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<CITY>SANTA CLARA
<STATE>CA
<ZIP>95054
<PHONE>4087271885
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<CITY>SANTA CLARA
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<FORMER-CONFORMED-NAME>NETERGY NETWORKS INC
<DATE-CHANGED>20000912
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<DESCRIPTION>FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30, 2001
<TEXT>

<PAGE>   1

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                    FORM 10-Q



[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2001

[_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                        Commission File Number: 000-21783


                                    8X8, INC.


               Delaware                              77-0142404
    (State or other jurisdiction of                (I.R.S. Employer
    incorporation or organization)                Identification No.)

                           2445 Mission College Blvd.
                              Santa Clara, CA 95054

                                 (408) 727-1885

    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 [X] No [_]

The number of shares of the Registrant's Common Stock outstanding as of July 23,
2001 was 26,585,949.


The exhibit index begins on page 24.



<PAGE>   2



                                    8X8, INC.

                                      INDEX
<TABLE>
<CAPTION>
                                                                                Page
<S>                                                                             <C>
PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

        Condensed Consolidated Balance Sheets at
            June 30, 2001 and March 31, 2001...................................   1
        Condensed Consolidated Statements of Operations
            for the three months ended June 30, 2001 and 2000..................   2

        Condensed Consolidated Statements of Cash Flows
            for the three months ended June 30, 2001 and 2000..................   3

        Notes to Unaudited Condensed Consolidated Financial Statements..........  4

Item 2.  Management's Discussion and Analysis of Financial Condition
             and Results of Operations..........................................  8

Item 3. Quantitative and Qualitative Disclosures about Market Risk.............  13


PART II- OTHER INFORMATION

Item 1.  Legal Proceedings.....................................................  23

Item 2.  Submission of Matters to a Vote of Securities Holders.................  23

Item 6.  Exhibits and Reports on Form 8-K......................................  24

Signatures.....................................................................  24
</TABLE>


<PAGE>   3



PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS


                                    8X8, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                            (In thousands, unaudited)

<TABLE>
<CAPTION>
                                                        June 30,       March 31,
                                                           2001          2001
                                                          -----          ----
<S>                                                    <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents .......................    $  21,889     $  24,126
  Accounts receivable, net ........................        1,166         2,907
  Inventory .......................................        1,109         1,328
  Other current assets ............................        2,015         2,571
                                                       ---------     ---------
    Total current assets ..........................       26,179        30,932

Property and equipment, net .......................        4,422         5,016
Intangibles and other assets ......................        2,933         3,197
                                                       ---------     ---------
                                                       $  33,534     $  39,145
                                                       =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ................................    $     680     $   1,387
  Accrued compensation ............................        1,572         1,531
  Accrued warranty ................................          486           525
  Deferred revenue ................................        5,237         5,903
  Other accrued liabilities .......................        1,401         1,623
  Income taxes payable ............................          306           306
                                                       ---------     ---------

    Total current liabilities .....................        9,682        11,275

Convertible subordinated debentures ...............        6,423         6,238
                                                       ---------     ---------

    Total liabilities .............................       16,105        17,513
                                                       ---------     ---------

Stockholders' equity:
  Common stock ....................................           27            27
  Additional paid-in capital ......................      149,956       150,015
  Notes receivable from stockholders ..............           --            (1)
  Deferred compensation ...........................          (40)         (174)
  Accumulated other comprehensive income (loss) ...           79           (89)
  Accumulated deficit .............................     (132,593)     (128,146)
                                                       ---------     ---------

    Total stockholders' equity ....................       17,429        21,632
                                                       ---------     ---------
                                                       $  33,534     $  39,145
                                                       =========     =========

</TABLE>
    The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.


                                       1
<PAGE>   4



                                    8X8, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>
                                            Three months ended June 30,
                                            ---------------------------
                                                2001           2000
                                               -------         ------
<S>                                            <C>            <C>
Product revenues ..........................    $  1,595     $  4,970
License and other revenues ................       2,005          853
                                               --------     --------
  Total revenues ..........................       3,600        5,823
                                               --------     --------

Cost of product revenues ..................         951        1,536
Cost of license and other revenues ........          87           42
                                               --------     --------
  Total cost of revenues ..................       1,038        1,578
                                               --------     --------

Gross profit ..............................       2,562        4,245
                                               --------     --------

Operating expenses:
    Research and development ..............       3,868        4,214
    Selling, general and administrative ...       2,962        3,699
    Amortization of intangibles ...........         191          190
                                               --------     --------
           Total operating expenses .......       7,021        8,103
                                               --------     --------

Loss from operations ......................      (4,459)      (3,858)
Other income, net .........................         344          976
Interest expense ..........................        (332)        (331)
                                               --------     --------

Loss before provision for income taxes ....      (4,447)      (3,213)
Provision for income taxes ................          --           12
                                               --------     --------
Net loss ..................................    $ (4,447)    $ (3,225)
                                               ========     ========


Net loss per basic and diluted share ......    $  (0.17)    $  (0.14)

Basic and diluted shares outstanding ......      26,769       22,582

</TABLE>


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


                                       2
<PAGE>   5


                                    8X8, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands, unaudited)

<TABLE>
<CAPTION>
                                                              Three months ended June 30,
                                                              ---------------------------
                                                                    2001          2000
                                                                 -------       --------
<S>                                                           <C>              <C>
Cash flows from operating activities:

Net loss ....................................................    $ (4,447)    $ (3,225)
Adjustment to reconcile net loss to net cash
   used in operating activities:
       Depreciation and amortization ........................       1,068          809
       Stock compensation expense ...........................         (21)         305
       Gain on sale of nonmarketable equity investment ......          --         (225)
       Other ................................................         107           29
Changes in assets and liabilities, net of effect
   of disposal of business ..................................       1,091           99
                                                                 --------     --------

      Net cash used in operating activities .................      (2,202)      (2,208)
                                                                 --------     --------

Cash flows from investing activities:
   Purchases of property and equipment ......................         (35)        (647)
   Proceeds from sale of nonmarketable equity investment ....          --          225
   Cash paid for acquisition, net ...........................          --       (1,536)
   Proceeds from disposition of business, net ...............          --        4,733
                                                                 --------     --------

      Net cash (used in) provided by investing activities ...         (35)       2,775
                                                                 --------     --------

Cash flows from financing activities:
   Proceeds from issuance of common stock ...................          --          274
   Repayment of notes receivable from stockholders ..........          --           26
                                                                 --------     --------

       Net cash provided by financing activities ............          --          300
                                                                 --------     --------

Net (decrease) increase in cash and cash equivalents ........      (2,237)         867
Cash and cash equivalents at the beginning of the period ....      24,126       48,576
                                                                 --------     --------

Cash and cash equivalents at the end of the period ..........    $ 21,889     $ 49,443
                                                                 ========     ========

Supplemental non-cash disclosure:
Common stock issued to satisfy interest obligations .........    $     97     $     --
                                                                 ========     ========

</TABLE>


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



                                       3
<PAGE>   6


                                    8X8, INC.
                    NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS


1.  DESCRIPTION OF THE BUSINESS

8x8, Inc. and its subsidiaries (collectively, the Company) develop and market
communication technology for Internet Protocol (IP) telephony and video
applications. The Company has three product lines: voice and video
semiconductors and related software, hosted Internet Private Branch Exchange
(iPBX) solutions, and Voice-over-IP (VoIP) service creation software.

During the fiscal year ended March 31, 2001, the Company formed two
subsidiaries, Netergy Microelectronics, Inc. (NME) and Centile, Inc. (Centile)
and reorganized its operations more clearly along its three product lines. NME
provides voice and video semiconductors and related communication software to
original equipment manufacturers (OEMs) of telephones, terminal adapters, and
other edge devices and to other semiconductor companies. NME's technologies are
used to make IP telephones and to voice-enable cable and digital subscriber line
(DSL) modems, wireless devices, and other broadband technologies. Centile
develops and markets hosted iPBX solutions that allow service providers to offer
private branch exchange (PBX) functionality to small and medium-sized businesses
over broadband networks. The Company has a third product line, VoIP service
creation software, that includes a service creation environment (SCE) and a
unified messaging application (UM) (collectively, the SCE Product), at the
parent company level. The SCE Product is designed for use by telecommunication
equipment manufacturers and service providers.

The Company was incorporated in California in February 1987 and in December 1996
was reincorporated in Delaware. In August 2000, the Company changed its name
from 8x8, Inc. to Netergy Networks, Inc. The Company changed its name back to
8x8, Inc. in July 2001.

2.  BASIS OF PRESENTATION

In December 2000, the Company approved a change in its fiscal year from a year
ending on the Thursday closest to March 31 to a year ending on March 31. This
change also resulted in each fiscal quarter ending on the last day of the last
month of each calendar quarter. Since the Company enacted this change during the
third quarter of fiscal 2001, the quarter end date for the first quarter of
fiscal 2001 was June 29, 2000. For purposes of these condensed consolidated
financial statements, we have indicated the first quarter of fiscal 2001 as
ending on June 30, 2000. The three month periods ended June 30, 2001 and June
30, 2000 included 13 weeks of operations.

The accompanying interim condensed consolidated financial statements are
unaudited and have been prepared on substantially the same basis as our annual
financial statements for the fiscal year ended March 31, 2001. In the opinion of
management, these financial statements reflect all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation of
our financial position, results of operations and cash flows for the periods
presented. These financial statements should be read in conjunction with our
audited consolidated financial statements for the year ended March 31, 2001,
including notes thereto, included in our fiscal 2001 Annual Report on Form 10-K.
Certain prior period balances have been reclassified to conform to the current
period presentation.

The results of operations and cash flows for the interim periods included in
these financial statements are not necessarily indicative of the results to be
expected for any future period or the entire fiscal year.


                                       4
<PAGE>   7

3.  BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
                                June 30,     March 31,
                                 2001          2001
                                -----         ------
<S>                             <C>         <C>
Inventory (in thousands):
      Raw materials .....       $  127       $  213
      Work-in-process ...          860          783
      Finished goods ....          122          332
                                ------       ------
                                $1,109       $1,328
                                ======       ======
</TABLE>

4.  DEBT

In December 1999, the Company issued $7.5 million of 4% Series A and Series B
convertible subordinated debentures (the Debentures). The Debentures mature on
December 17, 2002 unless converted earlier. Repayment of the debentures may be
accelerated under certain circumstances. The $3.75 million Series A debentures
and $3.75 million Series B debentures are convertible into the Company's common
stock at a conversion price equal to $7.05 and $35.50, respectively. Interest is
payable semiannually.

For the Series A and Series B debentures, the lender received a three-year
warrant to purchase approximately 532,000 common shares of the Company at $7.05
per share and 106,000 shares at $35.50 per share, respectively. The Company also
issued warrants to the placement agent in conjunction with the Series A and
Series B debentures equal to approximately 53,000 shares and 11,000 shares,
respectively, at substantially the same terms granted to the lender. The
conversion prices of the Debentures and the exercise price of the warrants
issued to the lender may be adjusted under certain circumstances.

Using the Black-Scholes pricing model, the Company determined that the debt
discount associated with the fair value of the warrants issued to the lender
approximated $2.2 million. The amortization of the debt discount is being
reflected as a non-cash charge to interest expense over the term of the
warrants. The Company recognized interest expense associated with amortization
of the debt discount of approximately $185,000 in each of the fiscal quarters
ended June 30, 2001 and 2000. The debt discount, net of accumulated
amortization, is reflected as a reduction in the face value of the Debentures.

5.  NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss available to common
stockholders (numerator) by the weighted average number of common shares
outstanding during the period (denominator). The numerators for each period
presented are equal to the reported net loss. Additionally, due to net losses
incurred for the periods presented, weighted average basic and diluted shares
outstanding for the respective three-month periods are the same. The following
equity instruments were not included in the computations of diluted net loss per
share because the effect on the calculations would be anti-dilutive (in
thousands):

<TABLE>
<CAPTION>
                                                           June 30,
                                                       -----------------
                                                       2001        2000
                                                       -----       -----
<S>                                                    <C>         <C>
Common stock options ...........................       7,291       4,452
Convertible subordinated debentures ............         638         638
Warrants .......................................         701         701
Unvested restricted common stock ...............           6         432
                                                       -----       -----
                                                       8,636       6,223
                                                       =====       =====
</TABLE>


6.  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss), as defined, includes all changes in equity (net
assets) during a period from non-owner sources. The difference between net
income (loss) and comprehensive income (loss) is due primarily to unrealized
gains and losses on short-term investments classified as available-for-sale and
foreign currency translation adjustments. Comprehensive losses for the periods
ended June 30, 2001 and 2000 were approximately $4.3 million and $3.2 million,
respectively.

7.  SEGMENT REPORTING

During the fourth quarter of fiscal year 2001, the Company changed its internal
reporting processes and determined that it had three reportable segments: NME,
Centile, and SCE and Other (formerly the Corporate and Other segment). NME and
Centile were new subsidiaries formed by the Company in the third and fourth
quarters, respectively, of fiscal 2001. The Company's reportable segments have
been determined based on the nature of the operations and products offered to
customers. The NME segment primarily reflects the activity associated with the
sale and development of semiconductors and related software focused on the IP
telephony and videoconferencing markets. In addition, the NME segment includes
revenue derived from the license of video monitoring technology to Interlogix,
Inc. (Interlogix), as well as sales of media hub systems. The Centile segment
reflects activity associated with the development and sale of a hosted iPBX
solution. The SCE and Other segment represents the business activities of the
parent entity, 8x8, Inc. The results for the SCE and Other segment for the first
quarter of fiscal 2002 principally reflect activities related to the development
and deployment of the SCE Product, unallocated corporate overhead expenses, and
revenues associated with discontinued products lines. The results for the SCE
and Other segment in the prior year primarily reflect revenue and costs
associated with the discontinued video monitoring systems and ViaTV consumer
videophone products, including certain transactions associated with their sale
or cessation, and unallocated corporate overhead expenses. The Company did not
have any SCE Product business activity during the first quarter of fiscal 2001
as the related technology was not acquired until the second quarter of that
fiscal year.

                                       5
<PAGE>   8



Inter-segment revenues between the reportable segments were not significant
during the periods presented. Shared support service functions such as human
resources, facilities management, and other infrastructure support and overhead
are allocated between the segments. Accounting policies are applied consistently
to the segments, where applicable.

Revenues, gross profit and, operating income (loss) for the NME, Centile and the
SCE and Other segments for the fiscal quarters ended June 30, 2001 and 2000 were
as follows (in thousands):


<TABLE>
<CAPTION>
                              Three Months Ended June 30,
                              --------------------------
                                  2001        2000
                               --------     -------
<S>                           <C>          <C>
Revenues:
NME ........................    $ 3,529     $ 4,875
Centile ....................         21          23
SCE and Other ..............         50         925
                                -------     -------
   Total revenues ..........    $ 3,600     $ 5,823
                                -------     -------

Gross profit:
NME ........................    $ 2,521     $ 3,662
Centile ....................         21          22
SCE and Other ..............         20         561
                                -------     -------
   Total gross profit ......    $ 2,562     $ 4,245
                                -------     -------

Operating income (loss):
NME ........................    $  (994)    $  (931)
Centile ....................     (2,367)     (3,293)
SCE and Other ..............     (1,098)        366
                                -------     -------
  Total operating loss .....    $(4,459)    $(3,858)
                                -------     -------
</TABLE>

There were no reconciling items between the segments for the revenue, gross
profit, and operating loss amounts.

The following table illustrates net revenues by groupings of similar products
(in thousands):

<TABLE>
<CAPTION>
                                               Three Months Ended June 30,
                                               ----------------------------
                                                     2001          2000
                                                   --------      --------
<S>                                                <C>           <C>
Videoconferencing semiconductors ...........        $1,319        $3,556
IP telephony semiconductors ................           224           272
Media hub systems ..........................            42           217
Video monitoring systems ...................            --           914
Consumer videophone systems ................            10            11
                                                    ------        ------
   Product revenues ........................         1,595         4,970
                                                    ------        ------

Videoconferencing licenses and royalties ...           938           757
IP telephony licenses and royalties ........           577            73
Hosted iPBX licenses .......................            21            23
Video monitoring licenses ..................           429            --
SCE Product licenses .......................            40            --
                                                    ------        ------
   License and other revenues ..............         2,005           853
                                                    ------        ------
   Total revenues ..........................        $3,600        $5,823
                                                    ======        ======
</TABLE>



                                       6
<PAGE>   9

Deferred revenue by groupings of similar products at June 30, 2001 and March 31,
2001 is as follows (in thousands):

<TABLE>
<CAPTION>
                                              June 30, 2001    March 31, 2001
                                             --------------    --------------
<S>                                          <C>               <C>
Videoconferencing semiconductors........        $   113          $    113
IP telephony semiconductors.............             15                --
                                               ---------         ---------
   Product deferred revenue.............            128               113
                                               ---------         ---------

Videoconferencing licenses..............             15                23
IP telephony licenses...................            445               741
Hosted iPBX licenses....................             77                 6
Video monitoring licenses...............          3,290             3,719
SCE Product licenses....................          1,282             1,301
                                               ---------         ---------
   License and other deferred revenue...          5,109             5,790
                                               ---------         ---------
   Total deferred revenue...............       $  5,237          $  5,903
                                               =========         =========
</TABLE>

The Company has received payment for the amounts included in deferred revenue
with the exception of $77,000 at June 30, 2001 and $826,000 at March 31, 2001.

7.  LEGAL PROCEEDINGS

On April 6, 2001, the Company, along with Sun Microsystems, Inc., Netscape
Communications Canada Inc., Burntsand Inc., and Intraware Canada Inc., was sued
by Milinx Business Services, Inc. and Milinx Business Group Inc. (collectively,
Milinx) in the Supreme Court of British Columbia, Canada (the Court). Milinx has
alleged that the Company failed to perform certain contractual obligations and
knowingly misrepresented the capabilities of its products. The lawsuit seeks
general, special, and aggravated damages totaling in excess of $65 million
Canadian dollars plus interest, costs, and any other relief which the Court may
choose to provide. Management believes that the Company has valid defenses
against the claims alleged by Milinx and intends to defend this lawsuit
vigorously. However, due to the nature of litigation and because the lawsuit is
in the very early pre-discovery stages, the Company cannot determine the
possible loss, if any, that may ultimately be incurred either in the context of
a trial or a negotiated settlement. Should the Company not prevail in the
litigation, its operating results and financial condition would be adversely
impacted.

The Company is also involved in various other legal claims and litigation that
have arisen in the normal course of the Company's operations. While the results
of such claims and litigation cannot be predicted with certainty, the Company
believes that the final outcome of such matters will not have a significant
adverse effect on the Company's financial position or results of operations.
However, should the Company not prevail in any such litigation, its operating
results and financial position could be adversely impacted.

8.  RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Financial Instruments and for Hedging Activities." SFAS No. 133, as amended by
SFAS No. 138, provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
adopted SFAS No. 133, beginning April 1, 2001, and it did not have a material
impact on the Company's results of operations or financial condition.



                                       7
<PAGE>   10

On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets.

SFAS No. 141 establishes new standards for accounting and reporting requirements
for business combinations and will require that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method will be prohibited. This statement is
effective for business combinations completed after June 30, 2001. The Company
expects to adopt this statement during the first quarter of fiscal 2003.

SFAS No. 142 establishes new standards for goodwill acquired in a business
combination and eliminates amortization of goodwill and instead sets forth
methods to periodically evaluate goodwill for impairment. Intangible assets with
a determinable useful life will continue to be amortized over that period. The
Company expects to adopt this statement during the first quarter of fiscal 2003.
Management is in the process of evaluating the requirements of SFAS No. 142,
but does not expect this pronouncement will materially impact our financial
position or results of operations.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This discussion and analysis of financial condition and results of operations
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including, but not limited to, those specifically
identified as such, that involve risks and uncertainties. The statements
contained in this Report on Form 10-Q (the Report) that are not purely
historical are forward looking statements, including, without limitation,
statements regarding our expectations, beliefs, estimates, intentions or
strategies regarding the future, including statements regarding working capital
and capital expenditure requirements, efforts to raise additional financing, the
acquisition or investment in other businesses and products, commitment of
resources, and reduction in operating costs including the possible sale or
cessation of certain business lines and the possible further reduction of
personnel and suspension of salary increases and capital expenditures. All
forward-looking statements included in this Report are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. You should not place undue reliance on these
forward-looking statements. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including, but not limited to, risks faced by us as described in this
Report, including those set forth under the section entitled "Factors that May
Affect Future Results", and the other documents we file with the Securities and
Exchange Commission (SEC) including our most recent reports on Form 8-K.


OVERVIEW

8x8, Inc. and its subsidiaries (collectively, We or 8x8) develop and market
communication technology for Internet Protocol (IP) telephony and video
applications. We have three product lines: voice and video semiconductors and
related software, hosted Internet Private Branch Exchange (iPBX) solutions, and
Voice-over-IP (VoIP) service creation software.

During the fiscal year ended March 31, 2001, we formed two subsidiaries, Netergy
Microelectronics, Inc. (NME) and Centile, Inc. (Centile) and reorganized our
operations more clearly along our three product lines. NME provides voice and
video semiconductors and related communication software to


                                       8
<PAGE>   11

original equipment manufacturers (OEMs) of telephones, terminal adapters, and
other edge devices and to other semiconductor companies. NME's technologies are
used to make IP telephones and to voice-enable cable and digital subscriber line
(DSL) modems, wireless devices, and other broadband technologies. Centile
develops and markets hosted iPBX solutions that allow service providers to offer
private branch exchange (PBX) functionality to small and medium-sized businesses
over broadband networks. We also have a third product line, VoIP service
creation software, that includes a service creation environment (SCE) and a
unified messaging application (UM) (collectively, the SCE Product), at the
parent company level. The SCE Product is designed for use by telecommunication
equipment manufacturers and service providers.

RESULTS OF OPERATIONS

The following table sets forth condensed consolidated statements of operations
data for each of the fiscal quarters ended June 30, 2001 and 2000, respectively,
as well as the percentage of our total revenues represented by each item. Cost
of product revenues is presented as a percentage of product revenues and cost of
license and other revenues is presented as a percentage of license and other
revenues. You should read this information in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this
Report:

<TABLE>
<CAPTION>
                                             Three Months Ended June 30,
                                   -------------------------------------------------
                                            2001                      2000
                                   -----------------------   -----------------------
                                                   ($ in millions)
<S>                                <C>          <C>          <C>          <C>
Product revenues                       $ 1.6          44%        $ 5.0          86%
License and other revenues               2.0          56%          0.8          14%
                                   ----------   ----------   ----------   ----------
   Total revenues                        3.6         100%          5.8         100%
                                   ----------   ----------   ----------   ----------
Cost of product revenues                 0.9          56%          1.5          30%
Cost of license and other revenues       0.1           5%          0.1          13%
                                   ----------   ----------   ----------   ----------
   Total cost of revenues                1.0          28%          1.6          28%
                                   ----------   ----------   ----------   ----------
   Gross profit                          2.6          72%          4.2          72%
                                   ----------   ----------   ----------   ----------
Operating expenses:
  Research and development               3.9         108%          4.2          72%
  Selling, general and
    administrative                       2.9          83%          3.7          64%
  Amortization of intangibles            0.2           6%          0.2           3%
                                   ----------   ----------   ----------   ----------
     Total operating expenses            7.0         197%          8.1         139%
                                   ----------   ----------   ----------   ----------
Loss from operations                    (4.4)       -125%         (3.9)        -67%
Other income, net                        0.3           8%          1.0          17%
Interest expense                        (0.3)         -8%         (0.3)         -5%
                                   ----------   ----------   ----------   ----------
Loss before income taxes                (4.4)       -125%         (3.2)        -55%
Provision for income taxes                --           0%           --           0%
                                   ----------   ----------   ----------   ----------
Net loss                             $  (4.4)       -125%       $ (3.2)        -55%
                                   ==========   ==========   ==========   ==========
</TABLE>



                                       9
<PAGE>   12


The following discussion should be read in conjunction with our condensed
consolidated statements of operations and the notes thereto:

Revenues

The following table illustrates net revenues by groupings of similar products
(in thousands):

<TABLE>
<CAPTION>
                                                Three Months Ended June 30,
                                                   2001             2000
                                                 ---------       ---------
<S>                                             <C>             <C>
Videoconferencing semiconductors........         $  1,319        $  3,556
IP telephony semiconductors.............              224             272
Media hub systems.......................               42             217
Video monitoring systems................               --             914
Consumer videophone systems.............               10              11
                                                 ---------       ---------
   Product revenues.....................            1,595           4,970
                                                 ---------       ---------

Videoconferencing licenses and royalties              938             757
IP telephony licenses and royalties.....              577              73
Hosted iPBX licenses....................               21              23
Video monitoring licenses...............              429              --
SCE Product licenses....................               40              --
                                                 ---------       ---------
   License and other revenues...........            2,005             853
                                                 ---------       ---------
   Total revenues.......................         $  3,600        $  5,823
                                                 =========       =========
</TABLE>

Product revenues were $1.6 million in the first quarter of fiscal 2002, a
decrease of $3.4 million from the $5.0 million reported in the first quarter of
fiscal 2001. The decrease in product revenues in the first quarter of fiscal
2002 was due primarily to a decrease in unit shipments of our videoconferencing
semiconductor products as well as a decrease in sales of video monitoring
systems resulting from our exit from this business.

License and other revenues during the quarters ended June 30, 2001 and 2000
consist primarily of revenue derived from non-cancelable technology licenses,
including royalties required under certain of such licenses, and revenues
associated with maintenance, which consists of product support services and
periodic updates. License and other revenues were $2.0 million in the first
quarter of fiscal 2002, an increase of approximately $1.2 million from the
$853,000 reported in the first quarter of fiscal 2001. This increase is due
primarily to an increase in licenses of our IP telephony technology, including
Veracity VoIP software and Audacity-T2 based reference design kits marketed by
NME, and $429,000 of revenue associated with the license of our video monitoring
technology to Interlogix in fiscal 2001. Recognition of the approximately $3.9
million of revenue ascribed to the license of video monitoring technology to
Interlogix had been deferred until we satisfied certain remaining obligations in
the quarter ended March 31, 2001. Revenue associated with the license is being
recognized ratably over the license term which expires in May 2003. The
remaining balance in deferred revenue at June 30, 2001 is approximately $3.3
million.

Three customers represented more than 10% of our total revenues for the first
quarter of fiscal 2002. These customers represented 15%, 14% and 11% of our
total revenues, respectively. No customer represented 10% or more of our total
revenues for the quarter ended June 30, 2000.


                                       10
<PAGE>   13


Our sales to Europe represented 21% and 32% of total revenues for the first
quarters of fiscal 2002 and 2001, respectively. Our sales to the Asia Pacific
region represented 43% and 34% of total revenues for the first quarters of
fiscal 2002 and 2001, respectively.

Cost of Revenues and Gross Profit

The cost of product revenues consists of costs associated with components,
semiconductor wafer fabrication, system and semiconductor assembly and testing
performed by third-party vendors and direct and indirect costs associated with
purchasing, scheduling and quality assurance. Gross profit from product revenues
was approximately $640,000 and $3.4 million for the fiscal quarters ended June
30, 2001 and 2000, respectively. The decrease in gross profit from product
revenues as compared to the prior year is due to the significant decrease in
sales of video monitoring systems, resulting from our exit from this business in
May 2000, and the decline in sales of our videoconferencing semiconductors.
Product gross margins decreased to 44% in the first quarter of fiscal 2002
compared to 70% in the corresponding period of fiscal 2001. The decrease in
product gross margins in the first quarter of fiscal 2002 compared to the
corresponding period in the prior year is due primarily to a decrease in higher
margin videoconferencing semiconductor sales relative to total product sales and
an increase in inventory reserves associated with our media hub products.

The cost of license and other revenues for the periods presented consists
principally of royalties associated with technology sublicensed from
third-parties and certain costs associated with providing maintenance services.
Gross profit from license and other revenues, substantially all of which were
nonrecurring, was $1.9 million and $811,000 in the fiscal quarters ended June
30, 2001 and 2000, respectively. The increase in gross profit is a function of
the increase in license and other revenues.

Research and Development Expenses

Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
necessary for us to conduct our development efforts. Research and development
costs, including software development costs, are expensed as incurred. Research
and development expenses were $3.9 million and $4.2 million for the first
quarters of fiscal 2002 and 2001, respectively. The decrease is due primarily to
a non-recurring stock compensation charge incurred in the first fiscal quarter
of 2001 of approximately $300,000 related to the acceleration of stock option
vesting pursuant to an existing bonus program.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel and
related overhead costs for sales, marketing, finance, human resources and
general management. Such costs also include advertising, sales commissions,
trade show and other marketing and promotional expenses. Selling, general and
administrative expenses were $3.0 million and $3.7 million in the first quarters
of fiscal 2002 and 2001, respectively. The decrease in selling, general and
administrative expenses in the first quarter of fiscal 2002 compared to the
corresponding period in fiscal 2001 is primarily the result of lower corporate
marketing and trade show expenditures.

Amortization of Intangibles

In conjunction with the acquisition of Odisei S.A. in May 1999, we recorded
intangible assets related to goodwill and workforce that are being amortized on
a straight-line basis over five and three years, respectively. The amortization
of goodwill and workforce that was charged to operations was approximately
$190,000 during each of the quarters ended June 30, 2001 and 2000.

                                       11
<PAGE>   14

Other Income, Net

In the first quarters of fiscal 2002 and 2001, other income was $344,000 and
$976,000, respectively. During fiscal 1996, we acquired an equity position in a
privately held company. We realized a gain of $225,000 in the quarter ended June
30, 2000 resulting from the sale of this investment. The remaining balance of
other income in the quarter ended June 30, 2000 consisted primarily of interest
income earned on our cash and cash equivalents. Interest income decreased
significantly in the first quarter of fiscal 2002 as compared to the
corresponding quarter of the prior fiscal year due primarily to significantly
lower average cash and cash equivalent balances combined with lower interest
rates.

Interest Expense

Interest expense of approximately $330,000 in the first quarters of fiscal 2002
and fiscal 2001 is primarily the result of charges associated with the
convertible subordinated debentures issued in December 1999, as well as the
amortization of the related debt discount and debt issuance costs.

Provision for Income Taxes

There was no tax provision for the quarter ended June 30, 2001 due to the net
losses incurred. The provision of $12,000 for the quarter ended June 30, 2000
represents certain foreign income taxes.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Financial Instruments and for Hedging Activities." SFAS No. 133, as amended by
SFAS No. 138, provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. We adopted
SFAS No. 133, beginning April 1, 2001, and it did not have a material impact on
our results of operations or financial condition.

On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets.

SFAS No. 141 establishes new standards for accounting and reporting requirements
for business combinations and will require that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method will be prohibited. This statement is
effective for business combinations completed after June 30, 2001. We expect to
adopt this statement during the first quarter of fiscal 2003.

SFAS No. 142 establishes new standards for goodwill acquired in a business
combination and eliminates amortization of goodwill and instead sets forth
methods to periodically evaluate goodwill for impairment. Intangible assets with
a determinable useful life will continue to be amortized over that period. We
expect to adopt this statement during the first quarter of fiscal 2003. We are
in the process of evaluating the requirements of SFAS No. 142, but we do not
expect this announcement will materially impact our financial position or
results of operations.



                                       12
<PAGE>   15

Liquidity and Capital Resources

As of June 30, 2001, we had cash and cash equivalents totaling $21.9 million,
representing a decrease of approximately $2.2 million from March 31, 2001. We
currently have no bank borrowing arrangements.

Cash used in operations of approximately $2.2 million in the first quarter of
fiscal 2002 is primarily attributable to the net loss of $4.4 million and
decreases in accounts payable of $707,000 and deferred revenue of $666,000. Cash
used in operations was partially offset by decreases in accounts receivable of
$1.7 million and other current assets of $626,000, and non-cash items, including
depreciation and amortization of $1.1 million. Cash used in operations of
approximately $2.2 million in the first quarter of fiscal 2001 is primarily
attributable to the net loss of $3.2 million, increases in prepaid expenses and
other assets of approximately $1.0 million, a decrease in accrued compensation
of $354,000, and a net gain resulting from the sale of investments of $225,000.
Cash used in operations was partially offset by an increase in accounts payable
of $1.7 million, and noncash items, including depreciation and amortization of
$809,000 and a stock compensation charge of $305,000.

Cash used in investing activities in the quarter ended June 30, 2001 is
attributable to capital expenditures of $35,000. Cash provided by investing
activities in the quarter ended June 30, 2000 is primarily attributable to net
proceeds of $4.7 million from the disposition of our video monitoring business
and proceeds from the sale of a nonmarketable equity investment of $225,000,
offset by capital expenditures of $647,000 and net cash paid of $1.5 million
related to the acquisition of U|Force, Inc.

No cash was provided by financing activities in the quarter ended June 30, 2001.
Cash provided by financing activities in the quarter ended June 30, 2000
consisted primarily of net proceeds from the repayment of stockholders' notes
receivable and net proceeds from sales of the Company's common stock upon the
exercise of employee stock options.

As of June 30, 2001, our principal commitments consisted of obligations
outstanding under non-cancelable operating leases.

Although we believe that our current cash and cash equivalents will
satisfy our expected working capital and capital expenditure requirements
through at least the next twelve months, our business may change in ways we do
not currently anticipate requiring us to raise additional funds to support our
operations earlier than otherwise expected. In addition, we anticipate that we
may require additional funds to support our business in fiscal 2003. We may not
be able to obtain additional financing as needed on acceptable terms, or at all,
which may require us to further reduce our operating costs and other
expenditures by making additional reductions in personnel and capital
expenditures. Alternatively, or in addition to such potential measures, we may
elect to implement other cost reduction actions as we may determine are
necessary and in our best interests, including the possible sale or cessation of
some or all of our business segments. Any such actions undertaken might limit
our opportunities to realize plans for revenue growth and we might not be able
to reduce our costs in amounts sufficient to achieve break-even or profitable
operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial market risk consists primarily of risks associated with
international operations and related foreign currencies. We derive a significant
portion of our revenues from customers in Europe and Asia. In order to reduce
the risk from fluctuation in foreign exchange rates, the vast majority of our
sales are


                                       13
<PAGE>   16

denominated in U.S. dollars. In addition, all of our arrangements with our
semiconductor foundry and assembly vendors are denominated in U.S. dollars. We
have foreign subsidiaries and are exposed to market risk from changes in
exchange rates. We have not entered into any currency hedging activities. To
date, our exposure to exchange rate volatility has not been significant;
however, there can be no assurance that there will not be a material impact in
the future.

We invest our surplus cash and cash equivalents in money market funds with
variable interest rates, and, accordingly, fluctuations in interest rates do not
have an impact on the fair values of such investments.


FACTORS THAT MAY AFFECT FUTURE RESULTS

WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO SUPPORT OUR OPERATIONS, AND FAILURE
TO DO SO IN A TIMELY MANNER MAY CAUSE US TO IMPLEMENT ADDITIONAL COST REDUCTION
STRATEGIES AND CAUSE OUR BUSINESS TO SUFFER

As of June 30, 2001, we had approximately $21.9 million in cash and cash
equivalents. Although we believe that our current cash and cash equivalents will
satisfy our expected working capital and capital expenditure requirements
through at least the next twelve months, our business may change in ways we do
not currently anticipate requiring us to raise additional funds to support our
operations earlier than otherwise expected. In addition, we anticipate that we
may require additional funds to support our business in fiscal 2003. We may not
be able to obtain additional financing as needed on acceptable terms, or at all,
which may require us to further reduce our operating costs and other
expenditures by making additional reductions in personnel and capital
expenditures. Alternatively, or in addition to such potential measures, we may
elect to implement other cost reduction actions as we may determine are
necessary and in our best interests, including the possible sale or cessation of
some or all of our business segments. Any such actions undertaken might limit
our opportunities to realize plans for revenue growth and we might not be able
to reduce our costs in amounts sufficient to achieve break-even or profitable
operations.

IF WE RAISE ADDITIONAL CAPITAL THROUGH THE ISSUANCE OF NEW SECURITIES, EXISTING
STOCKHOLDERS WILL INCUR ADDITIONAL DILUTION

If we raise additional capital through the issuance of new equity or
convertible debt securities, our stockholders will be subject to additional
dilution. In addition, any new securities issued may have rights, preferences
or privileges senior to those securities held by our current stockholders.

WE HAVE A HISTORY OF LOSSES AND WE ARE UNCERTAIN AS TO OUR FUTURE PROFITABILITY

We recorded an operating loss of approximately $4.4 million in the quarter ended
June 30, 2001 and we ended the quarter with an accumulated deficit of $132.6
million. In addition, we recorded operating losses of $74.5 million and $27.1
million for the fiscal years ended March 31, 2001 and 2000, respectively. We
expect that the Company, as well as its subsidiaries individually, will continue
to incur operating losses for the foreseeable future, and such losses may be
substantial. We will need to generate significant revenue growth to achieve
profitability. Given our history of fluctuating revenues and operating losses,
we cannot be certain that we will be able to achieve profitability on either a
quarterly or annual basis.

THE GROWTH OF OUR BUSINESS AND FUTURE PROFITABILITY DEPENDS ON FUTURE IP
TELEPHONY REVENUE

We believe that our business and future profitability will be largely dependent
on widespread market acceptance of our internet protocol (IP) telephony
products. Our videoconferencing semiconductor business has not provided, nor is
it expected to provide, sufficient revenues to profitably operate our


                                       14
<PAGE>   17

business. To date, we have not generated significant revenue from the sale of
our IP telephony products. If we are not able to generate significant revenues
selling into the IP telephony market, our business and operating results would
be seriously harmed.

Success of our IP telephony product strategy assumes that there will be future
demand for IP telephony systems and services. In order for the IP telephony
market to continue to grow, several things need to occur. Telephone service
providers must continue to invest in the deployment of high speed broadband
networks to residential and commercial customers. IP networks must improve
quality of service for real-time communications, managing effects such as packet
jitter, packet loss, and unreliable bandwidth, so that toll-quality service can
be provided. IP telephony equipment must achieve the 99.999% reliability that
users of the public switched telephone network (PSTN) have come to expect from
their telephone service. IP telephony service providers must offer cost and
feature benefits to their customers that are sufficient to cause the customers
to switch away from traditional telephony service providers. If any or all of
these factors fail to occur, our business may not grow.

OUR FUTURE OPERATING RESULTS MAY NOT FOLLOW PAST OR EXPECTED TRENDS DUE TO MANY
FACTORS AND ANY OF THESE COULD CAUSE OUR STOCK PRICE TO FALL

Our historical operating results have fluctuated significantly and will likely
continue to fluctuate in the future, and a decline in our operating results
could cause our stock price to fall. On an annual and a quarterly basis, there
are a number of factors that may affect our operating results, many of which are
outside our control. These include, but are not limited to:


    -   changes in market demand;

    -   the timing of customer orders;

    -   competitive market conditions;

    -   lengthy sales cycles and/or regulatory approval cycles;

    -   new product introductions by us or our competitors;

    -   market acceptance of new or existing products;

    -   the cost and availability of components;

    -   the mix of our customer base and sales channels;

    -   the mix of products sold;

    -   the management of inventory;

    -   the level of international sales;

    -   continued compliance with industry standards; and

    -   general economic conditions.

Our gross margin is affected by a number of factors including, product mix, the
recognition of license and other revenues for which there may be little or no
corresponding cost of revenues, product pricing, the allocation between
international and domestic sales, the percentage of direct sales and sales to
resellers, and manufacturing and component costs. The markets for our products
are characterized by falling average selling prices. We expect that, as a result
of competitive pressures and other factors, gross profit as a percentage of
revenue for our videoconferencing semiconductor products will continue to
decrease for the foreseeable future. Average selling prices (ASPs) realized to
date for our IP telephony semiconductors have been lower than those historically
attained for our videoconferencing semiconductor products resulting in lower
gross margins. In the likely event that we encounter significant price
competition in the markets for our products, we could be at a significant
disadvantage compared to our competitors, many of whom have substantially
greater resources, and therefore may be better able to withstand an extended
period of downward pricing pressure.

Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of our business
may be derived from orders placed by a limited number of


                                       15
<PAGE>   18

large customers, including OEM customers, the timing of such orders can also
cause significant fluctuations in our operating results. Anticipated orders from
customers may fail to materialize. Delivery schedules may be deferred or
canceled for a number of reasons, including changes in specific customer
requirements or international economic conditions. The adverse impact of a
shortfall in our revenues may be magnified by our inability to adjust spending
to compensate for such shortfall. Announcements by our competitors or us of new
products and technologies could cause customers to defer purchases of our
existing products, which would also have a material adverse effect on our
business and operating results.

As a result of these and other factors, it is likely that in some or all future
periods our operating results will be below the expectations of securities
analysts or investors, which would likely result in a significant reduction in
the market price of our common stock.

WE MAY NOT BE ABLE TO MANAGE OUR INVENTORY LEVELS EFFECTIVELY, WHICH MAY LEAD TO
INVENTORY OBSOLESCENCE THAT WOULD FORCE US TO LOWER OUR PRICES

Our products have lead times of up to several months, and are built to forecasts
that are necessarily imprecise. Because of our practice of building our products
to necessarily imprecise forecasts, it is likely that, from time to time, we
will have either excess or insufficient product inventory. Excess inventory
levels would subject us to the risk of inventory obsolescence and the risk that
our selling prices may drop below our inventory costs, while insufficient levels
of inventory may negatively affect relations with customers. Any of these
factors could have a material adverse effect on our business, operating results,
and financial condition.

WE DEPEND ON PURCHASE ORDERS FROM KEY CUSTOMERS AND FAILURE TO RECEIVE
SIGNIFICANT PURCHASE ORDERS IN THE FUTURE WOULD CAUSE A DECLINE IN OUR OPERATING
RESULTS

Historically, a significant portion of our sales has been to relatively few
customers, although the composition of these customers has varied. Revenues from
our ten largest customers for the quarters ended June 30, 2001 and 2000,
respectively, accounted for approximately 74% and 53% of total revenues.
Revenues from our ten largest customers for the fiscal years ended March 31,
2001 and 2000 accounted for approximately 48% and 35%, respectively, of total
revenues. Substantially all of our product sales have been made, and are
expected to continue to be made, on a purchase order basis. None of our
customers has entered into a long-term agreement requiring it to purchase our
products. In the future, we will need to gain purchase orders for our products
to earn additional revenue. Further, substantially all of our license and other
revenues are nonrecurring.

THE IP TELEPHONY MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE DEPEND
ON NEW PRODUCT INTRODUCTION IN ORDER TO MAINTAIN AND GROW OUR BUSINESS

IP telephony is an emerging market that is characterized by rapid changes in
customer requirements, frequent introductions of new and enhanced products, and
continuing and rapid technological advancement. To compete successfully in this
emerging market, we must continue to design, develop, manufacture, and sell new
and enhanced semiconductor and IP telephony software products and services that
provide increasingly higher levels of performance and reliability at lower cost.
These new and enhanced products must take advantage of technological
advancements and changes, and respond to new customer requirements. Our success
in designing, developing, manufacturing, and selling such products and services
will depend on a variety of factors, including:


    -   the identification of market demand for new products;

    -   product and feature selection;

    -   timely implementation of product design and development;

    -   product performance;


                                       16
<PAGE>   19

    -   cost-effectiveness of products under development;

    -   effective manufacturing processes; and

    -   success of promotional efforts.

Additionally, we may also be required to collaborate with third parties to
develop our products and may not be able to do so on a timely and cost-effective
basis, if at all. We have in the past experienced delays in the development of
new products and the enhancement of existing products, and such delays will
likely occur in the future. If we are unable, due to resource constraints or
technological or other reasons, to develop and introduce new or enhanced
products in a timely manner, if such new or enhanced products do not achieve
sufficient market acceptance, or if such new product introductions decrease
demand for existing products, our operating results would decline and our
business would not grow.

THE LONG AND VARIABLE SALES AND DEPLOYMENT CYCLES FOR OUR IP TELEPHONY SOFTWARE
PRODUCTS MAY CAUSE OUR REVENUE AND OPERATING RESULTS TO VARY

Our hosted iPBX product and SCE Product have lengthy sales cycles, and we may
incur substantial sales and marketing expenses and expend significant management
effort without making a sale. A customer's decision to purchase our products
often involves a significant commitment of its resources and a lengthy product
evaluation and qualification process. In addition, the length of our sales
cycles will vary depending on the type of customer to whom we are selling and
the product being sold. Even after making the decision to purchase our products,
our customers may deploy our products slowly. Timing of deployment can vary
widely and will depend on various factors, including:


    -   the size of the network deployment;

    -   the complexity of our customers' network environments;

    -   our customers' skill sets;

    -   the hardware and software configuration and customization necessary to
        deploy our products; and

    -   our customers' ability to finance their purchase of our products.

As a result, it is difficult for us to predict the quarter in which our
customers may purchase our products, and our revenue and operating results may
vary significantly from quarter to quarter.

IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS, ORDERS FOR OUR
PRODUCTS WILL BE DELAYED OR CANCELED AND SUBSTANTIAL PRODUCT RETURNS COULD
OCCUR, WHICH COULD HARM OUR BUSINESS

Many of the potential customers for our hosted iPBX and unified messaging
products have requested that our products be designed to interoperate with their
existing networks, each of which may have different specifications and use
multiple standards. Our customers' networks may contain multiple generations of
products from different vendors that have been added over time as their networks
have grown and evolved. Our products must interoperate with these products as
well as with future products in order to meet our customers' requirements. In
some cases, we may be required to modify our product designs to achieve a sale,
which may result in a longer sales cycle, increased research and development
expense, and reduced operating margins. If our products do not interoperate with
existing equipment or software in our customers' networks, installations could
be delayed, orders for our products could be canceled or our products could be
returned. This could harm our business, financial condition, and results of
operations.


                                       17
<PAGE>   20

WE MAY HAVE DIFFICULTY IDENTIFYING THE SOURCE OF THE PROBLEM WHEN THERE IS A
PROBLEM IN A NETWORK

Our hosted iPBX solution must successfully integrate with products from other
vendors, such as traditional telephone systems. As a result, when problems occur
in a network, it may be difficult to identify the source of the problem. The
occurrence of hardware and software errors, whether caused by our hosted iPBX
solution or another vendor's products, may result in the delay or loss of market
acceptance of our products and any necessary revisions may force us to incur
significant expenses. The occurrence of some of these types of problems may
seriously harm our business, financial condition and results of operations.

INTENSE COMPETITION IN THE MARKETS IN WHICH WE COMPETE COULD PREVENT US FROM
INCREASING OR SUSTAINING OUR REVENUE AND PREVENT US FROM ACHIEVING PROFITABILITY

We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. If our
competitors successfully introduce new products or enhance their existing
products, this could reduce the sales or market acceptance of our products and
services, increase price competition or make our products obsolete. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing, and customer support. We may not have
sufficient resources to make these investments or to make the technological
advances necessary to be competitive, which in turn will cause our business to
suffer.

In addition, our focus on developing a range of technology products, including
semiconductors and related embedded software, hosted iPBX solutions, and service
creation software, places a significant strain on our research and development
resources. Competitors that focus on one aspect of technology, such as software
or semiconductors, may have a considerable advantage over us. In addition, many
of our current and potential competitors have longer operating histories, are
substantially larger, and have greater financial, manufacturing, marketing,
technical, and other resources. For example, certain competitors in the market
for our semiconductor products maintain their own semiconductor foundries and
may therefore benefit from certain capacity, cost and technical advantages. Many
also have greater name recognition and a larger installed base of products than
us. Competition in our markets may result in significant price reductions. As a
result of their greater resources, many current and potential competitors may be
better able than us to initiate and withstand significant price competition or
downturns in the economy. There can be no assurance that we will be able to
continue to compete effectively, and any failure to do so would harm our
business, operating results, and financial condition.

IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL PARTNERSHIPS FOR IP TELEPHONY
PRODUCTS, WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR SOLUTIONS

We are entering into new market areas and our success is partly dependent on our
ability to forge new marketing and engineering partnerships. IP telephony
communication systems are extremely complex and no single company possesses all
the required technology components needed to build a complete end to end
solution. We will likely need to enter into partnerships to augment our
development programs and to assist us in marketing complete solutions to our
targeted customers. We may not be able to develop such partnerships in the
course of our product development. Even if we do establish the necessary
partnerships, we may not be able to adequately capitalize on these partnerships
to aid in the success of our business.

INABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY OR OUR INFRINGEMENT OF A THIRD
PARTY'S PROPRIETARY TECHNOLOGY WOULD DISRUPT OUR BUSINESS

We rely in part on trademark, copyright, and trade secret law to protect our
intellectual property in the United States and abroad. We seek to protect our
software, documentation, and other written materials under trade secret and
copyright law, which afford only limited protection. We also rely in part on
patent law to protect our intellectual property in the United States and
internationally. As of June 30,


                                       18
<PAGE>   21

2001, we held forty-two (42) United States patents, including patents relating
to programmable integrated circuit architectures, telephone control
arrangements, software structures, and memory architecture technology, and had a
number of United States and foreign patent applications pending. We cannot
predict whether such pending patent applications will result in issued patents.
We may not be able to protect our proprietary rights in the United States or
internationally (where effective intellectual property protection may be
unavailable or limited), and competitors may independently develop technologies
that are similar or superior to our technology, duplicate our technology or
design around any patent of ours. We have in the past licensed and in the future
expect to continue licensing our technology to others; many of who are located
or may be located abroad. There are no assurances that such licensees will
protect our technology from misappropriation. Moreover, litigation may be
necessary in the future to enforce our intellectual property rights, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of management time and resources and
could have a material adverse effect on our business and operating results. Any
settlement or adverse determination in such litigation would also subject us to
significant liability.

There has been substantial litigation in the semiconductor, electronics, and
related industries regarding intellectual property rights, and from time to time
third parties may claim infringement by us of their intellectual property
rights. Our broad range of technology, including systems, digital and analog
circuits, software, and semiconductors, increases the likelihood that third
parties may claim infringement by us of their intellectual property rights. If
we were found to be infringing on the intellectual property rights of any third
party, we could be subject to liabilities for such infringement, which could be
material. We could also be required to refrain from using, manufacturing or
selling certain products or using certain processes, either of which could have
a material adverse effect on our business and operating results. From time to
time, we have received, and may continue to receive in the future, notices of
claims of infringement, misappropriation or misuse of other parties' proprietary
rights. There can be no assurance that we will prevail in these discussions and
actions or that other actions alleging infringement by the Company of
third-party patents will not be asserted or prosecuted against the Company.

We rely on certain technology, including hardware and software licensed from
third parties. The loss of, or inability to maintain, existing licenses could
have a material adverse effect on our business and operating results. In
addition, we may be required to license technology from third parties in the
future to develop new products or product enhancements. Third-party licenses may
not be available to us on commercially reasonable terms, if at all. Our
inability to obtain third-party licenses required to develop new products and
product enhancements could require us to obtain substitute technology of lower
quality or performance standards or at a greater cost, any of which could
seriously harm our business, financial condition and operating results.

CONTINUED REDUCTIONS IN LEVELS OF CAPITAL INVESTMENT BY TELECOMMUNICATION
SERVICE PROVIDERS MIGHT IMPACT OUR ABILITY TO INCREASE REVENUE AND PREVENT US
FROM ACHIEVING PROFITABILITY

The market for the services provided by telecommunication service providers,
including competitive local exchange carriers (CLECs) and application service
providers (ASPs) who compete against traditional telephone companies, has
experienced a significant downturn over the last several quarters. As a result,
many such service providers have put plans for expansion on hold while other
high-profile service providers have ceased operations altogether. Additionally,
this industry has experienced a significant amount of consolidation over the
last year. Remaining telecommunication service providers may still require
substantial capital for the development, construction, and expansion of their
networks and the introduction of their services. Financing may not be available
to these service providers on favorable terms, if at all. The inability of our
current or potential telecommunication service provider customers to acquire and
keep customers, to successfully raise needed funds, or to respond to any other
trends such as price reductions for their services or diminished demand for
telecommunication services generally, will continue to adversely affect their
operating results and most likely cause them to further reduce their capital
spending programs. If our current or potential customers are forced to further
delay or curtail their capital spending programs, sales of our hosted iPBX
product and SCE Product may be adversely affected, which would negatively impact
our business, financial condition, and results of operations. In addition, the
loss of one or more of our current or potential telecommunication service
provider or telecommunication equipment manufacturing customers, through
industry consolidation or otherwise, could reduce or eliminate our sales to such
customers and consequently harm our business, financial condition, and results
of operations.


                                       19
<PAGE>   22


THE FAILURE OF IP NETWORKS TO MEET THE RELIABILITY AND QUALITY STANDARDS
REQUIRED FOR VOICE COMMUNICATIONS COULD RENDER OUR PRODUCTS OBSOLETE

Circuit-switched telephony networks feature very high reliability, with a
guaranteed quality of service. The common standard for reliability of
carrier-grade real-time voice communications is 99.999%, meaning that the
network can be down for only a few minutes per year. In addition, such networks
have imperceptible delay and consistently satisfactory audio quality. Emerging
broadband IP networks, such as LANs, WANs, and the Internet, or emerging last
mile technologies such as cable, DSL, and wireless local loop, may not be used
for telephony unless such networks and technologies can provide reliability and
quality consistent with these standards.

OUR PRODUCTS MUST COMPLY WITH INDUSTRY STANDARDS AND FCC REGULATIONS, AND
CHANGES MAY REQUIRE US TO MODIFY EXISTING PRODUCTS

In addition to reliability and quality standards, the market acceptance of
telephony over broadband IP networks is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. IP telephony products rely heavily on standards such as H.323,
SIP, SGCP, MGCP, H.GCP, and Megaco to interoperate with other vendors'
equipment. There is currently a lack of agreement among industry leaders about
which standard should be used for a particular application, and about the
definition of the standards themselves. We also must comply with certain rules
and regulations of the Federal Communications Commission (FCC) regarding
electromagnetic radiation and safety standards established by Underwriters
Laboratories as well as similar regulations and standards applicable in other
countries. Standards are continuously being modified and replaced. As standards
evolve, we may be required to modify our existing products or develop and
support new versions of our products. The failure of our products to comply, or
delays in compliance, with various existing and evolving industry standards
could delay or interrupt volume production of our IP telephony products, which
would have a material adverse effect on our business, financial condition and
operating results.

FUTURE REGULATION OR LEGISLATION OF THE INTERNET COULD RESTRICT OUR BUSINESS OR
INCREASE OUR COST OF DOING BUSINESS

At present there are few laws or regulations that specifically address access to
or commerce on the Internet, including IP telephony. We are unable to predict
the impact, if any, that future legislation, legal decisions or regulations
concerning the Internet may have on our business, financial condition, and
results of operations. Regulation may be targeted towards, among other things,
assessing access or settlement charges, imposing tariffs or imposing regulations
based on encryption concerns or the characteristics and quality of products and
services, any of which could restrict our business or increase our cost of doing
business. The increasing growth of the broadband IP telephony market and
popularity of broadband IP telephony products and services heighten the risk
that governments will seek to regulate broadband IP telephony and the Internet.
In addition, large, established telecommunication companies may devote
substantial lobbying efforts to influence the regulation of the broadband IP
telephony market, which may be contrary to our interests.


                                       20
<PAGE>   23

WE MAY TRANSITION TO SMALLER GEOMETRY PROCESS TECHNOLOGIES AND HIGHER LEVELS OF
DESIGN INTEGRATION, WHICH COULD DISRUPT OUR BUSINESS

We continuously evaluate the benefits, on an integrated circuit,
product-by-product basis, of migrating to smaller geometry process technologies
in order to reduce costs related to the development and production of our
semiconductors. We believe that the transition of our products to increasingly
smaller geometries will be important for us to remain competitive. We have in
the past experienced difficulty in migrating to new manufacturing processes,
which has resulted and could continue to result in reduced yields, delays in
product deliveries, and increased expense levels. Moreover, we are dependent on
relationships with our foundries and their partners to migrate to smaller
geometry processes successfully. If any such transition is substantially delayed
or inefficiently implemented, we may experience delays in product introductions
and incur increased expenses. As smaller geometry processes become more
prevalent, we expect to integrate greater levels of functionality, as well as
customer and third party intellectual property, into our products. We cannot
predict whether higher levels of design integration or the use of third-party
intellectual property will adversely affect our ability to deliver new
integrated products on a timely basis, or at all.

WE DEPEND ON SUBCONTRACTED MANUFACTURERS TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
PRODUCTS, AND ANY DELAY OR INTERRUPTION IN MANUFACTURING BY THESE CONTRACT
MANUFACTURERS WOULD RESULT IN DELAYED OR REDUCED SHIPMENTS TO OUR CUSTOMERS AND
MAY HARM OUR BUSINESS

We outsource the manufacturing of our semiconductor products to independent
foundries. Our primary semiconductor manufacturer is Taiwan Semiconductor
Manufacturing Corporation (TSMC). While TSMC has been a valuable and capable
supplier, there are no assurances or supply contracts guaranteeing that they
will continue to supply us with our required wafer supply. Furthermore, Taiwan
is always subject to geological or geopolitical disturbances that could
instantly cut off such supply. We also rely on other third party manufacturers
for packaging and testing of our semiconductors.

We do not have long-term purchase agreements with our subcontract manufacturers
or our component suppliers. There can be no assurance that our subcontract
manufacturers will be able or willing to reliably manufacture our products, in
volumes, on a cost effective basis or in a timely manner. For our semiconductor
products, the time to port our technology to another foundry, the time to
qualify the new versions of product, and the cost of this effort as well as the
tooling associated with wafer production would have a material adverse effect on
our business, operating results, and financial condition.

IF WE DISCOVER PRODUCT DEFECTS, WE MAY HAVE PRODUCT-RELATED LIABILITIES WHICH
MAY CAUSE US TO LOSE REVENUES OR DELAY MARKET ACCEPTANCE OF OUR PRODUCTS

Products as complex as those we offer frequently contain errors, defects, and
functional limitations when first introduced or as new versions are released. We
have in the past experienced such errors, defects or functional limitations. We
sell products into markets that are extremely demanding of robust, reliable,
fully functional products. Therefore, delivery of products with production
defects or reliability, quality or compatibility problems could significantly
delay or hinder market acceptance of such products, which could damage our
credibility with our customers and adversely affect our ability to retain our
existing customers and to attract new customers. Moreover, such errors, defects
or functional limitations could cause problems, interruptions, delays or a
cessation of sales to our customers. Alleviating such problems may require
significant expenditures of capital and resources by us. Despite our testing,
our suppliers or our customers may find errors, defects or functional
limitations in new products after commencement of commercial production. This
could result in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our other
development efforts, product repair or replacement costs, claims by our
customers or others against us, or the loss of credibility with our current and
prospective customers.


                                       21
<PAGE>   24

WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS, WHICH SUBJECT US TO RISKS THAT
COULD CAUSE OUR OPERATING RESULTS TO DECLINE

Sales to customers in the Asia Pacific region represented 43% and 34% of total
revenues in the quarters ended June 30, 2001 and 2000, respectively. Sales to
European customers represented 21% and 32% during the same quarterly periods.

Substantially all of our current semiconductor and system-level products are,
and substantially all of our future products will be, manufactured, assembled,
and tested by independent third parties in foreign countries. International
sales and manufacturing are subject to a number of risks, including general
economic conditions in regions such as Asia, changes in foreign government
regulations and telecommunication standards, export license requirements,
tariffs and taxes, other trade barriers, fluctuations in currency exchange
rates, difficulty in collecting accounts receivable, and difficulty in staffing
and managing foreign operations. We are also subject to geopolitical risks, such
as political, social, and economic instability, potential hostilities, and
changes in diplomatic and trade relationships, in connection with our
international operations. A significant decline in demand from foreign markets
could have a material adverse effect on our business, operating results, and
financial condition.

WE NEED TO RETAIN KEY PERSONNEL TO SUPPORT OUR PRODUCTS AND ONGOING OPERATIONS

The development and marketing of our IP telephony products will continue to
place a significant strain on our limited personnel, management, and other
resources. While the pace of economic growth in the San Francisco Bay Area
(where our corporate headquarters are located) has slowed in recent months,
competition for highly skilled engineering, sales, marketing, and support
personnel has remained strong. Any failure to retain qualified personnel could
adversely affect our financial results and impair our growth. We currently do
not maintain key person life insurance policies on any of our employees.

WE ARE INVOLVED IN A LITIGATION MATTER THAT COULD SERIOUSLY HARM OUR FINANCIAL
CONDITION

On April 6, 2001, we, along with Sun Microsystems, Inc., Netscape Communications
Canada Inc., Burntsand Inc., and Intraware Canada Inc., were sued by Milinx
Business Services, Inc. and Milinx Business Group Inc. (collectively, Milinx) in
the Supreme Court of British Columbia, Canada (the Court). Milinx has alleged
that we failed to perform certain contractual obligations and knowingly
misrepresented the capabilities of its products. The lawsuit seeks general,
special, and aggravated damages totaling in excess of $65 million Canadian
dollars plus interest, costs, and any other relief which the Court may choose to
provide. We believe we have valid defenses against the claims alleged by Milinx
and intend to defend this lawsuit vigorously. However, due to the nature of
litigation and because the lawsuit is in the very early pre-discovery stages, we
cannot determine the possible loss, if any, that may ultimately be incurred
either in the context of a trial or a negotiated settlement. Should we not
prevail in any such litigation, our operating results and financial condition
could be adversely impacted.

OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE

The market price of the shares of our common stock has been and is likely to be
highly volatile. It may be significantly affected by factors such as:

    -   actual or anticipated fluctuations in our operating results;


                                       22
<PAGE>   25

    -   announcements of technical innovations;

    -   loss of key personnel;

    -   new products or new contracts by us, our competitors or their customers;
        and

    -   developments with respect to patents or proprietary rights, general
        market conditions, changes in financial estimates by securities
        analysts, and other factors which could be unrelated to, or outside our
        control.

The stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies and that have often been unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against the issuing
company. If our stock price is volatile, we may also be subject to such
litigation. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would disrupt business and could
cause a decline in our operating results. Any settlement or adverse
determination in such litigation would also subject us to significant liability.


THE LOCATION OF OUR HEADQUARTERS FACILITY SUBJECTS US TO THE RISK OF EARTHQUAKES

Our corporate headquarters is located in the San Francisco Bay area of Northern
California, a region known for seismic activity. A significant natural disaster,
such as an earthquake, could have a material adverse impact on our business,
operating results, and financial condition.



PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On April 6, 2001, the Company, along with Sun Microsystems, Inc., Netscape
Communications Canada Inc., Burntsand Inc., and Intraware Canada Inc., was sued
by Milinx Business Services, Inc. and Milinx Business Group Inc. (collectively,
Milinx) in the Supreme Court of British Columbia, Canada (the Court). Milinx has
alleged that the Company failed to perform certain contractual obligations and
knowingly misrepresented the capabilities of its products. The lawsuit seeks
general, special, and aggravated damages totaling in excess of $65 million
Canadian dollars plus interest, costs, and any other relief which the Court may
choose to provide. Management believes that the Company has valid defenses
against the claims alleged by Milinx and intends to defend this lawsuit
vigorously. However, due to the nature of litigation and because the lawsuit is
in the very early pre-discovery stages, the Company cannot determine the
possible loss, if any, that may ultimately be incurred either in the context of
a trial or a negotiated settlement. Should the Company not prevail in the
litigation, its operating results and financial condition would be adversely
impacted.

ITEM 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

The Company's 2001 Annual Meeting of Stockholders was held on July 17, 2001 at
the Company's principal executive offices in Santa Clara, California. At the
meeting, 16,811,927 shares of the Company's common stock were present in person
or by proxy. The number of votes present in person or by proxy represented
approximately 63% of eligible votes associated with outstanding votable
securities.


                                       23
<PAGE>   26

The voting results by proposal were as follows:

    PROPOSAL 1. Each person elected as a Director will serve until the next
annual meeting of stockholders or until such person's successor is elected and
qualified. The following nominees for Director were elected:

<TABLE>
<CAPTION>
Name of Nominee                        Votes Cast For      Votes Withheld
---------------                        --------------      --------------
<S>                                    <C>                 <C>
Dr. Bernd Girod                          16,722,232            89,695
Ret. Maj. Gen. Guy L. Hecker             16,706,432           105,495
Christos Lagomichos                      16,741,120            70,807
Bryan R. Martin                          16,718,512            93,415
Joe Parkinson                            16,716,282            95,645
William P. Tai                           16,740,150            71,777
</TABLE>

    PROPOSAL 2. The ratification and appointment of PricewaterhouseCoopers LLP
as independent auditors of the Company for the fiscal year ending March 31, 2002
was approved by the stockholders with 16,767,122 voting in favor, 24,469 voting
against and 20,336 abstaining.

    PROPOSAL 3. The amendment to the Company's Restated Certificate of
Incorporation to change the Company's name to "8x8, Inc." was approved by the
stockholders with 16,642,594 voting in favor, 120,503 voting against and 48,830
abstaining.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   See Exhibit Index.

(b)   Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
      ended June 30, 2001.

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:

Date: July 26, 2001.

        8X8, INC.

        By: /s/ DAVID STOLL
        ---------------------
        David Stoll
        Chief Financial Officer and Vice President of Finance
        (Principal Financial and Accounting Officer)

                                  EXHIBIT INDEX

EXHIBIT No. EXHIBIT TITLE

10.1 Agreement by and between the Registrant and Dr. Paul Voois dated April 30,
2001.

10.2 Agreement by and between the Registrant and Jonathan Foster dated April
30, 2001.

      All other schedules are omitted because they are not required, are not
applicable or the information is included in the Condensed Consolidated
Financial Statements or notes thereto.



                                       24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>f74398ex10-1.txt
<DESCRIPTION>EXHIBIT 10.1
<TEXT>

<PAGE>   1
                                                                    EXHIBIT 10.1

                             NETERGY NETWORKS, INC.
                            2445 MISSION COLLEGE BLVD
                              SANTA CLARA, CA 95054
                                  408-727-1885

Mr. Paul Voois
VP, Netergy Networks, Inc.

Dear Paul:

This confirms that you are effectively resigning as an officer and director of
Netergy Networks, Inc. ("Netergy" or the "Company") on April 30, 2001, which
starts your six-month severance. This letter outlines the terms of your
employment during the six-month period ending October 31, 2001:

1.  EMPLOYMENT. Your status will be that of a part-time employee through October
    31, 2001, subject to honoring the obligations of noncompete (which are
    determined at the time you are engaging in any activity) and NDA, as well as
    assignment of intellectual property developed through April 30, 2001; you
    owe the Company nothing on intellectual property developed after April 30,
    2001, except related to projects that you worked on specifically at the
    Company's request. Your responsibilities will be to consult on matters as
    they arise that relate to your employment prior to April 30, 2001, including
    answering questions that may arise and perhaps even talking to some customer
    or party who may want reassurance. Your annual salary will remain at
    $190,000 irrespective of the amount of time worked. Nothing in this
    agreement will limit your ability to accept full-time employment with a
    company that is not competing with Netergy.

2.  LITIGATION. You will answer questions relating to the litigation as they
    arise, but if you are called to a deposition or to appear at a trial as a
    witness (by Netergy or any other party relating to matters prior to April
    30, 2001), then Netergy will pay you $1,000 per day (or prorated to 1/4 day
    increments if less than a full day is required) for the time you have to
    make yourself available, including travel time. You will also get reimbursed
    for your out-of-pocket expenses incurred at our request upon furnishing the
    usual receipts (same process as if you were an employee). Such amounts will
    be offset by any amount that you are paid by the court or other party to
    appear. This arrangement on litigation issues applies any time in the
    future, including after October 31, 2001.

3.  MEDICAL AND OTHER BENEFITS. You will continue receiving medical and other
    benefits for this 6 months (through October 31, 2001) other than PTO, which
    due to the reduced scope of your responsibilities, will cease to accrue on
    April 30, 2001.

4.  NETERGY PROPERTY. You may continue to use Netergy equipment presently in
    your possession (though you will pay the cost of any internet connection
    outside Netergy's property, and you will reimburse Netergy for the cost of
    your cell phone, though you can get reimbursed for Netergy phone calls on
    your cell phone or elsewhere). You will deliver all Netergy property back to
    Netergy on or the week before October 31, 2001 at your final exit interview.

5.  WAIVER. You hereby waive any and all claims against Netergy, its affiliates
    and subsidiaries, and Netergy's officers, directors, employees, consultants
    and contractors, and you also reaffirm such waiver each time you cash a
    check from Netergy through October 31, 2001 as a precondition to cashing
    such check. You will receive a checks for patent bonuses earned through
    April 30, 2001 in the amounts of $667 (6,215,425) and $1,333 (6,215,515).
    You claim no other bonus after April 30, 2001 (though I may in my discretion
    award you one). Netergy does not waive any claims against you, but I can say
    that I know of no breach of your obligations that would cause a claim.

6.  OFFLOAD. Please offload your work and files to Bryan Martin, David Stoll and
    Barry Andrews. Discard any files that are obsolete and no longer relevant.

Thanks for your cooperation in this recent transition period. Thanks also for
your many contributions to Netergy.

Sincerely,                           Approved:  /s/ PAUL VOOIS
                                                --------------------------------
                                                Paul Voois
/s/ JOE PARKINSON
Joe Parkinson, Chairman


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>f74398ex10-2.txt
<DESCRIPTION>EXHIBIT 10.2
<TEXT>

<PAGE>   1
                                                                    EXHIBIT 10.2

                             NETERGY NETWORKS, INC.
                            2445 MISSION COLLEGE BLVD
                              SANTA CLARA, CA 95054
                                  408-727-1885

Mr. Jonathan Foster
VP, Netergy Networks, Inc.

Dear Jon:

This confirms that you are effectively resigning as an officer of Netergy
Networks, Inc. ("Netergy" or the "Company") on April 30, 2001, which starts your
six-month severance. This letter outlines the terms of your employment during
the six-month period ending October 31, 2001:

1.  EMPLOYMENT. Your status will be that of a part-time employee through October
    31, 2001, subject to honoring the obligations of noncompete (which are
    determined at the time you are engaging in any activity) and NDA, as well as
    assignment of intellectual property developed through April 30, 2001; you
    owe the Company nothing on intellectual property developed after April 30,
    2001, except related to projects that you worked on specifically at the
    Company's request. Your responsibilities will be to consult on matters as
    they arise that relate to your employment prior to April 30, 2001, including
    answering questions that may arise and perhaps even talking to some customer
    or party who may want reassurance. Your annual salary will remain at
    $190,000 irrespective of the amount of time worked. Nothing in this
    agreement will limit your ability to accept full-time employment with a
    company that is not competing with Netergy.

2.  LITIGATION. You will answer questions relating to the litigation as they
    arise, but if you are called to a deposition or to appear at a trial as a
    witness (by Netergy or any other party relating to matters prior to April
    30, 2001), then Netergy will pay you $1,000 per day (or prorated to 1/4 day
    increments if less than a full day is required) for the time you have to
    make yourself available, including travel time. You will also get reimbursed
    for your out-of-pocket expenses incurred at our request upon furnishing the
    usual receipts (same process as if you were an employee). Such amounts will
    be offset by any amount that you are paid by the court or other party to
    appear. This arrangement on litigation issues applies any time in the
    future, including after October 31, 2001.

3.  MEDICAL AND OTHER BENEFITS. You will continue receiving medical and other
    benefits for this 6 months (through October 31, 2001) other than PTO, which
    due to the reduced scope of your responsibilities, will cease to accrue on
    April 30, 2001.

4.  NETERGY PROPERTY. You may continue to use Netergy equipment presently in
    your possession (though you will pay the cost of any internet connection
    outside Netergy's property, and you will reimburse Netergy for the cost of
    your cell phone, though you can get reimbursed for Netergy phone calls on
    your cell phone or elsewhere). You will deliver all Netergy property back to
    Netergy on or the week before October 31, 2001 at your final exit interview.

5.  WAIVER. You hereby waive any and all claims against Netergy, its affiliates
    and subsidiaries, and Netergy's officers, directors, employees, consultants
    and contractors, and you also reaffirm such waiver each time you cash a
    check from Netergy through October 31, 2001 as a precondition to cashing
    such check. You claim no other bonus after April 30, 2001 (though I may in
    my discretion award you one). Netergy does not waive any claims against you,
    but I can say that I know of no breach of your obligations that would cause
    a claim.

6.  OFFLOAD. Please offload your work and files to Bryan Martin, David Stoll and
    Barry Andrews. Discard any files that are obsolete and no longer relevant.

Thanks for your cooperation in this recent transition period. Thanks also for
your many contributions to Netergy.

Sincerely,                           Approved: /s/ JONATHAN FOSTER
                                               ---------------------------------
                                               Jonathan Foster
/s/ JOE PARKINSON
Joe Parkinson, Chairman


</TEXT>
</DOCUMENT>
</SUBMISSION>
