased by Tandberg Telecom AS. The patent involved is U.S. Patent No. 6,621,515, which claims a method and system for routing video calls. We responded to the complaint on March 23, 2006, at which time we asserted that we did not infringe the patent, that the patent was invalid, and that the claim was without merit. On February 15, 2007, we entered into a patent license agreement with Tandberg ASA, Tandberg AS and Tandberg, Inc. Under this agreement, CPI agreed to dismiss its infringement suit against Tandberg, Tandberg agreed to dismiss its infringement suit against us and CPI, and the companies agreed to cross-license each other’s patent portfolios. The agreement resulted in a payment to us from Tandberg in the amount of $12.0 million, of which $4.3 million was used by us to pay contingent legal fees we incurred in connection with the litigation. Item 4. Submission of Matters to a Vote of Security Holders None. 33 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has traded on the NASDAQ National Market from August 17, 2000 to October 29, 2002 and has traded on the NASDAQ Capital Market since October 30, 2002 under the symbol “AVSR.” Prior to August 17, 2000, there was no public market for our common stock. The following table sets forth for the period indicated the high and low closing sale prices for our common stock, as reported by the NASDAQ Stock Market. Year Ended December 31, 2006 High Low Year Ended December 31, 2005 High Low First Quarter Second Quarter Third Quarter Fourth Quarter $ 1.79 $ 1.76 $ 1.81 $ 2.52 $ 1.22 $ 1.25 $ 1.33 $ 1.44 $ 2.53 $ 3.10 $ 2.50 $ 2.10 $ 1.11 $ 2.08 $ 1.99 $ 1.52 On December 31, 2006, the last reported sale price of our common stock on the NASDAQ Capital Market was $1.81 per share. According to the records of our transfer agent, as of December 31, 2006 there were 76 holders of record of our common stock and we believe there are a substantially greater number of beneficial holders. Dividend Policy We have never paid cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. Equity Compensation Plan Information The information required by this Item is included under Item 12 of Part III of this Annual Report on Form 10-K. 34 Stock Performance Graph This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Avistar under the Securities Act of 1933, as amended or the Exchange Act. Set forth below is a line graph comparing the percentage change in the cumulative return to the holders of our common stock with the cumulative return of The NASDAQ Composite U.S. Index and a group of industry peers within the communications software infrastructure and video communications industries for the period commencing August 17, 2000 and ending on December 31, 2006. Returns for the indices are weighted based on market capitalization at the beginning of each fiscal year. Data for The NASDAQ Composite Index and the Peer Group assumes reinvestment of dividends. We have never paid dividends on our common stock and have no present plans to do so. Our common stock was transferred from The NASDAQ Global Market to The NASDAQ Capital Market on October 30, 2002. TOTAL RETURN TO STOCKHOLDERS (Assumes $100 investment on 12/31/01) Total Return Analysis 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 Avistar Communications Corp. Peer Group Nasdaq Composite $ 100.00 $ 100.00 $ 100.00 $ 11.50 $ 67.62 $ 68.47 $ 76.00 $ 118.95 $ 102.72 $ 66.50 $ 132.54 $ 111.54 $ 77.01 $ 137.28 $ 113.07 $ 90.50 $ 205.76 $ 123.84 Source: CTA Integrated Communications www.ctaintegrated.com (303) 665-4200. Data from ReutersBRIDGE Data Networks (1) The above graph sets forth the cumulative total return to our stockholders during the period from August 17, 2000 to December 31, 2006. The graph assumes the investment on December 31, 2001 of $100 in our common stock, The NASDAQ Composite Index, and an Industry Peer Group. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. The Industry Peer Group consists of Webex Communications, Inc., RealNetworks Inc., Packeteer, Inc., and Radvision Ltd. Although the companies included in the industry peer group were selected because of similar industry characteristics, they are not entirely representative of our business. 35 (2) Item 6. Selected Financial Data The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto. The selected statements of operations data for the years ended December 31, 2006, 2005 and 2004 and the selected balance sheet data as of December 31, 2006 and 2005 are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for the year ended December 31, 2003 and 2002 and the selected balance sheet data as of December 31, 2004, 2003 and 2002 is derived from our financial statements not included in the Annual Report on Form 10-K. The historical results presented below are not necessarily indicative of future results. 2006 Year Ended December 31, 2005 2004 2003 (In thousands, except per share data) Restated(1) 2002 Statements of Operations Data Revenue: Product Licensing Services, maintenance and support Total revenue Costs and expenses: Cost of product* Cost of services, maintenance and support* Income from settlement and patent licensing Research and development* Sales and marketing* General and administrative* Total costs and expenses Loss from operations Other income (expenses): Interest income Other income (expense), net Total other income (expense), net Loss before provision for (recovery from) income taxes Provision for (recovery from) income taxes Net loss Net loss per share—basic and diluted Weighted average shares used in calculating basic and diluted net loss per share * Including stock-based compensation of: Cost of product, services, maintenance and support revenue Research and development Sales and marketing General and administrative $ 4,528 $ 3,403 $ 3,121 $ 2,817 $ 4,430 5,155 — — — — 3,542 3,508 3,200 3,775 4,369 13,225 6,911 6,321 6,592 8,799 3,185 1,892 1,435 1,425 2,170 1,820 2,220 1,937 2,119 2,348 (4,226 ) (4,226 ) (575 ) — — 5,753 3,544 2,588 2,432 3,731 5,488 3,379 2,456 3,702 4,006 9,682 5,697 6,956 6,038 4,600 21,702 12,506 14,797 15,716 16,855 (8,477 ) (5,595 ) (8,476 ) (9,124 ) (8,056 ) 299 537 118 44 269 (2 ) (94 ) 15 481 227 297 443 133 525 496 (8,180 ) (5,152 ) (8,343 ) (8,599 ) (7,560 ) (31 ) 22 363 20 18 $ (8,149 ) $ (5,174 ) $ (8,706 ) $ (8,619 ) $ (7,578 ) $ (0.24 ) $ (0.15 ) $ (0.27 ) $ (0.33 ) $ (0.30 ) 33,928 $ 155 $ 618 497 764 2006 33,600 — $ — — 100 32,610 — $ — — 24 26,368 15 $ 12 104 4 25,260 41 32 278 7 2002 As of December 31, 2005 2004 2003 (In thousands) Restated(1) Balance Sheet Data Cash and cash equivalents Short-term investments Working capital (deficit) Total assets Stockholders’ equity (deficit) (1) $ 7,854 $ 8,216 $ 21,656 $ 4,438 $ 4,783 — 2,995 — 1,000 2,402 (2,575 ) 6,306 16,367 4,848 7,250 14,699 20,358 30,408 8,228 10,400 (9,949 ) (4,158 ) 514 5,491 7,948 See Note 2 “Correction of an Error” of the Notes to Consolidated Financial Statements. 36 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward looking statements. These risks and other factors include those listed under “Risk Factors” elsewhere in this Annual Report on Form 10-K. In some cases, you can identify forward looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under “Risk Factors.” These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform our prior statements to actual results. Overview We develop, market and support an integrated suite of vBusiness—video-enabled eBusiness—applications, all powered by the AvistarVOS application platform. From the desktop, we deliver high quality interactive video calling, content creation and publishing, broadcast origination and distribution, video-on-demand, and integrated data sharing. The Avistar video and data collaboration applications are all managed by the AvistarVOS software application. By integrating video tightly into the way they work, our customers can use our system to help reduce costs and improve productivity and communications within the enterprise and between enterprises, to enhance relationships with customers, suppliers and partners. Using AvistarVOS software and leveraging video, telephony and Internet networking standards, Avistar applications are designed to be scalable, reliable, cost effective, easy to use, and capable of evolving with communications networks as bandwidth increases and as new standards and protocols emerge. We currently sell our system directly to enterprises in selected strategic vertical markets, and have focused initially on the financial services industry. Our objective is to establish our technology as the standard for networked video through direct sales, indirect channel sales/partnerships and the licensing of our technology to others. We also seek to license our broad portfolio of patents covering, among other areas, video and rich media collaboration technologies, networked real-time text and nontext communications and desktop workstation echo cancellation. We operate on a 52-week fiscal year ending December 31. We operate in two segments. Avistar Communications Corporation engages in the design, development, manufacture, sale and marketing of networked video communications products and associated support services. Collaboration Properties, Inc., or CPI, our wholly owned subsidiary, engages in the prosecution, maintenance, support and licensing of the intellectual property that we have developed, some of which is used in our products. 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. As of December 31, 2006, we held 74 U.S. and foreign patents, which we look to license to others in the collaboration technology marketplace. 37 Change in Accounting Treatment In September 2005, we received a comment letter from the SEC relating to our 2004 Form 10-K, which included questions regarding our accounting for the November 2004 settlement and patent cross-license agreement with Polycom, Inc.. The settlement and patent cross-license agreement resulted in a $27.5 million one-time payment by Polycom, Inc. to us, and a payment by us to our own litigation counsel of $6.4 million in contingent legal fees. Our Form 10-K for the fiscal year ended December 31, 2004 and Form 10-Q for the three, six and nine months ended March 31, 2005, June 30, 2005 and September 30, 2005, respectively, reported the one time payment by Polycom, Inc. as revenue, recognized ratably over a five-year period, net of contingent legal fees. As a result of the SEC’s inquiry as to whether the Polycom, Inc. transaction should be characterized as revenue and after discussions with the SEC, we concluded that a reclassification of license revenues from revenue to a component of operating expenses and reflected as “Income from settlement and patent licensing” was necessary for previously filed financial reports. The reclassification of the proceeds and expenses from the Polycom, Inc. settlement and patent cross-license agreement had no effect on reported net loss, loss per share, stockholders’ equity (deficit) or net cash flows from operating, investing or financing activities, but did have the effect of overstating revenues and operating expenses for previously issued interim and annual consolidated financial statements, as of and for the quarters and year-to-date periods ended December 31, 2004, March 31, 2005, June 30, 2005 and September 30, 2005. In addition, the balance sheet as of December 31, 2004 was amended to reflect the gross effect of the $27.5 million payment by Polycom, Inc. to us, and the payment of $6.4 million of contingent legal fees by us, which was previously reported on a net basis as deferred revenue. Significant concentrations, revenue recognition, segment reporting footnotes and the unaudited interim results have been modified to reclassify the Polycom, Inc. proceeds from revenue to “Income from settlement and patent licensing,” to be consistent with the presentation of the net proceeds from the Polycom, Inc. settlement and patent cross-license agreement in the 2006 and 2005 Statements of Operations. The presentation within operations is supported by a determination that the Polycom, Inc. licensing transaction is central to the activities that constitute our ongoing major or central operations, but that the settlement may also contain a gain element related to the settlement, which is not considered revenue under the Financial Accounting Standards Board Concepts Statement No. 6, Elements of Financial Statements. We did not have sufficient historical evidence to support a reasonable determination of value for the purpose of segregating the transaction into revenue related to the patent licensing and an operating or non-operating gain upon settlement of litigation, resulting in the determination that the entire transaction is more appropriately classified as “Income from settlement and patent licensing” within operations, as opposed to revenue. See Note 2 “Correction of an error” of the Notes to Consolidated Financial Statements. License Agreement with Sony Corporation In July 2006, we entered into a Patent License Agreement with Sony Corporation and Sony Computer Entertainment, Inc.. Under the license agreement, CPI granted Sony Corporation and its subsidiaries a license to all of CPI’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 Sony Computer Entertainment, Inc. PlayStation products. As consideration for the licenses granted under the agreement, Sony Corporation agreed to make an upfront license payment of $5.0 million and Sony Computer Entertainment, Inc. has agreed to make future royalty payments relating to the sale, in certain countries, of certain Sony Computer Entertainment, Inc. products. The $5.0 million upfront payment was recognized by us as licensing revenue in the three month period ended September 30, 2006 and future royalty payments, if any, will be recognized as they occur in accordance with Statement of Position (“SOP”) 97-2 , Software Revenue Recognition (“SOP 97-2”). 38 Critical Accounting Policies The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements: • Revenue recognition; • Income from settlement and patent licensing; • Stock based compensation; • Valuation of accounts receivable; and • Valuation of inventories. Revenue Recognition We derive product revenue from the sale and licensing of our video-enabled networked communications system, consisting of a suite of Avistar-designed software and hardware products, including third party components. We also derive revenue from fees for installation, maintenance, support, training services and software development. In addition, we derive revenue from the licensing of our intellectual property portfolio. In 2006, we licensed all of CPI’s patents with a filing date on or before January 1, 2006 for a specific field of use relating to video conferencing to Sony Corporation and Sony Computer Entertainment, Inc. Product revenue as a percentage of total revenue was 34%, 49% and 49% for 2006, 2005 and 2004, respectively. We recognize product and services revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions (“SOP 98-9”). We derive product revenue from the sale and licensing of a set of desktop (endpoint) products (hardware and software) and infrastructure products (hardware and software) that combine to form an Avistar video-enabled collaboration solution. Services revenue includes revenue from installation services, post-contract customer support, training, out of pocket expenses, freight and software development. The installation services that we offer to customers relate to the physical set-up and configuration of desktop and infrastructure components of our solution. The fair value of all product, installation services, post-contract customer support and training offered to customers is determined based on the price charged when such products or services are sold separately. Arrangements that include multiple product and service elements may include software and hardware products, as well as installation services, post-contract customer support and training. Pursuant to SOP 97-2, we recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable. We apply these criteria as discussed below: • Persuasive evidence of an arrangement exists. We require a written contract, signed by both the customer and us, or a purchase order from those customers that have previously negotiated a standard end-user license arrangement or volume purchase agreement with us prior to recognizing revenue on an arrangement. 39 • Delivery has occurred. We deliver software and hardware to our customers physically. Our standard delivery terms are FOB shipping point. • The fee is fixed or determinable. Our determination that an arrangement fee is fixed or determinable depends principally on the arrangement’s payment terms. Our standard terms generally require payment within 30 to 90 days of the date of invoice. Where these terms apply, we regard the fee as fixed or determinable, and we recognize revenue upon delivery (assuming other revenue recognition criteria are met). If the payment terms do not meet this standard, but rather involve “extended payment terms,” we may not consider the fee to be fixed or determinable and would then recognize revenue when customer installments are due and payable. • Collectibility is probable. To recognize revenue, we must judge collectibility of the arrangement fees, which we do on a customer-bycustomer basis pursuant to our credit review policy. We typically sell to customers with which we have had a history of successful collections. For new customers, we evaluate the customer’s financial position and ability to pay. If we determine that collectibility is not probable based upon our credit review process or the customer’s payment history, we recognize revenue when cash is collected. If there are any undelivered elements, we defer revenue for those elements, as long as Vendor Specific Objective Evidence (“VSOE”) exists for the undelivered elements. Additionally, when we provide installation services, the product and installation revenue is recognized upon completion of the installation process and receipt of customer confirmation, subject to the satisfaction of the revenue recognition criteria described above. We believe that the fee associated with the delivered product elements does not meet the collectibility criteria if the installation services have not been completed. Customer confirmation is obtained and documented by means of a standard form indicating the installation services were provided and the hardware and software components were installed. When the customer or a third party provides installation services, the product revenue is recognized upon shipment, subject to satisfaction of the revenue recognition criteria described above. Payment for product is due upon shipment, subject to specific payment terms. Payment for installation and professional services is due upon providing the services, subject to specific payment terms. Reimbursements received for out of pocket expenses and shipping costs incurred during installation and support services have not been significant to date. These expenses are recognized as revenue in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-14 (“EITF 01-14”), Income Statement Characterization of Reimbursements Received for “Out of Pocket” Expenses Incurred. The price charged for maintenance and/or support is defined in the product sale contract, and is based on a fixed price for both hardware and software components as stipulated in the customer agreement. Customers have the option to renew the maintenance and/or support services in subsequent periods at the same or similar rate as paid in the initial year subject to contractual adjustments for inflation in some cases. Revenue from maintenance and support is recognized pro-rata over the maintenance and/or support term, which is typically one year in length. Payments for services made in advance of the provision of services are recorded as deferred revenue and customer deposits in the accompanying balance sheets. Training services are offered independently of the purchase of product. The value of these training services is determined based on the price charged when such services are sold separately. Training revenue is recognized upon performance of the service. We recognize service revenue from software development contracts in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue related to contracts for software development is recognized using the percentage of completion method, when all of the following conditions are met: a contract exists with the customer at a fixed price, we have fulfilled all of our material contractual obligations to the customer for each deliverable of the contract, verification of completion of the deliverable has been received, and collection of the receivable is probable. Amounts 40 billed to customers in excess of revenues recognized to date are deferred and recorded as deferred revenue and customer deposits in the accompanying balance sheets. Assumptions used for recording revenue and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs to complete the contract. Any anticipated losses on contracts in progress are charged to earnings when identified. We also derive revenue from the licensing of our intellectual property portfolio. We recognize revenue from the licensing of our intellectual property portfolio according to SOP 97-2, based on the terms of the royalty, partnership and cross-licensing agreements involved. In the event that a license to our intellectual property is granted after the commencement of litigation proceedings between us and the licensee, the proceeds of such transaction are recognized as licensing revenue by us only if sufficient historical evidence exists for the determination of fair value of the licensed patents to support the segregation of the proceeds between a gain on litigation settlement and patent license revenues consistent with Financial Accounting Standards Board (“FASB”) Concepts Statement No. 6, Elements of Financial Statements . As of December 31, 2006, these criteria for recognizing license revenue following the commencement of litigation had not been met. To date, a significant portion of our revenue has resulted from sales to a limited number of customers. For 2006, we recorded revenue of approximately $10.9 million, or 83% of total revenue from Sony Corporation and Sony Computer Entertainment, Inc, Deutsche Bank AG and their affiliates, and UBS Warburg LLC and their affiliates, each of whom accounted for greater than 10% of our total revenue. For 2005, we recorded revenue of approximately $5.8 million, or 84% of total revenue, from Deutsche Bank AG and their affiliates, and UBS Warburg LLC and their affiliates, each of whom accounted for greater than 10% of our total revenue. For 2004, we recorded revenue of approximately $4.5 million, or 71% of total revenue, from Deutsche Bank AG and their affiliates and UBS Warburg LLC and their affiliates, each of whom accounted for greater than 10% of our total revenue for 2004. We anticipate that our revenue, and therefore, our operating results for any given period, will continue to depend to a significant extent on a limited number of customers. As a result, the loss of or a reduction in sales to any one of these customers would have a significant adverse impact on our operations and financial performance. International revenue, which consists of sales to customers with operations principally in Western Europe and Asia, comprised 75% of total revenue for 2006, 63% for 2005 and 52% for 2004. Income from Settlement and Patent Licensing We recognize the proceeds from settlement and patent licensing agreements based on the terms involved. When litigation has been filed prior to a settlement and patent licensing agreement, and insufficient historical evidence exists for the determination of fair value of the patents licensed to support the segregation of the proceeds between a gain on litigation settlement and patent license revenues, we report all proceeds in “income from settlement and patent licensing” within operating costs and expenses. The gain portion of the proceeds, when sufficient historical evidence exists to segregate the proceeds, would be reported in other income according to SFAS No. 5, Accounting for Contingencies . To date, all proceeds from settlement and patent licensing agreements entered into following the commencement of litigation have been reported as income from settlement and patent licensing. When a patent license agreement is entered into prior to the commencement of litigation, we report the proceeds of such transaction as licensing revenue in the period in which such proceeds are received, subject to the revenue recognition criteria described above. Stock Based Compensation We adopted SFAS No. 123R effective January 1, 2006. SFAS No. 123R is a new and very complex accounting standard, the application of which requires significant judgment and the use of estimates, 41 particularly surrounding Black-Scholes-Merton assumptions such as stock price volatility and expected option terms, as well as expected option forfeiture rates used to value equity-based compensation. There is little experience or guidance with respect to developing these assumptions and models for nontransferable options. SFAS No. 123R requires the recognition of the fair value of stock compensation in net income (loss). We incurred $1.9 million, or $0.06 earnings per share in employee stock-based compensation expense in 2006 due to adoption of SFAS No. 123R, all of which was recorded to net loss in 2006. We received no tax benefit in the year ended 2006 due a full valuation allowance against the tax benefits of the stock-based compensation. Refer to Notes 3 and 8 in the Notes to our Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more information. In November 2005, the FASB issued FASB Staff Position SFAS No. 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards , which provides a practical exception when a company transitions to the accounting requirements in SFAS No. 123R. SFAS No. 123R requires a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting SFAS No. 123R, otherwise know as the “APIC Pool”, assuming the company had been following the recognition provisions prescribed by SFAS No. 123. We have elected to use the shortcut method under FASB Staff Position SFAS No. 123R-3 to calculate our APIC Pool. Valuation of Accounts Receivable Estimates are used in determining our allowance for doubtful accounts and are based on our historical collection experience, historical write-offs, current trends, and the credit quality of our customer base and the characteristics of our accounts receivable by aging category. If the allowance for doubtful accounts were to be understated, our operating income could be significantly reduced. The impact of any such change or deviation may be increased by our reliance on a relatively small number of customers for a large portion of our total revenue. As of December 31, 2006, three customers represented 44%, 20% and 20% of our gross accounts receivable balance. As of December 31, 2005, three customers represented 48%, 32% and 17% of our gross accounts receivable balance. Valuation of Inventories We record a provision for obsolete or excess inventory for systems and components that are no longer manufactured, or are at risk of being replaced with new versions of our product. In determining the allowance for obsolete or excess inventory, we look at our forecasted demand versus quantities on hand and commitments. Any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and commitments and our reported results. If actual market conditions are less favorable than those projected, additional inventory write-downs, provision for purchase commitments and charges against earnings may be required, which would negatively affect our operating results for such period. 42 Results of Operations The following table sets forth data expressed as a percentage of total revenue for the periods indicated. Percentage of Total Revenue Year Ended December 31, 2006 2005 2004 Restated(1) Revenue: Product Licensing Services, maintenance and support Total revenue Costs and expenses: Cost of product Cost of services, maintenance and support Income from settlement and patent licensing Research and development Sales and marketing General and administrative Total costs and expenses Loss from operations Other income (expense): Interest income Other income (expense), net Total other income, net Loss before provision for (recovery from) income taxes Provision for (recovery from) income taxes Net loss (1) See Note 2 “Correction of an Error” of the Notes to Consolidated Financial Statements. 34 % 39 27 100 24 14 (32 ) 44 41 73 164 (64 ) 2 — 2 (62 ) — (62 )% 49 % — 51 100 28 32 (61 ) 51 49 82 181 (81 ) 8 (2 ) 6 (75 ) — (75 )% 49 % — 51 100 23 30 (9 ) 41 39 110 234 (134 ) 2 — 2 (132 ) 6 (138 )% 43 COMPARISON OF 2006 AND 2005 Revenue Total revenue increased by 91% in 2006 to $13.2 million from $6.9 million for 2005. The increase in total revenue in 2006 relative to 2005 was primarily due to the licensing revenue of $5.2 million from Sony Corporation, Sony Computer Entertainment, Inc. and others, compared to no license revenue in 2005. The proceeds of our intellectual property licensing efforts tend to be sporadic and difficult to predict, which is expected to continue to contribute to the volatility of our financial condition and operating results. Product revenue increased by $1.1 million, or 33%, to $4.5 million in 2006 from $3.4 million in 2005, due primarily to additional sales to our existing customer base. Services, maintenance and support revenue totaled $3.5 million in 2006 and 2005. In 2006, three customers accounted for 83% of our revenue as compared to 2005 when two customers accounted for 84% of our revenue. The level of sales to any customer may vary from quarter to quarter and year to year. We anticipate that our revenue will continue to depend on a limited number of major customers for the foreseeable future; although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period. The loss of any one of those customers would have a material adverse impact on our financial condition and operating results. Cost of Revenue Total cost of revenue increased by 22% in 2006 to $5.0 million from $4.1 million for 2005. The increase in total cost of revenue in 2006 relative to 2005 was attributable to increased personnel utilized to support our maintenance and services offerings and additional product costs related to increased product sales. We expect cost of revenue to vary in the future based on the future mix of product revenues between hardware and software and the mix of services revenues. Income from Settlement and Patent Licensing Income from settlement and patent licensing was $4.2 million in 2006 and 2005, reflecting a full year of amortization of income associated with the Polycom, Inc. settlement and patent cross-license agreement. Operating Expenses Research and development. Research and development expenses increased by 62% in 2006 to $5.8 million from $3.5 million in 2005. The increase in research and development expenses in 2006 relative to 2005 was due to the hiring of new employees focused on research and development projects in 2006, the use of external labor to augment our internal development capacities, and stock-based compensation of $618,000. There was no stock-based compensation recorded in 2005. Research and development projects associated with customer funded development are expensed to cost of sales in the period in which they are incurred. Research and development expenses in 2007 are expected to increase due to additional hiring of software engineering personnel required to execute our 2007 research and development programs. Sales and marketing. Sales and marketing expenses increased by 62% in 2006 to $5.5 million from $3.4 million in 2005. The increase in sales and marketing expenses in 2006 relative to 2005 was due to the hiring of additional sales and marketing personnel and stock-based compensation of $497,000. There was no stock-based compensation recorded in 2005. Sales and marketing expenses in 2007 are expected to increase due to additional hiring of personnel required to execute our 2007 sales programs. General and administrative. General and administrative expenses increased by 70% in 2006 to $9.7 million from $5.7 million in 2005. The increase in general and administrative expenses in 2006 relative to 2005 was due primarily to an increase in legal fees associated with the litigation with Tandberg, which concluded in a patent license agreement on February 15, 2007, and stock-based compensation of $764,000 44 compared to $100,000 in 2005 General and administrative expenses in 2007 are expected to decrease due to decreased litigation activity. Other income, net. Other income, net decreased by 33% in 2006 to $297,000 from $443,000 in 2005. The decrease in other income, net in 2006 relative to 2005 was due primarily to the effect of reduced interest payments on lower levels of deposited cash, cash equivalents, and short and long term investments in 2006, offset by higher short-term interest rates. Provision for (recovery from) income taxes. Provision for (recovery from) income taxes decreased to a $31,000 recovery in 2006, from an expense of $22,000 in 2005 due to the recovery of $53,000 in 2006 of tax overpayments made in 2004, offset by foreign tax expenses of $22,000 in 2006. COMPARISON OF 2005 AND 2004 Revenue Total revenue increased by 9% in 2005 to $6.9 million from $6.3 million for 2004. The increase in total revenue in 2005 relative to 2004 was due to increases in product and services, maintenance and support revenues. Product revenue increased by $282,000 to $3.4 million in 2005 from $3.1 million in 2004, due primarily to additional sales to our existing customer base. Services, maintenance and support revenue increased by $308,000 to $3.5 million in 2005 from $3.2 million in 2004, due primarily to new services provided primarily to our existing customer base. In 2005, two customers accounted for 84% of our revenue. Cost of Revenue Total cost of revenue increased by 22% in 2005 to $4.1 million from $3.4 million for 2004. The increase in total cost of revenue in 2005 relative to 2004 was attributable to increased personnel utilized to support our maintenance and services offerings, and a shift among our existing customer base from the purchase of software offerings with no cost of revenue to more hardware-focused offerings with cost of revenue. Income from Settlement and Patent Licensing Income from settlement and patent licensing increased by $3.7 million to $4.2 million in 2005 from $575,000 in 2004, due to a full year of amortization in 2005 of income associated with the Polycom, Inc. settlement and patent cross-license agreement. Operating Expenses Research and development. Research and development expenses increased by 37% in 2005 to $3.5 million from $2.6 million in 2004. The increase in research and development expenses in 2005 relative to 2004 was due to the hiring of new employees focused on research and development projects in 2005. Sales and marketing. Sales and marketing expenses increased by 38% in 2005 to $3.4 million from $2.5 million in 2004. The increase in sales and marketing expenses in 2005 relative to 2004 was due to the hiring of additional sales and marketing personnel. General and administrative. General and administrative expenses decreased by 18% in 2005 to $5.7 million from $7.0 million in 2004. The decrease in general and administrative expenses in 2005 relative to 2004 was due primarily to a decrease in legal fees associated with our litigation with Polycom, Inc., which was concluded through a settlement and patent cross-licensing agreement signed on November 12, 2004. Other income, net. Other income, net increased by 233% in 2005 to $443,000 from $133,000 in 2004. The increase in other income, net in 2005 relative to 2004 was due primarily to the effect of higher short- 45 term interest rates and higher levels of cash, cash equivalents and short and long-term investments in 2005 versus 2004, resulting in a 355% increase in interest income to $537,000 in 2005, from $118,000 in 2004. Provision for income taxes. Provision for income taxes decreased to $22,000 in 2005, from $363,000 in 2004 due to the lack of US taxes being due as a result of taxable losses in 2005. The provision for income taxes in 2004 of $363,000 was due primarily to federal, state and foreign income taxes due as a result of taxable income generated by the settlement and cross-license patent agreement with Polycom, Inc. signed on November 12, 2004. The net $21.1 million license fee paid to us by Polycom, Inc. was deferred for financial reporting purposes, to be recognized as income from settlement and patent licensing ratably over the five year period beginning November 12, 2004. For tax reporting purposes, the $21.1 million license fee was accounted for as taxable income in 2004, thus generating a federal and state tax liability, net of utilization of our net operating losses and tax credits. Liquidity and Capital Resources We have funded our operations since inception primarily from product and services revenue, the net proceeds of $31.3 million from our August 2000 initial public offering of common stock, lines of credit with related parties and financial institutions, the proceeds of approximately $5.7 million and $3.6 million from the private sale of our common stock in October 2003 and March 2004, respectively, the net proceeds of approximately $21.1 million from the settlement and patent cross-license agreement signed with Polycom, Inc. on November 12, 2004 and approximately $5.0 million from the license agreement signed with Sony Corporation and Sony Computer Entertainment, Inc. in July 2006. We had cash, cash equivalents and short and long term investments of $7.9 million as of December 31, 2006 and cash, cash equivalents and short and long-term investments of $12.2 million as of December 31, 2005. For 2006, we had a net decrease in cash, cash equivalents and short and long-term investments of $4.3 million resulting primarily from a net loss from operations of $8.1 million, and a net decrease in deferred income from settlement and patent licensing and other, deferred services revenue and deposits and deferred settlement and patent licensing costs of $2.9 million partially offset by $3.0 million drawn on a line of credit, and $2.0 million in non-cash stock-based compensation, and a $1.3 million increase in net accounts payable, accrued liabilities and other. We had cash and cash equivalents of $7.9 million as of December 31, 2006 and $8.2 million as of December 31, 2005. For 2006, we had a net cash outflow of $362,000 resulting primarily from net cash outflows from operations of $7.3 million, net cash inflows from investing activities of $3.7 million and net cash inflows from financing activities of $3.3 million. The net cash outflows from operations were primarily due to a net loss of $8.1 million, a decrease in deferred income from settlement and patent licensing and other of $5.5 million, partially offset by non-cash expenses of $2.4 million associated with the expensing of stock-based compensation and depreciation, a decrease in deferred settlement and patenting licensing costs of $1.3 million, an increase in deferred services revenue and customer deposits of $1.3 million, and an increase in account payable, accrued liabilities and other of $1.3 million. The net cash inflows from investing were due to $4.0 million in short and long-term investments that matured in 2006 offset by the purchase of $290,000 of property and equipment. The net cash inflows from financing activities were due to $3.0 million drawn on our line of credit and $312,000 from the issuance of common stock through our employee stock purchase plan and stock option plans. We had cash and cash equivalents of $8.2 million as of December 31, 2005 and $21.7 million as of December 31, 2004. For 2005, we had a net cash outflow of $13.4 million resulting primarily from net cash outflows from operations of $9.5 million and net cash outflows from investing activities of $4.4 million. The net cash outflows from operations were primarily due to a net loss of $5.2 million, a decrease in deferred income from settlement and patent licensing of $5.4 million and an increase in accounts receivable of $641,000, partially offset by a decrease in deferred costs from settlement and patenting licensing of $1.3 46 million and non cash expenses of $472,000. The net cash outflows from investing were due to $4.0 million in purchases of short and long-term investments and the purchase of $392,000 of property and equipment. The net cash inflows from financing activities were due to $414,000 in proceeds from the issuance of common stock. We had cash and cash equivalents of $21.7 million as of December 31, 2004. For 2004, we had a net cash inflow of $17.2 million resulting primarily from net cash proceeds from the issuance of common stock of $3.7 million and net cash provided by operations of $12.7 million. The net cash proceeds from the issuance of common stock were primarily due to the private sale of 3,000,000 shares of our common stock to Fuller & Thaler Avalanche Fund, L.P. and Fuller & Thaler Behavioral Finance Fund, Ltd. in March 2004. The price per share of this transaction was $1.20, resulting in net proceeds of this private financing, after deducting expenses of the financing, of $3.6 million. The net cash provided by operations primarily reflected an increase in deferred income from settlement and patent licensing of $26.8 million as a result of the settlement and patent cross-license agreement signed with Polycom, Inc. on November 12, 2004, offset by a net loss of $8.7 million and an increase in deferred costs from settlement and patent licensing of $6.2 million. Expenditures for property and equipment in 2006 were approximately $290,000. At December 31, 2006, we did not have any material commitments for future capital expenditures. We anticipate spending approximately $1.0 million in capital expenditures during the next 12 months. The following table summarizes our known contractual obligations and commitments as of December 31, 2006 (in thousands) for the periods presented. Payments due by period More than Total Less than 1 Year 1–3 Years 3–5 Years 5 Years Contractual Obligations Operating Lease Obligations Purchase Obligations Total $ 7,317 927 $ 8,244 $ 1,091 248 $ 1,339 $ 2,379 679 $ 3,058 $ 2,038 — $ 2,038 $ 1,809 — $ 1,809 On March 26, 2004, we completed the private sale of a total of 3,000,000 shares of our common stock to Fuller & Thaler Avalanche Fund, L.P. and Fuller & Thaler Behavioral Finance Fund, Ltd. at a price per share of $1.20. The net proceeds of this private financing after deducting expenses of the financing were approximately $3.6 million. On November 12, 2004, we entered into settlement and patent cross-license agreement with Polycom, Inc. Under this agreement, CPI agreed to dismiss, with prejudice, its infringement suit against Polycom, Inc. and both companies agreed to cross-license each other’s patent portfolios. The original litigation was initiated in September 2002, in the Federal District Court for the Northern District of California and involved the following CPI patents: U.S. Patent Nos. 5,867,654; 5,896,500; 6,212,547; and 6,343,314. The agreement resulted in a payment, net of legal fees, to us from Polycom, Inc. in the amount of $21.1 million. In July 2006, we entered into a Patent License Agreement with Sony Corporation and Sony Computer Entertainment, Inc.. Under the license agreement, CPI granted Sony Corporation and its subsidiaries a license to all of CPI’s patents with a filing date on or before January 1, 2006 for a specific field of use relating to video conferencing. As consideration for the licenses granted under the agreement, Sony Corporation agreed to make an upfront license payment of $5.0 million and Sony Computer Entertainment, Inc. has agreed to make future royalty payments relating to the sale, in certain countries, of certain SCEI products. 47 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. The agreement includes a first priority security interest in all of our assets. Gerald Burnett, our Chairman and Chief Executive Officer, 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. The line of credit requires monthly interest-only payments based on LIBOR plus 0.75%, or 6.1% at December 31, 2006 or Prime Rate minus 2.0%, or 6.3% at December 31, 2006. On December 28, 2006, we borrowed $3.0 million under the revolving line of credit. The Revolving Credit and Promissory Note expires on December 23, 2007, and is subject to annual renewal. On February 15, 2007, we entered into a patent license agreement with Tandberg ASA, Tandberg AS and Tandberg, Inc. Under this agreement, CPI agreed to dismiss, with prejudice, its infringement suit against Tandberg and both companies agreed to cross-license each other’s patent portfolios. The original litigation was initiated in May 2005, in the Federal District Court for the Northern District of California and involved the following CPI patents: U.S. Patent Nos. 5,867,654; 5,896,500 and 6,212,547. The agreement resulted in a payment to us from Tandberg in the amount of $12.0 million, $4.3 million of which was used by us to pay our contingent legal fees associated with the Tandberg litigation. We currently believe that existing cash and cash equivalents balances will provide us with sufficient funds to finance our operations for the next 12 months. We intend to continue to invest in the development of new products and enhancements to our existing products. Our future liquidity and capital requirements will depend upon numerous factors, including without limitation, general economic conditions and conditions in the financial services industry in particular, the level and timing of product, services and licensing revenue, the costs and timing of our product development efforts and the success of these development efforts, the costs and timing of our sales and marketing activities, the extent to which our existing and new products gain market acceptance, competing technological and market developments, the costs and proceeds involved in maintaining and enforcing patent claims and other intellectual property rights, all of which may impact our ability to achieve and maintain profitability. 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 our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business, operating results and financial condition. Recent Accounting Pronouncements In June 2006, the Emerging Issues Task Force issued EITF No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-3”), which clarifies diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to this Issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006. We are currently assessing the impact, if any, that the adoption of this EITF will have on our financial statements. 48 In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN No. 48”), which became effective for us on January 1, 2007. This interpretation clarifies the accounting for income tax benefits that are uncertain in nature. Under FIN No. 48, a company will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than 50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. This accounting interpretation also provides guidance on measurement methodology, derecognition thresholds, financial statement classification and disclosures, interest and penalties recognition, and accounting for the cumulative-effect adjustment. The new interpretation is intended to provide better financial statement comparability among companies. Required annual disclosures include a tabular reconciliation of unrecognized tax benefits at the beginning and end of the period; the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate; the amounts of interest and penalties recognized in the financial statements; any expected significant impacts from unrecognized tax benefits on the financial statements over the subsequent 12month reporting period; and a description of the tax years remaining to be examined in major tax jurisdictions. FIN No. 48 is effective for fiscal years beginning on or after December 15, 2006. We are currently assessing the impact, if any, that the adoption of FIN No. 48 will have on our financial statements. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“FAS No.157”), which will become effective for us on January 1, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements but would apply to assets and liabilities that are required to be recorded at fair value under other accounting standards. The impact, if any, to us from the adoption of FAS No.157 in 2008 will depend on our assets and liabilities at that time that they are required to be measured at fair value. In September 2006, the SEC issued Staff Accounting Bulletin (SAB) SAB No. 108. SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No.108 permits registrants to record the cumulative effect of initial adoption by recording the necessary “correcting” adjustments to the carrying values of assets and liabilities as of the beginning of the 2006 year with the offsetting adjustment recorded to the opening balance of retained earnings. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006. The application of SAB No. 108 did not have any impact on our consolidated balance sheets, statements of operations, or statements of equity (deficit) for 2006, 2005 or 2004. Item 7a. Quantitative and Qualitative Disclosures About Market Risk We develop products primarily in the United States, and sell those products primarily in North America, Europe and Asia. International revenue, which consists of sales to customers with operations principally in Western Europe and Asia, comprised 75%, 63% and 52% of total revenue for the years ended 2006, 2005 and 2004, respectively. As a result, our financial condition could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all of our sales are currently made in United States dollars, a strengthening of the United States dollar could make our products less competitive in foreign markets. We do not use derivative financial instruments for speculative or trading purposes, nor do we engage in any foreign currency hedging transactions. Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our cash equivalents are invested in money market funds or securities. 49 Cash and Cash Equivalents and Short and Long-Term Investments Cash equivalents consist primarily of securities and money market funds acquired with remaining maturity periods of three months or less, and are stated at cost, plus accrued interest that approximates market value. We would not expect our operating results or cash flow to be significantly impacted by the effect of sudden changes in market interest rates given the nature of our short-term investments. The following table provides information about our investment portfolio. For investment securities, the table presents cash and cash equivalents and short-term investments and related weighted average interest rates by category at December 31, 2006. Weighted Average Amounts (in thousands) Interest Rate Description Cash and cash equivalents and short-term investments: Cash Commercial Paper (average 22 remaining days to maturity) Total cash and cash equivalents at December 31, 2006 Item 8. Financial Statements and Supplementary Data $ 4,224 3,630 $ 7,854 — 5.29 % Our consolidated financial statements and Reports of Independent Registered Public Accounting Firms appear on pages F-1 through F-30 of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9a. Controls and Procedures (a) Evaluation of disclosure controls and procedures: Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. (b) Changes in internal control over financial reporting: There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9b. None Other Information 50 PART III Item 10. Directors, Executive Officers of the Registrant and Corporate Governance Matters The information required by this item is incorporated by reference to the sections captioned “Election of Directors” and “Section 16 (a) Beneficial Ownership Reporting Compliance” contained in our Proxy Statement related to the 2007 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days of December 31, 2006, pursuant to General Instruction G(3) of Form 10-K (the “Proxy Statement”). Certain information required by this item concerning executive officers is set forth in Part I of this Report in “Business—Executive Officers,” and certain other information required by this item is incorporated by reference from the sections captioned “Principal Stockholders” contained in our Proxy Statement. We have adopted a code of ethics that applies to our principal executive officers and all members of our finance department, including the principal financial officer and principal accounting officer. This code of ethics, which also applies to employees generally, is posted on our Internet website. The Internet address for our website is http://www.avistar.com, and the code of ethics may be found as follows: 1. 2. 3. From our main Web page, first click on “Company.” Next, click on “Investor Relations.” Next, click on “Avistar’s Business Conduct and Ethics Policy.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, at the address and location specified above. Item 11. Executive Compensation The information required by this item is incorporated by reference to the section captioned “Executive Compensation and Other Matters” contained in our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to the sections captioned “Principal Stockholders”, “Executive Compensation and Other Matters” and “Certain Transactions” contained in our Proxy Statement. 51 Equity Compensation Plan Information The following table provides information as of December 31, 2006 with respect to the shares of our Common Stock that may be issued under our existing equity compensation plans. A B C Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A) Plan Category Number of securities to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total (1) 8,888,722 (1) — 8,888,722 $ 2.87 — $ 2.87 3,567,433 (2) — 3,567,433 This number reflects the number of shares to be issued upon exercise of outstanding options under our 2000 Director Option Plan (“Director Plan”), the 1997 Stock Option Plan (the “1997 Plan”) and the 2000 Stock Option Plan (the “2000 Option Plan”). This number excludes purchase rights accruing under the Employee Stock Purchase Plan (“Purchase Plan”). The Purchase Plan authorizes the granting of stock purchase rights to eligible employees during six month offering periods.. Shares are purchased through employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of our Common Stock at either the first day of each offering period or the date of purchase. Includes 1,858,643 shares available for issuance under the 2000 Option Plan, 230,750 shares available for issuance under the Director Plan and 1,478,040 shares available for issuance under the Purchase Plan. No securities are available for future issuance under the 1997 Plan. The 2000 Option Plan provides for an annual increase in the number of shares of Common Stock reserved for issuance thereunder on the first day of our fiscal year in an amount equal to the lesser of (x) 1,200,000 shares, (y) 4% of the outstanding shares of Avistar as of the last day of the prior fiscal year or (z) such lesser amount as determined by the Board. The Director Plan currently provides for an annual increase to the number of shares reserved thereunder on the first day of Avistar’s fiscal year equal to the lesser of (x) 175,000 shares, (y) 1% of the outstanding shares of our Common Stock on such date or (z) such amount as determined by the Board. The Purchase Plan provides for an annual increase in the number of shares of Common Stock reserved thereunder on the first day of our fiscal year in an amount equal to the lesser of (x) 900,000 shares, (y) 3% of our outstanding shares on the last day of the prior fiscal year or (z) such amount as determined by the Board. Under the terms of the Plans, on January 1, 2006, 1,200,000 and 175,000 shares were added to the 2000 Option Plan and the Director Plan, respectively. No shares were added to the Purchase Plan on January 1, 2006. Certain Relationships and Related Transactions and Director Independence (2) Item 13. The information required by this item is incorporated by reference to the sections captioned “Proposal One—Election of Directors,” “Compensation Committee Interlocks and Insider Participation” and “Certain Transactions” contained in our Proxy Statement. Item 14. Principal Accountant Fees and Services The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Accountants” in our Proxy Statement . 52 PART IV Item 15. Exhibits, Financial Statement Schedules (a)(1) Financial Statements The following financial statements are incorporated by reference in Item 8 of this Annual Report: Page Reports of Independent Registered Public Accounting Firms Consolidated Balance Sheets as of December 31, 2006 and 2005 Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 Notes to the Consolidated Financial Statements (a)(2) Financial Statement Schedules Schedule II—Valuation and Qualifying Accounts and Reserves (see page S-1) F-2 F-4 F-5 F-6 F-7 F-8 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (a)(3) Exhibits 3.2(1) 3.3(11) 4.1 (1) 10.1 (1) 10.1.1 (1) 10.2 (1) 10.3(12) 10.4 (1) 10.5 (4) 10.6 (1) 10.7 (6) 10.8 (8) 10.9 (8) 10.10 (10) Restated Certificate of Incorporation Bylaws of Avistar Communications Corporation Specimen Certificate evidencing shares of Common Stock 1997 Stock Option Plan, as amended* 1997 Stock Option Plan Form of Stock Option Agreement* 2000 Stock Option Plan, as amended* 2000 Director Option Plan, as amended* Form of Director Option Agreement* 2000 Employee Stock Purchase Program, as amended* Form of Indemnification Agreement* Settlement Agreement and Release between the Registrant and R. Stephen Heinrichs dated April 26, 2001* Office Lease Agreement between CA-Twin Dolphin Plaza Limited Partnership and the Registrant dated July 30, 2003 Common Stock Purchase Agreement by and among the Registrant and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust, Grady Burnett and Wendolyn Hearn dated October 15, 2003 Stock Purchase Agreement among the Registrant, Fuller & Thaler Behavioral Finance Fund, Ltd. and Fuller & Thaler Avalanche Fund, L.P. dated March 23, 2004 53 10.11(11) Settlement Agreement among the Registrant, Collaboration Properties, Inc. and Polycom, Inc. dated November 12, 2004 10.12(12) † Patent Cross-License Agreement Among the Company, Collaboration Properties, Inc. and Polycom, Inc. dated November 12, 2004 10.13(4) † 10.14 10.15 10.16 10.17 10.18 10.19 21.1 (7) 23.1 23.2 24.1 31.1 31.2 32 Patent License Agreement dated May 15, 2006 among the Registrant, Collaboration Properties, Inc., Sony Corporation and Sony Computer Entertainment, Inc. Revolving Credit Promissory Note dated December 26, 2006 issued by the Registrant to JPMorgan Chase Bank, N.A. Collateral Agreement between the Registrant and JPMorgan Chase Bank, N.A. dated December 23, 2006 Security Agreement between the Registrant and JPMorgan Chase Bank, N.A. dated December 23, 2006 Guaranty issued by Gerald J. Burnett and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase Bank, N.A. dated December 23, 2006 Form of Note Sale Agreement among Gerald J. Burnett, The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank, N.A. Lease Agreement among the Registrant and Crossroads Associates and Clocktower Associates dated December 1, 2006 Subsidiaries of the Company Consent of Independent Registered Public Accounting Firm: Burr, Pilger & Mayer LLP Consent of Independent Registered Public Accounting Firm: KPMG LLP Power of Attorney (see page 56) Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * † (1) (2) (3) (4) (5) Indicates management contract or compensatory plan or arrangement required to be filed an exhibit pursuant to Item 14(c) of Form 10-K. 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. Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-39008) as declared effective by the Securities and Exchange Commission on August 16, 2000. Reserved. Reserved. Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2006 filed with the Securities and Exchange Commission on November 14, 2006. Reserved. 54 (6) (7) (8) (9) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2001. Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 with the Securities and Exchange Commission on March 25, 2003. Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2003 filed with the Securities and Exchange Commission on October 23, 2003. Reserved. (10) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 filed with the Securities and Exchange Commission on May 11, 2004. (11) Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 28, 2005. (12) Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission on April 28, 2006. 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. AVISTAR COMMUNICATIONS CORPORATION By: /s/ GERALD J. BURNETT Gerald J. Burnett Chief Executive Officer and Chairman Date: March 22, 2007 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerald J. Burnett and Robert J. Habig, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to sign any and all amendments (including post- effective amendments) to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ GERALD J. BURNETT Gerald J. Burnett /s/ ROBERT J. HABIG Robert J. Habig /s/ WILLIAM L. CAMPBELL William L. Campbell /s/ CRAIG F. HEIMARK Craig F. Heimark /s/ R. STEPHEN HEINRICHS R. Stephen Heinrichs /s/ ROBERT P. LATTA Robert P. Latta /s/ ROBERT M. METCALFE Robert M. Metcalfe /s/ JAMES W. ZEIGON James W. Zeigon Chief Executive Officer and Chairman (Principal Executive Officer) Chief Financial Officer (Principal Financial and Accounting Officer) Executive Vice President, Chief Operating Officer and Director Director Director Director Director Director March 22, 2007 March 22, 2007 March 22, 2007 March 22, 2007 March 22, 2007 March 22, 2007 March 22, 2007 March 22, 2007 56 INDEX TO FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firms Consolidated Balance Sheets as of December 31, 2006 and 2005 Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 Notes to the Consolidated Financial Statements F-2 F-4 F-5 F-6 F-7 F-8 F-1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Avistar Communications Corporation We have audited the accompanying consolidated balance sheets of Avistar Communications Corporation and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2006. Our audits also included the related financial statement schedule listed in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor have we been engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avistar Communications Corporation and its subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 3 to the consolidated financial statements, on January 1, 2006 the Company changed its method of accounting for stock-based compensation as a result of adopting Statement of Financial Accounting Standards No. 123(R), Share Based Payment, applying the modified prospective method. /s/ BURR, PILGER & MAYER LLP Palo Alto, California March 19, 2007 F-2 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Avistar Communications Corporation: We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of Avistar Communications Corporation and subsidiaries for the year ended December 31, 2004. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for the year ended December 31, 2004. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Avistar Communications Corporation and subsidiaries for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule for the year ended December 31, 2004, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 2 to the accompanying consolidated financial statements, the consolidated statements of operations and cash flows of Avistar Communications Corporation and subsidiaries for the year ended December 31, 2004 have been restated. /s/ KPMG LLP Mountain View, California January 28, 2005, except as to Note 2, which is as of April 26, 2006 F-3 AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of December 31, 2006 and 2005 (in thousands, except share and per share data) December 31, December 31, 2006 2005 Assets: Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $51 and $121 at December 31, 2006 and 2005, respectively Inventories, including inventory shipped to customers’ sites, not yet installed of $70 and $28 at December 31, 2006 and 2005, respectively Deferred settlement and patent licensing costs Prepaid expenses and other current assets Total current assets Long-term investments Property and equipment, net Long-term deferred settlement and patent licensing costs Other assets Total assets Liabilities and Stockholders’ Equity (Deficit): Current liabilities: Line of credit Accounts payable Deferred income from settlement and patent licensing Deferred services revenue and customer deposits Accrued liabilities and other Total current liabilities Long-term liabilities: Long-term deferred income from settlement and patent licensing Total liabilities Commitments and contingencies (Notes 5 and 9) Stockholders’ equity (deficit): Common stock, $0.001 par value; 250,000,000 shares authorized at December 31, 2006 and 2005; 35,219,768 and 34,939,124 shares issued at December 31, 2006 and 2005, respectively Less: treasury common stock, 1,181,625 shares at December 31, 2006 and 2005, at cost Additional paid-in-capital Other comprehensive loss Accumulated deficit Total stockholders’ equity (deficit) Total liabilities and stockholders’ equity (deficit) $ 7,854 — 1,409 712 1,256 534 11,765 — 256 2,391 287 14,699 $ 8,216 2,995 1,428 $ 675 1,256 463 15,033 958 311 3,685 371 $ 20,358 $ 3,000 1,578 5,520 1,979 2,263 14,340 10,308 24,648 $ — 1,004 5,520 712 1,491 8,727 15,789 24,516 35 (53 ) 92,865 — (102,796 ) (9,949 ) $ 14,699 35 (53 ) 90,519 (12 ) (94,647 ) (4,158 ) $ 20,358 The accompanying notes are an integral part of these financial statements. F-4 AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 2006, 2005 and 2004 (in thousands, except per share data) 2006 Year Ended December 31, 2005 2004 Restated(1) Revenue: Product Licensing Services, maintenance and support Total revenue Costs and expenses: Cost of product revenues* Cost of services, maintenance and support revenues* Income from settlement and patent licensing Research and development* Sales and marketing* General and administrative* Total costs and expenses Loss from operations Other income (expense): Interest income Other income (expense), net Total other income, net Loss before provision for (recovery from) income taxes Provision for (recovery from) income taxes Net loss Net loss per share—basic and diluted Weighted average shares used in calculating basic and diluted net loss per share * Including stock-based compensation of: Cost of product, services, maintenance and support revenue Research and development Sales and marketing General and administrative (1) See Note 2 “Correction of an Error” of the Notes to Consolidated Financial Statements $ 4,528 5,155 3,542 13,225 3,185 1,820 (4,226 ) 5,753 5,488 9,682 21,702 (8,477 ) $ 3,403 — 3,508 6,911 1,892 2,220 (4,226 ) 3,544 3,379 5,697 12,506 (5,595 ) $ 3,121 — 3,200 6,321 1,435 1,937 (575 ) 2,588 2,456 6,956 14,797 (8,476 ) 299 537 (2 ) (94 ) 297 443 (8,180 ) (5,152 ) (31 ) 22 $ (8,149 ) $ (5,174 ) $ (0.24 ) $ (0.15 ) 33,928 33,600 118 15 133 (8,343 ) 363 $ (8,706 ) $ (0.27 ) 32,610 $ 155 618 497 764 $ — — — 100 $ — — — 24 The accompanying notes are an integral part of these financial statements. F-5 AVISTAR COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) for the years ended December 31, 2006, 2005 and 2004 (in thousands, except share amounts) Balance at December 31, 2003 Issuance of common stock to employees pursuant to employee stock purchase plan Issuance of common stock to employees pursuant to exercise of options Issuance of common stock pursuant to private placement (net of placement fees) Non-employee stock-based compensation Purchase of common stock pursuant to stock repurchase program Net loss Balance at December 31, 2004 Issuance of common stock to employees pursuant to employee stock purchase plan Issuance of common stock to employees pursuant to exercise of options Non-employee stock-based compensation Unrealized loss on short and long-term investments Net loss Balance at December 31, 2005 Issuance of common stock to employees pursuant to employee stock purchase plan Issuance of common stock to employees pursuant to exercise of options Non-employee stock-based compensation Employee stock-based compensation Unrealized gain on short and long-term investments Net loss Balance at December 31, 2006 Common Stock shares amount 31,390,383 $ 31 Treasury Stock shares amount 1,179,625 $ (51 ) Additional Paid-In Capital $ 86,278 Other Comprehensive Accumulated Income (Loss) Deficit $ — $ (80,767 ) Total Stockholders’ Equity (Deficit) $ 5,491 118,139 1 — — 85 — — 86 33,812 — — — 43 — — 43 3,000,000 — 3 — — — — — 3,575 24 — — — — 3,578 24 — — 34,542,334 — — 35 2,000 — 1,181,625 (2 ) — (53 ) — — 90,005 — — — (8,706 ) (89,473 ) (2 ) (8,706 ) 514 182,594 — — — 143 — — 143 214,196 — — — 34,939,124 — — — — 35 — — — — 1,181,625 — — — — (53 ) 271 100 — — 90,519 — — (12 ) — (12 ) — — — (5,174 ) (94,647 ) 271 100 (12 ) (5,174 ) (4,158 ) 225,657 — — — 266 — — 266 54,987 — — — — 35,219,768 — — — — — $ 35 — — — — — 1,181,625 — — — — — $ (53 ) 46 93 1,941 — — $ 92,865 — — — 12 — $ — — — — — (8,149 ) $ (102,796 ) 46 93 1,941 12 (8,149 ) $ (9,949 ) The accompanying notes are an integral part of these financial statements. F-6 AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 2006, 2005 and 2004 (in thousands) 2006 Year Ended December 31, 2005 2004 Restated(1) Cash Flows from Operating Activities: Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation Employee stock-based compensation Compensation on options issued to consultants Provision for doubtful accounts Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Deferred settlement and patent licensing costs Other assets Accounts payable Deferred income from settlement and patent licensing and other Deferred services revenue and customer deposits Accrued liabilities and other Net cash (used in) provided by operating activities Cash Flows from Investing Activities: Purchase of short and long-term investments Maturities of short and long-term investments Purchase of property and equipment Net cash provided by (used in) investing activities Cash Flows from Financing Activities: Proceeds from line of credit Proceeds from issuance of common stock Repurchases of common stock Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental Cash Flow Information: Cash paid for income taxes Cash paid for interest (1) See Note 2 “Correction of an Error” of the Notes to Consolidated Financial Statements $ (8,149 ) $ 345 1,941 93 (70 ) 89 (37 ) (71 ) 1,294 84 574 (5,481 ) 1,267 772 (7,349 ) — 3,965 (290 ) 3,675 3,000 312 — 3,312 (362 ) 8,216 7,854 $ — 2 $ $ (5,174 ) $ (8,706 ) 273 — 100 99 (641 ) 62 (9 ) 1,256 (85 ) (101 ) (5,445 ) (36 ) 204 (9,497 ) (3,965 ) — (392 ) (4,357 ) 339 — 24 77 (268 ) 200 61 (6,197 ) 5 164 26,754 77 162 12,692 — 1,000 (179 ) 821 $ $ $ — — 414 3,707 — (2 ) 414 3,705 (13,440 ) 17,218 21,656 4,438 8,216 $ 21,656 357 1 $ $ 60 6 The accompanying notes are an integral part of these financial statements. F-7 AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Business, Organization, Reorganization, Initial Public Offering, Basis of Presentation, and Risks and Uncertainties Business Avistar Communications Corporation (“Avistar” or the “Company”) provides the Avistar vBusiness integrated suite of video-enabled applications, including networked video communications software and hardware products and services. Avistar’s products include applications for interactive video calling, content creation and publishing, broadcast video and video-on-demand, as well as data sharing, directory services and network management. Avistar designs, develops, markets, sells, manufactures and/or assembles and installs and supports its products. Avistar’s real-time and non-real-time products are based upon its architecture and AvistarVOS software platform, which facilitates distribution over local and wide area networks using Internet or telephony services as appropriate. Avistar’s services include software development, consulting, implementation, training, maintenance and support. In addition, Avistar seeks to prosecute, maintain, support and license the intellectual property developed by the Company through its wholly-owned subsidiary, Collaboration Properties, Inc., a Nevada corporation (CPI). Organization The business was founded in 1993 as a Nevada limited partnership, Avistar Systems, Limited Partnership (“ASLP”). In December 1997, ASLP entered into an acquisition agreement with a newly formed corporation, Avistar Systems Corporation (“ASC”), to convey all of ASLP’s assets, and transfer all of ASLP’s liabilities, in exchange for 16,000,000 shares of ASC’s Series A convertible preferred stock and 2,171,400 shares of common stock. Effective December 31, 1997, all operations previously conducted by ASLP were thereafter undertaken by ASC. Collaboration Properties, Inc. (“CPI”) and VCT, Inc. (“VCT”) were founded in 1997 and 1998, respectively, to hold certain intellectual property, including patents, which underlie certain technology used by ASLP and subsequently by ASC. Three of the stockholders of CPI and VCT owned approximately 95% of CPI and 100% of VCT and were also the partners of Collaborative Holdings L.P. (“CHLP”), which owned a controlling interest in ASLP. The remaining 5% ownership of CPI was held by UBS (USA), Inc. (“UBS”) which also held a 5% ownership interest in ASC (see Note 5 and Note 6). Accordingly, the accounts of CPI and VCT have been combined at historical cost with those of ASC for all periods presented since their inception. Reorganization Effective March 31, 2000, ASC merged with and into a newly formed Delaware corporation, Avistar Communications Corporation. The operating assets and liabilities of the business were then contributed to a wholly owned subsidiary, Avistar Systems Corporation (“Avistar Systems”), a Delaware corporation. At the same time, the owners of CPI and VCT transferred all of their stock in those entities to Avistar as a capital contribution. As a result, CPI and VCT are recorded at their historical cost basis and became wholly owned subsidiaries of Avistar as of March 31, 2000. In April 2000, the operations of VCT were merged with and into CPI. In June 2000, all of the Series A preferred stock held by ASC was distributed to the Company’s three founders and several other individuals based on their respective ownership interests in ASLP. In addition, all of the shares of Avistar’s common stock, held by ASLP, were distributed to the Company’s employees, former advisors and officers. These common shares represent an amount equal to those shares of Class B units in ASLP that were owned by the respective individuals before the acquisition. F-8 In July 2001, the Board of Directors of Avistar and the Board of Directors of Avistar Systems approved the merger of Avistar Systems, the wholly owned subsidiary of Avistar, with and into Avistar. The merger was completed in July 2001. The assets and liabilities of Avistar Systems were transferred to the Company at historical cost on the date of the merger. Initial Public Offering In August 2000, the Company completed its initial public offering, selling three million shares of common stock at $12 per share. The initial public offering resulted in net proceeds to the Company of approximately $31.3 million after the payment of the underwriters’ commission and deduction of offering expenses. In August 2000, the Company used a portion of the net proceeds from the initial public offering to repay the outstanding balances of notes payable and accrued interest due related parties of approximately $12.6 million. The remainder of the proceeds have been used to fund the Company’s working capital requirements. Basis of Presentation The accompanying financial statements present the consolidated financial position, results of operations, and cash flows of Avistar and its two wholly-owned operating subsidiaries, Avistar Systems U.K. Limited (“ASUK”) and CPI after elimination of all intercompany accounts and transactions. The consolidated results are referred to, collectively, as those of Avistar or the Company in these notes. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The functional currency of ASUK is the United States dollar. Accordingly, all gains and losses resulting from transactions denominated in currencies other than the United States dollar are included in the statements of operations and have not been material. The Company’s fiscal year end is December 31. Reclassifications Certain prior year amounts have been reclassified to conform with the current year’s presentation, none of which had an impact on total assets, stockholders’ equity (deficit), net loss, or net loss per share. Risks and Uncertainties The markets for the Company’s products and services are in the early stages of development. Some of the Company’s products utilize changing and emerging technologies. As is typical in industries of this nature, demand and market acceptance are subject to a high level of uncertainty, particularly when there are adverse conditions in the economy. Acceptance of the Company’s products, over time, is critical to the Company’s success. The Company’s prospects must be evaluated in light of difficulties encountered by it and its competitors in further developing this evolving marketplace. The Company has generated losses since inception and had an accumulated deficit of $102.8 million as of December 31, 2006. The Company’s operating results may fluctuate significantly in the future as a result of a variety of factors, including, but not limited to, the economic environment, the adoption of different distribution channels, and the timing of new product announcements by the Company or its competitors. The Company’s future liquidity and capital requirements will depend upon numerous factors, including, but not limited to, the costs and timing of its expansion of product development efforts and the success of these development efforts, the costs and timing of its expansion of sales and marketing activities, the extent to which its existing and new products gain market acceptance, competing technological and F-9 market developments, the costs involved in maintaining, enforcing and defending patent claims and other intellectual property rights, the level and timing of revenue, and other factors. 2. Correction of an Error In September 2005, the Company received a comment letter from the U. S. Securities and Exchange Commission (“SEC”) relating to the Company’s 2004 Form 10-K, which included a question regarding the Company’s accounting for the November 2004 settlement and patent cross-license agreement with Polycom, Inc. (“Polycom”). The settlement and patent cross-license agreement resulted in a $27.5 million onetime payment by Polycom to Avistar and a payment by Avistar to its own litigation counsel of $6.4 million in contingent legal fees. The Company’s Form 10-K for the fiscal year ended December 31, 2004 and Form 10-Q for the three, six and nine months ended March 31, 2005, June 30, 2005 and September 30, 2005, respectively, reported the one time payment by Polycom as revenue, recognized ratably over a fiveyear period, net of contingent legal fees. As a result of the SEC’s inquiry as to whether the Polycom transaction should be characterized as revenue, and after discussions with the SEC, the Company concluded that a reclassification of license revenues from revenue to a component of operating expenses and reflected as “Income from settlement and patent licensing” was necessary for previously filed financial reports. The restatement of the net proceeds and expenses from the Polycom settlement and patent cross-license agreement had no effect on reported net loss, loss per share, stockholders’ equity (deficit) or net cash flows from operating, investing or financing activities, but did have the effect of overstating revenues and operating expenses for previously issued interim and annual consolidated financial statements, as of and for the quarters and year-to-date periods ended December 31, 2004, March 31, 2005, June 30, 2005 and September 30, 2005. In addition, the balance sheet as of December 31, 2004 was restated to reflect the gross effect of the $27.5 million payment by Polycom to Avistar, and the payment of $6.4 million of contingent legal fees by Avistar, which was previously reported on a net basis as deferred revenue. Notes 3, 12 and 14 regarding significant concentrations, revenue recognition, segment reporting and the unaudited interim results have been restated to reclassify the Polycom proceeds from revenue to “Income from settlement and patent licensing,” to be consistent with the presentation of the net proceeds from the Polycom settlement and patent cross-license agreement in the 2006 and 2005 Statements of Operations. The presentation within operations is supported by a determination that the Polycom licensing transaction is central to the activities that constitute the Company’s ongoing major or central operations, but that the settlement may also contain a gain element related to the settlement, which is not considered revenue under the Financial Accounting Standards Board (“FASB”) Concepts Statement No. 6, Elements of Financial Statements. The Company did not have sufficient historical evidence to support a reasonable determination of value for purposes of segregating the transaction into revenue related to the patent licensing and an operating or non-operating gain upon settlement of litigation, resulting in the determination that the entire transaction is more appropriately classified as “Income from settlement and patent licensing” within operations, as opposed to revenue. The following table presents the impact of the adjustment to the consolidated statement of operations and cash flows for the fiscal year ended December 31, 2004 (in thousands): Year Ended December 31, 2004 As Previously Reported Adjustment As Restated Statement of Operations Revenues: Licensing revenue Costs and expenses: Income from settlement and patent licensing $ 575 $ — $ (575 ) $ (575 ) $ — $ (575 ) F-10 Year Ended December 31, 2004 As Previously As Reported Adjustment Restated Statement of Cash Flows Cash flows from Operating Activities: Deferred settlement and patent licensing costs Deferred license revenue Deferred income from settlement and patent licensing — 20,557 $ — $ $ (6,197 ) (20,557 ) $ 26,754 $ (6,197 ) — $ 26,754 The above adjustments correct an error within the meaning of the Accounting Principles Board Opinion No. 20, Accounting Changes. 3. Summary of Significant Accounting Policies and Balance Sheet Details Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, income 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 repricing within three months. Investment securities with original or remaining maturities of one year or more are considered long-term investments. The Company’s cash equivalents at December 31, 2006 and 2005 consisted of money market funds and short-term commercial paper with original maturities of three months or less. The Company accounts for its short-term and long-term investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities . The Company’s short and long-term investments in securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in other comprehensive income (loss). Realized gains or losses and declines in value judged to be other than temporary, if any, on available- for-sale securities are reported in other income, net. The Company reviews the securities for impairments considering current factors including the economic environment, market conditions and the operational performance and other specific factors relating to the business underlying the securities. The Company records impairment charges equal to the amount that the carrying value of its available-for-sale securities exceeds the estimated fair market value of the securities as of the evaluation date. The fair value for publicly held securities is determined based on quoted market prices as of the evaluation date. In computing realized gains and losses on available-for-sale securities, the Company determines cost based on amounts paid, including direct costs such as commissions, to acquire the security using the specific identification method. The Company had no short or long-term investment securities as of December 31, 2006. F-11 Cash, cash equivalents, short and long-term investments consisted of the following at December 31, 2006 and 2005 (in thousands): December 31, 2006 2005 Description Cash and cash equivalents: Cash Commercial paper cash equivalents Total cash and cash equivalents Short-term investments: Short-term investments (average 60 remaining days to maturity in 2005) Total cash and cash equivalents and short term-investments Long-term-investments(average 390 remaining days to maturity in 2005) Total cash, cash equivalents and short- term and long-term investments Significant Concentrations $ 4,224 3,630 7,854 — 7,854 — $ 7,854 $ 549 7,667 8,216 2,995 11,211 958 $ 12,169 A relatively small number of customers have accounted for a significant percentage of the Company’s net sales. Sales to major customers as a percentage of sales for each fiscal year are as follows: 2006 2005 2004 Customer A Customer B Customer C * Less than 10% 38 % 25 % 20 % *% 39 % 45 % *% 55 % 16 % Any change in the relationship with these customers could have a potentially adverse effect on the Company’s financial position. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. The Company has cash and investment policies that limit the amount of credit exposure to any one financial institution, or restrict placement of these investments to financial institutions evaluated as highly credit worthy. As of December 31, 2006, the Company had cash and cash equivalents on deposit with a major financial institution that were in excess of FDIC insured limits. Historically, the Company has not experienced any loss of its cash and cash equivalents due to such concentration of credit risk. Concentrations of credit risk with respect to trade receivables relate to those trade receivables from both United States and foreign entities, primarily in the financial services industry. As of December 31, 2006, three customers represented 44%, 20% and 20% of the Company’s gross accounts receivable balance. As of December 31, 2005, three customers represented 48%, 32% and 17% of the Company’s gross accounts receivable. 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 thirty days past due. Uncollectible accounts are written off directly to the allowance for F-12 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, short -term investments, accounts receivable, line of credit, and accounts payable at December 31, 2006 and 2005, approximate fair value because of the short maturity of these instruments. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. When required, provisions are made to reduce excess and obsolete inventories to their estimated net realizable value. Inventories consisted of the following (in thousands): December 31,_ 2006 2005 Raw materials and sub-assemblies Finished goods Inventory shipped to customer sites, not yet installed $ 59 583 70 $ 712 $ 43 604 28 $ 675 Inventory shipped to customer sites, not yet installed, represents product shipped to customer sites pending completion of the installation process by the Company. As of December 31, 2006 and December 31, 2005, the Company had billed approximately $70,000 and $28,000, respectively, to customers related to these shipments, but did not record the revenue, as the installations had not been completed and confirmed by the customer. Although customers are billed in accordance with purchasing agreements, these deferred revenue amounts are netted against accounts receivable until the customer confirms installation. Property and Equipment Property and equipment are stated at cost and are depreciated using the double declining balance method over the estimated useful lives (three or five years) of the assets. Repairs and maintenance are expensed as incurred. Property and equipment consisted of the following (in thousands): December 31, 2006 2005 Computer equipment Computer software Furniture, fixtures and equipment Less: Accumulated depreciation $ 1,013 $ 876 389 364 304 346 1,706 1,586 (1,450 ) (1,275 ) $ 256 $ 311 F-13 Accrued Liabilities and Other Accrued liabilities and other consisted of the following (in thousands): December 31, 2006 2005 Accrued consulting and professional fees Accrued payroll and related benefits Accrued commissions and bonuses Other $ 1,029 705 157 372 $ 2,263 $ 570 522 116 283 $ 1,491 Patent Costs Due to uncertainties about the estimated future economic benefits and lives of the Company’s patents and patent applications, all related outside patent costs have been expensed as incurred. Outside patent costs were approximately $0.7 million, $0.4 million, and $0.1 million for 2006, 2005, and 2004, respectively, and are reflected in general and administrative expenses in the accompanying statements of operations. Revenue Recognition and Deferred Revenue The Company recognizes product and services revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions (“SOP 98-9”). The Company derives product revenue from the sale and licensing of a set of desktop (endpoint) products (hardware and software) and infrastructure products (hardware and software) that combine to form an Avistar video-enabled collaboration solution. Services revenue includes revenue from installation services, post-contract customer support, training and software development. The installation services that the Company offers to customers relate to the physical set-up and configuration of desktop and infrastructure components of the Company’s solution. The fair value of all product, installation services, post-contract customer support and training offered to customers is determined based on the price charged when such products or services are sold separately. Arrangements that include multiple product and service elements may include software and hardware products, as well as installation services, post-contract customer support and training. Pursuant to SOP 97-2, the Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable. The Company applies these criteria as discussed below: • Persuasive evidence of an arrangement exists . The Company requires a written contract, signed by both the customer and the Company, or a purchase order from those customers that have previously negotiated a standard end-user license arrangement or volume purchase agreement, prior to recognizing revenue on an arrangement. • Delivery has occurred . The Company delivers software and hardware to customers physically. The standard delivery terms are FOB shipping point. • The fee is fixed or determinable . The Company’s determination that an arrangement fee is fixed or determinable depends principally on the arrangement’s payment terms. The Company’s standard terms generally require payment within 30 to 90 days of the date of invoice. Where these terms apply, the Company regards the fee as fixed or determinable, and recognizes revenue upon delivery (assuming other revenue recognition criteria are met). If the payment terms do not meet this standard, but rather, involve “extended payment terms,” the fee may not be considered to be fixed F-14 or determinable and the revenue would then be recognized when customer installments are due and payable. • Collectibility is probable . To recognize revenue, the Company judges collectibility of the arrangement fees on a customer-by-customer basis pursuant to a credit review policy. The Company typically sells to customers with which it has had a history of successful collections. For new customers, the Company evaluates the customer’s financial position and ability to pay. If the Company determines that collectibility is not probable based upon the credit review process or the customer’s payment history, revenue is recognized when cash is collected. If there are any undelivered elements, the Company defers revenue for those elements, as long as Vendor Specific Objective Evidence (“VSOE”) exists for the undelivered elements. Additionally, per paragraph 14 of SOP 97-2, when the Company provides installation services, the product and installation revenue is recognized upon completion of the installation process and receipt of customer confirmation, subject to the satisfaction of the revenue recognition criteria described above. The Company believes that the fee associated with the delivered product elements does not meet the collectibility criteria if the installation services have not been completed. Customer confirmation is obtained and documented by means of a standard form indicating the installation services have been provided and the hardware and software components installed. When the customer or a third party provides installation services, the product revenue is recognized upon shipment, subject to satisfaction of the revenue recognition criteria described above. Payment for product is due upon shipment, subject to specific payment terms. Payment for installation and professional services is due upon providing the services, subject to specific payment terms. Reimbursements received for out-of-pocket expenses and shipping costs incurred during installation and support services, which have not been significant to date, are recognized as revenue in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-14 (“EITF 01-14”), Income Statement Characterization of Reimbursements Received for “Out of Pocket” Expenses Incurred. The price charged for maintenance and/or support is defined in the contract, and is based on a fixed price for both hardware and software components as stipulated in the customer agreement. Customers have the option to renew the maintenance and/or support arrangement in subsequent periods at the same or similar rate as paid in the initial year subject to contractual adjustments for inflation in some cases. Revenue from maintenance and support services is deferred and recognized pro-rata over the maintenance and/or support term, which is typically one year in length. Payments for services made in advance of the provision of services are recorded as deferred revenue and customer deposits in the accompanying balance sheets. Training services are offered independently of the purchase of product. The value of these training services is determined based on the price charged when such services are sold separately. Training revenue is recognized upon performance of the service. The Company recognizes service revenue from software development contracts in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue related to contracts for software development is recognized using the percentage of completion method, when all of the following conditions are met: a contract exists with the customer at a fixed price, the Company has fulfilled all of its material contractual obligations to the customer for each deliverable of the contract, verification of completion of the deliverable has been received, and collection of the receivable is probable. The amounts billed to customers in excess of revenues recognized to date are deferred and recorded as deferred revenue and customer deposits in the accompanying balance sheets. Assumptions used for recording revenue and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs to complete the contract. Any anticipated losses on contracts in progress are charged to earnings when identified. F-15 The Company also derives revenue from the licensing of its intellectual property portfolio. The Company recognizes revenue from the licensing of its intellectual property portfolio according to SOP 97-2, based on the terms of the royalty, partnership and cross-licensing agreements involved. In the event that a license to the Company’s intellectual property is granted after the commencement of litigation proceedings between the Company and the licensee, the proceeds of such transaction are recognized as licensing revenue by us only if sufficient historical evidence exists for the determination of fair value of the licensed patents to support the segregation of the proceeds between a gain on litigation settlement and patent license revenues consistent with Financial Accounting Standards Board (“FASB”) Concepts Statement No. 6, Elements of Financial Statements . As of December 31, 2006, these criteria for recognizing license revenue following the commencement of litigation had not been met. On July 17, 2006, Avistar and CPI entered into a Patent License Agreement with Sony Corporation (“Sony”) and Sony Computer Entertainment, Inc. (“SCEI”). Under the license agreement, CPI granted Sony and its subsidiaries a license to all of CPI’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. The $5.0 million upfront payment was recognized by the Company as licensing revenue in the three months ending September 30, 2006 and future royalty payments, if any, will be recognized as they occur in accordance with SOP 97-2. Income from Settlement and Patent Licensing The Company recognizes the proceeds from settlement and patent licensing agreements based on the terms involved. When litigation has been filed prior to a settlement and patent licensing agreement, and insufficient historical evidence exists for the determination of fair value of the patents licensed to support the segregation of the proceeds between a gain on litigation settlement and patent license revenues, the Company reports all proceeds in “income from settlement and patent licensing” within operating costs and expenses. The gain portion of the proceeds, when sufficient historical evidence exists to segregate the proceeds, would be reported in other income according to SFAS No. 5, Accounting for Contingencies . When a patent license agreement is entered into prior to the commencement of litigation, the Company reports the proceeds of such transaction as licensing revenue in the period in which such proceeds are received, subject to the revenue recognition criteria described above. On November 12, 2004, the Company entered into a settlement and a patent cross-license agreement with Polycom, thus ending litigation against Polycom for patent infringement. As part of the settlement and patent cross-license agreement with Polycom, Avistar granted Polycom a non-exclusive, fully paid-up license to its entire patent portfolio. The settlement and patent cross-license agreement includes a five year capture period from the date of the settlement, adding all new patents with a priority date extending up to five years from the date of execution of the agreement. Polycom, as part of the settlement and patent cross-licensing agreement, made a one time payment to the Company of $27.5 million and Avistar paid $6.4 million in contingent legal fees to Avistar’s litigation counsel upon completion of the settlement and patent crosslicensing agreement. The contingent legal fees were payable only in the event of a favorable outcome from the litigation with Polycom. The Company expects to recognize the gross proceeds of $27.5 million from the settlement and patent cross-license agreement as income from settlement and patent licensing within operations over the five-year capture period, due to a lack of evidence necessary to apportion the proceeds between an implied punitive gain element in the settlement of the litigation, and software license revenues from the cross-licensing of Avistar’s patented technologies for prior and future use by Polycom. Additionally, the $6.4 million in contingent legal fees was deferred and is expected to be amortized to income from settlement and patent licensing over the five year capture period, resulting in a net of $21.1 million being recognized as income within operations over the five year capture period. F-16 The presentation within operating expenses is supported by a determination that the transaction is central to the activities that constitute Avistar’s ongoing major or central operations, but may contain a gain element related to the settlement, which is not considered as revenue under the Financial Accounting Standards Board (“FASB”) Concepts Statement No. 6, Elements of Financial Statements. The Company did not have sufficient historical evidence to support a reasonable determination of value for the purposes of segregating the transaction into revenue related to the patent licensing and an operating or non-operating gain upon settlement of litigation, resulting in the determination that the entire transaction is more appropriately classified as “income from settlement and patent licensing” within operations, as opposed to revenue. See Note 2 “Correction of an Error.” Warranty The Company accrues the estimated costs of fulfilling the warranty provisions of its contracts over the warranty period, which is typically 90 days. The warranty accrual was approximately $1,000 as of December 31, 2006 and $1,000 as of December 31, 2005, and was included in accrued liabilities in the accompanying balance sheets. 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 Avistar’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. Avistar has not capitalized any software development costs since the period between establishing technological feasibility is relatively short, and these costs have not been significant. Stock-Based Compensation On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which establishes the accounting for stock-based awards granted for employee services. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for fiscal 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Stockbased compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No.107”) regarding the SEC’s interpretation of SFAS No. 123R and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123R. Avistar incurred $1.9 million in employee stock-based compensation in 2006 due to adoption of SFAS No. 123R and SAB No. 107, all of which was recorded to net loss in 2006. Had the Company continued to account for stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations, no employee compensation expense would have been recorded in 2006. The impact on both basic and diluted loss per share for the year ended December 31, 2006 was $0.06 per share. In November 2005, the FASB issued FASB Staff Position SFAS No. 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, which provides a practical exception when a company transitions to the accounting requirements in SFAS No. 123R. SFAS No. 123R F-17 requires a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting SFAS No. 123R, otherwise know as the “APIC Pool”, assuming the company had been following the recognition provisions prescribed by SFAS No. 123. Avistar has elected to use the shortcut method under FASB Staff Position SFAS No. 123R-3 to calculate our APIC Pool. The Company previously applied APB No. 25 and provided the required pro forma disclosures of SFAS No. 123. Prior to the adoption of SFAS No. 123R, the Company provided the disclosures required under SFAS No. 123 as amended by SFAS No. 148, Accounting for StockBased Compensation—Transition and Disclosures. The pro forma information for 2005 and 2004 was as follows and illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share data): Year Ended December 31, (in thousands) 2005 2004 Net loss, as reported Add stock-based employee compensation expense included in reported net loss, net of tax Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax Pro forma net loss Basic and diluted net loss per share As reported Pro forma $ (5,174 ) — (1,886 ) $ (7,060 ) $ (0.15 ) $ (0.21 ) $ (8,706 ) — (2,206 ) $ (10,912 ) $ $ (0.27 ) (0.33 ) The weighted average fair value of options granted during 2005 and 2004 estimated on the date of grant using the Black-Scholes-Merton option pricing model was $2.40 and $1.10, respectively. The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including a factor to represent expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123R and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The effects of applying SFAS No. 123 for providing pro forma disclosure for 2005 and 2004 are not likely to be representative of the effects on reported net income and net income per share for future years since options vest over several years, additional awards are made each year and stock-based compensation under SFAS No. 123R may be higher or lower than stock-based compensation under SFAS No. 123. Other Comprehensive Income SFAS No. 130 (“SFAS 130”), Reporting Comprehensive Income, establishes standards for the reporting and the display of comprehensive income (loss) and its components. This standard defines comprehensive income as the changes in equity of an enterprise, except those resulting from stockholder transactions. Accordingly, comprehensive income includes certain changes in equity that are excluded from the net income or loss. The comprehensive loss was $8.1 million, $5.2 million and $8.7 million for the years ended 2006, 2005 and 2004, respectively. F-18 The components of comprehensive loss were as follows (in thousands): Year Ending December 31, 2006 2005 2004 Net loss Other comprehensive income (loss): Change in net unrealized gains and losses on investments Total comprehensive loss Recent Accounting Pronouncements $ (8,149 ) $ (5,174 ) $ (8,706 ) 12 (12 ) — $ (8,137 ) $ (5,186 ) $ (8,706 ) In June 2006, the Emerging Issues Task Force issued EITF No.06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF No.06-3”), which clarifies diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to this Issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006. The Company is currently assessing the impact, if any, that the adoption EITF No.06-03 will have on its financial statements. In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN No. 48”), which became effective for the Company on January 1, 2007. This interpretation clarifies the accounting for income tax benefits that are uncertain in nature. Under FIN No. 48, a company will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than 50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. This accounting interpretation also provides guidance on measurement methodology, derecognition thresholds, financial statement classification and disclosures, interest and penalties recognition, and accounting for the cumulative-effect adjustment. The new interpretation is intended to provide better financial statement comparability among companies. Required annual disclosures include a tabular reconciliation of unrecognized tax benefits at the beginning and end of the period; the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate; the amounts of interest and penalties recognized in the financial statements; any expected significant impacts from unrecognized tax benefits on the financial statements over the subsequent 12month reporting period; and a description of the tax years remaining to be examined in major tax jurisdictions. FIN No. 48 is effective for fiscal years beginning on or after December 15, 2006. The Company is currently assessing the impact, if any, that the adoption of FIN No. 48 will have on its financial statements. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“FAS No. 157”), which will become effective for the Company on January 1, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements but would apply to assets and liabilities that are required to be recorded at fair value under other accounting standards. The impact, if any, to the Company from the adoption of FAS 157 in 2008 will depend on the Company’s assets and liabilities at that time that they are required to be measured at fair value. F-19 In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) SAB No. 108. SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary “correcting” adjustments to the carrying values of assets and liabilities as of the beginning of the 2006 year with the offsetting adjustment recorded to the opening balance of retained earnings. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006. The application of SAB No. 108 did not have any impact on the Company’s consolidated balance sheets, statements of operations or statements of stockholders’ equity (deficit) for 2006, 2005 or 2004. 4. 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. The agreement includes a first priority security interest in all of our assets. Gerald Burnett, our Chairman and Chief Executive Officer, 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. The line of credit requires monthly interest-only payments based on LIBOR plus 0.75%, or 6.1% at December 31, 2006 or Prime Rate minus 2.0%, or 6.3% at December 31, 2006. On December 28, 2006, the Company borrowed $3.0 million under the revolving line of credit. The Revolving Credit and Promissory Note matures on December 23, 2007, and is subject to annual renewal with the consent of the Company and the lender. 5. Commitments and Contingencies At December 31, 2006, the Company had open purchase orders and other contractual obligations of approximately $927,000, primarily related to inventory purchases. These purchase order commitments and contractual obligations will be reflected in the Company’s financial statements once goods or services have been received, or payments related to the obligations become due. The Company leases its facilities under operating leases that expire through March 2017. As of December 31, 2006, the future minimum lease commitments under all leases were as follows (in thousands): Year Ending December 31, Amount 2007 2008 2009 2010 2011 and thereafter Total minimum lease payments $ 1,091 1,250 1,129 1,009 2,838 $ 7,317 Rent expense under all operating leases for 2006, 2005 and 2004 was approximately $0.8 million, $0.7 million and $0.6 million, respectively. F-20 Software Indemnifications Avistar enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, Avistar indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally Avistar’s business partners or customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments Avistar could be required to make under these indemnification agreements is unlimited. Avistar has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. Accordingly, Avistar has no liabilities recorded for these agreements as of December 31, 2006. 6. Related Party Transactions Certain directors with controlling interests in the Company are also the majority owners of one entity that conducted business with the Company, Vicor Inc. (“Vicor”). Descriptions of certain transactions between the Company and this related entity follow. Revenue from a Related Party UBS Warburg LLC, which is an affiliate of UBS AG, is a stockholder of the Company and is also a customer of the Company. As of December 31, 2006 and 2005, UBS Warburg LLC held less than 5% of the Company’s stock. Revenue from UBS Warburg LLC and its affiliates represented 20%, 45% and 16% of total revenue for 2006, 2005 and 2004, respectively. Management believes the transactions with UBS Warburg LLC and its affiliates are at terms comparable to those provided to unrelated third parties. As of December 31, 2006 and 2005, the Company had accounts receivable outstanding from UBS Warburg LLC and its affiliates of approximately $298,000 and $749,000, respectively. Revenue from Vicor represented less than 10% of total revenue for 2006, 2005 and 2004. Management believes the transactions with Vicor are at terms comparable to those provided to unrelated third parties. As of December 31, 2006 and 2005, the Company did not have any accounts receivable outstanding from Vicor. Fees to Related Parties Robert P. Latta, a member of the law firm Wilson Sonsini Goodrich & Rosati, a Professional Corporation (“WSGR”), has served as a director of the Company since February 2001. Mr. Latta and WSGR have represented the Company and its predecessors as corporate counsel since 1997. During 2006, 2005 and 2004, payments of $118,000, $119,000 and $114,000, respectively, were made to WSGR for legal services provided to the Company. The Company had outstanding payables of $20,000 to WSGR as of December 31, 2006. 7. Stockholders’ Equity Private Placement of Common Stock On March 26, 2004, the Company completed the private sale of a total of 3,000,000 shares of common stock to Fuller & Thaler Avalanche Fund, L.P. and Fuller & Thaler Behavioral Finance Fund, Ltd. at a price per share of $1.20. The net proceeds of this private financing after deducting expenses of the financing were approximately $3.6 million. F- 21 Stock Repurchase Plan On March 22, 2001, the Company announced that its Board of Directors authorized the repurchase of up to $2.0 million of its common stock in the open market. During 2004, the Company repurchased 2,000 shares at an aggregate cost of $2,000. No shares of common stock were repurchased by the Company during 2006 or 2005. Preferred Stock In April 2000, the stockholders of the Company authorized 10,000,000 shares of convertible preferred stock, effective upon completion of its initial public offering in August 2000. As of December 31, 2006, the Company had 10,000,000 shares of convertible preferred stock authorized, at $0.001 per share par value. No shares of convertible preferred stock were issued or outstanding as of December 31, 2006. 8. Stock Option Plans 1997 Stock Option Plan In December 1997, the Board established the 1997 Stock Option Plan (the “1997 Plan”) and authorized the issuance of 1,828,602 shares of common stock thereunder. In December 1999 and May 2000, respectively, the Board authorized an additional 1,065,625 shares and 100,000 shares to be issued under the Plan. In connection with the initial public offering in August 2000, the Board terminated the 1997 Plan as to future grants, effective August 17, 2000. Under the 1997 Plan, incentive stock options to purchase shares of common stock were granted only to employees at not-less-than 100% of the fair market value at the grant date as determined by the Board. Additionally, nonqualified stock options to purchase shares of common stock were granted to employees and consultants at not-less-than 85% of the fair market value at the grant date. Options granted generally have had a contractual life of ten years. Options granted under the plan vested over a four-year period, with 25% vesting after one year and the remaining balance vesting 6.25% per quarter. At December 31, 2006, options to purchase a total of 798,400 shares were outstanding under the 1997 Plan, and no options were available for grant. 2000 Stock Option Plan In April 2000, the Board established the 2000 Stock Option Plan (the “2000 Plan”). Initially, a total of 3,000,000 shares of common stock were approved by the Board for issuance under the 2000 Plan, together with annual increases in the number of shares of common stock reserved under the plan beginning on the first day of the Company’s fiscal year, commencing January 1, 2001. In January 2001, the Board approved an increase of 1,004,936 shares. In January 2002, the Board approved an increase of 1,007,858 shares. In January 2003, the Board approved an increase of 1,011,957 shares. In January 2004, 2005 and 2006 the Board approved an increase of 1,200,000 shares. As of December 31, 2006, a total of 9,624,751 shares had been reserved for issuance under the 2000 Plan. The contractual term of the options granted under this plan may not exceed 10 years and in the case of the grantees who own more than 10% of the Company’s outstanding stock at the time of grant, the contractual term of the option may not exceed five years. Options granted under the 2000 Plan vest and become exercisable as set forth in each option agreement; generally one quarter vest after one year and one-twelfth vest quarterly thereafter. In the event of a merger or sale of substantially all assets, these options must be assumed by the successor and if not assumed, will fully vest. The 2000 Plan will terminate in 2010. As a result of past and future increases, a maximum of 15,000,000 shares of common stock could be issued under the 2000 Plan. The Company granted options to purchase approximately 1.4 million, 2.0 million and 1.3 million shares under the plan in 2006, 2005 and 2004, respectively. At December 31, 2006 options to purchase a total of 7,393,322 shares were outstanding under the 2000 Plan and 1,858,643 options were available for future grant. F- 22 2000 Director Option Plan In April 2000, the Company adopted the 2000 Director Option Plan (the “Director Plan”). Initially, a total of 90,000 shares of common stock were approved by the Board for issuance under the plan, together with an annual increase in the number of shares of common stock reserved thereunder as provided in the plan beginning on the first day of the Company’s fiscal year, commencing January 1, 2001. In January 2001, the Board approved an annual increase of 12,000 shares. In May 2001, the Board approved an additional 198,000 shares under this plan. In January 2002, the Board approved the annual increase of 30,000 shares. In January 2003, the Board approved the annual increase of 30,000 shares. In April 2003, the Board approved an additional 104,000 shares under this plan. In January 2004, 2005 and 2006, the Board approved annual increases of 175,000 shares. As of December 31, 2006, the Company has authorized a total of 989,000 shares for issuance under this plan. As a result of past and future annual increases, a maximum of 1,689,000 shares of common stock could be issued over the 10year life of the plan. The Company granted options to purchase 145,000, 170,000 and 170,000 shares under this plan in 2006, 2005 and 2004 respectively. At December 31, 2006 options to purchase a total of 697,000 shares were outstanding under the Director Plan and 230,750 options were available for future grant. In April 2005, the board of directors authorized further amendments to the Director Plan, subject to stockholder approval, to: (i) provide that annual grants under the plan shall take place on January 1 of each year starting in 2006, (ii) provide that, after the first year, options granted under the plan vest at a rate of 1/48 per month rather than 1/4 per year, (iii) provide that options granted under the plan shall continue to vest and be exercisable for so long as the option holder remains a director or consultant to the Company, subject to the term of the option; (iv) extend the time period for optionees to exercise options following the date on which they are no longer a director or consultant to the Company, and (v) to provide the board of directors with the authority to make amendments to the Director Plan applicable to all options granted under the Director Plan, including options granted prior to the effective date of the amendment. The proposed amendments were approved by stockholders in June 2005 but did not affect options already granted under the Director Plan prior to the effective date of the amendments. A summary of the 1997 Plan, the 2000 Plan, and the Director Plan activity and related information for the years ended December 31, 2006, 2005 and 2004 is as follows: Shares Available for Option Grant Options Outstanding Weighted Average Shares Exercise Price Balance, December 31, 2003 Authorized Granted Exercised Canceled/repurchased Balance, December 31, 2004 Authorized Granted Exercised Expired Canceled/repurchased Balance, December 31, 2005 Authorized Granted Exercised Expired Canceled Balance, December 31, 2006 1,668,705 1,375,000 (1,484,500 ) — 314,030 1,873,235 1,375,000 (2,180,500 ) — 150,000 460,720 1,678,455 1,375,000 (1,511,000 ) — 150,000 396,938 2,089,393 5,530,354 — 1,484,500 (33,812 ) (332,979 ) 6,648,063 — 2,180,500 (214,196 ) (150,000 ) (484,720 ) 7,979,647 — 1,511,000 (54,987 ) (150,000 ) (396,938 ) 8,888,722 $ 3.70 — 1.14 1.09 2.60 $ 3.20 — 2.71 1.27 9.35 1.69 $ 3.06 — 1.39 0.87 1.52 1.72 $ 2.87 F- 23 The pretax intrinsic value of outstanding options is the difference between the closing price of Avistar shares as quoted on the NASDAQ Capital Market for December 31, 2006 and the exercise price, multiplied by the number of in-the-money options. The aggregate intrinsic value of the options outstanding at December 31, 2006 for all options outstanding was $3.3 million and $2.3 million for only vested options outstanding. Vested and exercisable options outstanding at December 31, 2006 had a weighted average remaining contractual life of 5.4 years. The intrinsic value of options changes based on the fair market value of Avistar stock. The Company had 8,195,134 options vested and exercisable and expected to be vested and exercisable at December 31, 2006 with a weighted average exercise price of $2.96, a weighted average remaining contractual term of 6.1 years, and an aggregate intrinsic value of $3.1 million. Total intrinsic value of options exercised for the year ended December 31, 2006 was $47,000. Options Outstanding WeightedNumber Average Remaining Outstanding at December 31, 2006 Contractual Life Options Exercisable WeightedAverage Exercise Price Range of Exercise Prices Number Exercisable at December 31, 2006 WeightedAverage Exercise Price $0.25 - 0.90 $0.95 - 1.27 $1.30 - 1.95 $2.09 - 2.91 $3.95 - 5.31 $8.50 $17.25 1,410,734 2,558,338 1,164,200 2,763,500 76,300 437,700 477,950 8,888,722 6.08 7.02 6.80 7.46 3.90 3.71 3.25 6.59 $ 0.83 1.18 1.53 2.61 4.81 8.50 17.25 $ 2.87 1,187,135 1,429,212 609,387 1,550,649 76,300 437,700 477,950 5,768,333 $ 0.83 1.15 1.48 2.52 4.81 8.50 17.25 $ 3.43 As of December 31, 2006, the Company had an unrecognized stock-based compensation balance related to stock options of approximately $4.8 million before estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Based on the Company’s historical experience of option pre-vesting cancellations, the Company has assumed an annualized forfeiture rate of 7% for its executive options and 29% for non-executive options. Accordingly, as of December 31, 2006, the Company estimated that the stock-based compensation for the awards not expected to vest was approximately $1.2 million and therefore, the unrecognized deferred stock-based compensation balance related to stock options was adjusted to approximately $3.6 million after estimated forfeitures. This amount will be recognized over an estimated weighted average period of 2.0 years. The Company granted 1,486,000 stock options to employees, with an estimated total grant-date fair value of $1.9 million during 2006, or $1.29 per share. During 2006, 1.4 million options vested with a total fair value of $2.5 million. 2000 Employee Stock Purchase Plan In April 2000, the Company adopted the 2000 Employee Stock Purchase Plan (“Employee Stock Purchase Plan”). Initially, a total of 1,500,000 shares of common stock were approved by the Board for issuance under the plan, together with an annual increase in the number of shares of common stock reserved thereunder as provided in the plan beginning on the first day of the Company’s fiscal year, commencing January 1, 2001. In January 2001, the Board approved an increase of 753,702 shares. As of December 31, 2006, the Company has authorized a total of 2,253,702 shares for issuance under this plan. As a result of past and future annual increases, a maximum of 10,500,000 shares could be sold over the 10-year life of the plan. The Employee Stock Purchase Plan permits employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee’s compensation, at 85% of the lower of the fair market value of the Company’s common stock on the first or the last day of each offering period. A total of 225,657, 182,594 and 118,139 shares were sold under this plan during 2006, 2005 and 2004, respectively. F- 24 On July 19, 2006, the Compensation Committee of the Board of Directors of the Company approved amendments to the 2000 Employee Stock Purchase Plan to (i) change the offering periods under the plan from approximately 24 months to approximately six months, commencing on the first trading day on or after February 1 and August 1 of each year, and (ii) eliminate the section of the plan that provided for automatic withdrawal and re-enrollment in the event that the fair market value of the common stock on any exercise date was lower than the fair market value of the common stock on the enrollment date of the same offering period. Valuation Assumptions The Company estimated the fair value of stock options granted during 2006, using a Black-Scholes-Merton valuation model, consistent with the provisions of SFAS No. 123R, and SEC Staff Accounting Bulletin (“SAB”) No. 107. The Company’s prior period pro forma disclosures of stock-based compensation for 2005 and 2004 were determined under a fair value method as prescribed by SFAS No. 123. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option valuation model and the straight-line attribution approach with the following weighted-average assumptions: Year Ended December 31, 2006 2005 2004 Employee Stock Option Plan Expected dividend Average risk-free interest rate Expected volatility Expected term (years) 0% 4.9 % 143 % 6.1 0% 4.38 % 152 % 4 0% 3.5 % 230 % 4 Year Ended December 31, 2006 2005 2004 Employee Stock Purchase Plan Expected dividend Average risk-free interest rate Expected volatility Expected term (months) 0% 4.0 % 89 % 6 0% 3.3 % 96 % 6 0% 3.3 % 479 % 6 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 equal to the expected term of the options. Expected volatility is based on the historical volatility of the Company’s common stock over a period consistent with the expected term of the stock option. The expected term calculation is based on an average prescribed by SAB No. 107, based on the vesting periods, which is generally over four years, and the term of the option, which is generally 10 years, divided by 2. For the year ended December 31, 2006, stock-based compensation expense associated with employee stock options and ESPP shares amounted to $1.8 million and $0.1 million, respectively. F- 25 Common Stock Reserved for Future Issuance As of December 31, 2006, the Company had reserved the following shares of common stock for issuance in connection with: Stock options under stock option plans Employee stock purchase plan Total 9. Legal Proceedings 11,412,151 2,253,702 13,665,853 On May 11, 2005, CPI, Avistar’s wholly-owned patent prosecution and licensing subsidiary, commenced a patent infringement lawsuit against Tandberg ASA and Tandberg, Inc., alleging that numerous Tandberg videoconferencing products infringe three patents held by CPI. The suit was filed in the United States District Court for the Northern District of California. Both of the Tandberg entities answered the complaint on July 15, 2005, at which time they asserted that they did not infringe the patents and that the patents were invalid and unenforceable. On January 30, 2006, Tandberg Telecom AS, a wholly-owned subsidiary of Tandberg ASA, filed a patent infringement lawsuit against Avistar in the United States District Court for the Eastern District of Texas. The suit alleges that Avistar videoconferencing products infringe one patent purchased by Tandberg Telecom AS. The prosecution of this lawsuit and the defense of the Tandberg Telecom AS claim required Avistar and CPI to expend significant financial and managerial resources. See Note 13 Subsequent Events for information on the settlement of these lawsuits among the Company, CPI and Tandberg. 10. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 provides for an asset and liability approach to account for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The (recovery from) provision for income taxes relates to Federal, State and Foreign tax. The Company provided for income taxes for its subsidiary in the United Kingdom (ASUK) of approximately $22,000, $22,000 and $60,000 in 2006, 2005 and 2004, respectively. Federal and State overpayments of 2004 income taxes were refunded in 2006. F- 26 The (recovery from) provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2006 2005 2004 Current: Federal State Foreign Deferred benefits: Federal State Valuation allowance $ (33 ) $ (20 ) 22 (31 ) — — 22 22 $ 237 66 60 363 (2,789 ) (2,262 ) (2,691 ) (311 ) (460 ) (335 ) (3,100 ) (2,722 ) (3,026 ) 3,100 2,722 3,026 $ (31 ) $ 22 $ 363 For financial reporting purposes, loss before provision for income taxes included the following components (in thousands): Year Ended December 31, 2006 2005 2004 Domestic Foreign Loss before provision for income taxes $ (9,611 ) $ (4,839 ) $ (8,668 ) 1,431 (313 ) 325 $ (8,180 ) $ (5,152 ) $ (8,343 ) The Company’s effective income tax provision differed from the federal statutory rate of 34% due to the following (in thousands): Year Ended December 31, 2006 2005 2004 Expected tax benefit at federal statutory rate Foreign and state taxes, net Recovery of federal tax payments Permanent non-deductible Utilization of net operating losses Current year operating losses and temporary differences for which no tax benefit is recognized Provision for income taxes $ (2,771 ) $ (1,652 ) $ (2,837 ) 2 22 126 (33 ) 463 17 — — — (3,786 ) 2,308 1,635 (31 ) $ 22 6,860 363 $ $ Permanent non-deductible is primarily composed of the non-deductible portion of the deferred stock compensation expense. The net deferred income tax asset consisted of the following as of December 31, 2006 and 2005 (in thousands): 2006 2005 Deferred income tax assets: Federal net operating loss carry-forwards State net operating loss carry-forwards Tax credit carry-forwards Deferred settlement and patent licensing, net Reserves Property and Equipment Valuation allowance Net deferred income tax asset $ 15,178 $ 11,514 956 694 2,992 2,312 4,728 6,507 522 294 240 195 24,616 21,516 (24,616 ) (21,516 ) $ — $ — F- 27 Net operating loss carry-forwards at December 31, 2006 were approximately $45 million and $19 million, for Federal and state income tax purposes, respectively. The Federal net operating loss carry-forwards expire on various dates through the year 2026. As of December 31, 2006, unused research and development tax credits of approximately $1.5 million and $1.4 million are available to reduce future Federal and California income taxes, respectively. Federal credit carry-forwards expire beginning in year 2014. California credits will carry forward indefinitely. The Internal Revenue Code of 1986, as amended, contains provisions that may limit the net operating loss carry-forwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership interest. The Company believes significant uncertainty exists regarding the realizability of the net operating loss and tax credit carry-forwards and other timing differences. Accordingly, a valuation allowance has been provided for the entire net deferred tax asset. 11. Net Loss Per Share Basic and diluted net loss per share of common stock is presented in conformity with SFAS No. 128 (“SFAS 128”), Earnings Per Share , for all periods presented. In accordance with SFAS 128, basic net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed on the basis of the weighted average number of shares and potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding stock options that have a dilutive effect when applying the treasury stock method. The Company has excluded all outstanding stock options and shares subject to repurchase from the calculation of diluted net loss per share for 2006, 2005, and 2004, because all such securities are antidilutive (owing to the fact that the Company is in a loss position). Accordingly, diluted net loss per share is equal to basic net loss per share for all years presented. The total number of potential common shares excluded from the calculations of diluted net loss per share was 846,929, 1,668,006 and 1,873,782 for 2006, 2005, and 2004, respectively. The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data): Year Ended December 31, 2006 2005 2004 Net loss Weighted average shares of common stock used in computing net loss per share Net loss per share basic and diluted 12. Segment Reporting $ (8,149 ) $ (5,174 ) $ (8,706 ) 33,928 33,600 32,610 $ (0.24 ) $ (0.15 ) $ (0.27 ) Disclosure of segments is presented in accordance with SFAS No. 131 (“SFAS 131”), Disclosures About Segments of an Enterprise and Related Information . SFAS 131 establishes standards for disclosures regarding operating segments, products and services, geographic areas and major customers. The Company is organized and operates as two operating segments: (1) the design, development, manufacturing, sale and marketing of networked video communications products (Avistar) and (2) the prosecution, maintenance, support and licensing of the intellectual property, some of which is used in the Company’s products (CPI). Service revenue relates mainly to the maintenance, support, training, software development and installation of products, and is included in Avistar for purposes of reporting and decision-making. Avistar also engages in corporate functions, and provides financing and services to its subsidiaries. The Company’s chief operating decision-maker, its Chief Executive Officer, monitors the F- 28 Company’s operations based upon the information reflected in the following table (in thousands). The table includes a reconciliation of the revenue and expense classification used by the Company’s CEO with the classification of revenue, other income and expenses as set forth in the Company’s audited 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 licensing activity” as revenue within the CPI subsidiary. CPI Avistar Reconciliation Total Year Ended December 31, 2006 Revenue Depreciation expense Stock-based compensation Total costs and expenses Interest income Interest expense Net income (loss) Assets Year Ended December 31, 2005 Revenue Depreciation expense Total costs and expenses Interest income Interest expense Net loss Assets Year Ended December 31, 2004 (as restated) Revenue Depreciation expense Total costs and expenses Interest income Interest expense Net loss Assets $ 9,381 $ 8,070 — (345 ) 440 1,594 (5,701 ) (20,227 ) — 299 — 1 3,680 (11,829 ) 3,752 10,947 $ 4,226 $ 6,911 — (273 ) (2,535 ) (14,197 ) — 537 — 1 1,691 (6,865 ) 5,081 15,277 $ 575 $ 6,321 — (339 ) (3,898 ) (11,474 ) — 118 — 6 (3,322 ) (5,384 ) 6,330 24,078 (4,226 ) — — 4,226 — — — — (4,226 ) — 4,226 — — — — $ (575 ) — 575 — — — — $ 13,225 (345 ) 2,034 (21,702 ) 299 1 (8,149 ) 14,699 $ 6,911 (273 ) (12,506 ) 537 1 (5,174 ) 20,358 6,321 (339 ) (14,797 ) 118 6 (8,706 ) 30,408 $ International revenue, which consists of sales to customers with operations principally in Western Europe and Asia, comprised 75%, 63% and 52% of total revenue for 2006, 2005, and 2004, respectively. Revenue is allocated to individual countries by customer based on where the product is shipped to, location of services performed or the location of equipment that is under an annual maintenance agreement. For 2006, 2005, and 2004, respectively, international revenues to customers in the United Kingdom accounted for 12%, 23%, and 31% respectively, of total revenue. The Company had no significant long-lived assets in any country other than the United States for any period presented. 13. Subsequent Events On February 15, 2007, the Company entered into a patent license agreement with Tandberg ASA, Tandberg AS and Tandberg, Inc. Under this agreement, CPI agreed to dismiss its infringement suit against Tandberg, Tandberg agreed to dismiss its infringement suit against CPI and the Company and the companies agreed to cross-license each other’s patent portfolios. The original litigation was initiated in May 2005, in the Federal District Court for the Northern District of California and involved the following CPI patents: U.S. Patent Nos. 5,867,654; 5,896,500 and 6,212,547. The agreement resulted in a payment to the Company from Tandberg in the amount of $12.0 million, approximately $4.3 million of which was used by the Company to pay its own contingent legal fees incurred in connection with the litigation. F- 29 14. Selected Quarterly Results of Operations (unaudited) The following tables set forth, for the periods indicated, the Company’s unaudited financial information for the last eight quarters. The Company believes that the financial statements used to prepare this information include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information when read in conjunction with the Company’s financial statements and notes to financial statements. The operating results for any quarter do not necessarily indicate the results expected for any future period. In July 2006, the Company entered into a Patent License Agreement with Sony and SCEI. Under the license agreement, CPI granted Sony and its subsidiaries a license to all of CPI’s patents with a filing date on or before January 1, 2006 for a specific field of use relating to video conferencing. As consideration for the licenses granted under the agreement, Sony agreed to make an upfront license payment of $5.0 million. The $5.0 million upfront payment was recognized by Avistar as licensing revenue in the three months ended September 30, 2006. As described in the Summary of Significant Accounting Policies, Income from Settlement and Patent Licensing, we expect to recognize the payment received from Polycom and the associated deferred contingent legal costs paid in settlement and patent licensing in equal installments over a five-year period starting November 12, 2004. The payment from Polycom and its recognition in settlement and patent licensing may affect the comparability of the Companies financial statements for periods before and after the recognition periods. December 31, 2006 Quarter Ended September 30, March 31, 2006 June 30, 2006 2006 (In thousands except per share data) Total revenue Cost of product revenue Cost of services, maintenance and support revenue Net (loss) income Net (loss) income per share—Basic/Diluted Weighted average shares—Basic Weighted average shares—Diluted $ 2,337 834 454 $ (3,191 ) $ (0.09 ) 34,031 34,031 December 31, 2005 $ 7,276 998 374 $ 1,818 $ 0.05 33,965 34,860 $ 1,754 721 385 $ (3,720 ) $ (0.11 ) 33,880 33,880 $ 1,858 632 607 $ (3,056 ) $ (0.09 ) 33,834 33,834 Quarter Ended September 30, March 31, 2005 June 30, 2005 2005 (In thousands except per share data) Total revenue (As Previously Reported) Total revenue (Adjustment) Total revenue (As Restated) Cost of product revenue Cost of services, maintenance and support revenue Net loss Net loss per share—Basic/Diluted Weighted average shares—Basic/Diluted $ 1,809 — 1,809 593 632 $ (2,102 ) $ (0.06 ) 33,738 $ 2,891 (1,057 ) 1,834 531 616 $ (1,425 ) $ (0.04 ) 33,687 $ 2,403 (1,056 ) 1,347 318 525 $ (1,260 ) $ (0.04 ) 33,547 $ 2,979 (1,057 ) 1,922 450 447 $ (387 ) $ (0.01 ) 33,420 F- 30 Item 15(a) AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS Balance at Beginning of Year Additions Charged to Operations Write-Offs (In thousands) Balance at End of Year Allowance for Doubtful Accounts Period Ended: December 31, 2006 December 31, 2005 December 31, 2004 $ 121 $ 22 $ 44 $ (61 ) $ 120 $ 77 $ (9 ) $ (21 ) $ (99 ) $ 51 $ 121 $ 22 S-1 INDEX TO EXHIBITS Exhibits 3.2 (1) 3.3 (11) 4.1 (1) 10.1 (1) 10.1.1 (1) 10.2 (1) 10.3 (12) 10.4 (1) 10.5 (4) 10.6 (1) 10.7 (6) 10.8 (8) 10.9 (8) Restated Certificate of Incorporation Bylaws of Avistar Communications Corporation Specimen Certificate evidencing shares of Common Stock 1997 Stock Option Plan, as amended* 1997 Stock Option Plan Form of Stock Option Agreement* 2000 Stock Option Plan, as amended* 2000 Director Option Plan, as amended* Form of Director Option Agreement* 2000 Employee Stock Purchase Program, as amended* Form of Indemnification Agreement* Settlement Agreement and Release between the Registrant and R. Stephen Heinrichs dated April 26, 2001* Office Lease Agreement between CA-Twin Dolphin Plaza Limited Partnership and the Registrant dated July 30, 2003 Common Stock Purchase Agreement by and among the Registrant and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust, Grady Burnett and Wendolyn Hearn dated October 15, 2003 Stock Purchase Agreement among the Registrant, Fuller & Thaler Behavioral Finance Fund, Ltd. and Fuller & Thaler Avalanche Fund, L.P. dated March 23, 2004 Settlement Agreement among the Registrant, Collaboration Properties, Inc. and Polycom, Inc. dated November 12, 2004 Patent Cross-License Agreement Among the Company, Collaboration Properties, Inc. and Polycom, Inc. dated November 12, 2004 Patent License Agreement dated May 15, 2006 among the Registrant, Collaboration Properties, Inc., Sony Corporation and Sony Computer Entertainment, Inc. Revolving Credit Promissory Note dated December 26, 2006 issued by the Registrant to JPMorgan Chase Bank, N.A. Collateral Agreement between the Registrant and JPMorgan Chase Bank, N.A. dated December 23, 2006 Security Agreement between the Registrant and JPMorgan Chase Bank, N.A. dated December 23, 2006 Guaranty issued by Gerald J. Burnett and The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust in favor of JPMorgan Chase Bank, N.A. dated December 23, 2006 Form of Note Sale Agreement among Gerald J. Burnett, The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust and JPMorgan Chase Bank, N.A. Lease Agreement among the Registrant and Crossroads Associates and Clocktower Associates dated December 1, 2006 Subsidiaries of the Company 10.10 (10) 10.11 (11) 10.12 (12)† 10.13 (4)† 10.14 10.15 10.16 10.17 10.18 10.19 21.1 (7) 23.1 23.2 24.1 31.1 31.2 32 * † (1) (2) (3) (4) (5) (6) (7) (8) (9) Consent of Independent Registered Public Accounting Firm: Burr, Pilger & Mayer LLP Consent of Independent Registered Public Accounting Firm: KPMG LLP Power of Attorney (see page 51) Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Indicates management contract or compensatory plan or arrangement required to be filed an exhibit pursuant to Item 14(c) of Form 10-K. 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. Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-39008) as declared effective by the Securities and Exchange Commission on August 16, 2000. Reserved. Reserved. Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on November 14, 2006. Reserved. Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2001. Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 with the Securities and Exchange Commission on March 25, 2003. Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2003 filed with the Securities and Exchange Commission on October 23, 2003. Reserved. (10) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 filed with the Securities and Exchange Commission on May 11, 2004. (11) Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 28, 2005. (12) Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission on April 28, 2006. Exhibit 10.14 REVOLVING CREDIT PROMISSORY NOTE (LIBOR/PRIME) $10,000,000 Dated as of December 23, 2006 For value received, Avistar Communications Corporation , a Delaware corporation (the “Borrower”) hereby promises to pay to the order of JPMorgan Chase Bank, N.A. (the “Bank”) at its office at 345 Park Avenue, New York, New York 10154-1002 for the account of the lending office of the Bank, the principal amount of each loan made by the Bank to the Borrower (the “Loans”), up to an aggregate principal amount equal to the Maximum Facility Amount, on the first anniversary of the date hereof (the “Final Maturity Date”). The Borrower promises to pay interest on each Interest Payment Date on the unpaid balance of the principal amount of each such Loan from and including the date of such Loan to but excluding the date of its repayment at either (i) a floating rate per annum equal to the Prime Rate applicable to such Loan minus 2.00% (such Loan a “Prime Loan”), or (ii) a fixed rate per annum equal to the Adjusted Libor Rate applicable to such Loan plus 0.75% (such Loan a “Libor Loan”). After the occurrence and during the continuance of an Event of Default, principal shall bear interest from and including the date of such Event of Default until paid in full at a rate per annum equal to the Default Rate, such interest to be payable on demand. Interest shall be payable on the relevant Interest Payment Date and for Libor Loans shall be calculated on the basis of a year of 360 days for the actual number of days elapsed and for Prime Loans shall be calculated on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. Prior to the Final Maturity Date, provided that no Event of Default has occurred and is continuing, and subject to the terms of this Note, the Borrower may borrow, repay and reborrow under this Note, up to the aggregate principal amount equal to the Maximum Facility Amount (the “Commitment”). In consideration of the Bank’s granting the Commitment to the Borrower, the Borrower hereby agrees to pay to the Bank a facility fee in the amount of Ten Thousand Dollars ($10,000). The facility fee shall be due and payable on the first Interest Payment Date. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. Any extension of time for the payment of the principal of this Note resulting from the due date falling on a non-Banking Day shall be included in the computation of interest. The date, amount, type and Interest Period of, and the interest rate with respect to, each Loan evidenced hereby and all payments of principal thereof shall be recorded by the Bank on its books and, at the discretion of the Bank prior to any transfer of this Note at any other time, may be endorsed by the Bank on a schedule. Any such endorsement shall be conclusive absent manifest error. The Bank may (but shall not be obligated to) debit the amount of any payment under this Note that is not made when due to any deposit account of the Borrower with the Bank. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. 1. Definitions. The terms listed below shall be defined as follows: “Adjusted Libor Rate” shall mean the Libor Rate for such Loan divided by one minus the Reserve Requirement. “Banking Day” shall mean any day on which commercial banks are not authorized or required to close in New York City and whenever such day relates to a Libor Loan or notice with respect to any Libor Loan, a day on which dealings in U.S. dollar deposits are also carried out in the London interbank market. 1 “Borrowing Notice” shall mean a request for a borrowing substantially in the forma of Exhibit A hereto. “Default Rate” shall mean a rate per annum equal to: (a) if a Prime Loan, a floating rate of 2% above the rate of interest thereon (including any margin); (b) if a Libor Loan, a fixed rate of 2% above the rate of interest in effect thereon (including any margin) at the time of the applicable Event of Default until the last day of the Interest Period thereof and, thereafter, a floating rate of 2% above the rate of interest for a Prime Loan (including any margin). “Disclosure Schedule” means the schedule attached hereto as Exhibit B. “Event of Default” shall mean an event described in Section 7. “Facility Documents” shall mean this Note and any other documents, instruments, or agreements delivered as security or collateral for, or a guaranty of, the Loans, or in connection with, or as support for, any of the foregoing, whether by the Borrower or a Third Party, and any updates or renewals thereof. “Interest Payment Date” shall mean (i) the last Banking Day of each calendar month for Prime Loans commencing January 31, 2007 ; (ii) the last Banking Day of each calendar month and on the last day of the Interest Period with respect to Libor Loans (and for any Libor Loan with an Interest Period longer than three months, every three months); and (iii) on any payment of principal. “Interest Period” shall mean (i) with respect to a Prime Loan, the period commencing on the date such Prime Loan is made and ending on the earlier of the Final Maturity Date or the date recorded by the Bank on its books or if such day is not a Banking Day, then on the immediately succeeding Banking Day, and (ii) with respect to a Libor Loan, the period commencing on the date such Libor Loan is made and ending on the numerically corresponding day One, Two, Three or Six calendar months thereafter, as recorded by the Bank on its books, or if such day is not a Banking Day, then on the immediately succeeding Banking Day; provided that if such Banking Day would fall in the next calendar month, such Interest Period shall end on the immediately preceding Banking Day; and provided, further, that each such Interest Period which commences on the last Banking Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Banking Day of the appropriate calendar month. No Interest Period may extend beyond the Final Maturity Date. “Libor Rate” shall mean the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted by the Bank at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Banking Days prior to the first day of such Loan for the offering by the Bank to leading banks in the London interbank market of U.S. dollar deposits having a term comparable to such Loan and in an amount comparable to the principal amount of such Loan. “Main Office” shall mean the main office of the Bank, currently located at 1111 Polaris Parkway, Columbus, Ohio 43240. “Maximum Facility Amount” shall mean the lesser of (i) Ten Million Dollars ($10,00,000) and (ii) the value assigned by the Bank from time to time, in its sole reasonable discretion, to the collateral, if any, pledged and collaterally assigned to the Bank, and in which the Bank has a first-priority security interest and against which the Bank has a right of setoff, as security for the Borrower’s payment of its obligations under this Note . “Prime Rate” shall mean the rate of interest per annum announced from time to time by the Bank as its prime rate. Each change in the Prime Rate shall be effective from and including the date the change is announced as being effective. The Prime Rate is a reference rate and may not be the Bank’s lowest rate. “Regulation D” shall mean Regulation D of the Board of Governors of the Federal Reserve System. “Regulatory Change” shall mean any change after the date of this Note in United States federal, state or municipal laws or any foreign laws or regulations (including Regulation D) or the adoption or making after such date 2 of any interpretations, directives or requests applying to a class of banks, including the Bank, of or under any United States federal, state or municipal laws or any foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. “Reserve Requirement” shall mean, for any Libor Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during the term of such Loan under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion U.S. dollars, or as otherwise established by the Board of Governors of the Federal Reserve System and any other banking authority to which the Bank is subject, against “Eurocurrency liabilities” (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (x) any category of liabilities which includes deposits by reference to which the Libor Rate is to be determined or (y) any category of extensions of credit or other assets which include Libor Loans. The Reserve Requirement shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. “SEC” means the Securities and Exchange Commission. “Third Party” shall mean any party liable with respect to, or otherwise granting support for, this Note, whether by guaranty, subordination, grant of security or otherwise. 2. Borrowings, Conversions, Renewals and Prepayments. (a) The Borrower shall deliver a Borrowing Notice to the Bank, which shall be irrevocable, by 12:00 noon New York City time three (3) Banking Days prior to each requested borrowing of a Libor Loan and by 12:00 noon New York City time on the date of each requested borrowing of a Prime Loan; provided that no Libor Loan shall be in a minimum amount less than $500,000; provided, further, that no Prime Loan shall be in an amount less than $30,000; and provided, further, that the aggregate outstanding principal amount of all Loans shall not exceed the Maximum Facility Amount. Subject to the provisions of this Note, the Borrower shall have the right to (i) convert one type of Loan into another type of Loan on the last day of the Interest Period with respect to a Libor Loan or at any time for a Prime Loan, or (ii) renew any Libor Loan as a Libor Loan on the last day of the Interest Period with respect to such Libor Loan; provided that the Borrower shall give the Bank irrevocable notice by 12:00 noon New York City time three Banking Days prior to conversion into or renewal as a Libor Loan, and by 12:00 noon New York City time on or before the date of conversion into a Prime Loan. If the Borrower shall fail to give notice to the Bank of the renewal of any Libor Loan as provided herein, such Libor Loan shall automatically become a Prime Loan on the last day of the Interest Period thereof; provided that the Bank may renew such Loan as a Libor Loan for an Interest Period equal to that then ending, provided that no such renewal shall be made if the number of months in the renewal period is greater than six. (b) The Borrower shall have the right to make prepayments of principal at any time or from time to time, provided that: (i) the Borrower shall give the Bank irrevocable notice of each prepayment by 12:00 noon New York City time three Banking Days prior to prepayment of a Libor Loan, and by 12:00 noon New York City time on the date of prepayment of a Prime Loan; (ii) Libor Loans may be prepaid prior to the last day of their Interest Period only if accompanied by payment of the additional compensation calculated in accordance with paragraph 5 below, if applicable; (iii) all prepayments of Libor Loans shall be in a minimum amount equal to the lesser of $100,000 or the unpaid principal amount of this Note; and (iv) all prepayments of Prime Rate Loans shall be in a minimum amount equal to the lesser of $30,000 or the unpaid principal amount of this Note. 3. Additional Costs. (a) If as a result of any Regulatory Change which (i) changes the basis of taxation of any amounts payable to the Bank under the Note (other than taxes imposed on the overall net income of the Bank or the lending office by the jurisdictions in which the Main Office of the Bank or the lending office are located) or (ii) imposes or modifies any reserve, special deposit, deposit insurance or assessments, minimum capital, capital ratios or similar requirements relating to any extension of credit or other assets of, or any deposits with or other liabilities of the Bank, or (iii) imposes any other condition affecting this Note, the Bank determines (which determination shall be conclusive absent manifest error) that the cost to it of making or maintaining a Libor Loan is increased or any amount received or receivable by the Bank under this Note is reduced, then the Borrower will pay 3 to the Bank on demand an additional amount that the Bank determines will compensate it for the increased cost or reduction in amount. (b) Without limiting the effect of the foregoing provisions of this Section 3 (but without duplication), the Borrower shall pay to the Bank from time to time on request such amounts as the Bank may determine to be necessary to compensate the Bank for any costs which it determines are attributable to the maintenance by it or any of its affiliates pursuant to any law or regulation of any jurisdiction or any interpretation, directive or request (whether or not having the force of law and whether in effect on the date of this Note or thereafter) of any court or governmental or monetary authority of capital in respect of the Loans hereunder (such compensation to include, without limitation, an amount equal to any reduction in return on assets or equity of the Bank to a level below that which it could have achieved but for such law, regulation, interpretation, directive or request). 4. Unavailability, Inadequacy or Illegality of Libor Rate. Anything herein to the contrary notwithstanding, if the Bank determines (which determination shall be conclusive) that: (a) quotations of interest rates for the relevant deposits referred to in the definition of Libor Rate are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for a Libor Loan; or (b) the definition of Libor Rate does not adequately cover the cost to the Bank of making or maintaining a Libor Loan; or (c) as a result of any Regulatory Change (or any change in the interpretation thereof) adopted after the date hereof, the Main Office of the Bank or the lending office is subject to any taxes, reserves, limitations, or other charges, requirements or restrictions on any claims of such office on non-United States residents (including, without limitation, claims on non-United States offices or affiliates of the Bank) or in respect of the excess above a specified level of such claims; or (d) it is unlawful for the Bank or the lending office to maintain any Libor Loan at the Libor Rate; THEN, the Bank shall give the Borrower prompt notice thereof, and so long as such condition remains in effect, any existing Libor Loan shall bear interest as a Prime Loan and the Bank shall make no Libor Loans. 5. Certain Compensation. If for any reason there is a principal payment of a Libor Loan on a date other than the last day of the applicable Interest Period with respect thereto (whether by prepayment, acceleration, conversion or otherwise), the Borrower will pay to the Bank such amount or amounts as shall be sufficient (in the reasonable opinion of the Bank) to compensate the Bank for any loss, cost or expense which the Bank determines is attributable to such payment. 6. Representations. The Borrower represents and warrants that: (a) the Facility Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their terms, except as the enforcement hereof and thereof may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors’ rights generally and subject to the applicability of general principles of equity; (b) the execution, delivery and performance by the Borrower of the Facility Documents and all other documents contemplated hereby or thereby, and the use of the proceeds of any of the Loans, do not and will not (i) conflict with or constitute a breach of, or default under, or require any consent under, or result in the creation of any lien, charge or encumbrance upon the property or assets of the Borrower pursuant to any other agreement or instrument (other than any pledge of or security interest granted in any collateral pursuant to any Facility Document) to which the Borrower is a party or is bound or by which its properties may be bound or affected; or (ii) violate any provision of any law, rule, regulation (including, without limitation, Regulation U of the Federal Reserve Board), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower; (c) no consent, approval or authorization of, or registration, declaration or filing with, any governmental authority or other person or entity is required as a condition to or in connection with the due and valid execution, delivery and performance by the Borrower of any Facility Document; (d) there are no actions, suits, investigations or proceedings pending or, to Borrower’s knowledge, threatened at law, in equity, in arbitration or by or before any other authority involving or affecting: (i) the Borrower that could reasonably be expected to have a material adverse effect on the financial condition or any material part of 4 the assets or properties of the Borrower (provided, however, that set forth on the Disclosure Schedule are certain pending suits, none of which could reasonably be expected to have a material adverse effect on the prospects, financial condition or any material part of the assets or properties of the Borrower); (ii) any part of the collateral (if any) pledged by Borrower or any Third Party under any Facility Document; or (iii) any of the transactions contemplated in the Facility Documents. There are currently no material judgments entered against the Borrower and the Borrower is not in default with respect to any judgment, writ, injunction, order, decree or consent of any court or other judicial authority, which default is likely to have or has had a material adverse effect on the prospects or condition of the Borrower; in the event that the Borrower is a partnership, limited liability partnership, corporation or limited liability company, the Borrower also represents and warrants that it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, and has all requisite power and authority to execute, deliver and perform its obligations under the Facility Documents. Each borrowing request by the Borrower under this Note shall constitute a representation and warranty that the statements above are true and correct in all material respects both on the date of such request and on the date of the borrowing. Each borrowing request shall also constitute a representation that no Event of Default under this Note has occurred and is continuing or would result from such borrowing. 7. Events of Default. If any of the following events of default shall occur (each an “Event of Default”): (a) the Borrower shall fail to pay (i) any principal of this Note as and when due and payable, (ii) interest thereon within five (5) Banking Days of when due and payable or (iii) any other amount payable hereunder within ten (10) Banking Days of when due and payable; (b) any representation or warranty made or deemed made by the Borrower in this Note or by the Borrower or any Third Party in any Facility Document to which it is a party, or in any certificate, document, opinion or financial or other statement furnished under or in connection with a Facility Document, shall prove to have been incorrect in any material respect when made or deemed made; (c) the Borrower or any Third Party shall fail to perform or observe any term, covenant or agreement contained in any Facility Document on its part to be performed or observed; provided, however, that if any such failure is capable of remedy and if a grace period is not specifically provided for in such Facility Document, performance of such other term, covenant or agreement, such failure shall not constitute an Event of Default unless it is not remedied within ten (10) Banking Days of the Borrower’s receipt of the Bank’s request that such failure be remedied ; (d) the Borrower (i) shall fail to pay when due any of its indebtedness (including, but not limited to, indebtedness for borrowed money) or any interest or premium thereon in an aggregate amount of at least two hundred fifty thousand dollars ($250,000) or (ii) the Borrower shall default or otherwise fail to perform any agreement to which the Borrower is party or by which it is bound which results in the holder(s) of indebtedness having the right, whether or not exercised, to accelerate the maturity thereof in an aggregate amount of at least two hundred fifty thousand dollars ($250,000); (e) the Borrower or any Third Party: (i) shall generally not, or be unable to, or shall admit in writing its inability to, pay its debts as its debts become due; (ii) shall make an assignment for the benefit of creditors, or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for its or a substantial part of its assets; (iii) shall commence any proceeding under any law relating to bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation; (iv) shall have had any such petition filed, or any such proceeding shall have been commenced against it, in which an adjudication is made or order for relief is entered or which remains undismissed for a period of 30 days; (v) shall have had a receiver, custodian or trustee appointed for all or a substantial part of its property; or (vi) takes any action effectuating, approving or consenting to any of the events described in clauses (i) through (v); (f) the Borrower or any Third Party shall be determined or adjudged incompetent or otherwise incapacitated by a court of competent jurisdiction, die, dissolve or for any reason cease to be in existence or shall merge or consolidate; (g) (i) the Borrower is involved in a proceeding which may result in a forfeiture of all or a substantial part of the Borrower’s assets or (ii) a judgment is entered against the Borrower for the payment of in an aggregate amount of at least one hundred thousand dollars ($100,000); 5 (h) Borrower; there is, in the opinion of the Bank, a material adverse change in the business, prospects or financial condition of the (i) any Facility Document granting a security interest at any time and for any reason shall cease to create a valid and perfected first priority security interest in and to the property purported to be subject to the Facility Document or ceases to be in full force and effect or is declared null and void, or the validity or enforceability of any Facility Document is contested by any party to the Facility Document, or such signatory to the Facility Document denies it has any further liability or obligation under the Facility Document; (j) without the prior written consent of the Bank, the Borrower incurs or permits to exist (i) any debt for borrowed money (and any refinancing of such debt), other than debt for borrowed money hereunder or debt for borrowed money listed on the September 30, 2006 form 10Q filed with SEC by the Borrower or (ii) any lien or other encumbrance upon or with respect to any of the Borrower’s real or personal property securing (A) any of the Borrower’s obligations under swap, hedge or similar agreements or (B) any guaranty or other contingent liability of the Borrower; (k) without the prior written consent of the Bank, the Borrower guarantees or otherwise becomes contingently liable for the indebtedness for borrowed money of any entity; (l) the Borrower fails to furnish o the Bank (i) within ten (10) days of filing of the same with the SEC, a copy of each from 10K, form 10Q and form 8K filed with the SEC by the Borrower and (ii) within ten (10) days after filing of the same is required (after giving effect to any applicable extensions), a signed copy of the Borrower’s federal tax return; (m) the Borrower fails to furnish any additional financial information that the Bank may reasonably request from time to time promptly upon the Bank’s request; THEN, the Bank may, by notice to the Borrower, declare the Commitment terminated and the unpaid principal amount of this Note, accrued interest thereon and all other amounts payable under this Note due and payable whereupon the same shall become and be forthwith due and payable without presentment, demand, protest, notice of acceleration or intention to accelerate or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided that in the case of an event of default described in clause (e) above, the Commitment shall be immediately terminated and the unpaid principal amount of this Note, accrued interest and other amounts payable under this Note shall be immediately due and payable; and provided further that in the case of an Event of Default described in clause (f) above due to the death of the Borrower or any Third Party, the Bank shall not make any additional Loans for a period of 60 days and the Bank shall be suspended during such 60-day period. 8. Expenses. The Borrower agrees to reimburse the Bank on demand for all reasonable costs, expenses and charges (including, without limitation, fees and charges of counsel and costs allocated by internal legal counsel) in connection with the preparation or modification of the Facility Documents, performance or enforcement of the Facility Documents, or the defense or prosecution of any rights of the Bank pursuant to any Facility Documents. 9. Jurisdiction. To the maximum extent not prohibited by applicable law, the Borrower hereby irrevocably: (i) submits to the jurisdiction of any New York state or United States federal court sitting in New York City over any action or proceeding arising out of this Note; (ii) agrees that all claims in respect of such action or proceeding may be held and determined in such New York state or federal court; (iii) agrees that any action or proceeding brought against the Bank may be brought only in a New York state or United States federal court sitting in New York county; (iv) consents to the service of process in any such action or proceeding in either of said courts by mailing thereof by the Bank by registered or certified mail, postage prepaid, to the Borrower at its address specified on the signature page hereof, or at the Borrower’s most recent mailing address as set forth in the records of the Bank; and (v) waives any defense on the basis of an inconvenient forum. The Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit or proceeding in such state and hereby waives any defense on the basis of an inconvenient forum. Nothing herein shall affect the right of the Bank to serve legal process in any other manner permitted by law or affect the right of the Bank to bring any action or proceeding against the Borrower or its property in the courts of any other jurisdiction. 10. Waiver of Jury Trial. THE BORROWER AND THE BANK EACH WAIVE ANY RIGHT TO JURY TRIAL. 6 11. Miscellaneous. (a) The provisions of this Note are intended to be severable. If for any reason any provisions of this Note shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions thereof in any jurisdiction. (b) No amendment, modification, supplement or waiver of any provision of this Note nor consent to departure by the Borrower therefrom shall be effective unless the same shall be in writing and signed by the Borrower and the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (c) No failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof or preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. (d) As used herein, the term Borrower shall include all signatories hereto, if more than one. In such event, the obligations, representations and warranties of the Borrower hereunder shall be joint and several. This Note shall be binding on the Borrower and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns, except that the Borrower may not delegate any of its obligations hereunder without the prior written consent of the Bank. With the consent of the Borrower, not to be unreasonably withheld, the Bank may assign all or a portion of its rights and obligations under this Note; provided that such consent shall not be required (i) at any time that an Event of Default has occurred and is continuing, (ii) in connection with any assignment to an affiliate of the Bank, or (iii) in connection with any pledge or collateral assignment to secure obligations to a Federal Reserve Bank. (e) Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt thereof would be contrary to provisions of law applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. (f) Unless otherwise agreed in writing, notices shall be given to the Bank and the Borrower at their telecopier numbers (confirmed by telephone to their telephone numbers) or addresses set forth in the signature page of this Note, or such other telecopier (and telephone) number or address communicated in writing by either such party to the other. Notices to the Bank shall be effective upon receipt. (g) The obligations of the Borrower under Sections 3, 5, 8, 9 and 10 hereof shall survive the repayment of the Loans. (h) Each reference herein to the Bank shall be deemed to include its successors, endorsees, and assigns, in whose favor the provisions hereof shall inure. Each reference herein to the Borrower shall be deemed to include the heirs, executors, administrators, legal representatives, successors and assigns of the Borrower, all of whom shall be bound by the provisions hereof. (i) instrument. This Note may be signed in any number of counterparts, all of which taken together shall constitute one and the same 12. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of laws principles, and with the laws of the United States of America as applicable. The rest of this page is intentionally blank. 7 Address for Borrowing Notices: JPMorgan Chase Bank, N.A. Attn: Juan Espitia 1111 Fannin Street 14 th Floor Houston, Texas 77002 Telecopier: (800) 576-3217 Telephone: (713) 750-3217 With a courtesy copy to JPMorgan Chase Bank, N.A. Attn: Nancy A. Sheppard 560 Mission Street, 12th floor San Francisco, CA 94105 Telecopier: 415 315 8272 Telephone: 415 315 8285 Address for All Notices to the Bank Other than Borrowing Notices: JPMorgan Chase Bank, N.A. Private Bank Credit Attn: Patricia DeLeo 345 Park Avenue, Floor 04 New York, NY 10154-0004 Telecopier: (212 464-2531 Telephone: (212) 464-1883 With a courtesy copy to JPMorgan Chase Bank, N.A. Attn: Nancy A. Sheppard 560 Mission Street, 12th floor San Francisco, CA 94105 Telecopier: 415 315 8272 Telephone: 415 315 8285 Avistar Communications Corporation By: /s/ Robert J. Habig Name: Robert J. Habig Title: Chief Financial Officer By: /s/ William L. Campbell Name: William L. Campbell Title: Chief Operating Officer 8 Address for Notices to the Borrower: Attn: Robert Habig 555 Twin Dolphin Drive 3 rd Floor Redwood Shores, CA 94065 Telecopier: (650) 610-2505 Telephone: (650) 610-2910 State of _________ County of ________ ) ) ss.: ) On the ____ day of December in the year 2006, before me, the undersigned, personally appeared _____________________________ , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ____________________________________ Notary Public State of _________ County of ________ ) ) ss.: ) On the ____ day of December in the year 2006, before me, the undersigned, personally appeared _____________________________ , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ____________________________________ Notary Public 9 Exhibit A FORM OF BORROWING NOTICE Date: __________________ JPMorgan Chase Bank, N.A. Attn: Juan Espitia 1111 Fannin Street 14 th Floor Houston, Texas 77002 Telecopier: (800) 576-3217 Telephone: (713) 750-3217 Gentlemen: The undersigned hereby requests a Loan (the “Requested Loan”) under the Revolving Credit Promissory Note (Libor/Prime) dated as of December 23, 2006 by the undersigned to your order with a maximum principal amount of $10,000,000 (the “Note”). Initial capitalized terms used herein without definition have the meanings given such terms in the Note. The undersigned is faxing this Borrowing Notice to you (i) if the Requested Loan is a Prime Loan, by 12:00 noon (NYC time) on the “Disbursement Date” (as specified below) and (ii) if the Requested Loan is a Money Market Loan, by 12:00 noon (NYC time) at least one Banking Day prior to the Disbursement Date. The undersigned will promptly mail the signed original of this Borrowing Notice to you. Please book the Requested Loan as follows: Disbursement Date: Amount: Type: LIBOR Period (if applicable): Disbursement Instructions*: _________________ ___, 20___ $ ____ LIBOR ____ 1 month ____ Prime ____ 2 months ____ 3 months ____ 6 months Purpose: The proceeds of the Requested Loan shall be used for working capital purposes. A-1 Immediately upon funding of the Requested Loan, the aggregate principal amount of all Loans then outstanding will be $__________________. * In witness whereof, the undersigned has executed this Borrowing Notice as of the date first written above. Avistar Communications Corporation By: Name: Title: By: Name: Title: [Agreed as of date first written above: Gerald J. Burnett] * cc: JPMorgan Chase Bank, N.A. Attn: Nancy A. Sheppard 560 Mission Street, 12th floor San Francisco, CA 94105 Telecopier: (415) 315-8272 Telephone: (415) 315-8285 * If $8,000,000 or greater, the signature of Gerald J. Burnett will be required. A-2 Exhibit B DISCLOSURE SCHEDULE B-1 EXHIBIT 10.15 COLLATERAL AGREEMENT For value received, and in consideration of one or more loans, letters of credit or other financial accommodations extended by JPMORGAN CHASE BANK, N.A. or any of its subsidiaries or affiliates (the “Bank”), to Avistar Communications Corporation, a Delaware corporation (the “Obligor”, and, if more than one, collectively, the “Obligor”), the undersigned and the Bank agree as follows: 1. Definitions. “Account Assets” means all Deposits, Securities, securities entitlements and any other assets held in trust, or in any custody, subcustody, safekeeping, investment management accounts, or other accounts of the undersigned with the Bank or any other custodian, trustee, Intermediary or Clearing System (all of which shall be considered “financial assets” under the UCC). “Account Control Agreement” means a securities account control agreement or other similar agreement with any Intermediary and shall specifically include any master securities account control agreement among the Bank and any of its affiliates, as amended from time to time. “Clearing System” means the Depository Trust Company (“DTC”), Cedel Bank, societe anonyme, the Euroclear system and such other clearing or safekeeping system that may from time to time be used in connection with transactions relating to or the custody of any Securities, and any depository for any of the foregoing. “Collateral” means: (i) the Deposits, Securities and Account Assets that are listed on Exhibit A; (ii) all additions to, and proceeds, renewals, investments, reinvestments and substitutions of, the foregoing, whether or not listed on Exhibit A; and (iii) all certificates, receipts and other instruments evidencing any of the foregoing. “Deposits” means the deposits of the undersigned with the Bank or with any other Intermediary (whether or not held in trust, or in any custody, subcustody, safekeeping, investment management accounts, or other accounts of the undersigned with the Bank or any other Intermediary). “Intermediary” means (i) any party acting as a financial intermediary or securities intermediary, including, without limitation, affiliates of the Bank that are parties to any Account Control Agreement from time to time. “Liabilities” means indebtedness, obligations and liabilities of any kind of the Obligor or of the undersigned to the Bank, now or in the future, absolute or contingent, direct or indirect, joint or several, due or not due, arising by operation of law or otherwise, and costs and expenses incurred by the Bank in connection with the Collateral, this Agreement or any Liability Document. “Liability Document” means any instrument, agreement or document evidencing, governing, or executed or delivered in connection with the Liabilities. “Securities” means the stocks, bonds and other instruments and securities, whether or not held in trust or in any custody, subcustody, safekeeping, investment management accounts or other accounts of the undersigned with the Bank or any other Intermediary and securities entitlements with respect to the foregoing. “UCC” means the Uniform Commercial Code in effect in the State of New York. Unless the context otherwise requires, all terms used in this Agreement which are defined in the UCC will have the meanings stated in the UCC. 2. Grant of Security Interest. As security for the payment of all the Liabilities, the undersigned pledges, transfers and assigns to the Bank and grants to the Bank a security interest in and right of setoff against, the Collateral and hereby agrees to be bound by the terms of any Account Control Agreement among the Bank and its affiliates, as amended from time to time. 3. Agreements of the Undersigned and Rights of the Bank. The undersigned agrees as follows and irrevocably authorizes the Bank to exercise the rights listed below, at its option, for its own benefit, either in its own name or in the name of the undersigned, and appoints the Bank as its attorney-in-fact to take all action permitted under this Agreement. (a) Deposits: The Bank may: (i) renew the Deposits on terms and for periods the Bank deems appropriate; (ii) demand, collect, and receive payment of any monies or proceeds due or to become due under the Deposits; (iii) execute any instruments required for the withdrawal or repayment of the Deposits; and (iv) in all respects deal with the Deposits as the owner; provided that, as to (ii) through (iv), until the occurrence of a Default (as defined below), the Bank will only take that action if, in its judgment, failure to take that action would impair its rights under this Agreement or diminish its operational control over Collateral. (b) Securities: The Bank may: (i) transfer to the account of the Bank any Securities whether in the possession of, or registered in the name of, any Clearing System or held otherwise; (ii) transfer to the account of the Bank with any Federal Reserve Bank any Securities held in book entry form with any such Federal Reserve Bank; and (iii) transfer to the name of the Bank or its nominee any Securities registered in the name of the undersigned and held by the Bank and complete and deliver any necessary stock powers or other transfer instruments; provided that until the occurrence of a Default, the Bank will only take that action if, in its judgment, failure to take that action would impair its rights under this Agreement or diminish its operational control over Collateral, or if such Securities are held in a custody, investment management or similar account. 2 The undersigned grants to the Bank an irrevocable proxy to vote any and all Securities and give consents, waivers and ratifications in connection with those Securities upon and after the occurrence of a Default. All payments, distributions and dividends in securities, property or cash shall be paid directly to and, at the discretion of the Bank, retained by the Bank and held by it, until applied as provided in this Agreement, as additional Collateral; provided that until the occurrence of a Default, interest on Deposits and cash dividends on Securities paid in the ordinary course will be paid to the undersigned. (c) General : The Bank may, in its name, or in the name of the undersigned: (i) execute and file financing statements under the UCC or any other filings or notices necessary or desirable to create, perfect or preserve its security interest, all without notice (except as required by applicable law and not waivable) and without liability except to account for property actually received by it; (ii) demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any item of the Collateral (but shall be under no obligation to do so); (iii) make any notification (to the issuer of any certificate or Security, or otherwise, including giving any notice of exclusive control to the Intermediary) or take any other action in connection with the perfection or preservation of its security interest or any enforcement of remedies, and retain any documents evidencing the title of the undersigned to any item of the Collateral; and (iv) issue entitlement orders with respect to any of the Collateral. The undersigned agrees that it will not file or permit to be filed any termination statement with respect to the Collateral or any financing or like statement with respect to the Collateral in which the Bank is not named as the sole secured party, consent or be a party to any Account Control Agreement to which the Bank is not also a party or sell, assign, or otherwise dispose of, grant any option with respect to, or pledge, or otherwise encumber the Collateral. At the request of the Bank the undersigned agrees to do all other things which the Bank may deem necessary or advisable in order to perfect and preserve its security interest, perfection and operational control and to give effect to the rights granted to the Bank under this Agreement or enable the Bank to comply with any applicable laws or regulations. Notwithstanding the foregoing, the Bank does not assume any duty with respect to the Collateral and is not required to take any action to collect, preserve or protect its or the undersigned’s rights in any item of the Collateral. The undersigned releases the Bank and agrees to hold the Bank harmless from any claims, causes of action and demands at any time arising with respect to this Agreement, the use or disposition of any item of the Collateral or any action taken or omitted to be taken by the Bank with respect thereto. The undersigned releases each Intermediary and agrees to hold each Intermediary harmless from any claims, causes of action and demands at any time arising with respect to any instruction made by Bank to any Intermediary purporting to be made under this Agreement or any Account Control Agreement, it being understood that no Intermediary shall have any duty to investigate Bank’s right to issue any such instruction or any other matter related to any such instruction. The rights granted to the Bank pursuant to this Agreement are in addition to the rights granted to the Bank in any custody, investment management, trust, Account Control Agreement or 3 similar agreement. In case of conflict between the provisions of this Agreement and of any other such agreement, the provisions of this Agreement will prevail. 4. Loan Value of the Collateral. The undersigned agrees that at all times the Liabilities may not exceed the aggregate Loan Value of the Collateral. The undersigned will, at the Bank’s option, either supplement the Collateral or make, or cause to be made, any payment under the Liabilities to the extent necessary to ensure compliance with this provision or the Bank may liquidate Collateral to the extent necessary to ensure compliance with this provision. “Loan Value” means the value assigned by the Bank from time to time, in its sole reasonable discretion, to each item of the Collateral. The Bank retains the right to determine the eligibility of the Collateral. 5. Currency Conversion. For calculation purposes, any currency in which the Collateral is denominated (the “Collateral Currency”) will be converted into the currency of the Liabilities (the “Liability Currency”) at the spot rate of exchange for the purchase of the Liability Currency with the Collateral Currency quoted by the Bank at such place as the Bank deems appropriate (or, if no such rate is quoted on any relevant date, estimated by the Bank on the basis of the Bank’s last quoted spot rate) or another prevailing rate that the Bank deems more appropriate. 6. Representations and Warranties. The undersigned represents and warrants that: (a) this Agreement constitutes the legal, valid and binding obligation of the undersigned, enforceable against the undersigned in accordance with its terms, except as the enforcement hereof and thereof may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors’ rights generally and subject to the applicability of general principles of equity; (b) the execution, delivery and performance by the undersigned of this Agreement and all other documents contemplated hereby, do not and will not (i) conflict with or constitute a breach of, or default under, or require any consent under, or, except as contemplated hereby, result in the creation of any lien, charge or encumbrance upon the property or assets of the undersigned pursuant to any other agreement or instrument to which the undersigned is a party or is bound or by which its properties may be bound or affected; or (ii) violate any provision of any law, rule, regulation (including, without limitation, Regulation U of the Federal Reserve Board), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the undersigned; (c) no consent, approval or authorization of, or registration, declaration or filing with, any governmental authority or other person or entity is required as a condition to or in connection with the due and valid execution, delivery and performance by the undersigned of this Agreement; 4 (d) there are no actions, suits, investigations or proceedings pending or threatened at law, in equity, in arbitration or by or before any other authority involving or affecting: (i) the undersigned that, if adversely determined, are likely to have a material adverse effect on the prospects or condition of the undersigned; (ii) any material part of the assets or properties of the undersigned or any part of the Collateral; or (iii) any of the transactions contemplated in this Agreement. There are currently no material judgments entered against the undersigned and the undersigned is not in default with respect to any judgment, writ, injunction, order, decree or consent of any court or other judicial authority, which default is likely to have or has had a material adverse effect on the prospects or condition of the undersigned; (e) in the event the undersigned is not an Obligor, in executing and delivering this Agreement the undersigned has (i) without reliance on the Bank or any information received from the Bank and based upon such documents and information it deems appropriate, made an independent investigation of the transactions contemplated hereby and the Obligor, the Obligor’s business, assets, operations, prospects and condition, financial or otherwise, and any circumstances which may bear upon such transactions, the Obligor or the obligations and risks undertaken herein with respect to the Liabilities; (ii) adequate means to obtain from the Obligor on a continuing basis information concerning the Obligor and the Bank has no duty to provide to the undersigned any such information; (iii) full and complete access to the Liability Documents and any other documents executed in connection with the Liability Documents; (iv) not relied and will not rely upon any representations or warranties of the Bank not embodied herein or any acts heretofore or hereafter taken by the Bank (including but not limited to any review by the Bank of the affairs of the Obligor), and (v) determined that this Agreement will benefit the undersigned directly or indirectly ; (f) in the event that the undersigned is a partnership, limited liability partnership, corporation or limited liability company, the undersigned also represents and warrants that it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, and has all requisite power and authority to execute, deliver and perform its obligations under this Agreement; (g) in the event that the undersigned is a trust, the undersigned also represents and warrants that (i) it is a duly constituted and validly existing trust, (ii) the undersigned has delivered to the Bank a true, complete and accurate copy of the agreement pursuant to which it has been organized and all amendments and modifications thereto, and (iii) the trustees of the undersigned signing this Agreement have the legal capacity and full power and authority to execute, deliver, and perform their obligations under, and to bind the undersigned to perform its obligations under, this Agreement, and to execute and deliver any and all documents and instruments in connection therewith; (h) the undersigned is the sole owner of the Collateral and the Collateral is free of all encumbrances except for the security interest in favor of the Bank created by this Agreement; (i) as to Deposits and Account Assets, the undersigned has not withdrawn, canceled, been repaid or redeemed all or any part of any Deposits or Account Assets other than in compliance with this Agreement and there is no such pending application; and 5 (j) as to Securities, the Securities have been duly authorized and are fully paid and non-assessable, there are no restrictions on pledge of the Securities by the undersigned nor on sale of the Securities by the Bank (whether pursuant to securities laws or regulations or shareholder, lock-up or other similar agreements) and the Securities are fully marketable by the Bank as pledgee, without regard to any holding period, manner of sale, volume limitation, public information or notice requirements. 7. Default. Each of the following is an event of default (“Default”): (i) any sum payable on any of the Liabilities is not paid when due; (ii) any representation and warranty of the undersigned or any party liable on or for any of the Liabilities (including but not limited to the Obligor, a “Liability Party”) in this Agreement or in any Liability Document shall prove to have been incorrect in any material respect on or after the date hereof; (iii) the undersigned or any Liability Party fails to perform or observe any term, covenant, or condition under this Agreement or under any Liability Document; (iv) any indebtedness of the undersigned or any Liability Party or interest or premium thereon is not paid when due (whether by scheduled maturity, acceleration, demand or otherwise); (v) the undersigned or any Liability Party: (a) is generally not, or is unable to, or admits in writing its inability to, pay its debts as its debts become due; (b) makes an assignment for the benefit of creditors, or petitions or applies to any tribunal for the appointment of a custodian, receiver or trustee for its or a substantial part of its assets; (c) commences any proceeding under any law relating to bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation; (d) has any such petition filed, or any such proceeding has been commenced against it, in which an adjudication is made or order for relief is entered or which remains undismissed for a period of 30 days; (e) has a receiver, custodian or trustee appointed for all or a substantial part of its property; or (f) takes any action effectuating, approving or consenting to any of the events described in this section (v); (vi) the undersigned or any Liability Party shall die, dissolve or for any reason cease to be in existence or merge or consolidate; or if the undersigned or any Liability Party is a partnership, limited liability partnership or limited liability company, any general partner, partner or member, respectively, shall die, dissolve or for any reason cease to be in existence or cease to be a partner or member, as the case may be, or shall merge or consolidate; (vii) the undersigned or any Liability Party is involved in a proceeding relating to, or which may result in, a forfeiture of all or a substantial part of the undersigned’s or any Liability Party’s assets or a material judgment is entered against the undersigned or any Liability Party; (viii) there is, in the opinion of the Bank, a material adverse change in the business, prospects or financial condition of the undersigned or any Liability Party. 8. Remedies. On a Default, the Bank will have the rights and remedies under the UCC and the other rights granted to the Bank under this Agreement and may exercise its rights without regard to any premium or penalty from liquidation of any Collateral and without regard to the undersigned’s basis or holding period for any Collateral. 6 The Bank may sell in the Borough of Manhattan, New York City, or elsewhere, in one or more sales or parcels, at the price as the Bank deems best, for cash or on credit or for other property, for immediate or future delivery, any item of the Collateral, at any broker’s board or at public or private sale, in any reasonable manner permissible under the UCC (except that, to the extent permissible under the UCC, the undersigned waives any requirements of the UCC) and the Bank or anyone else may be the purchaser of the Collateral and hold it free from any claim or right including, without limitation, any equity of redemption of the undersigned, which right the undersigned expressly waives. The Bank may also, in its sole discretion: (i) convert any part of the Collateral Currency into the Liability Currency; (ii) hold any monies or proceeds representing the Collateral in a cash collateral account in the Liability Currency or other currency that the Bank reasonably selects; (iii) invest such monies or proceeds on behalf of the undersigned; and (iv) apply any portion of the Collateral, first, to all costs and expenses of the Bank, second, to the payment of interest on the Liabilities and any fees or commissions to which the Bank may be entitled, third, to the payment of principal of the Liabilities, whether or not then due, and fourth, to the undersigned. The undersigned will pay to the Bank all expenses (including attorneys’ fees and legal expenses incurred by the Bank and the allocated costs of its in-house counsel) in connection with the exercise of any of the Bank’s rights or obligations under this Agreement or the Liability Documents. The undersigned will take any action requested by the Bank to allow it to sell or dispose of the Collateral. Notwithstanding that the Bank may continue to hold Collateral and regardless of the value of the Collateral, the applicable Liability Party will remain liable for the payment in full of any unpaid balance of the Liabilities. 9. Jurisdiction. To the maximum extent not prohibited by applicable law, the undersigned hereby irrevocably: (i) submits to the jurisdiction of any New York state or United States federal court sitting in New York City over any action or proceeding arising out of this Agreement;(ii) agrees that all claims in respect of such action or proceeding may be held and determined in such New York state or federal court; (iii) agrees that any action or proceeding brought against the Bank may be brought only in a New York state or United States federal court sitting in New York county; (iv) consents to the service of process in any such action or proceeding in either of said courts by mailing thereof by the Bank by registered or certified mail, postage prepaid, to the undersigned at its address specified on the signature page hereof, or at the undersigned’s most recent mailing address as set forth in the records of the Bank; and (v) waives any defense on the basis of inconvenient forum. The undersigned agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit or proceeding in such state. Nothing herein shall affect the right of the Bank to serve legal process in any other manner permitted by law or affect the right of the Bank to bring any action or proceeding against the undersigned or its property in the courts of any other jurisdiction. 7 10. Waiver of Jury Trial. THE UNDERSIGNED AND THE BANK EACH WAIVE ANY RIGHT TO JURY TRIAL. 11. Notices. Unless otherwise agreed in writing, notices may be given to the Bank and the undersigned at their telecopier numbers (confirmed by telephone to their telephone numbers) or addresses listed on the signature page of this Agreement, or such other telecopier (and telephone) number or addresses communicated in writing by either party to the other. Notices to the Bank are effective on receipt. 12. Unconditional Obligations. If the undersigned is not an Obligor, the undersigned’s obligations under this Agreement are absolute and unconditional irrespective of: (a) any change in the amount, time, manner or place of payment of, or in any other term of, all or any of the Liability Documents or the Liabilities, or any other amendment or waiver of or any consent to departure from any of the terms of any Liability Document or the Liabilities; (b) any release or amendment or waiver of, or consent to departure from, any other guaranty or support document, or any exchange, release or non-perfection of any item of the Collateral, for all or any of the Liability Documents or the Liabilities; (c) any present or future law, regulation or order of any jurisdiction (whether of right or in fact) or of any agency thereof purporting to reduce, amend, restructure or otherwise affect any term of any Liability Document or the Liabilities; (d) without being limited by the foregoing, any lack of validity or enforceability of any Liability Document or the Liabilities; and (e) any other defense, setoff or counterclaim whatsoever (in any case, whether based on contract, tort or any other theory) with respect to the Liability Documents or the transactions contemplated thereby which might constitute a legal or equitable defense available to, or discharge of, the Obligor or a guarantor. 13. Miscellaneous. (a) As used herein, the term undersigned shall include all signatories hereto, if more than one. In such event, the obligations, representations and warranties of the undersigned hereunder shall be joint and several. This Agreement shall be binding on the undersigned and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns, except that the undersigned may not delegate any of its obligations hereunder without the prior written consent of the Bank. (b) No amendment or waiver of any provision of this Agreement nor consent to any departure by the undersigned will be effective unless it is in writing and signed by the undersigned and the Bank and will be effective only in that specific instance and for that specific purpose. No failure on the part of the Bank to exercise, and no delay in exercising, any right will operate as a waiver or preclude any other or further exercise or the exercise of any other right. 8 (c) The rights and remedies in this Agreement are cumulative and not exclusive of any rights and remedies which the Bank may have under law or under other agreements or arrangements with the undersigned or any Liability Party. (d) The provisions of this Agreement are intended to be severable. If for any reason any provision of this Agreement is not valid or enforceable in whole or in part in any jurisdiction, that provision will, as to that jurisdiction, be ineffective to the extent of that invalidity or unenforceability without in any manner affecting the validity or enforceability in any other jurisdiction or the remaining provisions of this Agreement. (e) The undersigned hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing the Liabilities or the Collateral and any other notices and demands, whether or not relating to those instruments. (f) This Agreement is governed by and construed according to the law of the State of New York, without regard to the conflict of laws principles, and with the laws of the United States of America as applicable. (g) This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. The rest of this page is intentionally blank. 9 IN WITNESS WHEREOF, the undersigned has signed this Agreement as of this 23rd day of December, 2006 ACCEPTED: JPMorgan Chase Bank, N.A. By: J.P. Morgan Trust Company, N.A. By: /s/ Nancy A. Sheppard Name: Nancy A. Sheppard Title: Managing Director Address for notices to the Bank: JPMorgan Chase Bank, N.A. Private Bank Credit Attn: Patricia DeLeo 345 Park Avenue, Floor 04 New York, NY 10154-0004 Telecopier: Telephone: With a courtesy copy to JPMorgan Chase Bank, N.A. Attn: Nancy A. Sheppard 560 Mission Street, 12th floor San Francisco, CA 94105 Telecopier: Telephone: /s/ Gerald J. Burnett Gerald J. Burnett 10 Address for notices: Gerald J. Burnett and Marjorie J. Burnett, as Trustee for The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust By: /s/ Gerald J. Burnett, trustee Gerald J. Burnett By: /s/ Marjorie J. Burnett Marjorie J. Burnett Address for notices: State of County of ) ) ss.: ) On the ____ day of December in the year 2006, before me, the undersigned, personally appeared Gerald J. Burnett , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. Notary Public State of County of ) ) ss.: ) On the ____ day of December in the year 2006, before me, the undersigned, personally appeared Marjorie J. Burnett , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. Notary Public 11 EXHIBIT A DESCRIPTION OF THE COLLATERAL 1. Deposits Type of Deposit (CD, TD,etc.) Location (NY, IBF-NY, etc.) Account, Contract or Certificate No. 2. Stocks, Bonds and Other Instruments and Securities Nature of Security or Obligation Number of Issuer Name of Units Certificate Number (if applicable) 3. All Assets Held or To Be Held in the Following Custody or Subcustody Accounts, Safekeeping Accounts, Investment Management Accounts and/or other account with Intermediary: Account Number: A-1 EXHIBIT 10.16 SECURITY AGREEMENT For value received, and in consideration of one or more loans, letters of credit or other financial accommodations extended by JPMorgan Chase Bank, N.A. or any of its subsidiaries or affiliates (the “Bank”), to Avistar Communications Corporation , a Delaware corporation (the “Grantor”), the Grantor and the Bank agree as follows: 1. Definitions. “Collateral” means all personal property of the Grantor whether presently existing or hereafter created or acquired, and wherever located, including but not limited to: (i) accounts (including health-care-insurance receivables), chattel paper, deposit accounts, documents (including negotiable documents), equipment, general intangibles, goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Grantor’s books and records with respect to any of the foregoing, and the computers and equipment containing said books and records; (ii) all claims, demands, causes and choses in action in respect of any of the foregoing and all all accessions and additions thereto; and (iii) any and all cash and noncash proceeds and products of any of the foregoing, including without limitation, any and all proceeds of any insurance, indemnity, instruments, warranty or guaranty payable to such Grantor from time to time with respect to the Collateral and any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. “Default” shall mean each “Event of Default” (as defined in the Note). “Liabilities” means indebtedness, obligations and liabilities of any kind of the Grantor to the Bank, now or in the future, absolute or contingent, direct or indirect, joint or several, due or not due, arising by operation of law or otherwise, and costs and expenses incurred by the Bank in connection with the Collateral, this Agreement or any Liability Document. “Liability Document” means any instrument, agreement or document evidencing or delivered in connection with the Liabilities (including, without limitation, the Note), as amended from time to time . “Loan” shall have the meaning given such term in the Note. “Note” means the Revolving Promissory Note (Libor/Prime) dated as of December 23, 2006 by the Grantor in favor of the Bank in the maximum principal amount of $10,000,000, as amended from time to time. “UCC” means the Uniform Commercial Code in effect in the State of New York. Unless the context otherwise requires, all terms used in this Agreement which are defined in the UCC will have the meanings stated in the UCC. 2. Grant of Security Interest. As security for the payment of all the Liabilities, the Grantor pledges, transfers and assigns to the Bank and grants to the Bank a security interest in and right of setoff against, the Collateral. 3. Agreements, Representations and Warranties of the Grantor and Rights of the Bank. (a) The Grantor represents and warrants that: the Grantor is the sole owner of the Collateral and the Collateral is free of all encumbrances except for the security interest in favor of the Bank created by this Agreement (b) The Grantor irrevocably authorizes the Bank to exercise the rights granted to the Bank herein, at its option, for its own benefit, either in its own name or in the name of the Grantor, and appoints the Bank as its attorney-in-fact to take all action permitted under this Agreement. (c) Without the prior written consent of the Bank, the Grantor agrees not to sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, any Collateral (other than sales of inventory and any grants of non-exclusive licenses or similar arrangements for the use of property of the Borrower, in each case in the ordinary course of business and consistent with past practice), nor will the Grantor create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, encumbrance, option or any other charge with respect to any of the Collateral, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Agreement or as otherwise provided in any other Liability Document. (d) The Grantor will not change jurisdiction of its incorporation or organization (by migratory merger or otherwise) except upon 30 days’ prior written notice to the Bank. (e) The Bank may, in its name, or in the name of the Grantor: (i) execute and file financing statements under the UCC or any other filings or notices necessary or desirable to create, perfect or preserve its security interest, all without notice (except as required by applicable law and not waivable) and without liability except to account for property actually received by it; (ii) demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any item of the Collateral (but shall be under no obligation to do so); (iii) make any notification (to the issuer of any certificate or security, or otherwise, or take any other action in connection with the perfection or preservation of its security interest or any enforcement of remedies, and retain any documents evidencing the title of the Grantor to any item of the Collateral; and (iv) issue entitlement orders with respect to any of the Collateral. The Grantor agrees that it will not file or permit to be filed any termination statement with respect to the Collateral or any financing or like statement with respect to the Collateral in which the Bank is not named as the sole secured party or otherwise dispose of, grant any option with respect to, or pledge, or otherwise encumber the Collateral. At the request of the Bank the Grantor agrees to do all other things which the Bank may deem necessary or advisable in order to perfect and preserve its security interest, perfection and operational control and to give effect to the rights granted to the Bank under this Agreement or enable the Bank to comply with any applicable laws or regulations. Notwithstanding the foregoing, the Bank does not assume any duty with respect to the Collateral and is not required to take any action to collect, preserve or protect its or the Grantor’s rights in any item of the Collateral. The Grantor releases the Bank and agrees to hold the Bank harmless from any claims, causes of action and demands at any time arising with respect to this Agreement, the use or disposition of any item of the Collateral or any action taken or omitted to be taken by the Bank with respect thereto. 4. Currency Conversion. For calculation purposes, any currency in which the Collateral is denominated (the “Collateral Currency”) will be converted into the currency of the Liabilities (the “Liability Currency”) at the spot rate of exchange for the purchase of the Liability Currency with the Collateral Currency quoted by the Bank at such place as the Bank deems appropriate (or, if no such rate is quoted on any relevant date, estimated by the Bank on the basis of the Bank’s last quoted spot rate) or another prevailing rate that the Bank deems more appropriate. 5. Remedies. On a Default, the Bank will have the rights and remedies under the UCC and the other rights granted to the Bank under this Agreement and may exercise its rights without regard to any premium or penalty from liquidation of any Collateral and without regard to the Grantor’s basis or holding period for any Collateral. The Bank may sell in the Borough of Manhattan, New York City, or elsewhere, in one or more sales or parcels, at the price as the Bank deems best, for cash or on credit or for other property, for immediate or future delivery, any item of the Collateral, at any broker’s board or at public or private sale, in any reasonable manner permissible under the UCC (except that, to the extent permissible under the UCC, the Grantor waives any requirements of the UCC) and the Bank or anyone else may be the purchaser of the Collateral and hold it free from any claim or right including, without limitation, any equity of redemption of the Grantor, which right the Grantor expressly waives. 2 The Bank may also, in its sole discretion: (i) convert any part of the Collateral Currency into the Liability Currency; (ii) hold any monies or proceeds representing the Collateral in a cash collateral account in the Liability Currency or other currency that the Bank reasonably selects; (iii) invest such monies or proceeds on behalf of the Grantor; and (iv) apply any portion of the Collateral, first, to all costs and expenses of the Bank, second, to the payment of interest on the Liabilities and any fees or commissions to which the Bank may be entitled, third, to the payment of principal of the Liabilities, whether or not then due, and fourth, to the Grantor. The Grantor will pay to the Bank all expenses (including attorneys’ fees and legal expenses incurred by the Bank and the allocated costs of its in-house counsel) in connection with the exercise of any of the Bank’s rights or obligations under this Agreement or the Liability Documents. The Grantor will take any action requested by the Bank to allow it to sell or dispose of the Collateral. Notwithstanding that the Bank may continue to hold Collateral and regardless of the value of the Collateral, the applicable Liability Party will remain liable for the payment in full of any unpaid balance of the Liabilities. 6. Jurisdiction. To the maximum extent not prohibited by applicable law, the Grantor hereby irrevocably: (i) submits to the jurisdiction of any New York state or United States federal court sitting in New York City over any action or proceeding arising out of this Agreement;(ii) agrees that all claims in respect of such action or proceeding may be held and determined in such New York state or federal court; (iii) agrees that any action or proceeding brought against the Bank may be brought only in a New York state or United States federal court sitting in New York county; (iv) consents to the service of process in any such action or proceeding in either of said courts by mailing thereof by the Bank by registered or certified mail, postage prepaid, to the Grantor at its address specified on the signature page hereof, or at the Grantor’s most recent mailing address as set forth in the records of the Bank; and (v) waives any defense on the basis of inconvenient forum. The Grantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit or proceeding in such state. Nothing herein shall affect the right of the Bank to serve legal process in any other manner permitted by law or affect the right of the Bank to bring any action or proceeding against the Grantor or its property in the courts of any other jurisdiction. 7. Waiver of Jury Trial . THE UNDERSIGNED AND THE BANK EACH WAIVE ANY RIGHT TO JURY TRIAL. 8. Notices. Unless otherwise agreed in writing, notices may be given to the Bank and the Grantor at their telecopier numbers (confirmed by telephone to their telephone numbers) or addresses listed on the signature page of this Agreement, or such other telecopier (and telephone) number or addresses communicated in writing by either party to the other. Notices to the Bank are effective on receipt. 9. Miscellaneous. (a) This Agreement shall be binding on the Grantor and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns, except that the Grantor may not delegate any of its obligations hereunder without the prior written consent of the Bank. (b) No amendment or waiver of any provision of this Agreement nor consent to any departure by the Grantor will be effective unless it is in writing and signed by the Grantor and the Bank and will be effective only in that specific instance and for that specific purpose. No failure on the part of the Bank to exercise, and no delay in exercising, any right will operate as a waiver or preclude any other or further exercise or the exercise of any other right. 3 (c) The rights and remedies in this Agreement are cumulative and not exclusive of any rights and remedies which the Bank may have under law or under other agreements or arrangements with the Grantor or any Liability Party. (d) The provisions of this Agreement are intended to be severable. If for any reason any provision of this Agreement is not valid or enforceable in whole or in part in any jurisdiction, that provision will, as to that jurisdiction, be ineffective to the extent of that invalidity or unenforceability without in any manner affecting the validity or enforceability in any other jurisdiction or the remaining provisions of this Agreement. (e) The Grantor hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing the Liabilities or the Collateral and any other notices and demands, whether or not relating to those instruments. (f) This Agreement is governed by and construed according to the law of the State of New York, without regard to the conflict of laws principles, and with the laws of the United States of America as applicable. (g) This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. The rest of this page is intentionally blank. 4 IN WITNESS WHEREOF, the Grantor has signed this Agreement as of December 22, 2006. ACCEPTED: JPMorgan Chase Bank, N.A. By: J.P. Morgan Trust Company, N.A. By: /s/ Nancy A. Sheppard Name: Nancy A. Sheppard Title: Managing Director Address for notices to the Bank: JPMorgan Chase Bank, N.A. Private Bank Credit Attn: Patricia DeLeo 345 Park Avenue, Floor 04 New York, NY 10154-0004 With a courtesy copy to JPMorgan Chase Bank, N.A. Attn: Nancy A. Sheppard 560 Mission Street, 12th floor San Francisco, CA 94105 Avistar Communications Corporation By: /s/Robert J. Habig Name: Robert J. Habig Title: Chief Financial Officer By: Name: Title: Address for Notices to the Grantor: Attn: Robert Habig 555 Twin Dolphin Drive 3 rd Floor Redwood Shores, CA 94065 Telecopier: (650) 610-2505 Telephone: (650) 610-2910 5 State of County of ) ) ss.: ) On the ____ day of December in the year 2006, before me, the Grantor, personally appeared _____________________________ , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. Notary Public State of County of ) ) ss.: ) On the ____ day of December in the year 2006, before me, the Grantor, personally appeared _____________________________ , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. Notary Public 6 EXHIBIT 10.17 GUARANTY GUARANTY dated as of December 23, 2006 made by the undersigned (individually, or if more than one, collectively, the “ Guarantor ”) in favor of JPMorgan Chase Bank, N.A., and/or any of its subsidiaries or affiliates (individually or collectively, as the context may require, the “ Bank ”). PRELIMINARY STATEMENTS : The Bank has entered, or may from time to time enter, into agreements or arrangements with Avistar Communications Corporation, a Delaware corporation (the “ Borrower ”), providing for credit extensions or financial accommodation to the Borrower of any kind whatsoever including, without limitation, the making of loans, advances or overdrafts, whether or not secured, discount or purchase of notes, securities or other instruments or property, creation of acceptances, issuance or confirmation of letters of credit, guaranties or indemnities, entering into foreign exchange or precious metals contracts or interest rate or currency swap or protection agreements, entering into any other derivative transactions under any ISDA Master Agreement or similar agreements between the Bank and the Borrower, or any other kind of lease, contract or agreement under which the Borrower may be indebted to the Bank in any manner (all of the foregoing agreements or arrangements being the “ Facilities ” and any writing or record evidencing, supporting, securing, or delivered in connection with a Facility, including but not limited to this Guaranty, and including as may subsequently be renewed, extended, amended, modified, substituted and/or replaced, being a “ Facility Document ”). THEREFORE , in order to induce the Bank to extend credit or give financial accommodation under the Facilities, the Guarantor agrees (and if more than one, jointly and severally agrees) as follows: Guaranty of Payments . For value received and in consideration of the Facilities extended by the Bank the Guarantor unconditionally and irrevocably guarantees to the Bank (a) performance and observance of every agreement and condition contained in any Facility Document to be performed or observed by the Borrower, and (b) payment of all sums now owing or which may in the future be owing by the Borrower under the Facilities, when the same are due and payable, whether on demand, at stated maturity, by acceleration or otherwise, and whether for principal, interest, fees, expenses, indemnification or otherwise (the “ Liabilities ”). The Liabilities include, without limitation, interest accruing after the commencement of a proceeding under bankruptcy, insolvency or similar laws of any jurisdiction at the rate or rates provided in the Facility Documents. This Guaranty is a guaranty of payment and performance and not of collection only. The Bank shall not be required to exhaust any right or remedy or take any action against the Borrower or any other person or entity or any collateral. The Guarantor agrees that, as between the Guarantor and the Bank, the Liabilities may be declared to be due and payable for the purposes of this Guaranty notwithstanding any stay, injunction or other prohibition which may prevent, delay or vitiate any declaration as regards the Borrower and that in the event of a declaration or attempted declaration, the Liabilities shall immediately become due and payable by the Guarantor for the purposes of this Guaranty. The Guarantor shall pay the Liabilities by the seventh (7th) day on which commercial banks are not authorized or required to close in New York City (a “Banking Day”) after the Bank’s demand for payment thereof (or if such demand is accompanied by notice from the Bank, or the Bank thereafter delivers notice, that the value of collateral securing the Liabilities is less than the amount of the Liabilities, on the second (2 nd ) Banking Day after delivery of such notice) (the “Due Date”). Upon the Bank’s making demand for payment of the Liabilities but prior to the Due Date, the Guarantor shall have the right (but not the obligation) to execute and deliver to the Bank a note sale agreement substantially in the form of Exhibit A hereto (the “Loan Sale Agreement”) together with payment of the “Note Purchase Price” (as defined therein) in immediately available funds, whereupon the obligations of the Guarantor hereunder shall terminate (but subject to reinstatement as provided below). Guaranty Absolute . The Guarantor guarantees that the Liabilities shall be performed and paid strictly in accordance with the terms of the Facilities. The liability of the Guarantor under this Guaranty is absolute and unconditional irrespective of: (a) any change in the amount, time, manner or place of payment of, or in any other term of, all or any of the Facility Documents or Liabilities, or any other amendment or waiver of or any consent to departure from any of the terms of any Facility Document or Liability; (b) any release or amendment or waiver of, or consent to departure from, any other guaranty or support document, or any exchange, release or non-perfection of any collateral, for all or any of the Facility Documents or Liabilities; (c) any present or future law, regulation or order of any jurisdiction (whether of right or in fact) or of any agency thereof purporting to reduce, amend, restructure or otherwise affect any term of any Facility Document or Liability; (d) without being limited by the foregoing, any lack of validity or enforceability of any Facility Document or Liability; and (e) any other defense, setoff or counterclaim whatsoever (in any case, whether based on contract, tort or any other theory) with respect to the Facility Documents or the transactions contemplated thereby which might constitute a legal or equitable defense available to, or discharge of, the Borrower or a guarantor. Guaranty Irrevocable . This Guaranty is a continuing guaranty of all Liabilities now or hereafter existing under the Facilities and shall remain in full force and effect until payment in full of all Liabilities and other amounts payable under this Guaranty and until the Facilities are no longer in effect or, if earlier, when the Guarantor has given the Bank written notice that this Guaranty has been revoked; provided that any notice under this Section shall not release the Guarantor from any Liability, absolute or contingent, existing prior to such notice. Such notice shall be effective only after the Bank’s actual receipt of the notice at its address set forth below, and the Bank shall have had a reasonable time to act upon such notice at each of its offices or departments responsible for the Facilities. Reinstatement . This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time (i) any payment of any of the Liabilities is rescinded or must otherwise be returned by the Bank on the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though the payment had not been made or (ii) the Loan Sale Agreement shall be held invalid or unenforceable in whole or in any part.. Subrogation . The Guarantor shall not exercise any rights against the Borrower which it may acquire by way of subrogation, by any payment made under this Guaranty or otherwise, until all the Liabilities have been paid in full and the Facilities are no longer in effect. If any amount is paid to the Guarantor on account of subrogation rights under this Guaranty at any time when all the Liabilities have not been paid in full, the amount shall be held in trust for the benefit of the Bank and shall be promptly paid to the Bank to be credited and applied to the Liabilities, whether matured or unmatured or absolute or contingent, in accordance with the terms of the Facilities. Subordination . Without limiting the Bank’s rights under any other agreement, any liabilities owed by the Borrower to the Guarantor in connection with any extension of credit or financial accommodation by the Guarantor to or for the account of the Borrower, including but not limited to interest accruing at the agreed contract rate after the commencement of a bankruptcy or similar proceeding, are hereby subordinated to the Liabilities, and such liabilities of the Borrower to the Guarantor, if the Bank so requests, shall be collected, enforced and received by the Guarantor as trustee for the Bank and shall be paid over to the Bank on account of the Liabilities but without reducing or affecting in any manner the liability of the Guarantor under the other provisions of this Guaranty. Representations and Warranties . The Guarantor represents and warrants that: (a) this Guaranty constitutes the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as the enforcement hereof and thereof may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors’ rights generally and subject to the applicability of general principles of equity; (b) the execution, delivery and performance by the Guarantor of this Guaranty and all other documents contemplated hereby or thereby, do not and will not (i) conflict with or constitute a breach of, or default under, or require any consent under, or result in the creation of any lien, charge or encumbrance upon the property or assets of the Guarantor pursuant to any other agreement or instrument (other than any pledge of or security interest granted in any collateral pursuant to any Facility Document) to which the Guarantor is a party or is bound or by which its properties may be bound or affected; or 2 (ii) violate any provision of any law, rule, regulation (including, without limitation, Regulation U of the Federal Reserve Board), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Guarantor; (c) no consent, approval or authorization of, or registration, declaration or filing with, any governmental authority or other person or entity is required as a condition to or in connection with the due and valid execution, delivery and performance by the Guarantor of this Guaranty; (d) there are no actions, suits, investigations or proceedings pending or threatened at law, in equity, in arbitration or by or before any other authority involving or affecting: (i) the Guarantor that, if adversely determined, are likely to have a material adverse effect on the prospects or condition of the Guarantor; (ii) any material part of the assets or properties of the Guarantor or any part of the collateral (if any) under any Facility Document; or (iii) any of the transactions contemplated in this Guaranty. There are currently no material judgments entered against the Guarantor and the Guarantor is not in default with respect to any judgment, writ, injunction, order, decree or consent of any court or other judicial authority, which default is likely to have or has had a material adverse effect on the prospects or condition of the Guarantor; (e) in executing and delivering this Guaranty, the Guarantor has (i) without reliance on the Bank or any information received from the Bank and based upon such documents and information it deems appropriate, made an independent investigation of the transactions contemplated hereby and the Borrower, the Borrower’s business, assets, operations, prospects and condition, financial or otherwise, and any circumstances which may bear upon such transactions, the Borrower or the obligations and risks undertaken herein with respect to the Liabilities; (ii) adequate means to obtain from the Borrower on a continuing basis information concerning the Borrower and the Bank has no duty to provide to the Guarantor any such information; (iii) full and complete access to the Facility Documents and any other documents executed in connection with the Facility Documents; (iv) not relied and will not rely upon any representations or warranties of the Bank not embodied herein or any acts heretofore or hereafter taken by the Bank (including but not limited to any review by the Bank of the affairs of the Borrower), and (v) determined that this Guaranty will benefit the Guarantor directly or indirectly; (f) in the event that the Guarantor is a partnership, limited liability partnership, corporation or limited liability company, the Guarantor also represents and warrants (i) that it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (ii) that it has all requisite power and authority to execute, deliver and perform its obligations under this Guaranty, and (iii) that the execution, delivery and performance of this Guaranty is in furtherance of its organizational purposes, and has been presented to and approved by its partners, directors, shareholders or members, as applicable; and (g) in the event that the Guarantor is a trust, the Guarantor also represents and warrants that (i) it is a duly constituted and validly existing trust, (ii) the Guarantor has delivered to the Bank a true, complete and accurate copy of the agreement pursuant to which it has been organized and all amendments and modifications thereto, and (iii) the trustees of the Guarantor signing this Guaranty have the legal capacity and full power and authority to execute, deliver, and perform their obligations under, and to bind the Guarantor to perform its obligations under, this Guaranty, and to execute and deliver any and all documents and instruments in connection herewith. Defaults. Each of the following is an event of default hereunder: (a) The Guarantor (i) shall fail to pay when due any of its indebtedness (including, but not limited to, indebtedness for borrowed money) or any interest or premium thereon in an aggregate amount of at least five hundred thousand dollars ($500,000) or (ii) the Guarantor shall default or otherwise fail to perform any agreement to which the Guarantor is party or by which it is bound which results in the holder(s) of indebtedness having the right, whether or not exercised, to accelerate the maturity thereof in an aggregate amount of at least five hundred thousand dollars ($500,000); (b) (i) the Guarantor is involved in a proceeding which may result in a forfeiture of all or a substantial part of the Guarantor ’s assets or (ii) a final, non-appealable judgment is entered against the Guarantor for the payment of in an aggregate amount of at least two million dollars ($2,000,000); (c) Guarantor ; there is, in the opinion of the Bank, a material adverse change in the business, prospects or financial condition of the (d) without the prior written consent of the Bank, the Guarantor incurs or permits to exist (i) any debt for borrowed money other than debt for borrowed money owing to the Bank or 3 listed on the Guarantor’s financial statement dated April 20 2006 (the “Financial Statement”) and any refinancing of such debt or (ii) other debt to the extent that the total amount thereof when added together with the total amount of the Borrower’s guarantees and contingent liabilities referred to in clause (ii) of the immediately following paragraph (e) is less than or equal to seven million dollars ($7,000,000); and (e) the Guarantor guarantees or otherwise becomes contingently liable for the debts or other obligations of any entity other than (i) any such guaranty or contingent obligation shown on the Financial Statement and (ii) guarantees and contingent obligations incurred after the date of the Financial Statement to the extent that the total amount thereof when added together with the total amount of debt referred to in clause (ii) of the immediately preceding paragraph (d) is less than or equal to seven million dollars ($7,000,000) . Remedies Generally . The rights, powers and remedies granted to the Bank in this Guaranty are cumulative and in addition to any rights, powers and remedies to which the Bank may be entitled either by operation of law or in equity or pursuant to any other document or instrument delivered or from time to time to be delivered to the Bank in connection with the Facilities. Setoff . The Guarantor agrees that, in addition to (and without limitation of) any right of setoff, banker’s lien or counterclaim the Bank may otherwise have, the Bank shall be entitled, at its option, to offset balances (general or special, time or demand, provisional or final) held by it for the account of the Guarantor at any of the Bank’s offices, in U.S. dollars or in any other currency, against any amount payable by the Guarantor under this Guaranty which is not paid when due (regardless of whether such balances are then due to the Guarantor), in which case it shall promptly notify the Guarantor thereof; provided that the Bank’s failure to give such notice shall not affect the validity thereof. Formalities . The Guarantor waives presentment, notice of dishonor, protest, notice of acceptance of this Guaranty or incurrence of any Liability and to the extent not prohibited by applicable law any other formality with respect to any of the Liabilities or this Guaranty. Amendments and Waivers . No amendment or waiver of any provision of this Guaranty, nor consent to any departure by the Guarantor therefrom, shall be effective unless it is in writing and signed by the Bank, and then the waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Bank to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver or preclude any other or further exercise thereof or the exercise of any other right. Expenses . The Guarantor shall reimburse the Bank on demand for all costs, expenses and charges (including without limitation fees and charges of external legal counsel for the Bank and costs allocated by its internal legal department) incurred by the Bank in connection with the preparation, performance or enforcement of this Guaranty. The obligations of the Guarantor under this Section shall survive the termination of this Guaranty. Assignment . This Guaranty shall immediately be binding on, and shall inure to the benefit of the Guarantor, the Bank and their respective heirs, successors and assigns; provided that the Guarantor may not assign or transfer its rights or obligations under this Guaranty. Captions . The headings and captions in this Guaranty are for convenience only and shall not affect the interpretation or construction of this Guaranty. Governing Law, Waiver of Jury Trial, Etc. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES, AND WITH THE LAWS OF THE UNITED STATES OF AMERICA AS APPLICABLE. THE GUARANTOR CONSENTS TO THE NONEXCLUSIVE JURISDICTION AND VENUE OF THE STATE OR FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK. SERVICE OF PROCESS BY THE BANK IN CONNECTION WITH ANY SUCH DISPUTE SHALL BE BINDING ON THE GUARANTOR IF SENT TO THE GUARANTOR BY REGISTERED MAIL AT THE ADDRESS 4 SPECIFIED BELOW OR AS OTHERWISE SPECIFIED BY THE GUARANTOR FROM TIME TO TIME. THE GUARANTOR WAIVES ANY RIGHT THE GUARANTOR MAY HAVE TO JURY TRIAL IN ANY ACTION RELATED TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY AND FURTHER WAIVES ANY RIGHT TO INTERPOSE ANY COUNTERCLAIM RELATED TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY IN ANY SUCH ACTION. TO THE EXTENT THAT THE GUARANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER FROM SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OF A JUDGMENT, EXECUTION OR OTHERWISE), THE GUARANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS GUARANTY. Integration; Effectiveness. This Guaranty alone sets forth the entire understanding of the Guarantor and the Bank relating to the guarantee of the Liabilities and constitutes the entire contract between the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. This Guaranty shall become effective when it shall have been executed and delivered by the Guarantor to the Bank. Delivery of an executed signature page of this Guaranty by telecopy shall be effective as delivery of a manually executed signature page of this Guaranty. The rest of this page is intentionally blank. 5 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered as of the date first above written. Address for notices to the Bank: JPMorgan Chase Bank, N.A. Private Bank Credit Attn: Patricia DeLeo 345 Park Avenue, Floor 04 New York, NY 10154-0004 With a courtesy copy to JPMorgan Chase Bank, N.A. Attn: Nancy A. Sheppard 560 Mission Street, 12th floor San Francisco, CA 94105 /s/ Gerald J. Burnett Gerald J. Burnett Address for notices: Gerald J. Burnett and Marjorie J. Burnett , as Trustee for The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust By: /s/ Gerald J. Burnett, trustee Gerald J. Burnett By: /s/ Marjorie J. Burnett, trustee Marjorie J. Burnett Address for notices: 6 Exhibit A FORM OF NOTE SALE AGREEMENT A-1 EXHIBIT 10.18 FORM OF NOTE SALE AGREEMENT Note Sale Agreement dated as __________ ___, _____ (this “ Agreement ”) by and between JPMorgan Chase Bank, N.A. (the “ Seller ”) and [Gerald J. Burnett] [and] [Gerald J. Burnett and Marjorie J. Burnett as trustees of The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust] (individually, or if more than one, collectively, the “Buyer”). The Seller is the holder of the Revolving Credit Promissory Note (Libor/Prime) dated as of December 23, 2006 executed and delivered by Avistar Communications Corporation, a Delaware corporation (the “ Borrower ”), to the Seller (as from time to time may be amended, modified or replaced, the “ Note ”). The Seller and the Borrower are parties to a Security Agreement dated as of December 23, 2006 by which the Borrower, among other things, granted the Seller security interests in the “Collateral” (as defined therein) to secure the Borrower’s obligations under the Note (as from time to time may be amended, modified or replaced, the “ Security Agreement ”). To induce the Seller to accept the Note, the Buyer [and [Gerald J. Burnett] [Gerald J. Burnett and Marjorie J. Burnett as trustees of The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust] (the together with the Buyer the “ Guarantors ”)] delivered to the Seller its Guaranty dated as of December 23, 2006, (the “ Guaranty ”) in which the [Buyer] [Guarantors] guaranteed payment and performance of the Note (reference is made to the Guaranty for a complete statement of its terms and conditions). The Seller has made a demand for payment under the Guaranty, and the Buyer has elected to purchase the Loan by executing and delivering to the Seller this Agreement on or before the Due Date (the “ Offer ”). NOW THEREFORE, the Buyer (and if more than one, jointly and severally) and the Seller agree as follows: 1. Definitions : The following terms shall be defined as follows: 1.1 “Banking Day” means any day on which commercial banks are not authorized or required to close in New York City. “Closing” means the simultaneous delivery by the Seller and the Buyer of documents and funds, and the performance of the acts herein provided to be performed at the Closing. “Closing Date” means the first (1 st ) Banking Day after the Seller’s receipt of the Offer, unless the Seller, in its discretion, deems it necessary to extend such time. “ Due Date ” has the meaning given such term in the Guaranty. “Facility Documents” has the meaning given such term in the Note. “Loan” means the Note and the Security Agreement and the Seller’s rights thereunder. “Note Purchase Price” means the principal amount outstanding under the Note as of the Closing Date, together with any interest thereon, and any costs and expenses under any Facility Document, all as calculated by the Seller. 1.2 1.3 1.4 1.5 1.6 1.7 2. Terms and Conditions of Sale : The Seller agrees to sell, assign, transfer, and convey to the Buyer, on the terms and conditions set forth in this Agreement, all the right, title, and interest of the Seller, as of the Closing Date, in and to the Loan. The Buyer acknowledges and agrees (a) that the Seller’s sale of the Loan to the Buyer is irrevocable and (b) that the Buyer shall have no recourse to the Seller. 3. Note Purchase Price : The Buyer shall pay to the Seller, by 2:00 p.m. (New York City time), by cashier’s check or wire transfer, the amount of the Note Purchase Price. All payments of the Note received by the Seller before the Closing Date shall belong to the Seller. All payments of the Note received by the Seller on or after the Closing Date shall belong to the Buyer. In the event that a draft the Seller has received in payment of the Note is dishonored after the Closing Date, an adjustment to the Note Purchase Price in the Seller’s favor shall be made upon notification by the Seller to the Buyer that the check has been dishonored, and the Buyer shall promptly forward that amount to the Seller. Place of Closing : The Closing shall be held at the Seller’s offices located at 270 Park Avenue, New York, New York , or such other place as may be practicable. The Closing shall, at the Seller’s option, be either by telephone, confirmed by letter or wire, or conducted in person at the place designated by the Seller. Endorsement and Delivery : The Seller agrees to endorse the Note, and deliver the endorsed Note to the Buyer, as soon as practicable after the Closing Date. The endorsement will be in the following form: For value received, pay to the order of [Gerald J. Burnett] [and] [Gerald J. Burnett and Marjorie J. Burnett as trustees of The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust] without recourse and without any representation or warranty either express or implied in fact or by law. JPMORGAN CHASE BANK, N.A. By: Name: Title: After the Closing, the Seller agrees to execute and deliver to the Buyer any such documents or instruments reasonably requested by Buyer to transfer to Buyer all right, title and interest of Seller in and to the Loan, provided that (i) the Buyer prepares such documents or instruments at its expense and (ii) the Buyer provides such documents or instruments to the Seller within thirty (30) days after the Closing 4. 5. 6. Representations, Warranties and Agreements of the Buyer : The Buyer represents, warrants and agrees as follows: 6.1 The Buyer will not violate any laws relating to unfair credit collection practices in connection with the Loan. The Buyer will indemnify the Seller and hold the Seller harmless from and against any and all claims, demands, losses, damages, penalties, fines, forfeitures, judgments, legal fees and any other costs, fees, and expenses heretofore or hereafter incurred by the Seller as a result of (i) a breach by the Buyer of the aforesaid agreement or (ii) any claim, demand or assertion that the Buyer or the Seller was in any way involved in or had in any way authorized any unlawful collection practices in connection with the Loan or (iii) any claim, demand or assertion by the Borrower in connection with the Loan. The Buyer agrees to notify the Seller within three (3) Banking Days of notice or knowledge of any such claim or demand. The Buyer will not institute any legal action in the name of the Seller or continue to prosecute in the name of the Seller any pending legal action nor shall the Buyer intentionally or unintentionally, through misrepresentation or nondisclosure, mislead or conceal that the Buyer’s ownership of the Loan following the Closing. The Buyer acknowledges that there is no adequate remedy at law for violation of this subparagraph 6.2 2 and consents to the entry of an order by a court of competent jurisdiction enjoining any violation or threatened violation of the provisions of this subparagraph. The Buyer will indemnify the Seller and hold the Seller harmless from and against any and all claims, demands, losses, damages, judgments, legal fees and any other costs, fees and expenses heretofore or hereafter incurred by the Seller as a result of a breach by the Buyer of the aforesaid agreement. 6.3 The Buyer’s decision to purchase the Loan is based upon the Buyer’s own independent evaluation. The Buyer has made such independent investigation as the Buyer deems to be warranted into the nature, validity, enforceability, collectibility, and value of the Loan and all other facts it deems material to its purchase, and is entering into this transaction herein provided for, solely on the basis of that investigation and the Buyer’s own judgment, and is not acting in reliance on any representation of, or information furnished by the Seller and acknowledges that no employee or representative of the Seller has been authorized to make any statements or representations other than those specifically contained in this Agreement. The Buyer hereby waives any right or cause of action it might now or in the future have against the Seller as a result of its purchase of the Loan. The Buyer (i) is able to bear the economic risk associated with the purchase of the Loan, (ii) has adequate information concerning the business and financial condition of the Borrower or any third party to make an informed decision regarding the purchase of the Loan, (iii) has such knowledge and experience so as to be aware of the risks and uncertainties inherent in the purchase of rights and assumption of liabilities of the type contemplated in this Agreement and (iv) has independently and without reliance upon the Seller, and based on such information as the Buyer has deemed appropriate, made its own analysis and decision to enter into this Agreement. The Buyer acknowledges that the Seller has not given the Buyer any investment advice, credit information or opinion on whether the purchase of the Loan is prudent. The Buyer has full power and authority to execute, deliver and perform its obligations under, this Agreement and is authorized to enter into this Agreement. All laws, rules and regulations to which the Buyer may be subject have been duly complied with. This Agreement has been duly and validly executed and delivered by the Buyer and constitutes the legal, valid, and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms, except that such enforceability may be limited by bankruptcy, insolvency, or other similar laws of general applicability affecting the enforcement of creditors’ rights generally and by the court’s discretion in relation to equitable remedies. The Buyer is an “accredited investor” as that term is defined by the Securities Act of 1933, as amended. The Buyer has such knowledge and experience in financial and business matters, relating to the ownership and collection of loan assets, that it is capable of evaluating the merits and risks of a prospective investment in the Loan. The Buyer acknowledges that the Loan may have limited or no liquidity and it has the financial capability to hold the Loan for an indefinite period of time and to bear the economic risks of, including a complete loss of its investment in, the purchase and acquisition of the Loan. 6.4 6.5 6.6 7. No Recourse or Warranty, Etc. : The sale of the Loan is made by the Seller without any representation or warranty either express or implied in fact or by law. Any other provisions of this Agreement to the contrary notwithstanding, the Seller and the Buyer agree that no guarantee of any kind or type whatsoever, whether made by public, private or governmental entity, is purchased, acquired, assumed, or in any other manner transferred or conveyed to the Buyer pursuant to this Agreement. Further, the Seller has not, does not and will not make any representations or warranties with regard to compliance with any, rules, regulations, orders or requirements. The Buyer acknowledges and agrees that the sale and assignment of the Loan is made without recourse 3 or warranty. The Seller makes no warranties, covenants or representation of any sort or in any manner with regard to the Loan, except that the Seller is the owner and holder of all rights in the Loan to be sold and assigned and is authorized to consummate such sale by virtue of such rights and capacity. 8. Files and Records : The Buyer further agrees as follows: 8.1 The Buyer agrees to abide by all applicable state and federal laws, rules and regulations regarding the handling and maintenance of all documents and records relating to the Loan purchased hereunder including, but not limited to, the length of time such documents and records are to be retained. After transfer of documents or files to the Buyer pursuant to the terms of this Agreement, the Buyer agrees that the Seller shall have the continuing right to use, inspect, and make extracts from or copies of any such documents or records, upon the Seller’s reasonable notice to the Buyer. The Buyer further agrees to allow the Seller the possession, custody and use of original documents for any lawful purpose and upon reasonable terms and conditions. Before destruction or disposition of any documents or files transferred hereunder, the Buyer agrees to give reasonable notice to the Seller and to allow the Seller, at its own expense, to recover the same from the Buyer. 8.2 8.3 8.4 9. Notice Of Claim: The Buyer shall immediately notify the Seller of any claim, threatened claim, or any litigation against the Seller which may come to its attention. Notices : Unless otherwise agreed in writing, notices shall be given to the Seller and the Buyer at their telecopier numbers (confirmed by telephone to their telephone numbers) or addresses set forth in the signature page of this Agreement, or such other telecopier (and telephone) number or address communicated in writing by either such party to the other. Notices to the Bank shall be effective upon receipt. Use of the Seller Name : The Buyer agrees that it will not use or permit the use by its agents, successors or assigns, of any name or combination of letters which is similar to “JPMorgan Chase Bank, N.A.”, “Chase” or “JPMCB.” The Buyer will not represent or imply that it is affiliated with, authorized by, or in any way related to the Seller. Severability : Each part of this Agreement is intended to be severable. If any term, covenant, condition or provision hereof is unlawful, invalid, or unenforceable for any reason whatsoever, such illegality, invalidity, or unenforceability shall not affect the legality, validity, or enforceability of the remaining parts of this Agreement, and all such remaining parts hereof shall be valid and enforceable and have full force and effect as if the invalid or unenforceable part had not been included. Construction : Unless the context otherwise requires, singular nouns and pronouns, when used herein, shall be deemed to include the plural and vice versa, and impersonal pronouns shall be deemed to include the personal pronoun of the appropriate gender. Assignment : This Agreement and the terms, covenants, conditions, provision, obligation, undertaking, rights and benefits hereof, shall be binding upon, and shall inure to the benefit of, the undersigned parties and their respective heirs, executors, administrators, representatives successors, and assigns. This Agreement shall not be assigned without the Seller’s prior written consent. 10. 11. 12. 13. 14. 4 15. Prior Understandings : This Agreement supersedes any and all prior discussions and agreements between the Seller and the Buyer with respect to the purchase of the Loan and other matters contained herein, and this Agreement contains the sole and entire understanding between the parties hereto with respect to the transactions contemplated herein. Survival : Each and every covenant made by the Buyer or the Seller in this Agreement shall survive the Closing and shall not merge into the closing documents, but instead shall be independently enforceable. Governing Law; Jurisdiction : This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The Buyer consents to the nonexclusive jurisdiction and venue of the state or federal courts located in such state. In the event of a dispute hereunder, suit may be brought against the Buyer in such courts or in any jurisdiction where the Buyer or any of its assets may be located. Service of process by the Seller in connection with any dispute shall be binding on the Buyer if sent to the Buyer by registered mail at the address(es) specified above or to such further address(es) as the Buyer may specify to the Seller in writing. Counterparts : This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. 16. 17. 18. IN WITNESS WHEREOF , the Seller and the Buyer have executed this Agreement by their duly authorized officers as of the date first set forth above. JPMORGAN CHASE BANK, N.A. By: Name: Title: Address for Notices to the Bank: JPMorgan Chase Bank, N.A. Private Bank Credit Attn: Patricia DeLeo 345 Park Avenue, Floor 04 New York, NY 10154-0004 With a courtesy copy to JPMorgan Chase Bank, N.A. Attn: Nancy A. Sheppard 560 Mission Street, 12th floor San Francisco, CA 94105 5 Gerald J. Burnett Address for notices: Gerald J. Burnett and Marjorie J. Burnett , as Trustee for The Gerald J. Burnett and Marjorie J. Burnett Revocable Trust By: Gerald J. Burnett By: Marjorie J. Burnett Address for notices: State of County of ) ) ss.: ) On the ____ day of ____________ in the year 200__, before me, the undersigned, personally appeared Gerald J. Burnett , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. Notary Public State of County of ) ) ss.: ) On the ____ day of ____________ in the year 200__, before me, the undersigned, personally appeared Marjorie J. Burnett , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. Notary Public 6 EXHIBIT 10.19 LEASE AGREEMENT This Lease, made this 1st day of December , 2006 between CROSSROADS ASSOCIATES AND CLOCKTOWER ASSOCIATES , hereinafter called Landlord, and AVISTAR COMMUNICATIONS CORPORATION, a Delaware Corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the “Premises”) outlined in red on Exhibit “A-1 and A-2”, attached hereto and incorporated herein by this reference thereto more particularly described as follows: Approximately 21,711 square feet of rentable space (which includes Tenant’s prorata share of building common areas) located on the tenth entire (10 th ) floor (approximately 17,702 square feet) and a portion of the first (1 st ) floor (approximately 4,009 square feet) of the “Building” located at 1875 South Grant Street, San Mateo, San Mateo County, California. Tenant’s Suite Numbers in the Building on the tenth (10 th ) and first (1 st ) floors shall be 1000 and 130 respectively. As used herein the Complex shall mean and include all of the land outlined in red and described in Exhibit “B”, attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of General Office, Storage, Distribution, Marketing and other legally related uses and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in, on or about the Premises or the Complex which will in any way unreasonably obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or unreasonably annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or unreasonably objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or the Complex. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorney’s fees, or liability arising out of failure of Tenant to comply with any applicable law applicable to the use of the Premises by Tenant. Tenant shall comply with any covenant, condition, or restriction (“CC&R’s”) affecting Tenant’s activities within the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2 2. TERM A. The term of this Lease shall be for a period of Sixty (60) months (unless sooner terminated as hereinafter provided) and, subject to Paragraph 2(B) and shall commence on the 1st day of April , 2007 and end on the 31st day of March , 2012. B. Possession of the Premises shall be tendered and the term of this Lease shall commence on April 1, 2007. Commencing upon the full execution of this Lease Agreement, Tenant shall have access to the Premises prior to April 1, 2007 for the installation of furniture, telephone and computer related equipment and such access shall be subject to all the terms and conditions of the Lease, excluding the payment of Basic Rent and Additional Rent. It is hereby understood and agreed that Tenant’s activities during this Early Access Period shall not interfere with or delay Landlord’s construction of the improvements described in Paragraph 8 below. In the event Tenant Improvements, as described below in Paragraph 8 herein, are substantially completed prior to April 1, 2007, Tenant is herein granted the right to occupy the Premises during the Early Access Period with operating personnel subject to all the terms and conditions of the Lease. During this early occupancy with operating personnel, Tenant will only be responsible for the payment of Additional Rent prior to April 1, 2007. In the event Tenant occupies the Premises early, as provided for herein, nevertheless the commencement date of the Lease shall remain April 1, 2007 . OPTION TO EXTEND C. Provided Tenant is in occupancy of at least eighty (80%) percent of the Premises and not in default on any of the terms, covenants or conditions of this Lease, and subject to the terms and conditions set forth hereafter, Tenant is granted the option to extend the term of Lease on the Premises to March 31, 2017 on the following terms and conditions: (a) On or before October 1, 2011, Tenant shall notify Landlord in writing of Tenant’s exercise of this option to extend the term of the Lease to March 31, 2017. The extended term of the Lease shall commence on April 1, 2012 and shall terminate on March 31, 2017. The Basic Rent, as of the commencement date of the Extended Term of the Lease, shall be the then prevailing market rate for similar Class A office space in San Mateo and Foster City with annual adjustments at the rate of increase then being charged in the market for similar space. (b) (c) 3 (d) The then current payment for Additional Rent described in Paragraph 4D of the Lease shall continue to be paid and adjusted according to Paragraph 4D of this Lease. This option to extend can be exercised only by Avistar Communications Corporation, a Delaware Corporation, a parent, subsidiary or an affiliate, for its sole use of the Premises and may not be transferred or assigned to any sublessee or other party, nor may this option be exercised by Avistar Communications Corporation, a Delaware Corporation, for the use of the Premises by any sublessee or party other than Avistar Communications Corporation, a Delaware Corporation, occupying the Premises as of the commencement date of any extended Term. (e) 3. POSSESSION If Landlord, for any reason whatsoever (other than Landlord’s breach of this Lease), cannot deliver possession of said Premises to Tenant at the scheduled commencement of said term, as hereinbefore specified, this Lease shall not be void or voidable; nor obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord’s agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby (including rent adjustment dates) shall be revised to conform to the date of Landlord’s delivery of possession in the condition described in Paragraph 8, as specified in Paragraph 2 (b), above. The above, is, however, subject to the provision that the period of delay of delivery of the Premises shall not exceed 15 days from the scheduled commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord’s control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease whereupon any monies previously paid by Tenant to Landlord shall be reimbursed to Tenant upon demand. In addition, for each day that the date the Premises are Ready For Occupancy is delayed beyond April 1, 2007 for any reason (including force majeure events), the date the Tenant is otherwise obliged to commence payment of Basic Monthly Rent shall be delayed by one day for each day of such delay . 4. RENT A. Basic Rent . Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand on the first (1 st ) day of each calendar month of the term of this Lease, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of _ Two Million Two Hundred Seventy One Thousand Two Hundred Twenty and 20/100 _____Dollars ($2,271,220.20) in lawful money of the United States of America, payable as follows:: $34,620.45 shall be due and payable upon execution of this Lease and represents payment of the Basic Rent for the first month of the lease term from April 1, 2007 through April 30, 2007. 4 The following amounts shall be due and payable on or before the first day of each month of the lease term thereafter as indicated for the time periods described: Basic Rent - Suite 1000 Basic Rent - Suite 130 Total Basic Rent 17,702 RSF 4/1/07 to 3/31/08 4/1/08 to 3/31/09 4/1/09 to 3/31/2010 4/1/2010to 3/31/2011 4/1/2011to 3/31/2012 $29,208.30 @ $1.65 NNN $30,624.46 @ $1.73 NNN $32,040.62 @ $1.81 NNN $33,456.78 @ $1.89NNN $34,872.94 @ $1.97 NNN 4,009 RSF $5,412.15 @ $1.35 NNN $5,612.60 @ $1.40 NNN $5,813.05 @ $1.45 NNN $6,013.50 @ $1.50 NNN $6,213.95 @ $1.55 NNN 21,711 RSF $34,620.45 $36,237.06 $37,853.67 $39,470.28 $41,086.89 B. Time for Payment . In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late charge . Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rent as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days after written notice. Said late charge shall equal ten (10%) percent of each rental payment so in default. 5 D. Additional Rent . Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (1) (2) (3) (4) Tenant’s proportionate share of all utilities relating to the Complex as set forth in Paragraph 11, and Tenant’s proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and Tenant’s proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and Tenant’s proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorney’s fees and legal expenses, that may accrue thereto in the event of Tenant’s failure to pay such amounts, and all damages, reasonable costs and expenses which landlord may incur by reason of default of Tenant or failure on Tenant’s part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. (5) Tenant shall pay to Landlord monthly, in advance, Tenant’s prorata share of an amount estimated by Landlord to be Landlord’s approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled at the end of each calendar year as compared to Landlord’s actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord refunding to Tenant any amount of estimated payments made by Tenant in excess of Landlord’s actual expenditures for said Additional Rent items. Tenant’s payment for such Additional Rent as of the commencement of the Term of this Lease shall be Eight Hundred Forty Two and 56/100 ($20,842.56) Dollars per month ($0.96 x 21,711 s.f. = $20,842.56). Twenty Thousand Any payments required to be made by Tenant for Additional Rent shall be made by check or instrument separate from that check or instrument used by Tenant to make any payments for Basic Rent pursuant to paragraph 4 A. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. E. Place of Payment of Rent and Additional Rent . All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at 1875 South Grant Street, Suite 100, San Mateo, CA 94402, or to such other person or to such other place as Landlord may from time to time designate in writing. 6 F. Security Deposit . Concurrently with Tenant’s execution of this Lease, Tenant shall deposit with Landlord the sum of Fifty Five Thousand and 00/100_ ($55,000.00) Dollars (the “Security Deposit”). Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to ) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant’s default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant’s default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant’s failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. The Security Deposit or any balance thereof after application by Landlord to Tenant’s default(s), shall be returned to Tenant (or at Landlord’s option, to the last assignee of Tenant’s interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord’s interest in this Lease, Landlord shall transfer said Deposit to Landlord’s successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions of this Lease and such reasonable Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant’s employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as “Common Area” This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be reasonably amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be consistent with comparable buildings and at the discretion of Landlord. 7 6 PARKING Tenant shall have the right at no charge to use with other tenants or occupants of the Complex 69 undesignated parking spaces in the common parking areas of the Complex. Tenant agrees that Tenant, Tenant’s employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 69 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord’s sole discretion, to specifically designate the location of Tenant’s parking spaces within the common parking areas of the Complex (but in a nondiscriminatory manner) in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant’s employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant’s use. Said parking spaces, if specifically designated by landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord’s sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant’s parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant’s parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant’s trucks or other vehicles or the trucks and vehicles of Tenant’s suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park not permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Within 48 hours following notice to Tenant, Tenant agrees to ensure compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas and fails to cure within 48 hours, then Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant’s sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant’s employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. 7. EXPENSES OF OPERATION, MANAGEMENT AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX, PREMISES AND BUILDING IN WHICH THE PREMISES ARE LOCATED Landlord shall maintain the Common Areas, the Building and the Premises in condition and repair comparable to similar buildings. As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant’s proportionate share (calculated on a square footage or other equitable basis) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical and plumbing systems; structural elements and exterior 8 surfaces of the buildings; salaries and employees benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord shall amortize its investment in said improvements (together with interest at the rate of eight (8%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not a rate greater than the anticipated savings in the operating expenses and further provided that any applicable reserve shall be applied before the charge is made. As Additional Rent and in accordance with paragraph 4D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis) of the cost of operation (including common utilities), management, maintenance and repair of the Premises and the building (including common areas such as lobbies, restrooms, janitor’s closets, hallways, elevators, mechanical and telephone rooms, stairwells, entrances, spaces above the ceilings) in which the Premises are located. The maintenance items herein referred to include, but are not limited to, janitorization, electrical systems (such as outlets, lighting fixtures, lamps, bulbs, tubs, ballasts), heating and airconditioning controls (such as mixing boxes, thermostats, time clocks, supply and return grills), all interior improvements within the Premises including but not limited to: wall coverings, window coverings, acoustical ceilings, vinyl tile, carpeting, partitioning, doors (both interior and exterior, including closing mechanisms, latches, locks), and all other interior improvements of any nature whatsoever, all windows, window frames, plate glass, glazing, truck doors, main plumbing systems of the building (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), main electrical systems (such as panels and conduits), heating and air conditioning systems (such as compressors, fans, air handlers, ducts, boilers, heaters), store fronts, roofs, downspouts, building common area interiors (such as wall coverings, window coverings, floor coverings and partitioning), ceilings, building exterior doors, skylights (if any), automatic fire extinguishing systems and elevators; license, permit, and inspection fees; security; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, than in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of eight (8%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant’s sole expense upon Lease termination. 9 “Additional Rent” as used herein shall not include and notwithstanding anything to the contrary in this Lease Tenant shall have no obligation to pay, reimburse Landlord for, or otherwise perform any of the following repairs, replacements, costs, or expenses (collectively “costs”): A. B. Landlord’s debt repayments; interest on charges; Costs and expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; and/or cost of attracting tenants; Depreciation Debt or ground lease payments, costs, fees or expenses, or any interest thereon; Executive salaries and other wages, salaries, compensation, and labor burden for any employee not stationed on the Complex on a full-time basis or any fee, profit or compensation retained by Landlord or its affiliates for management and administration of the Complex; other than a 3% management fee to an affiliate of Landlord. Costs occasioned by the act, omission or violation of Law by Landlord, any other occupant of the Complex, or their respective agents, employees or contractors. Costs occasioned by fire, acts of God, or other casualties or by the exercise of the power of eminent domain. Lease payments and costs for capital machinery and equipment, such as air conditioners, elevators, and the like and other costs relating to repairs, alterations, improvements, equipment and tools which could properly be capitalized under generally accepted accounting principles, except to the extent that (i) the foregoing reduces the expenses otherwise payable by Tenant under the Lease and (ii) Tenant’s share of such Cost during any twelve-month period of the Lease is does not exceed the amortized cost of the item over its useful life, based on the interest rate described above. Costs reasonably recoverable from others and costs for which Tenant reimburses Landlord directly or which Tenant pays directly to a third person. Costs to place the Premises in the delivery condition required by this Lease, costs to correct any construction defect in the Complex or to comply with any CC&R’s, underwriter’s requirement or Law applicable to the Premises or the Complex as of the Commencement Date. C. D. E. F. G. H. I. J. 10 K. L. Costs (i) arising from the disproportionate use of any utility or service supplied by Landlord to any other occupant of the Complex, or (ii) associated with utilities and services of a type not provided to Tenant. Fees, commissions, attorneys’ fees, costs or other disbursements incurred in connection with negotiations or disputes with any other occupant of the Complex and Costs arising from the violation by Landlord or any occupant of the Complex (other than Tenant) of the terms and conditions of any lease or other agreement. Insurance premiums for coverage not customarily paid by tenants of similar projects in the vicinity of the Premises, increases in insurance Costs caused by the activities of another occupant of the Complex, insurance deductibles exceeding $10,000, and co-insurance payments. Costs incurred with respect to any Hazardous Material, except as set forth in Paragraph 43. M. N. Landlord agrees to provide five-day janitorial service for the leased Premises and to maintain the Complex in a first-class manner. 8. ACCEPTANCE AND SURRENDER OF PREMISES As of the commencement date, the building shall be water tight, structurally sound and all of the electrical, mechanical, HVAC, plumbing, elevator and other systems serving the Premises shall be in good condition and repair (herein “good condition and repair”). Except as expressly required of Landlord in this Lease, by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Provided Landlord performs its obligation under the first sentence of this Section, Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in “good condition and repair” as defined above, damage by Acts of God, fire, Hazardous Materials (other than Tenant’s Hazardous Materials), repairs that are Landlord’s responsibility under this Lease, and normal wear and tear excepted, with all interior walls repaired, if damaged; the special air conditioning equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant’s responsibility during the term of this Lease) together with all alterations, additions and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord at the time of Tenant’s request for Alterations whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration prior to Alteration and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end 11 of this Lease at Tenant’s sole cost and expense (damage by Acts of God, fire, Hazardous Materials (other than tenant’s Hazardous Materials), repairs that are Landlord’s responsibility under this Lease and normal wear and tear excepted). Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant’s personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant’s sole cost, and repair any damage caused by such removal at Tenant’s sole cost. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, then except to the extent arising out of the breach of this Lease, negligence or willful misconduct of Landlord, its respective agents, employees, contractors or invitees, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. Except as expressly set forth in this Lease, TENANT AGREES TO LEASE THE PREMISES IN AN “AS IS” CONDITION , and any other alteration or modifications to the Premises shall be made in accordance with Paragraphs 8 & 9 of the Lease and shall not delay the commencement of the Lease nor delay the payment of rent and all such modifications shall be at Tenant’s sole cost and expense. Notwithstanding anything in this Lease to the contrary, Tenant shall not be responsible to pay for the repair of the building due to lack of compliance to any applicable law, as of the commencement date. Notwithstanding anything herein to the contrary, Landlord at Landlord’s sole cost and expense agrees to perform the following Improvements as indicated below: A. The Premises are configured with existing furniture, as shown on Exhibit C (Furniture Plan) attached hereto. All offices, cubicles and conference rooms within the Premises are already wired for voice and data and said wiring terminates in the server room. There are 3 cables in a drop to each office, cubicle and conference room, (2) CAT5 cables for data and (1) CAT3 cable split for two voice lines. Tenant shall pay for any additional wiring or upgrades. B. Landlord shall provide the Premises with furniture in the configuration, as shown and detailed on the list attached hereto as Exhibit “C” (Furniture and Equipment Inventory List ) and hereinafter referred to as “the Furniture.” Tenant shall be allowed free use of the furniture during the term of the Lease. Tenant agrees to repair any damage to the furniture caused by Tenant during the Term of this Lease, normal wear and tear excepted. Any reconfiguration of the furniture subsequent to the initial reconfiguration necessitated by Tenant’s initial requested improvements or additional furniture required by Tenant shall be at Tenant’s sole cost and expense. 12 Construction of the supply/copy room (Item C below) and Quality Assurance Lab (Item D below), as shown on Exhibit D attached hereto, will necessitate the removal of the workstations, as shown in red on Exhibit C (Furniture Plan), attached hereto. The workstations, removed from the Suite 1000 to accommodate construction of Tenant Improvements, shall be made available for Tenant’s use in Suite 130 (see Exhibit F attached hereto). With respect to the furniture placed in Suite 130, Tenant shall be allowed free use of the furniture during the term of the Lease subject to the same conditions outlined above for the furniture in Suite 1000. Tenant will be responsible for the cost of wiring Suite 130 with workstations using Landlord’s furniture from Suite 1000 and whatever additional workstations that may be required by Tenant. C. D. E. Construction of a supply/copy room (approximately 16’ x 8’) adjacent to the reception area, as shown on Exhibit D, attached hereto. Construction of a Quality Assurance Lab, as shown on Exhibit D, attached hereto. The Quality Assurance Lab to have anti-static floor covering. The installation of a ceiling mounted 5 ton cooling HVAC unit for the Quality Assurance Lab. In accordance with the provisions of Paragraph 11 herein, the server room will be separately metered to measure the amount of electricity being used by Tenant. Construction of four offices and a demising wall to enclose an area in Suite 130, as shown on Exhibit E, attached hereto. The office side of the demising wall shall be carpeted with the existing carpet. The shipping and receiving side of the demising wall shall have VCT floor covering. Patch and paint walls, as needed, throughout the Premises. Steam clean carpet throughout Suite 1000. Remodeling of the 10th floor elevator lobby, including the installation of new building standard entry doors. Landlord to provide the initial building standard signs for Tenant on the first floor lobby touch screen directory for Suite 130 and Suite 1000, tenth floor directory and door signage for Suite 130 and Suite 1000. All subsequent requests for signs shall be at Tenant’s sole cost and expense. In addition, Tenant will be permitted to install their own customized signage identification in the tenth floor elevator lobby at their own expense and subject to Landlord’s reasonable approval. The two (2) offices, as shown in green on Exhibit A attached hereto; shall be reconfigured as a conference room with a full height glass front, as shown on Exhibit D, attached hereto. F. G. H. I. J. K. 13 The above items shall be made by Landlord at Landlord’s sole cost and expense, all prior to the commencement date. Prior to April 1, 2007, Landlord shall provide Tenant with rent-free entry into the Premises for a period of not less than twenty (20) business days for the purpose of installing cable, fixture, equipment and furniture. Landlord shall provide tenant with reasonable notice of dates such entry will be allowed in order to permit Tenant to schedule its work. If the Premises are not delivered by Landlord in the condition and with the Improvements described in this Section 8 on or before April 1, 2007 or if Tenant is not so allowed the number of fixturing days described above prior to the date the Lease would have otherwise commneced, then Tenant shall be allowed a day for day rent credit for the number of days on and after April 1, 2007, until such requirements have been met. 9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first hand and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. If Landlord consents to the making of any alteration, addition, or improvement to or of the Premises by Tenant, the same shall be made by Landlord at Tenant’s sole cost and expense, except as provided in Paragraph 8 of this Lease. Any modifications to the building or building systems required by governmental code or otherwise as a result of Tenant’s alterations, additions or improvements shall be made at Tenant’s sole cost and expense, except as provided in Paragraph 8 of this Lease. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, airconditioning, partitioning, drapery, carpeting and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make any alterations or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant’s improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant’s own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic’s liens filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after notice to Tenant of the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. DELETED 11. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with paragraph 4D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable 14 basis) of the cost of all utility charges such as water, gas, electricity, sewer service, waste pick-up and any other utilities, materials of services furnished directly to the building in which the Premises are located, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Tenant shall pay the provider directly for telephone, telex, and other electronic comminications services. Except as herein expressly set forth, Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall furnish to the Premises: A. B. C. D. E. reasonable quantities of water, gas and electricity suitable for the intended use of the Premises, heat and air conditioning required for the comfortable use and occupation of the Premises for such purposes during the hours of 8:00 a.m. and 6:00 p.m. Monday through Fridays (holidays excepted), Trash and sewage disposal, Life safety systems as required by applicable law 24 hours per day, 7 days per week, and TI communication riser access to Premises. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all reasonable regulations and requirements that Landlord may prescribe for the proper functioning and protection of the building heating, ventilating and airconditioning systems. Whenever additiional heat generating machines, equipment, or any other devices (including exhaust fans) are used in the Premises by Tenant which affect the temperature or otherwise maintained by the airconditioning system, Landlord shall have the right to install supplementary airconditioning units in the Premises and the costs thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant will not, without the written consent of Landlord, use any apparatus or device in the Premises (including, without limitation), unusual electronic data processing machines or machines using current in excess of the voltage provided by existing plugs which will materially increase above building standard the amount of electricity, gas, water or airconditioning usually furnished or supplies to premises being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises), or with gas or water pipes any apparatus or device for the purposes of using electric current, gas or water. If Tenant shall require water, gas or electric current in excess of that usually furnished or supplied to premises being used as general office space, Tenant shall first obtain the written consent of 15 Landlord, which consent shall not be unreasonably withheld and Landlord may cause an electric current, gas, or water meter to be installed in the Premises in order to measure the amount of electric current, gas or water consumed for any such excess use. The cost of any such meter and of the installation, maintenance and repair thereof, all charges for such excess water, gas and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility); and any additional expense incurred by Landlord in keeping account of electric current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by Landlord. 12. TAXES A. As Additional Rent and in accordance with paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant’s proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term “Real Property Taxes”, as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Complex) now or hereafter imposed by any government or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord’s interest therein; any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorney’s fees) reasonably incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord’s interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord’s business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term “Real Property Taxes” for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such Real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term “Real Property Taxes”. Notwithstanding the foregoing, the term “Real Property Taxes” shall not include (i) estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord’s income from all sources, (ii) assessments, all other 16 governmental levies, and any increases in the foregoing occasioned by or relating to (a) any assets on the Complex owned by a party other than Landlord (or Landlord’s successor) or Tenant, (b) land and improvements not reserved for Tenant’s exclusive or nonexclusive use. B. Taxes on Tenant’s Property (1) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant’s personal property or trade fixtures are levied against Landlord or Landlord’s property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do so regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord’s full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (2) If after the Commencement Date, Tenant’s Alterations (which shall not include the improvements described in Paragraph 8) causes the value of improvements in the Premises to exceed the average value of improvements in the other tenant spaces in the Complex, then the Real Property Taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12A(i), above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE Tenant, at Tenant’s expense, agrees to keep in force during the term of this Lease a policy of commercial general liability insurance with combined limits in the amount of $1,000,000 per occurrence/2,000,000 aggregate for injuries to or death of persons and/or property damage occurring in, on or about the Premises or the Complex. Certificates of insurance evidencing this coverage shall be furnished to Landlord, in the case of the liability insurance shall name Landlord as additional insured, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days’ prior written notice to Landlord. 17 14. TENANT’S PERSONAL PROPERTY INSURANCE AND WORKER’S COMPENSATION INSURANCE Tenant shall maintain a policy or policies of fire and property damage insurance on a “special form” basis with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be Tenant’s sole property, and in Tenant’s discretion, used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of worker’s compensation insurance and any other employee benefit insurance sufficient to comply with all the laws. 15. PROPERTY INSURANCE Landlord shall purchase and keep in force and, as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant’s proportionate share (calculated on a square footage or other equitable basis) of the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of “special form” insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent. If such insurance costs are increased due to Tenant’s use of Premises or the Complex for other than office uses, Tenant agrees to pay to Landlord the full cost of such increase. Subject only to the terms of this Lease, Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Notwithstanding anything to the contrary in this Lease, Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party and to the extent the releasing party is required to carry insurance under this Lease, from any liability for loss or damage caused by fire or any of the extended coverage casualties included (or to be included) in the releasing party’s insurance policies, irrespective of the cause of such fire or casualty. 16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the breach of this Lease or violation of law by Landlord and/or the negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property the principal cause of which is the breach of this Lease or violation of law by Landlord, or the willful misconduct or negligence of Landlord, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorney’s fees, in connection therewith, to the extent arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, as a consequence of the negligence or willful misconduct of Tenant or its agents, employees, or contractors. 18 17. COMPLIANCE Tenant, as its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer governing the conduct of its activities in the Premises; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgement of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes, repairs to the Premises, or improvements, except to the extent such changes or improvements are required as a result of Tenant’s use of the Premises for other than general office purposes. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to its use of the Premises for other than general office purposes, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 18. LIENS Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within ten (10) days following notice to Tenant of the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. Tenant shall, by 30 days’ written notice, advise Landlord of its intent to sublet the Premises or any portion thereof for any part of the term hereof. As a condition for granting its consent to any subletting, Landlord may require that Tenant agrees to pay to Landlord, as additional rent, all rents or other considerations received by Tenant from its subtenants in excess of the rent payable by Tenant to Landlord hereunder and the costs incurred by Tenant to acquire, document, and perform under the transfer, including without limitation, brokerage commission, fit up cost for the transferee, attorneys’ fees, and the cost incurred by Tenant to provide any other services or equipment to the transferee. Tenant shall, by 30 days’ written notice, advise Landlord of its intent to sublet substantially all of the Premises for substantially all of the remaining term hereof which notice may be given prior to Tenant’s identification of a particular transferee. If Tenant intends to assign the lease or sublet substantially all of the Premises for 19 substantially all of the remaining term, then upon receipt of said notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant’s notice on the date specified in Tenant’s notice. If Tenant intends to assign the Lease or sublet substantially all of the Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant’s notice. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the premises, without also having obtained the prior written consent of Landlord. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant’s obligations hereunder to be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor. shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord. As a condition to its consent, Landlord may require Tenant to pay all its reasonable expenses in connection with the assignment up to a maximum of $500, and Landlord may require Tenant’s assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to landlord under the Lease. Notwithstanding anything to the contrary in the Lease (A) Tenant may, without Landlord’s prior written consent and without any participation by Landlord in assignment and subletting proceeds, sublet the Premises or assign the Lease to: (i) a subsidiary, affiliate, division or corporation controlling, controlled by or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization, or government action; or (iii) a purchaser of substantially all of Tenant’s assets located in the Premises, (B) sale or issuance of Tenant’s capital stock through any public exchange, national market or over-the counter or in consideration of contributions of capital to the Tenant, shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises, and (C) Landlord’s consent to any proposed assignment or subletting shall not be unreasonably withheld, conditioned, or delayed and Landlord shall respond within thirty (30) days. 20. SUBORDINATION AND MORTGAGES In the event Landlord’s title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as “Lender”) to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender’s deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Tenant hereby irrevocably appoints Landlord the attorney in fact of Tenant to execute, deliver and record any such instrument or instruments for and in the name and on behalf of Tenant. Notwithstanding any such subordination, Tenant’s possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this 20 Lease. Tenant agrees to send to any mortgagees and/or deed of trust holders, by registered mail, a copy of any notice of default served by Tenant upon the Landlord, provided that prior to such notice, Tenant has been notified, in writing (by way of notice of assignment of rents or otherwise) of the addresses of such mortgages and/or deed of trust holders. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, any such mortgagees and/or deed of trust holders shall have an additional thirty (30) days within which to cure such default, or if such default is not reasonably susceptible of cure within that time, then such additional time as may be reasonably necessary if within such (30) days, any mortgagee and/or deed of trust holder has commenced and is diligently pursuing the remedies necessary to cure such default, (including but not limited to commencement of foreclosure proceedings), in which event this Lease shall not be terminated when such remedies are being diligently pursued. 21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers or tenants; to post notices of nonresponsibility; and to so long as the change does not interfere with the conduct of Tenant’s business, increase Tenant’s costs, or materially reduce Tenant’s rights, alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however, that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex, provided such change does not unreasonably interfere with the conduct of Tenant’s business and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed and actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. BANKRUPTCY AND DEFAULT The commencement by Tenant of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, shall, at Landlord’s option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant’s unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of 21 Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustments thereto. Tenant shall have a period of ten (10) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the default cannot reasonably be cured within such 10 day period, Tenant shall have such reasonable time is may reasonably be required to cure such default so long as Tenant commences to cure the default within such 10 day period. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. (b) The rights and remedies provided by California Civil Code which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant’s right to possession; acts of maintenance or preservation, efforts 22 to relet the Premises, or the appointment of a receiver upon Landlord’s initiative to protect its interest under this Lease shall not constitute a termination of Tenant’s right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) The right and power, as attorney-in-fact for Tenant, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant and to sell such property and apply such proceeds therefrom pursuant to applicable California law. 23. ABANDONMENT If Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 24. DESTRUCTION In the event the Premises are destroyed in whole or in part or the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof from any cause, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease. If Landlord terminates this Lease and thereafter restores the damage, tenant shall have the right to reinstate the Lease on its then existing terms for a minimum of a one year term. If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent from the date of the casualty and while such repair is being made in the proportion that the area of the Premises rendered not reasonably suitable for the conduct of Tenant’s business by such damage bears to the total area of the Premises. If the expected restoration time after the date of the casualty exceed 180 days or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or for not more than 30 days because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord’s obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant’s trade fixtures, equipment, merchandise or any improvements, alterations or additions made by Tenant to the Premises. 23 Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4 of the California Civil Code. In the event the destruction of the Premises is caused by Tenant, Tenant shall pay the deductible portion of Landlord’s insurance proceeds up to a maximum of $10,000. 25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant’s personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the Premises or any portion thereof, or (ii)any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to permanently discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place, at the election of Tenant on the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises or any Tenant parking rights taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 24 26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant which are assumed by the transferee, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee’s foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten (10) days’ prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant’s failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modifications except as may be represented by Landlord; that there are no uncured defaults in Landlord’s performance, and that no more that one month’s rent has been paid in advance. 25 30. CONSTRUCTION CHANGES It is understood that the description of the Premises and the location of the ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord’s architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant so long as such change does not interfere with the conduct of Tenant’s business or adversely effect the Tenant’s rights and obligations. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant’s sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue without the undertaking of a cure by Tenant of 10 (10) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform any such other term or covenant on Tenant’s part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment of performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord or demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of non payment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS FEES (A) In the event that Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief hereunder, then all costs and expenses, including reasonable attorney’s fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgement. (B) Should Landlord, through no fault of Landlord, the other occupants of the Complex or their respective agents, employees, contractors or invitees be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant’s occupancy hereunder, Tenant shall pay to Landlord its costs and expenses reasonably incurred in such suit, including a reasonable attorney’s fee. 33. WAIVER The waiver by either party of the other party’s failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may 26 develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant at the notice address set forth below Tenant’s signature or at such other address as Tenant shall hereafter notify Landlord in writing in accordance with this Section or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant. All notices, demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at 1875 South Grant Street, Suite 100, San Mateo, CA 94402. Each notice, request, demand advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. Landlord and Tenant mutually intend that neither shall have any binding contractual obligations to the other with respect to the matters referred to herein unless and until this instrument has been fully executed by both parties. 36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord’s obligations is such than more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. Notwithstanding the foregoing if Landlord’s failure to perform any of its obligations under the Lease results in a condition which is causing or threatens to cause immediate damage to Tenant’s personnel or property, then Landlord shall repair such condition as soon as possible after receiving notice from Tenant. 37. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the 27 partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. 38. DELETED 39. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord and Landlord’s assets; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership) (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership) (iv) (v) (vi) hearing; (vii) (viii) no writ of execution will ever be levied against the assets of any partner of Landlord; these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. no partner of Landlord shall be required to answer or otherwise plead to any service of process; no judgement shall be taken against any partner of Landlord; any judgement taken against any partner of Landlord may be vacated and set aside at any time without (ix) The term, “Landlord”, as used in this section, shall mean only the owner or owners from time to time of the fee title or the tenant’s interest under a ground lease of the land described in Exhibit “B”, and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers the then grantor) shall be relieved from and after the date of such transfer of all liability as respects Landlord’s obligations thereafter to be performed which are assumed by the transferee, provided that any funds in the hands of Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be delivered to the grantee. Similarly, the obligations contained in this Lease to be performed by Landlord shall be binding on Landlord’s successors and assigns only during their respective period of ownership. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 40. BROKERS Tenant warrants that it had dealing with only of the following real estate brokers or agents in connection with the negotiation of this Lease CB Richard Ellis and Cornish and Carey Commercial and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Landlord will pay all compensation due to the Brokers with respect to this Lease. 28 41. SIGNS Except as expressly provided in this Lease, no sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, then upon expiration or other sooner termination of this Lease, Tenant at Tenant’s sole cost and expense shall both remove such sign and repair all damage in such manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. Except as expressly provided in this Lease, all approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. 42. FINANCIAL STATEMENTS In the event Tenant tenders to Landlord any information on the financial stability, credit worthiness or ability of the Tenant to pay the rent due and owing under the Lease, then Landlord shall be entitled to rely upon the information provided in determining whether or not to enter into this Lease Agreement with Tenant and Tenant hereby represents and warrants to Landlord the following: (i) That all documents provided by Tenant to Landlord are true and correct copies of the original; and (ii) Tenant has not withheld any information from Landlord which is material to Tenant’s credit worthiness, financial condition or ability to pay the rent; and (iii) all information supplied by Tenant to Landlord is true, correct and accurate; and (iv) no part of the information supplied by Tenant to Landlord contains misleading or fraudulent statements. A default under this paragraph shall be a non-curable default on behalf of Tenant and Landlord shall be entitled to pursue any right or remedy available to Landlord under the terms of this Lease or available to Landlord under the laws of the State of California. 43. HAZARDOUS MATERIALS A. As used herein, the term “Hazardous Material” shall mean any substance or material which has been determined by any state, federal or local governmental authority to be capable of posing a risk of injury to health, safety or property including all of those materials and substances designated or defined as “hazardous” or “toxic” by (i) the Environmental Protection Agency, the California Water Quality Control Board, the Department of Labor, the California Department of Industrial Relations, the Department of Transportation, the Department of Agriculture, the Consumer Product Safety Commission, the Department of Health and Human Services, the Food and Drug Agency or any other governmental agency now or hereafter authorized to regulate materials and substances in the environment, or by (ii) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9601 et seq., as amended; the Hazardous Materials Transportation Act, 49 U.S.C. 1801, et seq., as amended; the Resource Conservation and Recovery Act, 42 U.S.C. 6901, et seq., as amended; the Hazardous Waste Control Law, 29 California Health & Safety Code 25100 et seq., as amended; Sections 66680 through 66685 of Title 22 of the California Administration Code, Division 4, Chapter 30, as amended; and in the regulations adopted and publications promulgated pursuant to said laws. B. Tenant shall not cause any Hazardous Material to be improperly or illegally used, stored, discharged, released or disposed of in, from, under or about the Premises or the Complex, or any other land or improvements in the vicinity of the Premises or the Complex during the Lease Term (“Tenant’s Hazardous Materials”). Without limiting the generality of the foregoing, Tenant, at its sole cost, shall comply with all laws relating to such Hazardous Materials. If the presence of any Tenant’s Hazardous Materials on the Premises or the Complex results in contamination of the Premises or the Complex or any soil or about the Premises or the Complex, Tenant, as its expense shall promptly take all actions necessary to return the Premises or the Complex to the condition existing prior to the appearance of such Hazardous Mater