<SUBMISSION>
<ACCESSION-NUMBER>0001023731-02-000006
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>2
<PERIOD>20011231
<FILING-DATE>20020211
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>8X8 INC /DE/
<CIK>0001023731
<ASSIGNED-SIC>3674
<IRS-NUMBER>770142404
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>0331
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-21783
<FILM-NUMBER>02534499
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>2445 MISSION COLLEGE BLVD
<CITY>SANTA CLARA
<STATE>CA
<ZIP>95054
<PHONE>4087271885
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>2445 MISSION COLLEGE BLVD
<CITY>SANTA CLARA
<STATE>CA
<ZIP>95054
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>8X8 INC
<DATE-CHANGED>19961023
</FORMER-COMPANY>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>NETERGY NETWORKS INC
<DATE-CHANGED>20000912
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>form10q.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML>
<head>
<title>Q3 2002 DOC</title>
</head>
<body bgcolor=white>
<font FACE="Times New Roman" SIZE="3">

<DIV align=left>
<HR align=left SIZE=2 width="100%">
</DIV>
<DIV align=left>
<HR align=left SIZE=2 width="100%">
</DIV>

<p align="center"><font size="3"><B>UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</B></font></p>

<br>
<HR WIDTH="25%">
<br>
<p align="center"><font size="5"><B>FORM 10-Q</B></font></p>
<br>
<HR WIDTH="25%">

<p align="center"><font size="3"><B>
   [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
</B></font></p>
<p align="center"><font size="4" color="FF0000"><B>
             For the quarterly period ended December 31, 2001
</B></font></p>

<p align="center"><font size="3"><B> OR </B></font></p>

<p align="center"><font size="3"><B>
[&nbsp;&nbsp;]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
</B></font></p>
<p align="center"><font size="3"><B>
 For the transition period from ________to _________
</B></font></p>
<p align="center"><font size="3"><B>
                       <u>Commission file number 000-21783</u>
</B></font></p>
<p align="center"><font size="6" color="#0000FF"><B>
                                  <U>8X8, INC.</U>
</B></font><BR>
<font size="2">
               (Exact name of Registrant as Specified in its Charter)
</font></p>

<P>&nbsp;
<TABLE COLS=2 WIDTH="100%" >
<TR>
<TD>
<font size="3"><B>
<CENTER><u>Delaware</u></CENTER>
</font></B>
</TD>
<TD>
<font size="3"><B>
<CENTER><u> 77-0142404 </u></CENTER>
</font></B>
</TD>
</TR>
<TR>
<TD>
<font size="2">
<CENTER>&nbsp; (State or Other Jurisdiction of Incorporation or Organization)&nbsp;</CENTER>
</font>
</TD>
<TD>
<font size="2">
<CENTER>(I.R.S. Employer Identification Number)</CENTER>
</font>
</TD>
</TR>
</TABLE>
<BR>



<p align="center"><font size="3"><B>
                           2445 Mission College Blvd.<br>
                            <U>Santa Clara, CA &nbsp;&nbsp;  95054
</B></font></u><br>

<font size="2">
        (Address of Principal Executive Offices including Zip Code)
</font></p>

<p align="center"><font size="3"><B><u>
                                 (408) 727-1885
</B></font></u><br>

<font size="2">
                 (Registrant's Telephone Number, Including Area Code)
</font></p>


<DIV align=left>
<HR align=left SIZE=2 width="100%">
</DIV>
<DIV align=left>
<HR align=left SIZE=2 width="100%">
</DIV>

<p>&nbsp;&nbsp;&nbsp;
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [&nbsp;&nbsp;&nbsp;] </p>

<p>&nbsp;&nbsp;&nbsp;
The number of shares of the Registrant's Common Stock outstanding as of February 6,
2002 was 28,140,552.

<p>&nbsp;&nbsp;&nbsp;
The Exhibit Index begins on page 26.



<DIV align=left>
<HR align=left SIZE=2 width="100%">
</DIV>
<DIV align=left>

<HR align=left SIZE=2 width="100%">
</DIV>


<br>
<br>
<P ALIGN="CENTER"><IMG SRC="logo.gif"></P>
<p align="center"><B>
                                    8X8, INC.<br>
                                    FORM 10-Q<br>
                                TABLE OF CONTENTS
</B></p>

<P ALIGN="LEFT"><TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=700>
  <TR vAlign=bottom>
<TD WIDTH="90%">
<font size="3"><B>
    PART I.   FINANCIAL INFORMATION
</font></B>
</TD>

<TD WIDTH="10%">
<font size="3"><B>
<u>Page No.</u>
</font></B>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
Item 1.   Financial Statements:

</font>
</TD>

<TD>
<font size="3">
<CENTER>&nbsp;</CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
        Condensed Consolidated Balance Sheets at
         December 31, 2001 and March 31, 2001
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#bs">1</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
        Condensed Consolidated Statements of Operations for the three and<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         nine months ended December 31, 2001 and 2000
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#ops">2</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
        Condensed Consolidated Statements of Cash Flows for the nine<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         months ended December 31, 2001 and 2000
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#flows">3</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
        Notes to Unaudited Condensed Consolidated Financial Statements
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#notes">4</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
        Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#mda">9</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
Item 3.   Quantitative and Qualitative Disclosures About Market Risk

</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#market">16</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3"><B>
        PART II.  OTHER INFORMATION
</font></B>
</TD>

<TD>
<font size="3">
<CENTER>&nbsp;</CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>


  <TR vAlign=top>
<TD>
<font size="3">
        Item 1:  Legal Proceedings
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item1">24</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>


  <TR vAlign=top>
<TD>
<font size="3">
        Item 2:  Changes in Securities and Use of Proceeds
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item1">25</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
        Item 6.   Exhibits and Reports on Form 8-K
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item6">25</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3"><B>
        Signature
</font></B>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#sign">25</A></CENTER>
</font>
</TD>
</TR>
</TABLE>

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>

<P ALIGN="CENTER"><B>
Part I -- FINANCIAL INFORMATION </B> </P>
<P ALIGN="JUSTIFY"></P>
<B><P ALIGN="JUSTIFY">ITEM 1.&#9;FINANCIAL STATEMENTS</B> </P>

<br>
<br>
<br>
<A NAME="bs"></A>
<p align="center"><B>
                                    8X8, INC.
<br>
<br>
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<br>
                            (In thousands, unaudited)
<br>
<pre>
                                                      December 31,    March 31,
                                                         2001          2001
                                                     ------------  ------------
ASSETS                                                                         </B>
Current assets:
  Cash and cash equivalents ....................... $     13,806  $     24,126
  Accounts receivable, net ........................        1,845         2,907
  Inventory .......................................          915         1,328
  Other current assets ............................        1,529         2,571
                                                     ------------  ------------
    Total current assets ..........................       18,095        30,932
Property and equipment, net .......................        3,132         5,016
Intangibles and other assets ......................        2,088         3,197
                                                     ------------  ------------
                                                    $     23,315  $     39,145
                                                     ============  ============
<B>
LIABILITIES AND STOCKHOLDERS' EQUITY                                           </B>
Current liabilities:
  Accounts payable ................................ $        406  $      1,387
  Accrued compensation ............................        1,167         1,531
  Accrued warranty ................................          481           525
  Deferred revenue ................................        2,963         5,903
  Other accrued liabilities .......................        1,291         1,929
                                                     ------------  ------------
    Total current liabilities .....................        6,308        11,275
Convertible subordinated debentures ...............           --         6,238
                                                     ------------  ------------
    Total liabilities .............................        6,308        17,513
                                                     ------------  ------------
Commitments and contingencies (Notes 4 and 8)
Contingently redeemable common stock...............          898            --

Stockholders' equity:
  Common stock ....................................           27            27
  Additional paid-in capital ......................      150,372       150,015
  Notes receivable from stockholders ..............           --            (1)
  Deferred compensation ...........................          (34)         (174)
  Accumulated other comprehensive loss ............          (97)          (89)
  Accumulated deficit .............................     (134,159)     (128,146)
                                                     ------------  ------------
    Total stockholders' equity ....................       16,109        21,632
                                                     ------------  ------------
                                                    $     23,315  $     39,145
                                                     ============  ============

</pre>
<p align="center">
    The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.



<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="ops"></A>
<p align="center"><B>
                                    8X8, INC.
<br>
<br>
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<br>
                    (In thousands, except per share amounts)
<br>
                                   (Unaudited)
<pre>


                                                Three Months Ended     Nine Months Ended
                                                   December 31,          December 31,
                                              --------------------  --------------------
                                                 2001       2000       2001       2000
                                              ---------  ---------  ---------  ---------</B>
Product revenues ........................... $   1,644  $   2,388  $   4,679  $   9,962
License and other revenues .................     3,300      1,716      7,791      3,857
                                              ---------  ---------  ---------  ---------
   Total revenues ..........................     4,944      4,104     12,470     13,819
                                              ---------  ---------  ---------  ---------

Cost of product revenues ...................       615      1,175      1,976      3,969
Cost of license and other revenues .........        44        773        155      1,322
                                              ---------  ---------  ---------  ---------
   Total cost of revenues ..................       659      1,948      2,131      5,291
                                              ---------  ---------  ---------  ---------
Gross profit ...............................     4,285      2,156     10,339      8,528
                                              ---------  ---------  ---------  ---------
Operating expenses:
  Research and development .................     2,295      4,868      8,860     13,870
  Selling, general and administrative ......     2,269      4,497      7,598     12,924
  In-process research and development ......        --         --         --      4,563
  Amortization of intangibles ..............       190      3,612        572      7,375
                                              ---------  ---------  ---------  ---------
   Total operating expenses ................     4,754     12,977     17,030     38,732
                                              ---------  ---------  ---------  ---------
Loss from operations .......................      (469)   (10,821)    (6,691)   (30,204)
Other income, net ..........................       353        460        809      2,354
Interest expense ...........................      (218)      (393)      (882)    (1,088)
                                              ---------  ---------  ---------  ---------
Loss before provision for income taxes .....      (334)   (10,754)    (6,764)   (28,938)
Provision for income taxes .................        --         --         --         12
                                              ---------  ---------  ---------  ---------
Net loss before extraordinary gain and
  cumulative effect of change
  in accounting principle ..................      (334)   (10,754)    (6,764)   (28,950)
Extraordinary gain on extinguishment
  of debt, net..............................       779         --        779         --
Cumulative effect of change in
  accounting principle .....................        --     (1,081)        --     (1,081)
                                              ---------  ---------  ---------  ---------
Net income (loss) .......................... $     445  $ (11,835) $  (5,985) $ (30,031)
                                              =========  =========  =========  =========

Net loss per share before extraordinary
  gain and cumulative effect of change
  in accounting principle:
    Basic................................... $   (0.01) $   (0.42) $   (0.25) $   (1.19)
    Diluted................................. $   (0.01) $   (0.42) $   (0.25) $   (1.19)
Net income per share on extraordinary
  gain from extinguishment of debt:
    Basic................................... $    0.03  $      --  $    0.03  $      --
    Diluted................................. $    0.03  $      --  $    0.03  $      --
Net loss per share on cumulative effect
  of change in accounting principle:
    Basic................................... $      --  $   (0.05) $      --  $   (0.05)
    Diluted................................. $      --  $   (0.05) $      --  $   (0.05)
Net income (loss) per share after
  extraordinary gain and cumulative effect
  of change in accounting principle:
    Basic................................... $    0.02  $   (0.47) $   (0.22) $   (1.24)
    Diluted................................. $    0.02  $   (0.47) $   (0.22) $   (1.24)
                                              =========  =========  =========  =========
Weighted average number of shares:
    Basic...................................    27,201     25,337     26,976     24,281
    Diluted.................................    27,438     25,337     26,976     24,281
                                              =========  =========  =========  =========



</pre>
<p align="center">
    The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.



<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="flows"></A>
<p align="center"><B>
                                    8X8, INC.
<br>
<br>
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<br>
                            (In thousands, unaudited)
<pre>

                                                                    Nine Months Ended
                                                                     December 31,
                                                                 ----------------------
                                                                     2001        2000
                                                                 ----------  ----------</B>
Cash flows from operating activities:
Net loss ...................................................... $   (5,985) $  (30,031)
Adjustment to reconcile net loss to net cash
   used in operating activities:
       Depreciation and amortization ..........................      3,172       9,708
       Extraordinary gain due to debt redemption ..............       (779)         --
       Stock compensation expense .............................        (15)        716
       Cumulative effect of change in accounting principle ....         --       1,081
       Purchased in-process research and development ..........         --       4,563
       Gain on sale of investments.............................       (131)       (225)
       Other ..................................................         26          57
Changes in assets and liabilities, net of effects of
   acquisition and disposal of businesses .....................     (2,784)     (1,653)
                                                                 ----------  ----------
      Net cash used in operating activities ...................     (6,496)    (15,784)
                                                                 ----------  ----------
Cash flows from investing activities:
   Purchases of property and equipment ........................       (158)     (5,463)
   Proceeds from sale of equipment ............................        116          --
   Proceeds from sale of investments ..........................        543         225
   Cash paid for acquisition, net .............................         --        (553)
   Proceeds from disposition of business, net .................         --       5,160
                                                                 ----------  ----------
      Net cash provided by (used in) investing activities .....        501        (631)
                                                                 ----------  ----------
Cash flows from financing activities:
   Proceeds from issuance of common stock .....................        204       2,396
   Long-term debt repayment ...................................     (4,529)       (174)
   Repayment of notes receivable from stockholders ............         --          60
                                                                 ----------  ----------
       Net cash (used in) provided by financing activities ....     (4,325)      2,282
                                                                 ----------  ----------
Net decrease in cash and equivalents ..........................    (10,320)    (14,133)
Cash and cash equivalents at the beginning of the period ......     24,126      48,576
                                                                 ----------  ----------
Cash and cash equivalents at the end of the period ............ $   13,806  $   34,443
                                                                 ==========  ==========
Supplemental non-cash disclosure:
   Common stock issued to satisfy interest obligations ........ $       97  $       --
                                                                 ==========  ==========
   Issuance of shares and assumption of options in
     connection with the acquisition of U|Force................ $       --  $   44,586
                                                                 ==========  ==========
   Issuance of shares and repricing of warrants in
     connection with the debt extinguishment................... $    1,108  $       --
                                                                 ==========  ==========


</PRE>

<p align="center">
    The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="notes"></A>
<p align="center"><B>
                                    8X8, INC.
<br>
<br>
                    NOTES TO UNAUDITED CONDENSED CONSOLIDATED
<br>
                              FINANCIAL STATEMENTS       </B>


<B><P>1. DESCRIPTION OF THE BUSINESS </P>
</B><P ALIGN="JUSTIFY">8x8, Inc. and its subsidiaries (collectively, the Company
or 8x8) develop and market communication technology for Internet Protocol or,
IP, telephony and video applications. The Company has three primary product
lines: voice and video semiconductors and related software, hosted Internet
Private Branch Exchange, or iPBX, solutions, and telecommunication services
software. </P>
<P ALIGN="JUSTIFY">During the fiscal year ended March&nbsp;31, 2001, 8x8 formed
two subsidiaries, Netergy Microelectronics, Inc. and Centile, Inc. and
reorganized its operations more clearly along its three product lines. </P>

<UL>
<P ALIGN="JUSTIFY"><LI>Netergy Microelectronics, Inc. provides voice and video
semiconductors and related communication software to original equipment
manufacturers of telephones, terminal adapters, and other edge devices and to
other semiconductor companies. Netergy Microelectronics' technologies are used
to make IP telephones and to voice-enable cable and digital subscriber line
modems, wireless devices, and other broadband technologies. </LI></P>
<P ALIGN="JUSTIFY"><LI>Centile, Inc. develops and markets hosted iPBX solutions
that allow service providers to offer the features and functions that a user
commonly expects to find in a typical phone system to small and medium-sized
businesses over broadband networks. A hosted iPBX solution is a software
application that implements the functionality of a business phone system over
the same data connection that a business uses for connection to the internet.
The phone system software runs on servers that are located at a central data
center so that the only phone system equipment that is required at the customer
site are telephones. The phone system can also be accessed and controlled from
any web browser on the internet. </LI></P>
<P ALIGN="JUSTIFY"><LI>8x8 has a third product line, telecommunications services
software, that includes a service creation environment and a unified messaging
application (collectively, the SCE Product). The service creation environment is
a software application that enables software developers to create new
telecommunication software applications by using a Windows-based visual flow
chart environment, which has been used to implement entire voice mail systems
using these flow chart descriptors. Unified messaging is a voicemail system that
is capable of accepting voice messages, FAX transmissions and e-mail in a single
mailbox. The SCE Product is designed for use by telecommunication equipment
manufacturers and service providers.</LI></P></UL>

<P ALIGN="JUSTIFY">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.  </P>
<B><P ALIGN="JUSTIFY">2. BASIS OF PRESENTATION </P>
</B><P ALIGN="JUSTIFY">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. Therefore, while the
third quarters and first nine months of fiscal 2002 and fiscal 2001 each ended
on December 31, there is a slight difference in the number of days included in
the respective periods. The three and nine month periods ended December 31, 2001
included 13 weeks and 1 day, and 39 weeks and 2 days of operations,
respectively. The three and nine month periods ended December 31, 2000 included
13 weeks and 3 days, and 39 weeks and 3 days of operations, respectively.</P>
<P ALIGN="JUSTIFY">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. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated condensed financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from these estimates. </P>
<P ALIGN="JUSTIFY">These financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended March
31, 2001, including notes thereto, included in the Company's fiscal 2001 Annual
Report on Form 10-K. Certain prior period balances have been reclassified to
conform to the current period presentation. </P>
<P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">3. BALANCE SHEET DETAIL </P></B>

<PRE>
<B>
                                          December 31,    March 31,
                                             2001          2001
                                         ------------  ------------ </B>
Inventory (in thousands):
   Raw materials ...................... $        155  $        213
   Work-in-process ....................          655           783
   Finished goods .....................          105           332
                                         ------------  ------------
                                        $        915  $      1,328
                                         ============  ============

</PRE>


<B><P ALIGN="JUSTIFY">4. CONVERTIBLE SUBORDINATED DEBENTURES </P>
<I><P ALIGN="JUSTIFY">Issuance of the Debentures</P>
</B></I><P ALIGN="JUSTIFY">In December 1999, the Company issued $7.5 million of
4% Series A and Series B convertible subordinated debentures (the Debentures)
due in December 2002. In conjunction with the issuance of the Debentures, the
lenders received warrants to purchase 531,915 8x8 common shares at $7.05 per
share and 105,634 shares at $35.50 per share. The Company also issued warrants
to the placement agent to purchase 53,191 8x8 common shares at $7.05 per share
and 10,563 shares at $35.50 per share. All of the warrants expire in December
2002. </P>
<P ALIGN="JUSTIFY">Using the Black-Scholes pricing model, the Company determined
that the debt discount associated with the fair value of the warrants issued to
the lenders approximated $2.2 million. The costs of issuing the Debentures
totaled $864,000, including a non-cash charge for the value of warrants issued
to the placement agent. The debt discount and debt issuance costs have been
amortized to interest expense on a straight-line basis over the term of the
Debentures. </P>
<B><I><P ALIGN="JUSTIFY">Cumulative Effect of Change in Accounting Principle -
Beneficial Conversion Feature</P>
</B></I><P ALIGN="JUSTIFY">In November 2000, the Emerging Issues Task Force
reached several conclusions regarding the accounting for debt and equity
securities with beneficial conversion features, including a consensus requiring
the application of the "accounting conversion price" method, versus the use of
the stated conversion price, to calculate the beneficial conversion feature for
such securities. The SEC required companies to record a cumulative catch-up
adjustment in the fourth quarter of calendar 2000 related to the application of
the "accounting conversion price" method to securities issued after May 21,
1999. Accordingly, the Company recorded a $1.1 million non-cash expense during
the quarter ended December 31, 2000 to account for a beneficial conversion
feature associated with the Debentures and related warrants. The Company has
presented the charge in the Condensed Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle.</P>
<B><I><P ALIGN="JUSTIFY">Extraordinary Item - Early Extinguishment of
Debentures</P>
</B></I><P ALIGN="JUSTIFY">In December 2001, the Company redeemed the Debentures
for $4.5 million in cash and 1,000,000 shares of common stock. Additionally, the
Company agreed to reduce the exercise price of the 637,549 warrants held by the
lenders to $0.898 per share. This transaction resulted in an extraordinary gain
of $779,000, net of the incremental fair value of the repriced warrants, the
write-off of unamortized debt discount and debt issue costs, and other costs
associated with the early extinguishment of the Debentures. </P>
<B><I><P ALIGN="JUSTIFY">Contingently Redeemable Common Stock</P>
</B></I><P ALIGN="JUSTIFY">Under the terms of a registration rights agreement
(the Rights Agreement) that the Company and the lenders entered into in
connection with the issuance of the 1,000,000 shares of common stock, the
Company agreed to register the shares for resale within sixty days of their
issuance (the Registration Requirement) and maintain the effectiveness of the
registration statement for specified periods of time until the shares are resold
or can be resold without the registration statement (the Maintenance
Requirements). The Company further agreed that if it does not satisfy the
Registration Requirement or fails to comply with the Maintenance Requirements in
the future, it may be required to pay cash penalties and redeem all or a portion
of the shares held by the lenders at the higher of $0.898 per share or the
market price of the Company's stock at the time of the redemption. </P>
<P ALIGN="JUSTIFY">The 1,000,000 shares held by the lenders were recorded at
their potential redemption value at December 31, 2001 of $898,000 and classified
as contingently redeemable common stock due to the redemption rights described
above. The difference between the potential redemption value at December 31,
2001 of $898,000 and the value of the shares on the date of issuance of $870,000
has been treated as a deemed dividend and included as an adjustment to net
income (loss) available to common stockholders for purposes of calculating the
Company's net income (loss) per share (see Note 5). </P>
<B><I><P ALIGN="JUSTIFY">Subsequent Event</P>
</B></I><P ALIGN="JUSTIFY">In February 2002, the Company satisfied the
Registration Requirement. As the Registration Requirement has been met, the
Company will no longer mark the contingently redeemable common stock to the
higher of $0.898 per share or market unless it becomes probable that the
Company will not be able to comply with the Maintenance Requirements. </P>
<B><P ALIGN="JUSTIFY">5. NET INCOME (LOSS) PER SHARE </P>
</B><P ALIGN="JUSTIFY">Basic net income (loss) per share is computed by dividing
net income (loss) available to common stockholders (numerator) by the weighted
average number of common shares outstanding during the period (denominator).
Net income (loss) available to common stockholders was as follows (in
thousands):</P>

<PRE>
<B>
                                       Three Months Ended  Nine Months Ended
                                       December 31,        December 31,
                                       ------------------  ------------------
                                          2001      2000      2001      2000   </B>
                                       --------  --------  --------  --------
   Net loss.......................... $   (334) $(10,754) $ (6,764) $(28,950)
   Extraordinary gain................      779        --       779        --
   Cumulative effect of change
     in accounting principle.........       --    (1,081)       --    (1,081)
   Accretion of dividends on
     contingently redeemable
     common stock....................      (28)       --       (28)       --
                                       --------  --------  --------  --------
   Net income (loss) available
     to common stockholders.......... $    417  $(11,835) $ (6,013) $(30,031)
                                       ========  ========  ========  ========

</PRE>


<P ALIGN="JUSTIFY">Due to net losses incurred for the nine month period ended
December 31, 2001 and during the three and nine month periods ended December 31,
2000, basic and diluted shares outstanding for each of the respective periods
are the same. Diluted shares outstanding for the quarter ended December 31, 2001
is comprised of basic shares and potential common shares resulting from the
assumed exercise, using the treasury stock method, of outstanding stock options
having a dilutive effect. The following equity instruments were not included in
the computations of diluted net income (loss) per share because the effect on
the calculations would be anti-dilutive (in thousands):</P>

<PRE>
<B>                                         Three Months Ended     Nine Months Ended
                                               December 31,          December 31,
                                          --------------------  --------------------
                                             2001       2000       2001       2000
                                          ---------  ---------  ---------  ---------</B>
Common stock options ...................     5,271      8,411      6,140      8,411
Convertible subordinated debentures ....        --        638         --        638
Warrants ...............................       701        701        701        701
Unvested restricted common stock .......        --         57         --         57
Unvested restricted exchangeable shares         --      1,045         --      1,045
                                          ---------  ---------  ---------  ---------
                                             5,972     10,852      6,841     10,852
                                          =========  =========  =========  =========

</PRE>


<B><P ALIGN="JUSTIFY">6. COMPREHENSIVE INCOME (LOSS) </P>
</B><P ALIGN="JUSTIFY">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
income (loss) for the three and nine month periods ended December 31, 2001 and
2000 were as follows (in thousands): </P>

<PRE>
<B>
                                            Three Months Ended     Nine Months Ended
                                               December 31,          December 31,
                                          --------------------  --------------------
                                             2001       2000       2001       2000
                                          ---------  ---------  ---------  ---------</B>
Net income (loss), as reported.......... $     445  $ (11,835) $  (5,985) $ (30,031)
Reclassification of gain included
   in net income (loss).................       139         --         24         --
Cumulative translation adjustment.......       (74)        20        (32)        30
                                          ---------  ---------  ---------  ---------
Comprehensive income (loss)............. $     510  $ (11,815) $  (5,993) $ (30,001)
                                          =========  =========  =========  =========

</PRE>


<B><P ALIGN="JUSTIFY">7. SEGMENT REPORTING </P>
</B><P ALIGN="JUSTIFY">During the fourth quarter of fiscal year 2001, the
Company changed its internal reporting processes and determined that it had
three reportable segments: Netergy Micro, Centile, and Corporate and Other
(formerly the SCE and Other segment). The Company's reportable segments have
been determined based on the nature of the operations and products offered to
customers. The Netergy Micro 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 Netergy Micro
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. Centile also markets and sells media hub systems as part
of its hosted iPBX solution. The Corporate and Other segment represents the
business activities of the parent entity, 8x8, Inc. The results for the
Corporate and Other segment principally reflect activities related to the
development and deployment of the SCE Product, unallocated corporate overhead
expenses, and revenues and certain costs associated with discontinued product
lines. 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. </P>
<P>Revenues, gross profit, operating income (loss), and net income (loss) for
the Netergy Micro, Centile and the Corporate and Other segments for the fiscal
quarters and nine month periods ended December 31, 2001 and 2000 were as follows
(in thousands):  </P>

<PRE>
<B>
                                            Three Months Ended     Nine Months Ended
                                               December 31,          December 31,
                                          --------------------  --------------------
                                             2001       2000       2001       2000
                                          ---------  ---------  ---------  ---------
Revenues:                                                                           </B>
Netergy Micro........................... $   4,552  $   3,356  $  11,284  $  11,458
Centile ................................        62         70        168        153
Corporate and Other ....................       330        678      1,018      2,208
                                          ---------  ---------  ---------  ---------
   Total revenues ...................... $   4,944  $   4,104  $  12,470  $  13,819
                                          =========  =========  =========  =========<B>

Gross profit:                                                                       </B>
Netergy Micro........................... $   3,903  $   2,131  $   9,194  $   7,683
Centile ................................        52          2        158         37
Corporate and Other ....................       330         23        987        808
                                          ---------  ---------  ---------  ---------
   Total gross profit .................. $   4,285  $   2,156  $  10,339  $   8,528
                                          =========  =========  =========  =========<B>

Operating income (loss):                                                            </B>
Netergy Micro........................... $     971  $  (1,707) $     (56) $  (4,974)
Centile ................................      (910)    (3,455)    (4,712)   (10,061)
Corporate and Other ....................      (530)    (5,659)    (1,923)   (15,169)
                                          ---------  ---------  ---------  ---------
  Total operating loss ................. $    (469) $ (10,821) $  (6,691) $ (30,204)
                                          =========  =========  =========  =========<B>

Net income (loss):                                                                  </B>
Netergy Micro........................... $   1,001  $  (1,757) $     136  $  (5,053)
Centile ................................      (911)    (3,490)    (4,622)   (10,047)
Corporate and Other ....................       355     (6,588)    (1,499)   (14,931)
                                          ---------  ---------  ---------  ---------
  Total net loss ....................... $     445  $ (11,835) $  (5,985) $ (30,031)
                                          =========  =========  =========  =========

</PRE>


<P>There were no significant reconciling items between the segments for the
revenue, gross profit, operating loss, and net income (loss) amounts.</P>
<P>The following table illustrates net revenues by groupings of similar products
(in thousands): </P>

<PRE>
<B>

                                             Three Months Ended     Nine Months Ended
                                                December 31,          December 31,
                                           --------------------  ------------------
                                              2001       2000       2001      2000
                                           ---------  ---------  --------  --------</B>
Videoconferencing semiconductors ........ $   1,156  $   1,610  $  3,640  $  7,569
IP telephony semiconductors .............       446        652       926       967
Media hub systems .......................        42        101       104       409
Video monitoring systems ................        --         --        --       915
Consumer videophone systems .............        --         25         9       102
                                           ---------  ---------  --------  --------
   Product revenues .....................     1,644      2,388     4,679     9,962
                                           ---------  ---------  --------  --------

Videoconferencing licenses and royalties      1,953        782     3,453     1,990
IP telephony licenses and royalties .....       552        211     1,903       529
Hosted iPBX licenses ....................        36         70       140       153
Video monitoring licenses ...............       429         --     1,287        --
SCE Product licenses ....................       330         --     1,008        --
Professional services....................        --        653        --     1,185
                                           ---------  ---------  --------  --------
   License and other revenues ...........     3,300      1,716     7,791     3,857
                                           ---------  ---------  --------  --------
   Total revenues ....................... $   4,944  $   4,104  $ 12,470  $ 13,819
                                           =========  =========  ========  ========

</PRE>


<P>Deferred revenue by groupings of similar products is as follows (in
thousands): </P>

<PRE>
<B>
                                          December 31,     March 31,
                                              2001          2001
                                          ------------  ------------</B>
Videoconferencing semiconductors........ $         88  $        113
IP telephony semiconductors.............           15            --
                                          ------------  ------------
   Product deferred revenue.............          103           113
                                          ------------  ------------

Videoconferencing licenses..............           --            23
IP telephony licenses...................          281           741
Hosted iPBX licenses....................           56             6
Video monitoring licenses...............        2,432         3,719
SCE Product licenses....................           91         1,301
                                          ------------  ------------
   License and other deferred revenue...        2,860         5,790
                                          ------------  ------------
   Total deferred revenue............... $      2,963  $      5,903
                                          ============  ============

</PRE>


<P>At December 31, 2001 the Company had received payment for the amounts included
in deferred revenue as of such date with the exception of $91,000. </P>
<B><P ALIGN="JUSTIFY">8. LEGAL PROCEEDINGS </P>
</B><P ALIGN="JUSTIFY">In November 2001, the Company settled a lawsuit that was
filed against it in April 2001 in British Columbia, Canada by Milinx Business
Services, Inc. and Milinx Business Group, Inc (collectively, Milinx). The
Company was one of five named defendants in the lawsuit, the others being Sun
Microsystems, Inc., Netscape Communications Canada, Inc., Burntsand, Inc., and
Intraware Canada, Inc. The Company has been released of any further obligations
to Milinx in exchange for returning a portion of the original license fee. As a
result of the settlement agreement, the Company recognized $309,000 of
previously deferred revenue stemming from a March 2000 license agreement with
Milinx.</P>
<P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">9. RECENT ACCOUNTING PRONOUNCEMENTS </P>
</B><P ALIGN="JUSTIFY">In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires all business combinations to be accounted for using the purchase
method of accounting, and also requires that certain intangible assets acquired
in a business combination be recognized as assets apart from goodwill.
SFAS No. 141 was effective for all business combinations initiated after June 30,
2001. Under SFAS No. 142, goodwill will no longer be amortized, but will be subject
to annual impairment tests. Goodwill should be assigned to an entity's reporting units,
which, under SFAS No. 142, are defined as operating segments, or one level below
that. Furthermore, SFAS No. 142 requires purchased intangible assets other than
goodwill to be amortized over their useful lives, unless those lives are
determined to be indefinite, and, upon adoption, requires a reassessment of the
useful lives previously assigned to its recognized intangible assets. In
addition, if certain recognized intangible assets do not meet certain criteria,
such assets should be reclassified to goodwill. Conversely, certain intangible
assets that have been reported as part of goodwill may need to be reclassified
as of the date that SFAS No. 142 is initially applied in its entirety.</P>
<P ALIGN="JUSTIFY"> The Company plans to adopt these standards effective April
1, 2002. Goodwill that existed at June 30, 2001 will continue to be amortized
through March 31, 2002. Upon adoption in the first quarter of fiscal 2003,
goodwill will no longer be amortized, but will be subject to annual impairment
tests, which the Company will perform by applying a fair-value based test. The
first step of the goodwill impairment test should be performed by September 30,
2002.  If an impairment is indicated, the second step of the impairment test
must be completed no later than March 31, 2003. The Company will reassess the
useful lives assigned to its recognized intangible assets and determine if any
reclassification of goodwill and intangible assets will be required. The Company
anticipates that its operating segments will comprise its reporting units, and,
accordingly, annual impairment tests would be performed at the operating segment
level. Based on acquisitions completed as of June 30, 2001, application of the
goodwill non-amortization provisions of SFAS No. 142 is expected to result in a
decrease in operating expenses of approximately $697,000 for fiscal 2003.</P>
<P ALIGN="JUSTIFY">On October 3, 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets.&quot; SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of."  SFAS No. 144 applies to all long-
lived assets (including discontinued operations) and consequently amends
Accounting Principles Board Opinion No. 30. SFAS No. 144 develops one accounting
model for long-lived assets that are to be disposed of by sale. SFAS No. 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell.  Additionally, SFAS
No. 144 expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction.  SFAS No. 144 is effective for the Company for all
financial statements issued in fiscal 2003.</P>
<B><P ALIGN="JUSTIFY">ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS </P>
<I><P>FORWARD-LOOKING STATEMENTS</B></I> </P>
<P ALIGN="JUSTIFY">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 the impact of
various factors on our revenues derived from sales of videoconferencing
semiconductors, 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, the possible
further reduction of personnel and suspension of salary increases and capital
expenditures and the possible redemption of shares issued as part of the debt
extinguishment. 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 including our most recent
reports on Form 8-K. </P>
<B><I><P ALIGN="JUSTIFY">OVERVIEW</B></I> </P>
<P ALIGN="JUSTIFY">8x8, Inc. and its subsidiaries (collectively, We or 8x8)
develop and market communication technology for Internet Protocol or, IP,
telephony and video applications. We have three primary product lines: voice and
video semiconductors and related software, hosted Internet Private Branch
Exchange or, iPBX, solutions, and telecommunication services software. During
the fiscal year ended March&nbsp;31, 2001, we formed two subsidiaries, Netergy
Microelectronics, Inc. and Centile, Inc. and reorganized our operations more
clearly along our three product lines. </P>

<UL>
<P ALIGN="JUSTIFY"><LI>Netergy Microelectronics, Inc. provides voice and video
semiconductors and related communication software to original equipment
manufacturers of telephones, terminal adapters, and other edge devices and to
other semiconductor companies. Netergy Microelectronics' technologies are used
to make IP telephones and to voice-enable cable and digital subscriber line
modems, wireless devices, and other broadband technologies. </LI></P>
<P ALIGN="JUSTIFY"><LI>Centile, Inc. develops and markets hosted iPBX solutions
that allow service providers to offer the features and functions that a user
commonly expects to find in a typical phone system to small and medium-sized
businesses over broadband networks. A hosted iPBX solution is a software
application that implements the functionality of a business phone system over
the same data connection that a business uses for connection to the internet.
The phone system software runs on servers that are located at a central data
center so that the only phone system equipment that is required at the customer
site are telephones. The phone system can also be accessed and controlled from
any web browser on the internet. </LI></P>
<P ALIGN="JUSTIFY"><LI>We have a third product line, telecommunications services
software, that includes a service creation environment and a unified messaging
application (collectively, the SCE Product). The service creation environment is
a software application that enables software developers to create new
telecommunication software applications by using a Windows-based visual flow
chart environment, which has been used to implement entire voice mail systems
using these flow chart descriptors. Unified messaging is a voicemail system that
is capable of accepting voice messages, FAX transmissions and e-mail in a single
mailbox. The SCE Product is designed for use by telecommunication equipment
manufacturers and service providers.</LI></P></UL>

<B><I><P ALIGN="JUSTIFY">RESULTS OF OPERATIONS</B></I> </P>
<P ALIGN="JUSTIFY">The following table sets forth condensed consolidated
statements of operations data for the three and nine month periods ended
December 31, 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 ($ in millions). </P>

<PRE>

<B>
                                          Three Months Ended December 31,    Nine Months Ended December 31,
                                          --------------------------------  --------------------------------
                                               2001            2000              2001            2000
                                          ---------------  ---------------  ---------------  ---------------</B>
                                                                  ($ in millions)
Product revenues ....................... $   1.6      33% $   2.4      58% $   4.7      38% $  10.0      72%
License and other revenues .............     3.3      67%     1.7      42%     7.8      62%     3.8      27%
                                          -------  ------  -------  ------  -------  ------  -------  ------
   Total revenues ......................     4.9     100%     4.1     100%    12.5     100%    13.8     100%
                                          -------  ------  -------  ------  -------  ------  -------  ------

Cost of product revenues ...............     0.6      37%     1.2      49%     2.0      42%     4.0      40%
Cost of license and other revenues .....     0.0       1%     0.7      41%     0.2       2%     1.3      35%
                                          -------  ------  -------  ------  -------  ------  -------  ------
   Total cost of revenues ..............     0.6      12%     1.9      47%     2.2      18%     5.3      38%
                                          -------  ------  -------  ------  -------  ------  -------  ------
Gross profit ...........................     4.3      87%     2.2      53%    10.3      83%     8.5      62%
                                          -------  ------  -------  ------  -------  ------  -------  ------
Operating expenses:
  Research and development .............     2.3      46%     4.9     119%     8.8      71%    13.9     100%
  Selling, general and administrative ..     2.3      46%     4.5     110%     7.6      61%    12.9      94%
  In-process research and development ..      --      --       --      --       --      --      4.5      33%
  Amortization of intangibles ..........     0.2       4%     3.6      88%     0.6       5%     7.4      53%
                                          -------  ------  -------  ------  -------  ------  -------  ------
   Total operating expenses ............     4.8      96%    13.0     316%    17.0     137%    38.7     280%
                                          -------  ------  -------  ------  -------  ------  -------  ------
Loss from operations ...................    (0.5)     -9%   (10.8)   -264%    (6.7)    -54%   (30.2)   -219%
Other income, net ......................     0.3       6%     0.5      11%     0.8       6%     2.4      17%
Interest expense .......................    (0.2)     -4%    (0.4)    -10%    (0.9)     -7%    (1.1)     -8%
                                          -------  ------  -------  ------  -------  ------  -------  ------
Loss before provision for income taxes .    (0.4)     -8%   (10.7)   -261%    (6.8)    -86%   (28.9)   -209%
Provision for income taxes .............      --      --       --      --       --      --      0.0      --
                                          -------  ------  -------  ------  -------  ------  -------  ------
Net loss before extraordinary gain and
  cumulative effect of change
  in accounting principle ..............    (0.4)     -8%   (10.7)   -261%    (6.8)    -54%   (28.9)   -209%
Extraordinary gain on extinguishment
  of debt, net..........................     0.8      16%      --      --      0.8       6%      --      --
Cumulative effect of change in
  accounting principle .................      --      --     (1.1)    -26%      --      --     (1.1)     -8%
                                          -------  ------  -------  ------  -------  ------  -------  ------
Net income (loss) ...................... $   0.4       9% $ (11.8)   -288% $  (6.0)    -48% $ (30.0)   -217%
                                          =======  ======  =======  ======  =======  ======  =======  ======


</PRE>


<P ALIGN="JUSTIFY">The following discussion should be read in conjunction with
our Condensed Consolidated Financial Statements and the notes thereto: </P>
<B><I><P ALIGN="JUSTIFY">Revenues</B></I> </P>
<P ALIGN="JUSTIFY">The following table illustrates net revenues by groupings of
similar products (in thousands): </P>

<PRE>
<B>

                                             Three Months Ended     Nine Months Ended
                                                December 31,          December 31,
                                           --------------------  ------------------
                                              2001       2000       2001      2000
                                           ---------  ---------  --------  --------</B>
Videoconferencing semiconductors ........ $   1,156  $   1,610  $  3,640  $  7,569
IP telephony semiconductors .............       446        652       926       967
Media hub systems .......................        42        101       104       409
Video monitoring systems ................        --         --        --       915
Consumer videophone systems .............        --         25         9       102
                                           ---------  ---------  --------  --------
   Product revenues .....................     1,644      2,388     4,679     9,962
                                           ---------  ---------  --------  --------

Videoconferencing licenses and royalties      1,953        782     3,453     1,990
IP telephony licenses and royalties .....       552        211     1,903       529
Hosted iPBX licenses ....................        36         70       140       153
Video monitoring licenses ...............       429         --     1,287        --
SCE Product licenses ....................       330         --     1,008        --
Professional services....................        --        653        --     1,185
                                           ---------  ---------  --------  --------
   License and other revenues ...........     3,300      1,716     7,791     3,857
                                           ---------  ---------  --------  --------
   Total revenues ....................... $   4,944  $   4,104  $ 12,470  $ 13,819
                                           =========  =========  ========  ========

</PRE>


<P ALIGN="JUSTIFY">Product revenues were $1.6 million in the third quarter of
fiscal 2002, a decrease of $744,000 from the $2.4 million reported in the third
quarter of fiscal 2001. Product revenues were $4.7 million for the nine month
period ended December 31, 2001, a decrease of approximately $5.3 million from
the $10.0 million reported in the prior year period. The decreases in the three
and nine month periods ended December 31, 2001 as compared to the corresponding
periods in the prior year were due primarily to a significant decrease in unit
shipments of our videoconferencing semiconductor products and media hub systems,
offset partially by increases in average selling prices, or ASPs, associated
with our videoconferencing semiconductor products. The decrease in unit
shipments of media hub systems as compared to prior year periods was due to a
decline in sales to a significant customer. Factors that have contributed to
the significant decrease in unit shipments of our videoconferencing
semiconductors for the periods covered, and that we anticipate will have a
significant impact for the foreseeable future, include: </P>

<UL>
<P ALIGN="JUSTIFY"><LI>Increased competition from other developers of
semiconductors used in videoconferencing applications; </LI></P>
<P ALIGN="JUSTIFY"><LI>The acquisition of two of our customers by a
company that appears to have standardized its product development efforts
around technology supplied by one or more of our competitors; </LI></P>
<P ALIGN="JUSTIFY"><LI>Increased competition from evolving PC-based
videoconferencing applications which has resulted in reduced demand for products
marketed and sold by our customers that incorporate our videoconferencing
semiconductors; and</LI></P>
<P ALIGN="JUSTIFY"><LI>Decreased corporate and consumer spending.</LI></P></UL>

<P ALIGN="JUSTIFY">In addition to the factors noted above, the decrease in
product revenues for the three month period ended December 31, 2001 as compared
to the prior year was also due to a decrease in sales of our Audacity-T2
semiconductor product to a significant customer.
The decrease in product revenues for the nine month
period ended December 31, 2001 as compared to the prior year was also due to a
decrease in sales of video monitoring systems resulting from our exit from this
business in May 2000.</P>
<P ALIGN="JUSTIFY">License and other revenues were $3.3 million in the third
quarter of fiscal 2002, an increase of approximately $1.6 million over the $1.7
million reported in the third quarter of fiscal 2001. License and other revenues
were $7.8 million for the nine month period ended December 31, 2001, an increase
of approximately $3.9 million over the $3.9 million reported in the prior year
period. </P>
<P ALIGN="JUSTIFY">License and other revenues for the periods reported, the
majority of which are considered to be non-recurring in nature, consist
primarily of technology licenses, including royalties earned under such
licenses.  However, license and other revenues for the three and nine month
periods ended December 31, 2000 also included professional service revenues
associated with our Canadian operations. No professional service revenues were
recognized in the corresponding periods in fiscal 2002 due to the elimination of
the professional services organization as part of the restructuring of our
Canadian operations in the fourth quarter of fiscal 2001. The negative impact of
eliminating professional service revenues in fiscal 2002 was more than offset by
the following:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>Royalties earned by Netergy Micro from a single customer
under a license agreement for certain of our MPEG video compression technology.
Royalty revenue recognized under this agreement totaled $1.4 million and $1.8
million for the three and nine months ended December 31, 2001 as compared to
$183,000 and $768,000 for the three and nine months ended December 31, 2000. The
customer has no obligations to pay royalties on future shipments of products
that incorporate our technology. The $1.4 million received in the third quarter
of fiscal 2002 resulted from an adjustment to amounts paid to us in prior
periods. The customer is continuing to evaluate amounts paid in prior periods to
determine if additional royalties are due and payable to us. We do not currently
anticipate that any additional royalties paid by the customer will be
significant;</LI></P>
<P ALIGN="JUSTIFY"><LI>Licenses of our IP telephony technology, e.g., Veracity
VoIP software and Audacity-T2 based reference design kits marketed by Netergy
Micro;</LI></P>
<P ALIGN="JUSTIFY"><LI>SCE Product license revenue due to the recognition of
$309,000 of previously deferred revenue associated with our license of unified
messaging technology to Milinx in the quarter ended December 31, 2001. See Note
8 to the Condensed Consolidated Financial Statements for further discussion.
SCE Product revenues for the first nine months of fiscal 2002 also included
$659,000 of revenue associated the license of our SCE technology to
Lucent;</LI></P>
<P ALIGN="JUSTIFY"><LI>Revenue associated with the license of our video
monitoring technology to Interlogix. Recognition of the approximately $3.9
million of revenue ascribed to the license of video monitoring technology to
Interlogix in fiscal 2001 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 December 31, 2001 is
approximately $2.4 million.</LI></P></UL>

<P ALIGN="JUSTIFY">Three customers represented more than 10% of our total
revenues for the quarter ended December 31, 2001. These customers represented
29%, 14%, and 13% of our total revenues, respectively. Two customers represented
13% and 12% of our total revenues for the quarter ended December 31, 2000. Three
customers represented 15%, 15% and 10% of our total revenues, respectively, for
the nine month period ended December 31, 2001. No customer represented 10% or
more of our total revenues for the nine month period ended December 31,
2000.</P>
<P ALIGN="JUSTIFY">Our revenue distribution by geographic region (based upon the
destination of shipments) was as follows: </P>

<PRE>
<B>
                                       Three Months Ended   Nine Months Ended
                                          December 31,        December 31,
                                     ------------------  ------------------
                                        2001      2000      2001      2000   </B>
                                     --------  --------  --------  --------
   North America...................       46%       40%       42%       44%
   Europe..........................       32%       29%       25%       26%
   Taiwan..........................       14%       12%       16%       13%
   Other Asia Pacific..............        8%       19%       17%       17%
                                     --------  --------  --------  --------
                                         100%      100%      100%      100%
                                     ========  ========  ========  ========

</PRE>


<B><I><P ALIGN="JUSTIFY">Cost of Revenues and Gross Profit </B></I> </P>
<P ALIGN="JUSTIFY">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 decreased to approximately $1.0 million in the
third quarter of fiscal 2002 from $1.2 million for the quarter ended December
31, 2000 due to a decrease in product revenues offset by an increase in product
gross margins from 51% to 63%. The increase in product gross margins is due
primarily to an increase in average selling prices on our videoconferencing
semiconductors and, to a lesser degree, a decrease in manufacturing overhead
costs in the current period as a result of reductions in manufacturing headcount
and efforts to reduce discretionary manufacturing-related spending.  Gross
profit from product revenues decreased to $2.7 million for the nine month period
ended December 31, 2001 from $6.0 million during the corresponding period of the
prior year due to a decrease in product revenues and, to a lesser degree, a
decrease in product gross margins from 60% to 58%. The slight decrease in
product gross margins is due primarily to inventory reserves associated with our
media hub products that we recorded in the first quarter of fiscal 2002 and an
increase in revenues derived from IP telephony semiconductors, which have lower
gross margins than those historically derived on our videoconferencing
semiconductors, as a percentage of total revenues.  These factors were partially
offset by an increase in average selling prices on our videoconferencing
semiconductors as compared to the prior year period.</P>
<P ALIGN="JUSTIFY">The cost of license and other revenues for the periods
presented consist principally of royalties associated with technology
sublicensed from third parties and certain costs associated with providing
maintenance services.  The cost of license and other revenues for the three and
nine month periods ended December 31, 2000 also included costs associated with
our Canadian professional services organization. No such costs were incurred in
the corresponding periods in fiscal 2002 due to the elimination of our
professional services organization as part of the restructuring of our Canadian
operations in the fourth quarter of fiscal 2001. Due to the low gross margins
attributable to professional service revenues, the elimination of the
professional services organization had a significant impact on gross margins
associated with overall license and other revenues in fiscal 2002. Gross margin
increased from 55% during the three months ended December 31, 2000 to 99% in the
quarter ended December 31, 2001. Gross margin increased from 66% during the nine
months ended December 31, 2000 to 98% in the corresponding period in the current
fiscal year. </P>
<B><I><P ALIGN="JUSTIFY">Research and Development Expenses</B></I> </P>
<P ALIGN="JUSTIFY">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 decreased by $2.6 million in the
third quarter of fiscal 2002 as compared to the third quarter of fiscal 2001,
and decreased by approximately $5.0 million in the first nine months of fiscal
2002 as compared to the first nine months of fiscal 2001. The significant
decreases in research and development expenses for the three and nine month
periods ended December 31, 2001 as compared to the comparable periods in the
prior year are due to the following:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>The elimination of our Canadian operations in the fourth
quarter of fiscal 2001; </LI></P>
<P ALIGN="JUSTIFY"><LI>Reductions in headcount;</LI></P>
<P ALIGN="JUSTIFY"><LI>Lower consulting expenses associated with development of
the graphical user interface for Centile's hosted iPBX product; and</LI></P>
<P ALIGN="JUSTIFY"><LI>Our overall efforts to reduce discretionary operating
costs.  </LI></P></UL>

<P ALIGN="JUSTIFY">In addition, the nine month period ended December 31, 2000
included a non-recurring stock compensation charge of approximately $300,000
related to the acceleration of stock option vesting under an existing bonus
program. </P>
<B><I><P ALIGN="JUSTIFY">Selling, General and Administrative Expenses</B></I>
</P>
<P ALIGN="JUSTIFY">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 sales
commissions, trade show, advertising and other marketing and promotional
expenses. Selling, general and administrative expenses decreased by $2.2 million
in the third quarter of fiscal 2002 as compared the same period in the prior
year and decreased by approximately $5.3 million in the first nine months of
fiscal 2002 as compared to the first nine months of fiscal 2001. The decreases
in selling, general and administrative expenses during the three and nine month
periods ended December 31, 2001 as compared to the comparable periods in the
prior year are primarily attributable to:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>The elimination of our Canadian operations in the fourth
quarter of fiscal 2001;</LI></P></UL>


<UL>
<P ALIGN="JUSTIFY"><LI>Reductions in headcount; and</LI></P></UL>


<UL>
<P ALIGN="JUSTIFY"><LI>Lower legal, travel, corporate marketing, public
relations and trade show expenditures resulting from our efforts to reduce
discretionary operating costs.</LI></P></UL>

<B><I><P ALIGN="JUSTIFY">In-Process Research and Development and Amortization of
Intangibles</B></I> </P>
<P ALIGN="JUSTIFY">In the second quarter of fiscal 2001 we incurred an in-
process research and development charge of $4.6 million related to the
acquisition of U|Force.</P>
<P ALIGN="JUSTIFY">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. Approximately $190,000 of such amortization was charged to
operations during each of the two three-month periods ending December 31, 2001
and 2000. An additional $3.4 million was charged to operating expenses during
the third quarter of fiscal 2001 related to the amortization of intangible
assets acquired as a result of the acquisition of U|Force. Amortization of
intangible assets totaled $572,000 and $7.4 million in the nine month periods
ended December 31, 2001 and 2000, respectively. The significant decrease in the
amortization of intangibles as compared to the prior year period was primarily
due to the write-off of U|Force intangible assets during the fourth quarter of
fiscal 2001.   </P>
<P ALIGN="JUSTIFY">See the Management's Discussion and Analysis in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2001 for further
explanation of the U|Force transactions.</P>
<B><I><P ALIGN="JUSTIFY">Other Income, Net</B></I> </P>
<P ALIGN="JUSTIFY">In the third quarters of fiscal 2002 and 2001, other income,
net, was $353,000 and $460,000, respectively. The decrease in other income, net,
as compared to the prior year period was due primarily to a significant decrease
in interest income resulting from lower average cash and cash equivalent
balances and lower interest rates.  The decrease in interest income was
partially offset by a $131,000 gain realized on the sale of an investment in the
quarter ended December 31, 2001.</P>
<P ALIGN="JUSTIFY">During the nine month periods ended December 31, 2001 and
2000, other income, net, was $809,000 and $2.4 million, respectively. The
decrease as compared to the prior year period was also due primarily to a
decrease in interest income as a result of the factors noted above. Gains
realized on the sale of investments also decreased by approximately $94,000 as
compared to the prior year period. </P>
<B><I><P ALIGN="JUSTIFY">Interest Expense</B></I> </P>
<P ALIGN="JUSTIFY">Interest expense for the three and nine month periods ended
December 31, 2001 and 2000 consisted mainly of charges associated with the 4%
convertible subordinated debentures (the Debentures), as well as the
amortization of the related debt discount and debt issuance costs. We redeemed
the Debentures in December 2001. Interest expense for the three and nine month periods
ended December 31, 2000 also included amounts associated with lines of credit and a
bank loan assumed as part of the U|Force acquisition. </P>
<B><I><P ALIGN="JUSTIFY">Provision for Income Taxes</B></I> </P>
<P ALIGN="JUSTIFY">There was no tax provision recorded during the nine month
period ended December 31, 2001 due to net losses incurred. The tax provision
reported for the nine month period ended December 31, 2000 represents certain
taxes associated with our foreign subsidiaries. </P>
<B><I><P ALIGN="JUSTIFY">Extraordinary Gain</P>
</B></I><P ALIGN="JUSTIFY">We realized an extraordinary gain of $779,000 in the
quarter ended December 31, 2001 resulting from the early extinguishment of our
convertible subordinated debentures.  See further discussion regarding this
transaction at Note 4 to the Condensed Consolidated Financial Statements.</P>
<B><I><P ALIGN="JUSTIFY">Cumulative Effect of Change in Accounting Principle</P>
</B></I><P ALIGN="JUSTIFY">In November 2000, the Emerging Issues Task Force
reached several conclusions regarding the accounting for debt and equity
securities with beneficial conversion features, including a consensus requiring
the application of the "accounting conversion price" method, versus the use of
the stated conversion price, to calculate the beneficial conversion feature for
such securities. The Securities and Exchange Commission (SEC) requires companies
to record a cumulative catch-up adjustment in the fourth quarter of calendar
2000 related to the application of the "accounting conversion price" method to
securities issued after May 21, 1999. Accordingly, we recorded a $1.1 million
non-cash expense during the quarter ended December 31, 2000 to account for a
beneficial conversion feature associated with the convertible subordinated
debentures and related warrants issued in December 1999, and we presented it as
a cumulative effect of a change in accounting principle as required by the
SEC.</P>
<B><I><P ALIGN="JUSTIFY">Recent Accounting Pronouncements</B></I> </P>
<P ALIGN="JUSTIFY">In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
141 requires all business combinations to be accounted for using the purchase
method of accounting, and also requires that certain intangible assets acquired
in a business combination be recognized as assets apart from
goodwill. SFAS No. 141
was effective for all business combinations initiated after June 30,
2001. Under SFAS No.
142, goodwill will no longer be amortized, but will be subject to annual
impairment tests. Goodwill should be assigned to an entity's reporting units,
which, under SFAS No. 142, are defined as operating segments, or one level below
that. Furthermore, SFAS No. 142 requires purchased intangible assets other than
goodwill to be amortized over their useful lives, unless these lives are
determined to be indefinite, and, upon adoption, requires a reassessment of the
useful lives previously assigned to its recognized intangible assets. In
addition, if certain recognized intangible assets do not meet certain criteria,
such assets should be reclassified to goodwill. Conversely, certain intangible
assets that have been reported as part of goodwill may need to be reclassified
as of the date that SFAS No. 142 is initially applied in its entirety.</P>
<P ALIGN="JUSTIFY">We plan to adopt these standards effective April 1, 2002.
Goodwill that existed at June 30, 2001 will continue to be amortized through
March 31, 2002. Upon adoption in the first quarter of fiscal 2003, goodwill will
no longer be amortized, but will be subject to annual impairment tests, which we
will perform by applying a fair-value based test. The first step of the goodwill
impairment test should be performed by September 30, 2002.  If an impairment is
indicated, the second step of the impairment test must be completed no later
than March 31, 2003. We will reassess the useful lives assigned to its
recognized intangible assets and determine if any reclassification of goodwill
and intangible assets will be required. We anticipate that our operating
segments will comprise our reporting units, and, accordingly, annual impairment
tests would be performed at the operating segment level. Based on acquisitions
completed as of June 30, 2001, application of the goodwill non-amortization
provisions of SFAS No. 142 is expected to result in a decrease in operating
expenses of approximately $697,000 for fiscal 2003.</P>
<P ALIGN="JUSTIFY">On October 3, 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets.&quot; SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of."  SFAS No. 144 applies to all long-
lived assets (including discontinued operations) and consequently amends
Accounting Principles Board Opinion No. 30. SFAS No. 144 develops one accounting
model for long-lived assets that are to be disposed of by sale. SFAS No. 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell.  Additionally, SFAS
No. 144 expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction.  SFAS No. 144 is effective for the Company for all
financial statements issued in fiscal 2003.</P>
<B><I><P ALIGN="JUSTIFY">Liquidity and Capital Resources</B></I> </P>
<P ALIGN="JUSTIFY">As of December 31, 2001, we had cash and cash equivalents
totaling $13.8 million, representing a decrease of approximately $10.3 million
from March 31, 2001. We currently have no bank borrowing arrangements. </P>
<P ALIGN="JUSTIFY">Cash used in operations of approximately $6.5 million in the
first nine months of fiscal 2002 is primarily attributable to the net loss of
$6.0 million, a $981,000 decrease in accounts payable, a $364,000 decrease in
accrued compensation, a $596,000 decrease in other accrued liabilities, and a
$2.9 million decrease in deferred revenue.  This was offset by a decrease in
accounts receivable of $1.1 million, a $413,000 decrease in inventory, a $1.0
million decrease in other current assets, and non-cash items including
depreciation and amortization of $3.2 million. Cash used in operations of
approximately $15.8 million in the first nine months of fiscal 2001 is primarily
attributable to the net loss of $30.0 million, increases in deposits and other
assets of $634,000, increases in prepaid expenses and other assets of
approximately $2.0 million, decrease in accounts payable of $1.1 million,
increase in inventory of $238,000, and a net gain resulting from the sale of
investments of $225,000. Cash used in operations was partially offset by an
increase in other accrued liabilities of $287,000, an increase in accrued
compensation of $410,000, a decrease in accounts receivable of $1.6 million, and
noncash items, including depreciation and amortization of $9.7 million,
cumulative effect of change in accounting principle of $1.1 million, stock
compensation expense of $716,000, and a charge for purchased in-process research
and development of $4.6 million.</P>
<P ALIGN="JUSTIFY">Cash provided by investing activities in the nine months
ended December 31, 2001 is attributable to proceeds from the sale of an
investment in marketable equity securities of $543,000 and proceeds from the
sale of equipment of $116,000, partially offset by capital expenditures of
$158,000. Cash provided by investing activities in the nine months ended
December 31, 2000 is primarily attributable to net proceeds from the sale of
assets and the license of technology associated with our video monitoring
business of $5.2 million and proceeds from the sale of a non-marketable equity
investment of $225,000, offset by capital expenditures of $5.5 million and net
cash paid of $553,000 related to the acquisition of U|Force.</P>
<P ALIGN="JUSTIFY">Cash used in financing activities during the first three
quarters of fiscal 2002 consisted of the $4.5 million payment associated with
the redemption of the convertible subordinated debentures and certain costs
incurred in connection with the redemption, offset partially by proceeds
resulting from the sale of the our common stock to employees through our
employee stock purchase and stock option plans. Cash provided by financing
activities in the nine month period ended December 31, 2000 consisted primarily
of net proceeds from sales of our common stock to employees through our employee
stock purchase and stock option plans, offset partially by the repayment of
certain debt obligations that we had assumed in conjunction with the acquisition
of U|Force.</P>
<P ALIGN="JUSTIFY">As of December 31, 2001, our principal commitments consisted
of obligations outstanding under non-cancelable operating leases. </P>
<P ALIGN="JUSTIFY">As noted previously, we redeemed our convertible subordinated
debentures in December 2001. The consideration included issuing 1,000,000 shares
of our common stock to the lenders. We have committed to maintaining the
effectiveness of the registration statement covering the resale of these shares.
Should we fail to maintain the effectiveness of the registration statement we
may be required to pay a cash penalty and redeem all or a portion of the shares
at the higher of $0.898 or the market price of our common stock at the time of
the redemption which could have a material adverse effect on our cash flows.</P>
<P ALIGN="JUSTIFY">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 2004. 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. <A NAME="market"></A></P>
<B><P ALIGN="JUSTIFY">ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK </P>
</B><P ALIGN="JUSTIFY">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 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.</P>
<P ALIGN="JUSTIFY">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.</P>
<I><P ALIGN="JUSTIFY">FACTORS THAT MAY AFFECT FUTURE RESULTS</P>
</I><B><P ALIGN="JUSTIFY">We may need to raise additional capital to support our
growth, and failure to do so in a timely manner may cause us to delay our plans
for growth or cause us to implement additional cost reduction strategies</P>
</B><P ALIGN="JUSTIFY">As of December&nbsp;31, 2001, we had approximately $13.8
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.
Accordingly, we may seek additional financing at some point during the next
twelve months in order to meet our cash requirements in fiscal 2004.  We may
also seek to explore business opportunities, including acquiring or investing in
complementary businesses or products that will require additional capital from
equity or debt sources.  Additionally, the development and marketing of new
products could require a significant commitment of resources, which could in
turn require us to obtain additional financing earlier than otherwise expected.
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, including additional reductions of personnel and suspension of
salary increases 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 certain 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 issue additional equity or
convertible debt securities to raise funds, the ownership percentage of our
existing stockholders would be reduced.  New investors may demand rights,
preferences or privileges senior to those of existing holders of our common
stock.</P>
<B><P ALIGN="JUSTIFY">We have a history of losses and we are uncertain as to our
future profitability</P>
</B><P ALIGN="JUSTIFY">We recorded an operating loss of approximately $6.7
million in the nine months ended December&nbsp;31, 2001 and we ended the period
with an accumulated deficit of $134.2 million.  In addition, we recorded
operating losses of $74.5 million and $27.1 million for the fiscal years ended
March&nbsp;31, 2001 and 2000, respectively.  We expect that we 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 an
operating profit.  Notwithstanding the net income of $445,000 we reported for
the quarter ended December 31, 2001, 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 in the future.</P>
<B><P ALIGN="JUSTIFY">If we fail to meet the continued listing requirements of
the Nasdaq National Market, our common stock could be delisted resulting in a
decline in the liquidity of our common stock </P>
</B><P ALIGN="JUSTIFY">Our common stock is listed on the Nasdaq National Market.
The Nasdaq Stock Market's Marketplace Rules impose requirements for companies
listed on the Nasdaq National Market to maintain their listing status, including
minimum bid price and net tangible assets or stockholders' equity requirements.
Our common stock has traded at levels lower than the minimum bid price threshold
of $1.00 on several occasions recently.  If our minimum bid price does not rise
above the threshold we could face delisting.  Delisting could reduce the ability
of our shareholders to purchase or sell shares as quickly and as inexpensively
as they have done historically.  For instance, failure to obtain listing on
another market or exchange may make it more difficult for traders to sell our
securities.  Broker-dealers may be less willing or able to sell or make a market
in our common stock.  Not maintaining a listing on a major stock market may:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>result in a decrease in the trading price of our common
stock due to a decrease in liquidity;</LI></P>
<P ALIGN="JUSTIFY"><LI>lessen interest by institutions and individuals in
investing in our common stock; </LI></P>
<P ALIGN="JUSTIFY"><LI>make it more difficult to obtain analyst coverage;
and</LI></P>
<P ALIGN="JUSTIFY"><LI>make it more difficult for us to raise capital in the
future.</LI></P></UL>

<B><P ALIGN="JUSTIFY">The growth of our business and future profitability
depends on future IP telephony revenue</P>
</B><P ALIGN="JUSTIFY">We believe that our business and future profitability
will be largely dependent on widespread market acceptance of our IP telephony
technology and products.  Our videoconferencing semiconductor business has not
provided, nor is it expected to provide, sufficient revenues to profitably
operate our 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.</P>
<P ALIGN="JUSTIFY">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 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. </P>
<B><P ALIGN="JUSTIFY">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</P>
</B><P ALIGN="JUSTIFY">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:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>changes in market demand;</LI></P>
<P ALIGN="JUSTIFY"><LI>the timing of customer orders;</LI></P>
<P ALIGN="JUSTIFY"><LI>competitive market conditions;</LI></P>
<P ALIGN="JUSTIFY"><LI>lengthy sales cycles and/or regulatory approval
cycles;</LI></P>
<P ALIGN="JUSTIFY"><LI>new product introductions by us or our
competitors;</LI></P>
<P ALIGN="JUSTIFY"><LI>market acceptance of new or existing products;</LI></P>
<P ALIGN="JUSTIFY"><LI>the cost and availability of components;</LI></P>
<P ALIGN="JUSTIFY"><LI>the mix of our customer base and sales channels;</LI></P>
<P ALIGN="JUSTIFY"><LI>the mix of products sold;</LI></P>
<P ALIGN="JUSTIFY"><LI>the management of inventory;</LI></P>
<P ALIGN="JUSTIFY"><LI>the level of international sales;</LI></P>
<P ALIGN="JUSTIFY"><LI>continued compliance with industry standards;
and</LI></P>
<P ALIGN="JUSTIFY"><LI>general economic conditions.</LI></P></UL>

<P ALIGN="JUSTIFY">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 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. </P>
<P ALIGN="JUSTIFY">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
large customers, including original equipment manufacturers, 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.</P>
<B><P ALIGN="JUSTIFY">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</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">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</P>
</B><P ALIGN="JUSTIFY">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
December&nbsp;31, 2001 and 2000, respectively, accounted for approximately 94%
and 75% of total revenues.  Revenues from our ten largest customers for the
fiscal years ended March&nbsp;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. </P>
<B><P ALIGN="JUSTIFY">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</P>
</B><P ALIGN="JUSTIFY">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:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>the identification of market demand for new
products;</LI></P>
<P ALIGN="JUSTIFY"><LI>product and feature selection;</LI></P>
<P ALIGN="JUSTIFY"><LI>timely implementation of product design and
development;</LI></P>
<P ALIGN="JUSTIFY"><LI>product performance;</LI></P>
<P ALIGN="JUSTIFY"><LI>cost-effectiveness of products under
development;</LI></P>
<P ALIGN="JUSTIFY"><LI>effective manufacturing processes; and</LI></P>
<P ALIGN="JUSTIFY"><LI>success of promotional efforts.</LI></P></UL>

<P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">The long and variable sales and deployment cycles for our
IP telephony software products may cause our revenue and operating results to
vary </P>
</B><P ALIGN="JUSTIFY">Our IP telephony software products, including our hosted
iPBX and the 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:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>the size of the network deployment;</LI></P>
<P ALIGN="JUSTIFY"><LI>the complexity of our customers' network
environments;</LI></P>
<P ALIGN="JUSTIFY"><LI>our customers' skill sets;</LI></P>
<P ALIGN="JUSTIFY"><LI>the hardware and software configuration and customization
necessary to deploy our products; and</LI></P>
<P ALIGN="JUSTIFY"><LI>our customers' ability to finance their purchase of our
products.</LI></P></UL>

<P ALIGN="JUSTIFY">As a result, it is difficult for us to predict the quarter in
which our customers may purchase our IP telephony software products, and our
revenue and operating results may vary significantly from quarter to
quarter.</P>
<B><P ALIGN="JUSTIFY">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</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">We may have difficulty identifying the source of the
problem when there is a problem in a network</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">Intense competition in the markets in which we compete
could prevent us from increasing or sustaining our revenue and prevent us from
achieving profitability </P>
</B><P ALIGN="JUSTIFY">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.</P>
<P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">If we do not develop and maintain successful partnerships
for IP telephony products, we may not be able to successfully market our
solutions</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">Inability to protect our proprietary technology or our
infringement of a third party's proprietary technology would disrupt our
business</P>
</B><P ALIGN="JUSTIFY">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 the date of this filing we hold forty-seven
United States patents and have 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, financial condition, liquidity and operating results.  Any settlement
or adverse determination in such litigation would also subject us to significant
liability.</P>
<P ALIGN="JUSTIFY">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 us of third-party patents will not be asserted or prosecuted
against the Company.</P>
<P ALIGN="JUSTIFY">We rely upon certain technology, including hardware and
software, licensed from third parties. There can be no assurance that the
technology licensed by us will continue to provide competitive features and
functionality or that licenses for technology currently utilized by us or other
technology which we may seek to license in the future will be available to us on
commercially reasonable terms or at all. The loss of, or inability to maintain
existing licenses could result in shipment delays or reductions until equivalent
technology or suitable alternative products could be developed, identified,
licensed and integrated, and could harm our business.  These licenses are on
standard commercial terms made generally available by the companies providing
the licenses.  The cost and terms of these licenses individually are not
material to our business.</P>
<B><P ALIGN="JUSTIFY">Continued reductions in levels of capital investment by
telecommunication service providers might impact our ability to increase revenue
and prevent us from achieving profitability</P>
</B><P ALIGN="JUSTIFY">The market for the services provided by telecommunication
service providers who compete against traditional telephone companies has only
begun to emerge, and many of these service providers are still building their
infrastructure and rolling out their services.  These telecommunication service
providers require substantial capital for the development, construction, and
expansion of their networks and the introduction of their services.  Financing
may not be available to emerging telecommunication service providers on
favorable terms, if at all.  The inability of our current or potential emerging
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, could adversely affect their operating results or cause them
to reduce their capital spending programs.  If our current or potential
customers are forced to defer or curtail their capital spending programs, sales
of our hosted iPBX and SCE Product to those telecommunication service providers
may be adversely affected, which would negatively impact our business, financial
condition, and results of operations.  In addition, many of the industries in
which telecommunication service providers operate have recently experienced
consolidation.  The loss of one or more of our current or potential
telecommunication service provider customers, through industry consolidation or
otherwise, could reduce or eliminate our sales to such a customer and
consequently harm our business, financial condition, and results of
operations.</P>
<B><P ALIGN="JUSTIFY">The failure of IP networks to meet the reliability and
quality standards required for voice communications could render our products
obsolete</P>
</B><P ALIGN="JUSTIFY">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, digital subscriber lines, and
wireless local loop, may not be used for telephony unless such networks and
technologies can provide reliability and quality consistent with these
standards.<B> </P>
<P ALIGN="JUSTIFY">Our products must comply with industry standards and FCC
regulations, and changes may require us to modify existing products</P>
</B><P ALIGN="JUSTIFY">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, MGCP, 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 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.</P>
<B><P ALIGN="JUSTIFY">Future regulation or legislation of the Internet could
restrict our business or increase our cost of doing business</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">We may transition to smaller geometry process technologies
and higher levels of design integration, which could disrupt our business</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">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 </P>
</B><P ALIGN="JUSTIFY">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. </P>
<P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">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</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">We have significant international operations, which
subject us to risks that could cause our operating results to decline</P>
</B><P ALIGN="JUSTIFY">Sales to customers outside of North America during the
three and nine month periods ended December&nbsp;31, 2001 were 54% and 58%,
respectively.  The table below shows the percentage of total revenue received
from customers in the different regions:  </P>

<PRE>
<B>
                                       Three Months Ended   Nine Months Ended
                                          December 31,        December 31,
                                     ------------------  ------------------
                                        2001      2000      2001      2000   </B>
                                     --------  --------  --------  --------
   North America...................       46%       40%       42%       44%
   Europe..........................       32%       29%       25%       26%
   Taiwan..........................       14%       12%       16%       13%
   Other Asia Pacific..............        8%       19%       17%       17%
                                     --------  --------  --------  --------
                                         100%      100%      100%      100%
                                     ========  ========  ========  ========

</PRE>


<P ALIGN="JUSTIFY">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.  Taiwan in particular is subject to a high
rate of natural disasters, such as earthquakes or typhoons, which could have
significant impact on our suppliers and customers due to a delay in operations
within that country.  In addition, Taiwan's tenuous relationship with mainland
China is a source of continuing concern due to potential hostilities.  A
significant decline in demand from foreign markets could have a material adverse
effect on our business, operating results, and financial condition.</P>
<B><P ALIGN="JUSTIFY">We need to retain key personnel to support our products
and ongoing operations </P>
</B><P ALIGN="JUSTIFY">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 have no written employment contracts with employees but we have provided our
Chief Executive Officer, through a resolution of our Board of Directors, with
severance benefits that vest over time as a retention device.  Similarly, the
Board of Directors authorized severance arrangements with Bryan R. Martin, Dr.
Philip Bednarz, David M. Stoll, and certain other vice-presidents of Netergy
Microelectronics, Inc., which are all fully vested.  We primarily rely on equity
compensation plans and compensation policies to retain our key personnel.  We
currently do not maintain key person life insurance policies on any of our
employees.</P>
<B><P ALIGN="JUSTIFY">Our stock price has been highly volatile </P>
</B><P ALIGN="JUSTIFY">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: </P>

<UL>
<P ALIGN="JUSTIFY"><LI>actual or anticipated fluctuations in our operating
results;</LI></P>
<P ALIGN="JUSTIFY"><LI>announcements of technical innovations;</LI></P>
<P ALIGN="JUSTIFY"><LI>loss of key personnel;</LI></P>
<P ALIGN="JUSTIFY"><LI>new products or new contracts by us, our competitors or
their customers; and</LI></P>
<P ALIGN="JUSTIFY"><LI>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.</LI></P></UL>

<P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">The location of our headquarters facility subjects us to
the risk of earthquakes</P>
</B><P ALIGN="JUSTIFY">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.</P>
<B><P ALIGN="JUSTIFY">We may face interruption of production and services due to
increased security measures in response to recent and potential future terrorist
activities</P>
</B><P ALIGN="JUSTIFY">Our business depends on the free flow of products and
services through the channels of commerce.  Recently, in response to terrorists'
activities and threats aimed at the United States, transportation, mail,
financial and other services have been slowed or stopped altogether.  Further
delays or stoppages in transportation, mail, financial or other services,
particularly any such delays or stoppages which harm our ability to obtain an
adequate supply of wafers and products from our independent foundries, could
harm our business, results of operations and financial condition.  Furthermore,
we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential activities.  We may also experience delays in receiving payments from
customers that have been affected by the terrorist activities and potential
activities.  The United States economy in general is being adversely affected by
terrorist activities and potential terrorist activities.  Any economic downturn
could adversely impact our results of operations, impair our ability to raise
capital or otherwise adversely affect our ability to grow our business.
Moreover, we cannot determine whether other attacks may occur in the future and
the effects of such attacks on our business.</P>
<B><P ALIGN="JUSTIFY">If we fail to maintain effectiveness of a registration
statement for the resale of 1,000,000 shares of our common stock issued in
connection with the redemption of our outstanding convertible debt we may be
forced to pay a cash penalty or redeem all or a portion of the shares causing
our business to suffer</P>
</B><P ALIGN="JUSTIFY">Under the terms of a registration rights agreement we
entered into in connection with the redemption of our outstanding convertible
debt we agreed to register the shares for resale by the former note holders.  If
we fail to maintain effectiveness of the registration statement covering the
resale of 1,000,000 shares of common stock, we may be required to pay a cash
penalty and may be required to redeem all or a portion of the shares of common
stock to be registered.  Under the agreement the redemption price would be the
higher of $0.898 or the market price of our common stock at the time of the
redemption.  If we are required to pay a cash penalty or to redeem any of the
shares, this will deplete our cash reserves, which may cause harm to our
business, results of operations and financial condition.</P>
<P ALIGN="CENTER"><B>
PART II -- OTHER INFORMATION</P>
<P ALIGN="JUSTIFY"><A NAME="item1"></A>ITEM 1. LEGAL PROCEEDINGS
</P>
</B><P ALIGN="JUSTIFY">In November 2001, the Company settled a lawsuit that was
filed against it in April 2001 in British Columbia, Canada by Milinx Business
Services, Inc. and Milinx Business Group, Inc (collectively, Milinx). The
Company was one of five named defendants in the lawsuit, the others being Sun
Microsystems, Inc., Netscape Communications Canada, Inc., Burntsand, Inc., and
Intraware Canada, Inc. The Company has been released of any further obligations
to Milinx in exchange for returning a portion of the original license fee. As a
result of the settlement agreement, the Company recognized $309,000 of
previously deferred revenue stemming from a March 2000 license agreement with
Milinx.</P>
<P ALIGN="JUSTIFY">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. <A NAME="item2"></A></P>
<B><P ALIGN="JUSTIFY"><A NAME="item6"></A>ITEM 2. CHANGES IN SECURITIES AND USE
OF PROCEEDS</P>
<I><P ALIGN="JUSTIFY">Recent Issuances of Unregistered Securities</P>
</B></I><P ALIGN="JUSTIFY">On December 17, 2001, we entered into an agreement
with Fisher Capital Ltd. and Wingate Capital Ltd. (together, the Lenders) to
retire $7.5 million of convertible subordinated debentures for $4.5 million in
cash and 1,000,000 shares of our common stock. Additionally, we agreed to reduce
the exercise price of the 637,549 warrants held by the Lenders to $0.898 per share.
The warrants expire in December 2002. The securities were issued in reliance upon
an exemption from registration provided by Rule 506 of Regulation D as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended, based on representations from the securities holders that
they are an &quot;accredited investor&quot; as that term is defined in Rule 501(a) of
Regulation D. </P>
<B><P ALIGN="JUSTIFY">ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K </P><DIR>

</B><P ALIGN="JUSTIFY">(a) See Exhibit Index. </P>
<P ALIGN="JUSTIFY">(b) Reports on Form 8-K. </P>
<P ALIGN="JUSTIFY">On November 14, 2001, we filed a Current Report on Form 8-K
dated November 12, 2001 announcing that we had settled a lawsuit that was filed
against the Company in April 2001 by Milinx Business Services, Inc. and Milinx
Business Group, Inc..</P>
<P ALIGN="JUSTIFY">On December 17, 2001, we filed a Current Report on Form 8-K
also dated December 17, 2001 announcing that we had redeemed all of our
outstanding 4% Series A and Series B convertible subordinated notes due December
2002.</P></DIR>

<B><P ALIGN="CENTER"><A NAME="sign"></A>SIGNATURES </P>
</B><P>Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.</P>
<P ALIGN="JUSTIFY">Date: February 11, 2002</P>
<B><P ALIGN="CENTER"></P></B>
<P ALIGN="RIGHT"><TABLE CELLSPACING=0 BORDER=0 WIDTH=336>
<TR><TD VALIGN="MIDDLE">
<P>8X8, INC. </TD>
</TR>
<TR><TD VALIGN="MIDDLE">
<I><P>(Registrant)</I> </TD>
</TR>
<TR><TD VALIGN="MIDDLE">
<U><P>By: /s/      DAVID STOLL</U></TD>
</TR>
<TR><TD VALIGN="MIDDLE">
<P>David Stoll </TD>
</TR>
<TR><TD VALIGN="MIDDLE">
<I><P>Chief Financial Officer, Vice President of Finance and
Secretary<BR>
(Principal Financial and Accounting Officer) </I></TD>
</TR>
</TABLE>
</P>

<B><P ALIGN="CENTER"><HR></P>
<P ALIGN="CENTER">&nbsp;</P>
<P ALIGN="CENTER"> </P></B>
<TABLE BORDER CELLSPACING=2 BORDERCOLOR="#c0c0c0" CELLPADDING=7 WIDTH=649>
<TR><TD VALIGN="MIDDLE" COLSPAN=2 HEIGHT=25>
<B><FONT SIZE=3><P ALIGN="CENTER">Exhibit Index</B></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="MIDDLE" HEIGHT=30>
<B><FONT SIZE=3><P>Exhibit No.</B></FONT></TD>
<TD WIDTH="86%" VALIGN="MIDDLE" HEIGHT=30>
<B><FONT SIZE=3><P>Description</B></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=3><P><A NAME="_DV_M365"></A>4.1</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=3><P><A NAME="_DV_M366"></A>Form of Amendment No.1 to the Series A
and Series B Warrants, dated as of December&nbsp;17, 2001, by and among 8x8,
Inc., Fisher Capital Ltd. and Wingate Capital Ltd. (Incorporated by reference
from Exhibit&nbsp;4.1 of the Current Report on Form&nbsp;8-K filed on
December&nbsp;17, 2001).</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=3><P><A NAME="_DV_M367"></A>4.2</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=3><P><A NAME="_DV_M368"></A>Registration Rights Agreement, dated as
of December&nbsp;13, 2001, by and among 8x8, Inc., Fisher Capital Ltd. and
Wingate Capital Ltd. (Incorporated by reference from Exhibit&nbsp;4.2 of the
Current Report on Form&nbsp;8-K filed on December&nbsp;17, 2001).</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=3><P><A NAME="_DV_M369"></A>10.1</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=3><P><A NAME="_DV_M370"></A>Redemption and Exchange Agreement, dated
as of December&nbsp;13, 2001, by and among 8x8, Inc., Fisher Capital Ltd. and
Wingate Capital Ltd<A NAME="_DV_C55">.<A NAME="_DV_M371"></A></A> (Incorporated
by reference from Exhibit&nbsp;10.1 of the Current Report on Form&nbsp;8-K<A
NAME="_DV_C56">/A<A NAME="_DV_M372"></A></A> filed on <A NAME="_DV_C58">January
30, 2002<A NAME="_DV_M373"></A></A>).</FONT></TD>
</TR>
</TABLE>

<P><A NAME="_DV_M374"></A>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. </P>



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