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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission File Number 000-19462

ARTISOFT, INC.
(Exact name of registrant as specified in its charter)

5 CAMBRIDGE CENTER, CAMBRIDGE, MA 02142
(Address of Principal Executive Offices including Zip Code)

Registrant's telephone number, including area code: (617) 354-0600

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.01 PAR VALUE PER SHARE

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        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 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. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o    No ý

        The aggregate market value of common stock held by non-affiliates of the registrant was approximately $6,033,879 based on the closing per share sale price of $2.70 on December 31, 2003, on the The OTC Bulletin Board. Shares of common stock held by each executive officer and director of the registrant and by each entity known to the registrant to beneficially own 10% or more of the registrant's common stock have been excluded from this calculation in that such persons and entities may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The registrant has no shares of non-voting common stock authorized or outstanding.

        The number of shares outstanding of the registrant's sole class of common stock, as of October 13, 2004 was 30,244,955.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Definitive Proxy Statement for its next Annual Meeting of Stockholders (the "Proxy Statement"), to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2004, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, the Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are subject to a number of risks and uncertainties. All statements, other than statements of historical fact, included in this Annual Report on Form 10-K, including statements regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. When used in this Annual Report on Form 10-K, the words "will," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic alliances. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors" and elsewhere in this Annual Report on Form 10-K. The forward-looking statements provided by Artisoft in this Annual Report on Form 10-K represent Artisoft's estimates as of the date this report was originally filed with the SEC. Forward-looking statements contained herein do not reflect events transpiring subsequent to that date. We anticipate that subsequent events and developments will cause our estimates to change. However, while we may elect to update our forward-looking statements in the future, we specifically disclaim any obligation to do so. Our forward-looking statements should not be relied upon as representing our estimates as of any date subsequent to the date this report is filed with the SEC.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.

INTRODUCTION

        Artisoft, Inc. ("Artisoft," the "Company" or the "Registrant") develops, markets and sells computer telephony software application products and associated services. The Company's principal product are TeleVantage and InstantOffice.

        The Company's principal executive offices are located at 5 Cambridge Center, Cambridge, Massachusetts 02142. The telephone number at that address is (617) 354-0600. The Company was incorporated in Arizona in November 1982 and reincorporated by merger in Delaware in July 1991.

        Our Internet website is www.artisoft.com. References in this Annual Report on Form 10-K to our or any other Internet website are inactive textual references only. The information on our Internet website or at any other Internet website is not incorporated by reference in this Annual Report on Form 10-K and should not be considered to be a part of this document. We make available through our Internet website, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. These reports may be accessed through our Internet website's investor relations page.

BACKGROUND AND RECENT DEVELOPMENTS

        On September 28, 2004, Artisoft completed the acquisition of substantially all of the assets, other than patents and patent rights, of Vertical Networks, a leading provider of distributed IP-PBX software and communications solutions to large enterprises, pursuant to the terms of an asset purchase agreement entered into on September 23, 2004. Artisoft has also received a patent license for the use of all of Vertical Networks' patents and patent applications other than Vertical Networks' rights under specified patents that do not relate to the business purchased by Artisoft. In addition, Artisoft assumed specific liabilities of Vertical Networks.

        The purchase price for Vertical Networks consisted of: $13.5 million in cash, paid at closing except for $1.0 million held in escrow to secure Vertical Networks' indemnification obligations to Artisoft, the assumption of most liabilities of Vertical Networks and up to $5.5 million in cash payable under an earn-out provision in an amount equal to the first $5.5 million of non-refundable software license revenues received in cash by Artisoft from CVS Pharmacy, Inc. with respect to various types of Vertical Networks software to be used by CVS in connection with a rapid prescription refill project that it plans to roll out to its stores and other projects.

        The acquisition was financed with a portion of the proceeds from a $27.5 million common stock financing also completed on September 28, 2004 and shortly thereafter, pursuant to which Artisoft sold a total of 24,159,468 shares of its common stock at a per share purchase price of $1.1386 to several investors, including M/C Venture Partners. In connection with or, prior to the financing, the holders of all shares of Artisoft's preferred stock converted those shares into common stock. Following the issuance and sale of common stock in the financing and the conversions of Artisoft's preferred stock to common stock, M/C Venture Partners is now the largest beneficial holder of Artisoft's common stock, with a 51.69% beneficial ownership interest.

        The acquisition of Vertical Networks provides Artisoft with access to highly distributed large enterprise customers, and with additional technology, which can be incorporated into its product lines. Artisoft intends to continue to sell the InstantOffice product line to highly distributed enterprise customers, and will exchange advanced technologies and software applications between the TeleVantage

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product line and the InstantOffice product line. Artisoft will also benefit from the enterprise sales force inherited from Vertical Networks, and its large systems integrator partners.

        Concurrent with the acquisition of Vertical Networks, William Y. Tauscher, Artisoft's Chairman of the Board assumed the role of CEO of the combined companies. Steven G. Manson, Artisoft's former CEO has continued his role as President of the Company.

        Artisoft's financial condition as of, and results of operations for the fiscal year ended, June 30, 2004 do not reflect the financial condition or results of operations of Vertical Networks, as Artisoft completed the acquisition on September 28, 2004.

        TeleVantage is a software-based phone system that runs on the Windows server platform and Intel communications hardware. The product is primarily sold to small to mid-sized businesses, corporate branch offices and call centers. TeleVantage includes the functionality of a stand-alone private branch exchange, or PBX, plus advanced call management features.

        In its 2004 fiscal year, Artisoft began shipping TeleVantage 6.0. The release includes many flexible features designed to improve customer service and enhance productivity, while at the same time lowering cost of ownership. With this release Artisoft introduced TeleVantage ViewPoint, a new version of the system's graphical interface that allows users to visually manage their calls and messages from any PC. All ViewPoint features can be used with any remote phone—including IP, home and cell phones—allowing telecommuters and mobile workers to point-and-click to conference or record calls; juggle multiple calls on hold; and drag and drop to transfer calls or dial numbers. ViewPoint transforms remote phones into fully functional TeleVantage office extensions, offering the perfect solution for organizations that employ home office or traveling workers.

        This new release greatly expands the range of companies that can benefit from TeleVantage. Scalability has been increased by 50% to accommodate larger organizations, supporting up to 288 incoming trunks and 720 phones per TeleVantage server. For smaller configurations, TeleVantage now supports Intel® Dialogic® telephony hardware that handles 4 trunks, 8 stations, 4 Voice over IP ("VoIP") calls and conferencing using a single PCI slot, making it a cost-effective choice for corporate branch and small offices. Regardless of office size, the rich features of TeleVantage remain consistent, making it an ideal solution for multi-site businesses to standardize on a single solution.

        Businesses can also realize many of the benefits of TeleVantage 6.0 without replacing their legacy PBX investment. As an adjunct system to a legacy PBX, TeleVantage can provide unified messaging, conference bridge facilities, call center management, and CRM integration.

        In addition, TeleVantage 6.0 improves the productivity and lowers the cost of doing business with many other powerful features, including: rules-based call handling, graphical voice mail, comprehensive messaging, automated attendant, Web browser access and IP telephony. Industry-standard Application Programming Interface ("APIs") enable development of customized applications and tight integration with database systems such as CRM applications.

        Artisoft also sells TeleVantage Small Office Edition, a turnkey bundled solution that provides small businesses with a sophisticated phone system at an affordable price; TeleVantage Call Classifier 2.0, which provides advanced call routing and agent scripting based on customer data; and TeleVantage Call Center Scoreboard 1.0, a tool for call center managers who need to closely monitor call center queue and agent performance.

        Artisoft has an original equipment manufacturer ("OEM") relationship with Toshiba, which is selling and supporting a re-branded version of TeleVantage 6.0, called Strata CS, through its extensive dealer channel. Artisoft has developed complete support for the integration of TeleVantage and Toshiba's popular Strata DK handsets, enhancing both companies' ability to pursue this market opportunity. The companies have extended their OEM agreement through the end of February 2005.

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        Artisoft has formed an Open Communications Alliance. The Open Communications Alliance is an effort to deliver standards-based communications solutions with TeleVantage as the focal point. It includes relationships with leading technology vendors in the Customer Relationship Management ("CRM"), call center, VoIP, business automation and speech recognition fields.

        TeleVantage also continued to be honored for technical excellence during the 2004 fiscal year with awards from industry leading publications, events and associations. In fiscal 2004, TeleVantage received Technology Marketing Corporation's "Best of Show" at the Internet Telephony Conference & Expo. TeleVantage also received Customer Inter@ction Solutions® magazine's CRM Excellence Award for the second year in a row.

        With the acquisition of Vertical Networks, Artisoft now sells the InstantOffice family of products. InstantOffice is a server-based phone system that runs on the Windows server platform. The product is primarily sold to distributed large enterprises, corporate branch offices and retail businesses. InstantOffice includes the functionality of a stand-alone private branch exchange, or PBX, plus robust remote management features. The InstantOffice products also serve as a platform for enterprise applications such as interactive voice response or IVR applications, fax server applications and advanced outbound dialing applications.

        InstantOffice also features advanced add-on applications such as MultiSite Manager and MultiSite Reporter that facilitate the management of highly distributed enterprises that desire centralized administration of their telecommunications infrastructure.

        In fiscal year 2003, InstantOffice was selected by CVS/pharmacy as the telecommunications solution for all its stores, and to date CVS has rolled out over a thousand InstantOffice systems to its stores. In late fiscal 2004, InstantOffice was selected as the telecommunications solution for Staples, Inc.'s retail stores, and roll out of systems to Staples stores has begun in fiscal year 2005. Vertical Network's focus on building a solution for highly distributed enterprises, such as retail stores, has provided companies like CVS and Staples with a communications solution which supports the way they do business, and allows them an opportunity to maintain full control of their telecommunications systems.

        For the fiscal year 2004, Artisoft generated total net revenue of $9.0 million compared to total net revenue of $6.6 million in fiscal year 2003. The increase in revenue for fiscal year 2004 is attributable primarily due to increased TeleVantage revenue resulting from the release of TeleVantage 6.0 in March 2004 which increased scalability by 50% compared to TeleVantage 5.0. In fiscal year 2004 net product revenue from TeleVantage included approximately $.7 million relating to Toshiba. Our Toshiba-related revenue in fiscal year 2004 reflected non-cash charges against revenue of approximately $.3 million relating to amortized equity costs resulting from Toshiba's 2000 investment in Artisoft. Artisoft records Toshiba product revenue when Toshiba has shipped the products to its customers as Artisoft does not have the ability to estimate returns, including stock rotations. In the event, for example, Toshiba replaces its existing inventory of TeleVantage with an updated version. For all other product sales, revenue is recognized at the time of shipment because the Company has sufficient information, experience and history to support its ability to estimate returns, including future stock rotations.

        For the fiscal year 2003, Artisoft had net sales of $6.6 million, as compared to net sales of $6.1 million in fiscal year 2002. The increase in revenue for fiscal year 2003 is attributable primarily due to increased TeleVantage revenue resulting from the release of TeleVantage 5.0 in December 2002. TeleVantage 5.0, which increased scalability significantly from the previous release enabled Artisoft to engage in additional markets and attract larger opportunities. During fiscal year 2002, Artisoft discontinued selling add-on Dialogic hardware.

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        For the fiscal year 2002, Artisoft had net sales of $6.1 million, as compared to net sales of $6.3 million in its 2001 fiscal year. The decrease in revenue for fiscal year 2002 is attributable primarily to a decrease of $.8 million in professional service fees from Intel, offset by an increase in net product revenue of $.6 million. The decrease was also due in part to the Company's decision to discontinue selling add-on Dialogic hardware and a decrease in distribution channel inventories.

        At June 30, 2004, our total assets were approximately $5.1 million and at June 30, 2003, our total assets were approximately $5.0 million.

PRODUCTS

        As of June 30, 2004, the Company's products included TeleVantage 6.0, TeleVantage Call Center module, and several add-ons, including TeleVantage Call Center Scoreboard, TeleVantage Call Classifier, TeleVantage Smart Dialer, TeleVantage Persistent Pager and TeleVantage Conference Manager. The TeleVantage product line is primarily sold to small to mid-size companies, or to large companies for use in their branch offices or call centers.

        As a result of the acquisition of Vertical Networks on September 28, 2004 the Company now also sells the InstantOffice product family and associated software applications. This includes InstantOffice 3000 Series and InstantOffice 6000 Series integrated communications platforms, the MultiSite Manager application, the MultiSite Reporter application, and custom interactive voice response or IVR solutions. The InstantOffice product line is primarily sold to highly distributed large enterprises such as retailers, or businesses that require remote administration and centralized management and reporting on their telecommunications network.

        The Company plans to continue selling and distributing both product lines to their respective markets.

RAW MATERIALS, MANUFACTURING AND SUPPLIERS

        The Company does not manufacture any of the hardware necessary to be used in conjunction with its software-based phone system. The Company's distributors purchase Intel voice processing boards for sale with its TeleVantage product. TeleVantage is designed to operate on servers built by multiple manufacturers in conjunction with the Intel boards. The functionality of the Company's telephony software products is dependent on the continued availability of hardware assemblies from Intel. To date, customer returns of the Company's products for defective workmanship have not been material.

        As a result of the acquisition of Vertical Networks on September 28, 2004, the Company designs and distributes the hardware on which the InstantOffice product operates, including phones and custom server hardware. Continued sales of the InstantOffice product are dependent upon continued availability of the commercially available components used to manufacture the custom hardware incorporated into the product, as well as continued cooperation by the manufacturers involved in assembling the custom servers used by the product. The Company does not manufacture the hardware utilized by the InstantOffice product and holds only limited amounts of inventory for purposes of replacements of systems or parts as required for field support.

MARKETING, SALES AND DISTRIBUTION

        The Company's principal marketing strategy is to create reseller and customer demand for the Company's products and to use distributors to meet this demand. The Company's authorized resellers and distributors are selected for their sales ability, technical expertise, reputation and financial resources. The Company sells direct to large enterprise customers which require coordinated sales and support across multiple geographic areas. The Company also sells direct to Toshiba as an OEM of the TeleVantage product line. The Company's selling efforts have been assisted by product reviews, awards and recognition earned from technology publications.

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        The Company's marketing programs have three objectives: first, to create brand name recognition of the Company and its products; second, to generate sales leads for its resellers, distributors and systems integrators; and third, to support the sales efforts of its resellers, distributors, and systems integrators through market development funding, sales tools and training. Marketing activities that address the first two objectives include frequent participation in industry trade shows and seminars, direct mail, advertising in major trade publications, executive participation in press briefings and industry seminars, sponsorship of seminars by the Company and on-going communication with the Company's end users. The Company is also increasing its focus on telemarketing to identify prospective customers and put them in touch with our resellers. To train and support resellers, distributors and systems integrators, the Company provides electronic mailings of product and technical updates, seminar material, presentations, and promotions. The Company has recently undertaken a value-added reseller recruitment initiative to insure that resellers are available in all major geographic markets. The Company also conducts marketing and sales training to assist its TeleVantage and InstantOffice resellers, distributors and systems integrators with growing their business, and offers market development funding to assist them in generating leads for TeleVantage and InstantOffice systems.

        Artisoft records Toshiba product revenue when Toshiba has shipped the products to its customers as Artisoft does not have the ability to estimate returns, including stock rotations. For all other product sales, including those to distributors, value-added resellers, revenue is recognized at the time of shipment because the Company has sufficient information, experience and history to support its ability to estimate future stock rotations and all other revenue criteria have been met upon shipment. This is largely because all of the Company's other distributors carry minimal amounts of inventory and most of them are now ordering product on a just in time basis using the company's electronic license distribution system. If the Company introduces more products, timing of sales to end users and returns to the Company of unsold products by distributors may become more difficult to predict and could result in material fluctuations in quarterly operating results.

        Substantially all of the Company's TeleVantage revenue in each fiscal quarter results from orders booked in that quarter. A significant percentage of the Company's bookings and sales to major distributors on a quarterly basis historically has occurred during the last month of the quarter and is usually concentrated in the latter half of that month. The timing of new product announcements and introductions by the Company or significant product returns by major customers to the Company could also result in material fluctuations in quarterly operating results. The timing of orders from large enterprise customers could also result in material fluctuations in quarterly operating results.

        The Company supports its products through non-fee-based phone support provided to TeleVantage and InstantOffice resellers, and systems integrators and through a technical support web site. TeleVantage resellers attend training sessions provided by the Company prior to being certified as resellers.

        The Company's ability to compete is dependent upon the timely introduction of new products to the marketplace and the timely enhancement of existing products. Product development expenses totaled approximately $3.2 million in fiscal year 2004, $3.1 million in fiscal year 2003 and $3.5 million in fiscal year 2002.

        The Company utilizes a sales, marketing and distribution strategy with regard to its TeleVantage product line as follows. The Company employs regional sales managers to recruit and support qualified TeleVantage resellers. TeleVantage software is sold to national distributors, principally Paracon (through its subsidiary Scansource, doing business as Catalyst Telecom), Cygcom, and Alliance Systems. These distributors then sell the TeleVantage software and associated Intel hardware to the qualified TeleVantage resellers as warranted by end-user demand. Large enterprise customers that span several geographic territories are handled by the Company's enterprise sales team, which can sell direct or coordinate the services of several TeleVantage resellers.

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        As a result of the acquisition on September 28, 2004 of Vertical Networks, the Company distributes the InstantOffice product line direct to its InstantOffice resellers and systems integrators, principally AT&T and IBM. These partners sell and support the product line and provide value added services to InstantOffice customers. The Company also has a direct sales force which assists resellers and systems integrators or handles sells direct to customers who do not require the services of a value added reseller or system integrator.

SEASONALITY

        Typically, the telecommunications and computer telephony industries experience some seasonal variations in demand, with weaker sales in July and August because of customers' vacations and planned international shutdowns. This seasonality is especially notable in Europe. Sales of phone systems can also be weak in the months of January and February following typically stronger sales in the November-December time frame. Artisoft experiences fluctuations in the demand for its products consistent with the fluctuations experienced in the telecommunications and computer telephony industries overall.

COMPETITION

        The Company's TeleVantage and InstantOffice software-based phone systems principally compete with proprietary PBXs offered by companies such as Nortel, Siemens and Avaya, proprietary IP-PBX products offered by Cisco and 3Com, proprietary PC-PBX products offered by Altigen, and high end call center software offered by Interactive Intelligence. Many of these companies have substantially greater financial, technological, production, sales and marketing and other recourses, as well as greater name recognition and larger customer bases than does Artisoft. The Company competes with these offerings primarily on the basis of product architecture, price, vendor and product reputation, quality of product and support and effectiveness of sales and marketing efforts. The Company believes that it competes favorably in these areas. Our competitors may be able to respond quickly and effectively than can Artisoft to new or emerging technologies and changes in customer requirements or to devote greater resources than can Artisoft to the development, promotion, sales and support of their products.

INTERNATIONAL BUSINESS

        The Company markets and sells its products in international as well as domestic markets. International sales accounted for 15% in fiscal year 2004, 12% in fiscal year 2003, and 8% in fiscal year 2002 of the Company's net sales. Less than 1% of the Company's assets were deployed to support the Company's international business at the end of fiscal years 2004 and 2003.

        The Company's major international distribution relationships include the following: Icon PLC (United Kingdom), Midia (Ireland), Burkhalter (Switzerland), Commlogik (Latin America), Boport Tele-Communication BV (The Netherlands) and Logic Phone (Spain).

        Sales to non-U.S. customers are substantially all in U.S. dollars. These customers may be affected by fluctuations in exchange rates and government regulations. To date, the Company's operations have not been affected materially by currency fluctuations.

        With the acquisition of Vertical Networks on September 28, 2004 the Company has added Selta Telematica of Italy as a European distribution partner. Selta has distribution rights for the InstantOffice product line in Europe.

SIGNIFICANT CUSTOMERS

        The Company sells its products through a variety of channels of distribution, including distributors, resellers and OEMs. In fiscal year 2004, Paracon accounted for 37% of total net sales. In fiscal year 2003, Paracon accounted for 42% of total net sales.

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        At June 30, 2004, Paracon accounted for 31% of the Company's outstanding gross trade receivables. At June 30, 2003 Paracon accounted for 36% of the Company's outstanding gross trade receivables.

        Our relationship with Paracon is through its subsidiary Scansource, which is doing business as Catalyst Telecom.

        With the acquisition of Vertical Networks on September 28, 2004, the Company has added several large enterprise customers including CVS/pharmacy and Staples, Inc. who will represent a majority of the sales of the InstantOffice product line.

BACKLOG

        Substantially all of the Company's revenue in each quarter results from orders booked in that quarter. Accordingly, the Company does not believe that its backlog at any particular point is indicative of future sales.

        As a result of the September 28, 2004 acquisition of Vertical Networks, the Company has a backlog of orders for CVS/pharmacy and Staples, Inc. These orders will be scheduled for delivery at the discretion of the customers and as such are not necessarily indicative of levels of future sales during any period.

PROPRIETARY RIGHTS AND LICENSES

        The Company has a number of registered trademarks, including "ARTISOFT" and "TELEVANTAGE." These registered trademarks have the effect of helping the Company identify and distinguish the Company's name and its products from others in the marketplace and protecting the Company from unauthorized use of these trademarks. These registered trademarks are of material importance to the Company because they identify the Company's name and its single family of products. Under state common law, the Company's trademarks continue indefinitely. The registered trademark "ARTISOFT" is due for renewal in the United States in November 2012 and the registered trademark "TELEVANTAGE" is due for renewal in the United States in January 2010. Since the acquisition of Vertical Networks on September 28, 2004 the Company has also acquired additional registered trademarks, including "VERTICAL NETWORKS," "InstantOffice" and "MISCELLANEOUS DESIGN."

        The Company currently relies on a combination of copyright, trademark and patent laws, nondisclosure and other contractual agreements and other technical measures to establish and protect its proprietary rights in its products and to protect its technologies from appropriation by others. Despite these precautions, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information the Company regards as proprietary. In addition, it may be possible for others to develop products using technologies similar to the Company's but which do not infringe upon the Company's proprietary rights.

        While the Company's success will depend to a certain degree on its ability to protect its technologies, the Company believes that, because of the rapid pace of technological change in the industries in which the Company competes, the legal protections for its products are less significant factors in the Company's success than the knowledge, ability and experience of the Company's employees, the nature and frequency of product enhancements and the timeliness and quality of support services provided by the Company.

        From time to time, the Company has received and may in the future receive communications from third parties asserting that the Company's trade names or features, content, or trademarks of certain of the Company's products infringe upon intellectual property rights held by such third parties. Such claims could have an adverse affect on the Company and may also require the Company to obtain one

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or more licenses from third parties. There can be no assurance that the Company would be able to obtain any such required licenses upon reasonable terms, if at all, and the failure by the Company to obtain such licenses could have an adverse effect on its business, results of operations and financial condition. If the Company were able to obtain such licenses, the licensing costs could materially affect the Company's future financial results. In addition, the Company licenses technology on a non-exclusive basis from several companies for inclusion in its products and anticipates that it will continue to do so in the future. The inability of the Company to continue to license these technologies or to license other necessary technologies for inclusion in its products, or substantial increases in royalty payments under these third party licenses, could have an adverse effect on its business, results of operations and financial condition.

        Litigation or threatened litigation in the software development industry has increasingly been used as a competitive tactic both by established companies seeking to protect their existing position in the market and by emerging companies attempting to gain access to the market. If the Company is required to defend itself against a claim, whether or not meritorious, the Company could be forced to incur substantial expense and diversion of management attention, and may encounter market confusion and reluctance of customers to purchase the Company's software products. Such litigation, if determined adversely to the Company, could have an adverse effect on its business, results of operations and financial condition.

        In the course of its product development efforts, the Company periodically identifies certain technologies owned by others that either would be useful to incorporate into its products or are necessary in order to remain competitive in light of industry trends. In these cases, the Company has in the past sought to obtain licenses of such third-party technologies. The Company expects that it will continue to find it desirable or necessary to obtain additional technology licenses from others, but there can be no assurance that any particular license will be available at all, or on acceptable terms, at any future time. The royalties paid on future licensing arrangements may adversely impact the Company's operating results.

        Artisoft entered into a patent license agreement with Lucent Technologies in June 2000. Under the agreement, Artisoft received a nonexclusive and nontransferable license to voice processing technologies it uses in TeleVantage. The agreement expires on June 30, 2005, but may be terminated prior to that date by either party upon six months notice. Artisoft paid an initial $250,000 royalty under the agreement and is required to pay additional royalties under the agreement to the extent sales of TeleVantage exceed $25.0 million during the term of the agreement. The licensing by Lucent Technologies of its products or brand name to competitors of the Company, or the withdrawal or termination of licensing rights to the Company's technologies, could have an adverse affect on the Company's sale of products incorporating such licensed technologies and the Company's results of operations as a whole.

EMPLOYEES

        As of June 30, 2004, the Company had 80 full-time employees, including approximately 43 in sales, marketing and customer support, 26 in engineering and product development, 1 in operations and 10 in administration. Future success of the Company will depend in large part on its continued ability to retain highly skilled and qualified personnel. None of the Company's employees are represented by a labor union. The Company has experienced no work stoppages and believes that its relations with its employees are good.

        With the acquisition of Vertical Networks on September 28, 2004 the Company added 64 employees in Sunnyvale, California.

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ITEM 2. PROPERTIES.

        The Company leases property as detailed in the following table.

        Aggregate annual rental payments for the Company's Cambridge facilities were approximately $1,166,000 in fiscal year 2004. The lease of our Sunnyvale, California location carries annual rental payments of approximately $500,000.

        The Company's current facilities are generally adequate for anticipated needs over the next 12 to 24 months. The Company's lease on its facility in Sunnyvale, CA expires in May of 2005. The company will investigate leasing appropriate space in the Sunnyvale vicinity, and intends to continue operations there. The Company does not own any real property.

ITEM 3. LEGAL PROCEEDINGS.

        The Company is a party to legal proceedings arising in the ordinary course of its business. The Company believes that the ultimate resolution of these proceedings will not have a material adverse effect on its financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        During the fiscal quarter ended June 30, 2004, there were no matters submitted to a vote of security holders of Artisoft, through the solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth information concerning the executive officers of the Company as of October 11, 2004:

        William Tauscher has served as Chairman of Artisoft's board of directors since February 2004 and as Chief Executive Officer since September 2004. Mr. Tauscher served as the managing member of The Tauscher Group, which invests and assists in the management of enterprises in various industries. Before founding The Tauscher Group, Mr. Tauscher served as chairman and CEO of Vanstar Corporation (formerly ComputerLand Corporation), having led the group that acquired ComputerLand in 1987. He currently serves on several boards of directors, including Safeway Corporation, a $30 billion NYSE listed grocery company, and holds controlling investments in a number of successful companies.

        Steven G. Manson served as a Director and Chief Executive Officer of Artisoft from July 2000 to September 28, 2004, and has served as President of Artisoft since July of 2000. Mr. Manson joined Artisoft in 1996 as Vice President of Product Management—Computer Telephony Division. Subsequently, he was named Vice President and General Manger, and then Senior Vice President and General Manager of the Computer Telephony Products Group. Earlier in his career, Mr. Manson held

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various senior level marketing positions at Gensym Corporation, Cadre Technologies, Inc. and Prime Computer Inc.

        Christopher H. Brookins joined Artisoft in 1996 as Vice President of Development—Computer Telephony Division, upon the acquisition of Stylus Innovation by Artisoft. In June 1999, Mr. Brookins was named Chief Technology Officer and Vice President of Development of Artisoft. With the acquisition of Vertical Networks on September 28, 2004, Mr. Brookins assumed the role of Senior Vice President of Development. Prior to joining Artisoft, Mr. Brookins served as Vice President of Development at Stylus Innovation from 1993 to 1996. Mr. Brookins also held a senior management position at Easel Corporation from 1989 to 1993.

        Duncan G. Perry joined Artisoft in February 2003 as Chief Financial Officer. Prior to joining Artisoft, from 2000 to 2002, he served as Chief Financial Officer for SupplyWorks, Inc., a software application developer in the supply chain management space. He also held the roles of Chief Financial Officer and Chief Information Officer at Elron Software, an internet security software company, from 1997 to 2000, was Director of Finance and Director of IT for ON Technology Corporation, a network software application provider, from 1994 to 1997, and held numerous financial management positions at IBM. Mr. Perry is a Certified Management Accountant.

        Mel Passarelli joined Artisoft in January 2004 as Vice President of Sales. Prior to joining Artisoft, he served as Executive Vice President of Create!form International, a provider of software products that streamline and e-enable output formatting and delivery of business documents. Earlier, he served as executive vice president of worldwide sales and customer support for Omtool, Ltd., a developer of enterprise fax and secure e-mail solutions; and vice president of sales, marketing and customer support for Geographic Data Technologies, Inc., a supplier of software, services, and content for digital mapping applications. Mr. Passarelli also worked as vice president of sales, marketing, and business development at MAK Technologies, Inc., a supplier of simulation networking software; and as vice president of sales and marketing at ATSI, Inc., a provider of contract programming and outsourcing services.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

        The principal market for Artisoft's common stock is the OTC Bulletin Board, and the common stock is traded under the symbol ASFT. Artisoft was previously listed on the NASDAQ SmallCap Market but was delisted effective November 19, 2003. NASDAQ advised the Company that, as the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 reported total shareholders' equity below the required minimum of $2.5 million, the Company had not satisfied the requirement for continued listing. In April 2003, Artisoft implemented a one-for-six reverse split of its common stock. Unless otherwise noted, data used throughout this Annual Report on Form 10-K is adjusted to reflect that reverse stock split.

        The following table presents the high and low sale prices of Artisoft's common stock for each calendar quarter of the fiscal years ended June 30, 2004 and 2003, as reported by The NASDAQ Stock Market and the OTC Bulletin Board. These quotations may reflect inter-dealer prices, without related mark-up, mark-down or commission and may not necessarily represent actual transactions.

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        There were 175 record holders of Artisoft's common stock at June 30, 2004. This number does not include stockholders who hold their shares in "street name" or through broker or nominee accounts.

ITEM 6. SELECTED FINANCIAL DATA.

        Artisoft paid no cash dividends in fiscal year 2004 or 2003. Artisoft currently intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Artisoft generally requires the consent of MC Venture Partners, its' largest stockholder, to pay cash dividends. The selected consolidated financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included in this Annual Report on Form 10-K.

        The selected consolidated financial data set forth below as of June 30, 2004 and 2003 and for the years ended June 30, 2004, 2003 and 2002 are derived from the audited consolidated financial statements of Artisoft included in this Annual Report on Form 10-K. All other selected consolidated financial data set forth below is derived from audited financial statements of Artisoft not included in this Annual Report on Form 10-K. Artisoft's historical results are not necessarily indicative of its results of operations to be expected in the future.

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SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

        You should read the following discussion together with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. Actual results may differ materially from those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under "Risk Factors" commencing on page 23, as well as those otherwise discussed in this section and elsewhere in this Annual Report on Form 10-K. See "Forward-Looking Statements."

OVERVIEW

        The following is a summary of the areas that management believes are important in understanding the results of the fiscal year. This summary is not a substitute for the detail provided in the following pages or for the consolidated financial statements and notes that appear elsewhere in this document.

        The Company has two families of products, TeleVantage, a shrink-wrap software-based phone system that runs on a Windows server platform and Intel communications hardware, and InstantOffice a software based phone system that runs on a Windows server platform and proprietary hardware. TeleVantage has an optional Call Center module, and add-ons, such as TeleVantage Conference Manager, TeleVantage Call Center Scoreboard, TeleVantage Call Classifier, TeleVantage Smart Dialer and TeleVantage persistent pager. All modules are fully integrated and represent shrink-wrap software. InstantOffice supports add-ons such as custom IVR applications, and software applications including MultiSite Manager and MultiSite Reporter which facilitate remote management of large networks of InstantOffice installations.

        For fiscal year 2004, Artisoft had total net revenue of $9.0 million compared to total net revenue in fiscal year 2003 of $6.6 million. The increase of 36.1% in revenue for fiscal year 2004 is attributable to an increase of TeleVantage product revenue of $2.4 million. We achieved this through an increase in the number of TeleVantage licenses sold and through increasing average deal size resulting from the release of TeleVantage 6.0. This new release greatly expands the range of companies that can benefit from TeleVantage. Scalability has been increased by 50% to accommodate larger organizations. Since the acquisition of Vertical Networks was completed on September 28, 2004, our fiscal 2004 results do not include any revenue or expenses related to InstantOffice; however we expect revenues to increase significantly in fiscal 2005 as a result of the acquisition of Vertical Networks, Inc.

        Gross margins for fiscal year 2004 increased slightly to 97.1%, compared to 96.4% in fiscal year 2003. This increase was primarily the result of efficiencies and savings derived from increased use of electronic distribution of licenses. We believe that all or nearly all of the savings to be achieved through such electronic distribution have been achieved but we expect gross margins to decrease due to hardware costs included in InstantOffice revenue.

        Operating expenses for fiscal year 2004 decreased approximately 11.6%, compared to fiscal year 2003. Despite the overall reduction in operating expenses, sales and marketing expenses increased by 5.8% due to costs associated with an increase in personnel in the sales and marketing organization consistent with increased levels of total net revenues. We expect operating expenses to increases significantly as a result of the acquisition of Vertical Networks.

        Product development expenses for fiscal year 2004 increased slightly by 3.9% compared to fiscal year 2003, largely due to higher employer costs and a reduction in the capitalized development costs in fiscal 2004 relating to the release of TeleVantage 6.0 in comparison to the amount capitalized in fiscal year 2003 for the release of TeleVantage 5.0. We expect product development resources to increase

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significantly as a result of the acquisition of Vertical Networks. We will continue to invest in the development of the InstantOffice product line.

        The decrease in general and administrative expenses was primarily the result of a reversal of a tax liability accrual related to our stock incentive plan. We originally established the accrual in the quarter ended September 2002 for $.7 million. We reduced the accrual by $.3 million in the third quarter of fiscal year 2003 and by the remaining $.4 million in the third quarter of fiscal year 2004, based on available information. In addition, general and administrative costs decreased by 41.5% in comparison to fiscal year 2003, largely as a result of a reduction in professional fees, depreciation and executive severance costs. We expect general and administrative expenses to increase as a result of the acquisition of Vertical Networks.

        The Company anticipates the overall operating expenses will increase as a result of the acquisition of Vertical Networks. However, the Company believes that it will be able to reduce some operating expenses over time as redundant operations are eliminated and overhead cost elements are reduced.

CRITICAL ACCOUNTING POLICIES

        We have identified the policies below as critical to the understanding of our results of operations. Note that our preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition. Management bases its estimates and judgments on historical experience and on various other factors that are believed 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 those estimates.

        Critical accounting polices are those policies that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. We believe our most critical accounting policies is as follows:

Revenue Recognition.

        The Company follows the provisions of the statement of position "SOP" 97-2, SOFTWARE REVENUE RECOGNITION as amended by SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition, with Respect to Certain Transactions. Generally, the Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable and collectability is reasonably assured. The Company reduces revenue for estimated customer returns, rotations and sales rebates when such amounts can be estimated. When these amounts cannot be estimated, the Company defers revenue until the product is sold to the end-user. As part of its product sales price, the Company provides phone support, which is generally utilized by the customer shortly after the sale. The cost of the phone support is not significant but is accrued in the financial statements. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue.

        Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, provided the Company has vendor-specific objective evidence of the fair value of each undelivered element. Revenue is deferred for the fair value of the undelivered elements based upon the price of these elements when sold separately. Revenue is also deferred for the entire arrangement if vendor-specific objective evidence does not exist for each undelivered contract element.

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Examples of undelivered elements in which the timing of delivery is uncertain include contractual elements that give customers rights to any future upgrades at no additional charge or future maintenance that is provided within the overall price. The revenue that is deferred for any contract element is recognized when all of the revenue recognition criteria have been met for that element. Revenue for annual software subscriptions is recognized ratably over the length of the software subscription.

        In January 2000, the Company executed a strategic alliance agreement with Toshiba intended to allow the Company and Toshiba to deliver an integrated communications server and software-PBX solution for small and midsize businesses. TeleVantage 4.0 represented the results of a 1¹/2 year joint-engineering project with Toshiba to integrate TeleVantage with Toshiba digital handsets. Through an Original Equipment Manufacturer ("OEM") arrangement with Artisoft, Toshiba is marketing TeleVantage under the Strata CS brand, which is being distributed and supported through Toshiba's established dealer channel. Under the terms of the agreement, Toshiba has purchased licenses of TeleVantage for customized versions of the software product to be integrated with its digital handsets and communications server product offerings. The Company defers revenue on shipments to Toshiba until the product is resold by Toshiba to its customers. The deferral of revenue is due to Artisoft's inability to reasonably estimate potential future stock rotations resulting from future product releases and their effect on future revenue. For all other product sales, revenue is recognized at the time of shipment because the Company has sufficient information, experience and history to support its ability to estimate future stock rotations.

RESULTS OF OPERATIONS

Revenue and Gross Profit (in thousands, except percentages)

NET REVENUE

        Product Revenue.    Net product revenue increased 36% to $9.0 million for fiscal year 2004 from $6.6 million for fiscal year 2003. Net product revenue increased 9% to $6.6 million for fiscal year 2003 from $6.1 million for fiscal year 2002. The increases in net product revenue for the fiscal years 2004 and 2003 were due primarily to increases in TeleVantage revenue. We achieved this through increases in the number of TeleVantage licenses sold and through increasing average deal size resulting from the release of TeleVantage 6.0 in fiscal 2004 and TeleVantage 5.0 in 2003. With the acquisition of Vertical Networks on September 28, 2004 the Company expects to significantly increase its product revenues. The Company acquired the InstantOffice product line, as well as relationships with AT&T and IBM, and large customers including CVS/pharmacy and Staples, Inc. While the exact impact of the acquisition upon revenue cannot be determined in advance, it is clear that the acquisition will bring incremental revenues, and those increments may to be significant.

        The Company distributes its products internationally. International product revenue was 15%, 12% and 8% of total net revenue for fiscal years 2004, 2003 and 2002, respectively. International revenue increased 73% to $1.3 million in fiscal year 2004 from $.8 million in fiscal year 2003. International revenue increased 52% to $.8 million in fiscal year 2003 from $.5 million in fiscal year 2002. The increase in international revenue in fiscal year 2004 was due primarily to increased volume of sales of

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TeleVantage products in our existing international markets, accompanied with an increase in average deal size. The Company continues to focus on and strengthen its distribution efforts in international geographic regions.

GROSS PROFIT

        Product.    The Company's gross profit from net product revenue was $8.7 million, $6.4 million and $5.2 million in fiscal years 2004, 2003 and 2002, respectively, or 97%, 96% and 86% of net product revenue, respectively. The increase in gross profit percentage from net product revenue for fiscal years 2004 and 2003 as compared to fiscal year 2002 was primarily due to an increase in higher margin TeleVantage software sales coupled with a decrease in the percentage of revenue derived from lower margin Intel Dialogic add-on hardware which was discontinued in fiscal year 2002. Gross profit may fluctuate on a quarterly and yearly basis because of product mix, pricing actions and changes in sales and inventory allowances. Gross profits are expected to increase significantly as a result of incremental revenue from the InstantOffice product line but we expect gross profit as a percentage of revenue to decrease due to hardware costs included in InstantOffice revenue.

OPERATING EXPENSES

        Operating Expenses (in thousands, except percentages)

SALES AND MARKETING

        Sales and marketing expenses were $5.9 million, $5.5 million and $5.9 million for fiscal years 2004, 2003 and 2002, respectively, representing 65%, 84% and 97% of total net revenue, respectively. The increase in sales and marketing expense in aggregate dollars for fiscal year 2004 compared to fiscal year 2003 was primarily due to an increase in personnel. In fiscal 2003 we also incurred a non-recurring charge of approximately $.2 million relating to executive severance compensation. The reduction of sales and marketing expenses in fiscal year 2004 as a percentage of net revenue in comparison to fiscal year 2003 was due to increases in TeleVantage sales outpacing increases in sales and marketing expenses resulting from larger sized system sales. The decrease in sales and marketing expenses in aggregate dollars for fiscal year 2003 compared to fiscal year 2002 was due primarily to a reduction in marketing program expense. This reduction coupled with an increase in net revenue contributed to the reduction in sales and marketing expense as a percentage of total net revenue for fiscal year 2003 compared to fiscal year 2002. Aggregate sales and marketing expenses are expected to increase significantly as a result of the acquisition of Vertical Networks.

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PRODUCT DEVELOPMENT

        Product development expenses were $3.2 million, $3.1 million and $3.5 million for fiscal years 2004, 2003 and 2002, respectively, representing 36%, 47% and 57% of total net revenue, respectively. The decrease in the ratio of development expense to total net revenue for fiscal years 2004 and 2003 compared to fiscal year 2002 was due primarily to a headcount reduction as well as an increase in total net revenue.

        The Company believes that continued development and introduction to the market in a timely manner of new versions of TeleVantage is critical to its future success. The Company will also continue to develop the InstantOffice product line in the markets that product serves.

GENERAL AND ADMINISTRATIVE

        General and administrative expenses were $2.8 million, $4.8 million and $4.4 million for fiscal years 2004, 2003 and 2002, respectively, representing 32%, 73% and 73% of total net revenue, respectively.

        The decrease in general and administrative expenses in aggregate dollars in fiscal year 2004 as compared to fiscal year 2003 was primarily the result of $.7 million incurred for non-recurring charges related to executive severance compensation, and professional services costs relating to activity associated with registration statements and the Company's NASDAQ listing incurred in fiscal year 2003. Also, a $.4 million net reserve was established during fiscal year 2003 for a tax contingency in connection with the company's stock option plan, which was reversed in fiscal year 2004 when the contingency was resolved. Depreciation expense decreased by $.3 million, due to lower capital expenditures, and occupancy costs decreased by approximately $.1 million. These reductions, in addition to an increase in sales resulted in general and administration expenses as a percentage of sales decreasing in fiscal year 2004.

        The increase in general and administrative expenses in aggregate dollars in fiscal year 2003 as compared to fiscal year 2002 was primarily the result of the non-recurring charges and professional services costs discussed above, which were partially offset by a reduction in the workforce in September 2001. Also, contributing was a reduction in non-recurring occupancy costs and a reduction in tax liabilities.

        The company expects to see increased aggregate general and administrative expenses as a result of the acquisition of Vertical Networks.

OTHER INCOME (EXPENSE)

        Other income (expense), net was $18,000, $61,000 and $188,000 for fiscal years 2004, 2003 and 2002, respectively. The decrease in other income results from decreasing interest rates combined with lower average cash and invested balances.

INCOME TAX EXPENSE

        The effective tax rates for the Company were 0% for fiscal years 2004, 2003 and 2002. No income tax expense or benefit was recognized for fiscal years 2004, 2003, or 2002, as the Company incurred net losses for all periods.

FUTURE RESULTS

        On September 28, 2004 the Company acquired substantially all the assets of Vertical Networks, Inc. ("Vertical Networks") of Sunnyvale, CA. The Company intends to continue investing in the sales, marketing, and development of Vertical Networks' InstantOffice phone system product. The

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Company is still completing pro forma financials reports for the acquired business and the combined businesses, but expects that InstantOffice revenues will increase and reduce or eliminate future operating losses from the InstantOffice business. However, the rate at which these revenues may increase, like those of the TeleVantage product line, will be highly dependent on the overall growth in capital spending on telecom products, the rate of market acceptance of the InstantOffice products and the success of the Company's strategic relationships with AT&T, IBM and Fujitsu.

LIQUIDITY AND CAPITAL RESOURCES

        The Company had cash and cash equivalents of $2.7 million at June 30, 2004 compared to $3.0 million at June 30, 2003. Working capital, representing the difference between current assets and current liabilities was ($0.1) million at June 30, 2004 compared to ($1.0) million at June 30, 2003, an increase of approximately $.9 million. The increase in working capital reflects mainly an increase in net trade receivables of approximately $.5 million, a decrease in accrued liabilities of $.9 million and a decrease in deferred revenue of approximately $.1 million. These increases in were offset by a reduction in cash and cash equivalents of approximately $.3 million, an increase in accounts payable of approximately $.1 million and an increase in customer deposits of approximately $.2 million.

        The decrease in accrued liabilities at June 30, 2004 resulted from the reversal of approximately $.4 million relating to a potential tax exposure which was resolved. The balance of the decrease arose primarily from the settlement of approximately $.3 million relating to a penalty arising from the non-registration of securities issued in our September 2002 financing within prescribed time limits and payment of executive severance of approximately $.2 million. The increase in net trade receivables results from increased revenues.

        For the fiscal year 2004, we received $3.9 million from the sale of series C preferred stock less $.6 million for related expenses. We invested cash of $.1 million to develop software and an additional $.1 million to purchase property and equipment. The Company used cash of $3.5 million to fund operating activities during the fiscal year 2004. The cash used in operating activities was principally the result of $3.2 million in net loss offset by depreciation and amortization of $.4 million, amortization of deferred Toshiba equity costs of $.3 million, non-cash compensation relating to the penalty referred to above of $.3 million, an increase in accounts payable of approximately $.1 million and an increase in customer deposits of approximately $.2 million. Operating activities resulted in trade receivables increasing by $.5 million, accrued liabilities decreasing by $.9 million and deferred revenue decreased by $.1 million.

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        The Company leases office, product packaging, storage space and equipment under noncancelable operating lease agreements expiring through 2005. The table below also includes those contractual payments acquired on the acquisition of Vertical Networks on September 28, 2004.

        On September 28, 2004, Artisoft completed the acquisition of substantially all of the assets of Vertical Networks, a leading provider of distributed IP-PBX software and communications solutions to large enterprises, other than patents and patent rights, pursuant to the terms of an asset purchase agreement entered into on September 23, 2004. Artisoft has also received a patent license for the use of all of Vertical Networks' patents and patent applications other than Vertical Networks' rights under specified patents that do not relate to the business purchased by Artisoft. In addition, Artisoft assumed specified liabilities of Vertical Networks.

        The purchase price for Vertical Networks consisted of: $13.5 million in cash, paid at closing except for $1.0 million held in escrow to secure Vertical Networks' indemnification obligations to Artisoft, the assumption of most liabilities of Vertical Networks and up to $5.5 million in cash payable under an earn-out provision in an amount equal to the first $5.5 million of non-refundable software license revenues received in cash by Artisoft from CVS Pharmacy, Inc. with respect to various types of Vertical Networks software to be used by CVS in connection with a rapid prescription refill project that it plans to roll out to its stores and other projects. The Company is also obligated to pay additional amounts which we estimate to be approximately $5 million, representing professional fees associated with the transaction and assumed liabilities acquired in excess of expected working capital level.

        The acquisition was financed with a portion of the proceeds from a $27.5 million common stock financing also completed on September 28, 2004 and shortly thereafter, pursuant to which Artisoft sold a total 24,159,468 shares of its common stock at a per share purchase price of $1.1386 to several investors, including M/C Venture Partners. In connection with, or prior to the financing, the holders of all shares of Artisoft's preferred stock converted those shares into common stock. Following the issuance and sale of common stock in the financing and the conversions of Artisoft's preferred stock to common stock, M/C Venture Partners is now the largest beneficial holder of Artisoft's common stock, with a 51.69% beneficial ownership interest.

        The stock purchase agreement for the financing provides that the size of Artisoft's board of directors be set at seven members, with the board initially consisting of (1) the chief executive officer of Artisoft (William Y. Tauscher—class II director), (2) one member designated by the former holders of Artisoft's series B preferred stock (Robert J. Majteles—class II director), (3) one member designated by the former holders of Artisoft's series C preferred stock (R. Randy Stolworthy—class II director), (4) two members designated by M/C Venture Partners (John P. Ward and Matthew J. Rubins—class III directors) and (5) two other directors designated by mutual agreement of M/C Venture Partners and Artisoft's board of directors (Michael P. Downey and Francis E. Girard—class I directors).

        Following March 28, 2005, the stock purchase agreement provides that Artisoft's board of directors will consist of (1) its chief executive officer (a class II director), (2) one member designated by Special Situations Fund III, L.P. (an affiliate of Austin W. Marxe and David M. Greenhouse) so long as Special Situations Fund III, L.P. and its affiliates continue to beneficially own at least 50% of the shares of

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Artisoft's common stock acquired upon the conversion of their shares of Artisoft's series B preferred stock, and otherwise, one member designated by the former holders of Artisoft's series B preferred stock and series C preferred stock (a class II director), (3) two members designated by M/C Venture Partners (class III directors) and (4) three directors with relevant industry experience designated by M/C Venture Partners and Artisoft's board of directors (class I directors).

        The investors' designees are entitled to membership on the compensation and nominating committees of the board of directors.

        Artisoft is required to register, under the Securities Act of 1933, the shares issued and sold under the stock purchase agreement for resale by the investors. Artisoft has agreed to file with the Securities and Exchange Commission the registration statement with respect to this registration by November 12, 2004 and to use its best efforts to cause the registration statement to become effective on or before December 31, 2004. If the registration statement is not declared effective by the SEC on or prior to March 31, 2005 or if the registration statement, after being declared effective, ceases to be effective and available for any continuous period that exceeds 30 days or for one or more periods that exceed in the aggregate 60 days in any 12-month period, Artisoft will be required to pay each investor in the financing liquidated damages in an amount equal to 1% of the aggregate purchase price paid by the investor under the purchase agreement (not to exceed 9% of such purchase price, in the aggregate). Artisoft has also made other customary agreements regarding this registration, including matters relating to indemnification; maintenance of the registration statement; payment of expenses; and compliance with state "blue sky" laws.

        Artisoft also agreed to several negative covenants under the stock purchase agreement. Artisoft's negative covenants relate to obligations not to, without the prior consent of M/C Venture Partners, enter into a transaction involving a change in control of Artisoft; incur indebtedness in excess of $3.0 million; create any security with an equity component unless that security is junior to the common stock or, subject to specified exceptions, issue any equity securities; transfer its intellectual property; repurchase, redeem or pay dividends on any shares of capital stock (subject to limited exceptions); grant stock options that are not authorized by a vote of the board of directors or its compensation committee; liquidate or dissolve; change the size of Artisoft's board of directors; amend Artisoft's certificate of incorporation or bylaws; change the nature of Artisoft's business; or alter the voting rights of shares of Artisoft's capital stock in a disparate manner.

        As a result of the sale of common stock under the stock purchase agreement, the exercise price of all of the warrants to purchase an aggregate of 466,664 shares of common stock issued in Artisoft's 2001 financing and all of the warrants to purchase an aggregate of 2,627,002 shares of common stock issued in Artisoft's 2003 financing was reduced to $1.1386 per share pursuant to the terms of those warrants. Immediately prior to the sale of common stock under the purchase agreement, the exercise price of the warrants issued in 2001 was $1.50 per share, and the exercise price of the warrants issued in 2003 was $1.88 per share. The reduction of the exercise price of these warrants will result in the recording of a non-cash deemed dividend equal to approximately $1.5 million in the first quarter of fiscal 2005.

        Under the consent, amendment and waiver agreement, all warrants issued in the 2001 and 2003 financings were amended to delete the price protection provisions of those warrants. Therefore, as so amended, the per share exercise price of those warrants will no longer be subject to adjustment in the event of sales of securities by Artisoft, except for customary adjustments for stock splits, dividends, recapitalizations and other organic changes.

        The Company anticipates that existing cash balances at June 30, 2004 combined with gross proceeds of $27.5 million received by the Company in the September 2004 financing will be adequate to meet the Company's current and expected cash requirements for the next year. However, a change in circumstance, such as a reduction in the demand for our products, could necessitate that the

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Company seek additional debt or equity capital or take actions to reduce our operating costs to levels that can be supported by our available cash. See "Risk Factors" below. In addition, the Company may also from time to time seek debt or equity financing for various business reasons. There can be no assurance that any such additional financing will be available when needed or on acceptable terms to allow the Company to successfully achieve its operating plan or fund future investment in its TeleVantage product line.

        During the quarter ended December 31, 2003 our common stock was delisted from the NASDAQ SmallCap Market. Our common stock was transferred to the over-the-counter electronic bulletin board, also referred to as the OTCBB. The listing of our common stock on the OTCBB may reduce the price of our common stock and the levels of liquidity available to our stockholders. In addition, the listing of our common stock on the OTCBB could materially adversely affect our access to the capital markets, and the limited liquidity and reduced price of our common stock could materially adversely affect our ability to raise capital through alternative financing sources on terms acceptable to us or at all. Our delisting from the NASDAQ SmallCap Market may also result in other negative implications, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities.

        With the completion of the financing of September 2004, and the acquisition of Vertical Networks, the Company may pursue relisting on the NASDAQ SmallCap Market. The Company will evaluate this opportunity when it is determined that the Company does in fact meet the listing requirements of the NASDAQ SmallCap Market.

RECENT ACCOUNTING PRONOUNCEMENTS

        In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, and, in December 2003, issued a revision to that interpretation (FIN 46R). FIN 46R replaces FIN 46 and addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. A variable interest entity ("VIE") is defined as (a) an ownership, contractual or monetary interest in an entity where the ability to influence financial decisions is not proportional to the investment interest, or (b) an entity lacking the invested capital sufficient to fund future activities without the support of a third party. FIN 46R establishes standards for determining under what circumstances VIEs should be consolidated with their primary beneficiary, including those to which the usual condition for consolidation does not apply. The Company adopted the provisions of FIN 46R during the three months ended December 31, 2003. The Company's adoption of FIN 46R did not have a material effect on its financial position or results of operations.

        In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer's equity shares or variations inversely related to changes in the fair value of the issuer's equity shares. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003 the FASB deferred the classification and measurement provisions of SFAS No. 150 as they apply to certain mandatory redeemable non-controlling interests. This deferral is expected to remain in effect while these provisions are further evaluated by the FASB. The Company has not entered into or modified any financial instruments covered by this statement after May 31, 2003 and the application of this standard did not have a material impact on our consolidated financial statements or results of operations.

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RISK FACTORS

        We caution you that the following important factors, among others, in the future could cause our actual results to differ materially from those expressed in forward-looking statements made by or on behalf of us in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Annual Report on Form 10-K, and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below are important in determining future results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.

Our revenues are dependent upon sales of a two families of products, and our business will fail, if we do not increase sales of those products.

        Our revenues are derived from sales of a two families of products, TeleVantage and InstantOffice. If we are not able to increase sales of these products, our business will fail. TeleVantage and InstantOffice are relatively new products in the emerging market for server-based phone systems and it is difficult to predict when or if sales of TeleVantage and InstantOffice will increase substantially or at all. We face a substantial risk that our sales will continue to not cover our operating expenses and that we will continue to incur operating losses.

We have a history of losses and expect to incur future losses.

        We had operating losses for fiscal year 2004 and in each of the last ten fiscal years. We also had negative cash flow from operating activities in five out of the last nine fiscal years. If our revenues do not increase significantly we may never achieve profitability, on a sustained basis or at all, or generate positive cash flow in the future. In that case our business will fail. We expect to incur significant future operating losses and negative cash flows. Vertical Networks, Inc. also incurred operating losses in each of its last three fiscal years, and had negative cash flow from operating activities many of which were acquired when the Company acquired most of the assets of Vertical Networks. The operations acquired from Vertical Networks may not generate profits or positive cash flow.

Our operating results vary, making future operating results difficult to predict and adversely affecting the price of our common stock.

        Our operating results have in the past fluctuated, and may in the future fluctuate, from quarter to quarter. The resulting continued unpredictability of our operating results could depress the market price of our common stock, particularly if operating results do not meet the expectations of public market analysts or investors. Factors that contribute to fluctuations in our operating results include:

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the extent and timing of sales to significant customers, particularly Toshiba, Staples and CVS/pharmacy;



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our ability to develop, introduce and market enhancements to our TeleVantage and InstantOffice family of products;



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changes in pricing policies or price reductions by us or our competitors;



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variations in sales by our value-added resellers and distributors; and



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variations in product returns.

        Sales in any quarter are dependent primarily on orders booked and shipped in that quarter and are not predictable with any degree of certainty. In addition, our expense levels are based, in part, on

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our expectations as to future revenues. If revenue levels are below our expectations, net loss may be disproportionately affected due to fixed costs related to generating our revenues.

We rely upon the availability of distributors, resellers and original equipment manufacturers to market TeleVantage and the ability of these organizations to pay for the products they purchase from us.

        If distributors, resellers and original equipment manufacturers in the software industry choose not to focus their marketing efforts on software-based phone systems or on products competitive with TeleVantage, our sales efforts will be materially adversely affected. In fiscal year 2004, our distributor, Paracon, accounted for 37% of our total net sales. In fiscals year 2003 and 2002, Paracon accounted for 42% and 32%, respectively, of our total net sales. We depend upon the availability of distribution outlets similar to these relationships to market TeleVantage. In addition, our operating results would be adversely affected if one of our major distributors, resellers or original equipment manufacturers fails to pay us for the products they purchase from us. At June 30, 2004, Paracon represented approximately 31% of our outstanding trade receivables. At June 30, 2003, Paracon represented approximately 36% of our outstanding trade receivables and at June 30, 2002, Paracon represented approximately 36% of our outstanding trade receivables. Our relationship with Paracon is through its subsidiary Scansource, which is doing business as Catalyst Telecom.

If we lose the services of our Chief Executive Officer we may not be able to implement our business model successfully, which could harm our ability to remain competitive in our market.

        Our future success depends to a significant extent on the continued service of and effective working relationship with William Tauscher, our Chief Executive Officer. Our business may suffer if we lose the services of Mr. Tauscher.

The integration of Artisoft's and Vertical Networks' businesses may distract management from achieving its operational objectives which could limit Artisoft's ability to retain its employees.

        The integration of Artisoft's and Vertical Networks' businesses will require the dedication of management resources. This may distract management's attention from the day-to-day business of Artisoft. Employee uncertainty and lack of focus during integration may also disrupt the business of Artisoft. The retention by Artisoft of key employees is critical to ensure continued advancement, development and support of Artisoft's technologies as well as on-going sales and marketing efforts. During the integration phase, competitors may intensify their efforts to recruit key employees. Artisoft may not be able to retain key technical, sales or marketing personnel which would adversely affect Artisoft's business.

If Artisoft and Vertical Networks cannot be successfully integrated, the anticipated advantages of the recent acquisition of Vertical Networks may not be realized.

        In order to maintain and increase profitability Artisoft will need to successfully integrate and streamline overlapping functions of Vertical Networks. The desired cost savings may not be achieved and the integration of Artisoft's and Vertical Networks' operations may not be accomplished smoothly, expeditiously or successfully.

The listing of our common stock on the OTCBB limits the liquidity of our common stock and our access to capital markets.

        Our common stock was now trades on the over-the-counter electronic bulletin board, also referred to as the OTCBB. The listing of our common stock on the OTCBB may reduce the price of our common stock and the levels of liquidity available to our stockholders. In addition, the listing of our common stock on the OTCBB could materially adversely affect our access to the capital markets, and

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the limited liquidity and reduced price of our common stock could materially adversely affect our ability to raise capital through alternative financing sources on terms acceptable to us or at all. Our stock listing may also result in other negative implications, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities.

We may need to procure additional third party financing, but financing may not be available when needed or upon terms acceptable to us.

        In order to obtain the funds to continue our operations and meet our working capital requirements, we may require additional equity financing or debt financing. The proceeds from our common stock financing, completed in September 2004 may not be sufficient to meet our business needs. Any additional financing may not be available to us on terms acceptable to us or at all.

Our market is highly competitive; if we fail to compete successfully, our products will not be successful.

        We compete with other phone system companies, many of which have substantially greater financial, technological, production, sales and marketing and other resources, as well as greater name recognition and larger customer bases, than does Artisoft. Given the greater financial resources of many of our competitors, our products may not be successful or even accepted. The computer telephony industry is highly competitive and is characterized by rapidly evolving industry standards. We believe that the principal competitive factors affecting the markets we serve include:

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product architecture, functionality and features;



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price;



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vendor and product reputation;



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quality of product and support; and



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effectiveness of sales and marketing efforts.

        Our competitors may be able to respond more quickly and effectively than can Artisoft to new or emerging technologies and changes in customer requirements or to devote greater resources than can Artisoft to the development, promotion, sales and support of their products.

If server-based phone systems do not achieve widespread acceptance, we may not be able to continue our operations.

        Our product lines, TeleVantage and InstantOffice, competes in the newly emerging server-based phone system market, as well as existing traditional, proprietary hardware solutions offered by companies such as Avaya Communications, Nortel Networks Corporation and Siemens Corporation. We do not know if markets will migrate toward server-based phone system solutions. If server-based phone systems do not achieve widespread acceptance or widespread acceptance is delayed, sales of TeleVantage and InstantOffice will not increase and may decline. We may then be unable to continue our operations.

Variability in product returns makes it difficult to predict our revenue.

        We are exposed to the risk of product returns from our systems integrators, distributors and value-added resellers, which are estimated and recorded by us as a reduction in sales. Actual returns in any period may exceed our estimates, thereby making it difficult to predict our revenues. To the extent we may, in the future, introduce new products, the predictability and timing of sales to end-users and the

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management of returns to us of unsold products by distributors and volume purchasers may become more complex.

Our market is subject to changing preferences and technological change; our failure to keep up with these changes would result in our losing market share.

        The introduction of products incorporating new technologies and the emergence of new industry standards could render our products obsolete and unmarketable. If this occurs, we would likely lose market share. The markets for computer telephony solutions are characterized by rapid technological change, changing customer needs, frequent product introductions and evolving industry standards within the markets for computer technology solutions. Our future success will depend upon our ability to develop and introduce new computer telephony products (including new releases and enhancements) on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of our customers.

M/C Venture Partners has acquired a substantial interest in Artisoft and may be able to exert substantial influence over Artisoft's actions.

        Based upon its substantial stock ownership and their director rights, M/C Venture Partners may be able to exert substantial influence over matters submitted to our stockholders for approval and our management and affairs, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. As of October 1, 2004, M/C Venture Partners beneficially owned approximately 51.69% of our common stock. In addition to its beneficial ownership interest in Artisoft's common stock, the stock purchase agreement governing M/C Venture Partners' September 2004 investment in Artisoft provides for significant board of directors rights, and other privileges, for M/C Ventures.

        The stock purchase agreement provides that, initially, (1) M/C Venture Partners may designate two members of Artisoft's board of directors and (2) M/C Venture Partners and Artisoft's board of directors may designate by mutual agreement two other directors. Pursuant to these provisions, M/C Venture Partners has designated John P. Ward and Matthew J. Rubins, each a general partner of M/C Venture Partners, as Artisoft directors, and M/C Venture Partners and Artisoft's board of directors have mutually agreed to designate Michael P. Downey and Francis E. Girard, each an existing Artisoft director, Artisoft directors. Following March 28, 2005, the stock purchase agreement provides that (1) M/C Venture Partners may designate two members of Artisoft's board of directors and (2) M/C Venture Partners and Artisoft's board of directors may designate by mutual agreement three directors with relevant industry experience. M/C Venture Partners' designees are entitled to membership on the compensation and nominating committees of the board of directors.

        Artisoft also agreed under the stock purchase agreement that it would not, without the prior consent of M/C Venture Partners, take any of the following actions: enter into a transaction involving a change in control of Artisoft; incur indebtedness in excess of $3.0 million; create any security with an equity component unless that security is junior to the common stock or, subject to specified exceptions, issue any equity securities; transfer its intellectual property; repurchase, redeem or pay dividends on any shares of capital stock (subject to limited exceptions); grant stock options that are not authorized by a vote of the board of directors or its compensation committee; liquidate or dissolve; change the size of Artisoft's board of directors; amend Artisoft's certificate of incorporation or bylaws; change the nature of Artisoft's business; or alter the voting rights of shares of Artisoft's capital stock in a disparate manner.

        M/C Venture Partners may elect to sell all or a substantial portion of their Artisoft securities to one or more third parties. In that case, a third party with whom we have no prior relationship could exercise the same degree of control over us as M/C Venture Partners presently does.

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If the employment of either of our President or our Senior Vice President of Development is terminated prior to October 2004 without cause or by the executive for good reason, we will be required to provide substantial benefits to that officer.

        We have change in control agreements with two of our executive officers that provide that in the event of termination of employment of an executive officer within two years of the change in control either without cause or by the executive for "good reason," such as a reduction in duties and responsibilities:

•

all of the executive's unvested options vest and become exercisable in full; and



•

Artisoft will pay the executive a lump sum equal to one year's, or two years' in the case of the President, base salary plus bonus.

        Due to open market purchases of our common stock, a change in control, within the meaning of the change in control agreements, occurred in December 2002, in September 2003, and again in September 2004. Therefore, each of the executives set forth in the table below will receive benefits under its change in control agreement in the event his employment at Artisoft is terminated prior to September 2006 either without cause or for good reason. The salary and bonus of each executive for Artisoft's 2004 fiscal year ended June 30, 2004 is also set forth on the table below.

Software errors may damage our reputation, cause loss of customers and increase customer support costs.

        Telecommunications products as complex as TeleVantage and InstantOffice may contain undetected errors. This could result in damage to our reputation, loss of customers, delay of market acceptance of our products or all of these consequences. We or our customers may find errors in TeleVantage or InstantOffice or any new products after commencement of commercial shipments. In addition, if our products are flawed, or are difficult to use, customer support costs could rise.

We rely on third-party technology and hardware products. This technology may contain undetected errors, be superseded or may become unavailable, thereby limiting our ability to sell, and the performance of, our products.

        TeleVantage operates on hardware manufactured by Intel. To the extent that this hardware becomes unavailable or in short supply we could experience delays in shipping TeleVantage to our customers. In addition, we are dependent on the reliability of this hardware and to the extent the hardware has defects it will affect the performance of TeleVantage. If the hardware becomes unreliable, does not perform in a manner that is acceptable to our customers or becomes more expensive, sales of TeleVantage could fall.

        Because our products run only on Microsoft Windows NT servers and use other Microsoft Corporation technologies, including the Microsoft Data Engine, a decline in market acceptance for Microsoft technologies or the increased acceptance of other server technologies could cause us to incur significant development costs and could have a material adverse effect on our ability to market our current products.

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Any failure by us to protect our intellectual property could harm our business and competitive position.

        Our success is dependent upon our software code base, our programming methodologies and other intellectual properties. If we are unable to protect these properties, we will not be able to remain technologically competitive and our business will suffer. To protect our proprietary technology, we rely primarily on a combination of trade secret laws and nondisclosure, confidentiality, and other agreements and procedures, as well as copyright and trademark laws. These laws and actions may afford only limited protection. We may not be able to deter misappropriation of our proprietary information or to prevent the successful assertion of an adverse claim to software utilized by us. In addition, we may not be able to detect unauthorized use and take effective steps to enforce our intellectual property rights. In selling our products, we rely primarily on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of some jurisdictions. In addition, the laws of some foreign countries provide substantially less protection to our proprietary rights than do the laws of the United States.

If we are not able to hire and retain qualified personnel, we will be hindered in our efforts to maintain and expand our business.

        We are dependent on our ability to identify, hire, train, retain and motivate high quality personnel, especially highly skilled engineers involved in the ongoing research and development required to develop and enhance our software products and introduce enhanced future products. If we are not able to hire and retain qualified personnel, we will be hindered in our efforts to maintain and expand our business. The computer telephony industry is characterized by rapid technological change, changing customer needs, frequent product introductions and evolving industry standards. These characteristics require a high degree of industry-specific technological and operational understanding. A high level of employee mobility and aggressive recruiting of skilled personnel characterize our industry. There can be no assurance that our current employees will continue to work for us or that we will be able to hire additional employees on a timely basis or at all. We expect to grant additional stock options and provide other forms of incentive compensation to attract and retain key technical and executive personnel. These additional incentives will lead to higher compensation costs in the future and may adversely affect our future results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        Market Risk.    During the normal course of business Artisoft is routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements and collectability of accounts receivable. Artisoft currently assesses these risks and has established policies and practices to protect against the adverse effects of these and other potential exposures. Although Artisoft does not anticipate any material losses in these risk areas, it may nonetheless experience material losses in these areas in the future.

        Interest Rate Risk.    Artisoft may be exposed to interest rate risk on many of its cash equivalents. The value of many of the Company's investments may be adversely impacted in a rising interest rate investment environment. Although Artisoft does not anticipate any material losses from such a movement in interest rates, it may nonetheless experience such material losses in the future.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

ARTISOFT, INC.
INDEX TO FINANCIAL STATEMENTS

        All schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Artisoft, Inc. and subsidiaries:

        We have audited the accompanying consolidated balance sheets of Artisoft, Inc. and subsidiaries as of June 30, 2004 and 2003, and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for each of the years in the three-year period ended June 30, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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. 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 Artisoft, Inc. and subsidiaries as of June 30, 2004 and 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Boston, Massachusetts
October 13, 2004

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ARTISOFT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements.

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ARTISOFT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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ARTISOFT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

(in thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements.

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ARTISOFT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)