UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM 10-K
 (Mark
One)
  x
                ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
      ACT OF 1934
 For the
fiscal year ended September 30,
2010
  Or
   ̈
                TRANSITION
      REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIESEXCHANGE
      ACT OF 1934
  For the
transition period from _________________ to _______________________
  Commission
file number: 000-27427
  ALTIGEN
COMMUNICATIONS, INC.
 (Exact
name of registrant as specified in its charter)
  Delaware
                    
                    94-3204299(State
      or other jurisdiction of
                      incorporation
      or organization)
                    
                    (I.R.S.
      Employer
                      Identification
      Number)410
      East Plumeria Drive
                      San
      Jose, CA
                    
                    95134(Address
      of principal executive offices)
                    
                    (Zip
      Code)
 Registrant’s
telephone number, including area code: (408) 597-9000
 Securities
registered pursuant to Section 12(b) of the Act:
 Title of Each Class
                    
                    Name of Each Exchange onWhich RegisteredCommon Stock, $0.001 par value, and associated preferred stock purchase rights
                    
                    The OTCQX Over-the-Counter Market
 Securities registered pursuant to
Section 12(g) of the Act:  *
 
 *On
November 2, 2010, the registrant filed a Certification of Notice of Termination
of Registration on Form 15 with the Securities and
Exchange   Commission to voluntarily deregister its common stock
and suspend its reporting obligations under the Securities Exchange Act of
1934.
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes  ̈   No
x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes  ̈   No
x
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days.                           Yes
x   No
 ̈
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this
Form 10-K.                                                                     ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).    Yes o    NO  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.  (Check one):
  Large accelerated filer   ̈
                
                Accelerated filer  ̈Non-accelerated filer     ̈  (Do not check if a smaller reporting company)
                
                Smaller reporting company x
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
 Yes  ̈   No
x
  The
aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $10,269,786 as of March 31, 2010, based on the
closing price of our common stock as reported on The OTCQX Over-the-Counter
Market on such date. Shares of common stock held by each officer and director
and by each person known to own 5% or more of our outstanding common stock have
been excluded in that such persons may be deemed to be
affiliates.  This determination of affiliate status is not necessarily
a conclusive determination for other purposes.  As of March 31,
2010, there were 16,431,022 shares of our common stock issued and
outstanding.
 
 The
number of shares outstanding of the registrant's common stock as of
December 09, 2010 was 16,494,758.
  
 DOCUMENTS
INCORPORATED BY REFERENCE
 None.
 
  
 
 ALTIGEN
COMMUNICATIONS, INC.
 Form 10-K
for the Year Ended September 30, 2010
  TABLE
OF CONTENTS
 
 PagePART IItem
      1.
                Business
                1Item
      1A.
                Risk
      Factors
                13Item
      1B.
                Unresolved
      Staff Comments
                22Item
      2.
                Properties
                22Item
      3.
                Legal
      Proceedings
                22Item
      4.
                Removed and Reserved
                22PART IIItem
      5.
                Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                23Item
      6.
                Selected
      Financial Data
                26Item
      7.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                27Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                38Item
      8.
                Financial
      Statements and Supplementary Data
                39Item
      9.
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                40Item
      9A.
                Controls
      and Procedures
                40Item
      9B.
                Other
      Information
                41PART IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                42Item
      11.
                Executive
      Compensation
                44Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                51Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                52Item
      14.
                Principal
      Accountant Fees and Services
                53PART IVItem
      15.
                Exhibits
      and Financial Statement Schedules
                54SIGNATURES
                80
  
  Note
About Forward-Looking Statements
  Our
disclosure and analysis in this Annual Report on Form 10-K contains some
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of
1934.  Forward-looking statements give our current expectations or
forecasts of future events.  You can identify these statements by the
fact that they do not relate strictly to historical or current
facts.  They use words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe" and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance.  These forward-looking statements rely on assumptions,
estimates and predictions that could be inaccurate and that are subject to risks
and uncertainties that could cause actual results to differ
materially.  Important factors that may cause our actual results to
differ materially from expectations reflected in our forward-looking statements
include those described in Item 1A. "Risk
Factors."  Forward-looking statements speak only as of the date of
this report, and we undertake no obligation to update or revise such statements
to reflect new circumstances or unanticipated events as they occur.
  PART
I
  Item
1.  BUSINESS
  INTRODUCTION
  AltiGen Communications, Inc.
(OTCQX: ATGN.PK) is a leading provider of 100% Microsoft-based (VoIP) business
phone systems and Unified Communications solutions.  AltiGen solutions are
designed for high reliability, ease of use, seamless integration to
Microsoft infrastructure technologies, and are built on a scalable, open
standards platform.
  AltiGen
Communications, or AltiGen, was founded by current Chairman of the Board Gilbert
Hu in 1994, and the first products began shipping in 1996. Our telephony
products are primarily sold to small-to-medium sized businesses, multi-site
businesses, corporate branch offices, call centers, credit unions and community
banks.
  AltiGen's
products enable an array of applications like VoIP phones and servers, Contact
Center, voicemail, call recording, call activity reporting, and mobility
solutions that take advantage of the convergence of voice and data
communications to achieve cost reduction.  Our systems are designed
with an open architecture and are built on an industry standard
platform.  This adherence to widely-used standards allows our products
to integrate with and leverage a company's existing technology
investment.
  AltiGen's
hardware and software products are available from independent authorized
resellers and strategic partners. AltiGen's family of telephony solutions has
been recognized for excellence with more than 40 industry awards since
1996.
  We
generated net revenue of $16.6 million with a net loss of $1.7 million
during fiscal year 2010.  As of September 30, 2010, we had an
accumulated deficit of $62.4 million.  Net cash used in operating
activities was $743,000 in fiscal year 2010.
  Our
principal executive office is located at 410 East Plumeria Drive, San Jose,
California 95134.  Our telephone number is (408)
597-9000.  We were incorporated in California in May 1994, and we
reincorporated into Delaware in June 1999.
  We
maintain an Internet website at http://www.altigen.com.  Our
most recent annual report on Form 10-K and certain of our other filings
with the Securities and Exchange Commission (SEC) are available through the
Investor Relations section of our website.  Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and other required filings and amendments to these filings are
available on the SEC website at http://www.sec.gov, which can
be accessed from the Investor Relations section of our website.  In
addition, you may read and copy any material we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549.  You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
  INDUSTRY
BACKGROUND
  We focus
our sales efforts on medium and enterprise sized businesses, multi-site
businesses, corporate branch offices, and call centers.
  1
  THE
ALTIGEN PRODUCT OFFERING
  AltiGen's
unified communications solutions are designed with an open architecture, built
on industry standard Intel-based servers, Session Initiation Protocol ("SIP")
based platform, and Microsoft Windows-based applications.  This
adherence to widely-used standards allows our solutions to both integrate with
and leverage a company's existing technology investment.  AltiGen's
award winning, integrated IP applications suite provides customers with a
complete business communications solution.  Voicemail, Unified
Messaging, Mobility, Automatic Call Distribution, Call Recording, Call Activity
Reporting, and Mobility solutions take advantage of the convergence of voice and
data communications to achieve superior business results.
  The
AltiGen unified communications solutions work with digital, analog and internet
protocol trunks, and internet protocol and analog telephone
extensions.  AltiGen’s solutions can be configured with digital,
analog or VoIP, or a combination of the three.  By allowing the
customer to choose what best fits their current and future requirement, we
provide a practical and cost effective solution to future growth.
  Each
unified communications system can be configured to include a wide range of
comprehensive features. Mobile Convergence, Contact Center,
voicemail  with over 2,500 hours of storage, 255 auto attendant menus
with unlimited levels, automatic call distribution, call detail reporting, call
recording on demand, meet-me conference bridges, and standard PBX (Private
Branch Exchange) functionality.  A PBX is a telephone system within an
enterprise that switches calls between enterprise users on local lines while
allowing all users to share a certain number of external telephone
lines.  Additionally, the system provides intuitive and easy to use
system administration software to allow for customer self-administration or
remote administration by our authorized reseller partners.
  AltiGen
phone systems can be scaled to customer needs, and multiple systems may be
networked together for greater expansion.  These networked systems can
be at a single site, a campus environment or multiple locations throughout the
world using Internet protocol technology to link them.  AltiGen phone
systems allow affordable entry point while maintaining logical system
growth.
  For
customers with more advanced requirements, we provide AltiContact
Manager.  The product is available as a software upgrade to an
existing MAXCommunications Server System (MAXCS System).  For
additional information regarding MAXCS System, see the section entitled
“Product.” This product is capable of skills-based routing, priority queuing,
centralized call recording and advanced monitoring and
reporting.  This capability may be added on a per agent/supervisor
basis as the customer grows.  This allows a smaller business or branch
office to enjoy the same capability as a large professional call center
organization.  If a customer has more than one location, call center
calls can automatically be routed to other locations based on conditions the
customer chooses.
  Key
features of our phone systems include:
  ·
              Scalability.  AltiGen's
      software based MAXCS 6.5 softswitch architecture was designed to scale in
      both size and capability to the meet the evolving needs of the small and
      medium-sized business (SMB) and enterprise markets.  As a
      software-based system, AltiGen can rapidly deploy new features to our
      customers without requiring expensive hardware
  upgrades.
  ·
              Native Microsoft Office
      Communications Server 2007 R2.  MAXCS 6.5 fully supports
      native integration to Microsoft’s Unified Communications platform to
      provide advance Contact Center and Mobility solutions. AltiGen’s solution
      has been tested and certified by Microsoft’s Open Interoperability
      Program.
  ·
              Native Microsoft Exchange
      Server Integration.  MAXCS 6.5 fully supports native
      integration into Microsoft Exchange Server 2007 to unlock the embedded
      Unified Messaging capabilities of Exchange.  As the "Voice of
      Microsoft Exchange", mutual Microsoft and AltiGen customers now have voice
      access to e-mails, calendar events, and personal and global company
      contact information via Text-to-Speech
services.
  ·
              Measurable Information to
      Ensure Best Business Practices.  We provide a complete
      view into individual and group performance.  The amount, type
      and duration of calls can be tracked and analyzed.  An
      individual can record a call for later review, or a company can centrally
      record all or a percentage of calls for quality
  control.
  2
  ·
              Reduced Administration
      Costs.  Our easy to use self administration software
      allows customers to manage their own telephone system.  This
      reduces or eliminates ongoing operating cost of any business telephone
      system typically referred to as adds, moves and
      changes.  AltiGen phone systems allow administrators to perform
      many of these tasks on site or remotely without assistance from third
      parties.
  ·
              Lower Toll
      Costs.  By routing voice over data networks, our systems
      reduce toll charges associated with long-distance calls between
      locations.  Using our products, businesses can send and receive
      voice communications over the Internet or a private data
      network.
  ·
              Unified Company
      Locations.  For companies with AltiGen systems in
      multiple locations, we provide a seamless dialing
      plan.  Customers calling into one location can automatically be
      routed to the correct group or individual.  This allows a
      multi-site business to operate under a unified dialing plan and allows
      users in different sites to operate as if they were supported by a single
      system rather than an individual system for each
  location.
  ·
              Survivability
      Options.  Our systems allow practical and cost efficient
      options for disaster recovery planning.  Redundant system hard
      drives allow all voicemail and configuration information to be copied to a
      spare hard drive.  The system allows nightly backup to another
      network drive.  If weather or other problems prevent employees
      from reaching the office, MaxMobile, One Number Access and VoIP telephones
      can be utilized to keep operations running.  We provide multiple
      options based upon what best fits the customer
  environment.
  ·
              Innovative Desktop Productivity
      Software.  Our systems provide desktop software
      applications to increase user productivity.  Call control,
      changes in extension configuration and the ability to view and manage
      voicemail messages improve an employee's ability to process
      calls.  In addition, we provide software for group supervisors,
      agents, system administrators and operators.  Applications are
      centrally upgraded from the phone system to allow for quick and efficient
      deployment.
  ·
              Integration with Customer
      Relationship Management Software.  The MAXCommunicator
      Agent Edition and MAXCommunicator desktop interface provide automatic
      contact record retrieval and "screen pops" of contact records to a user's
      desktop.  Microsoft Outlook users can type in a name to
      automatically retrieve telephone numbers and click and dial from an
      integrated contact record directory.  We provide built-in
      integration with other Microsoft software applications like Microsoft
      Outlook and Microsoft Exchange.
  ·
              Ease of Installation, Use and
      Maintenance.  AltiGen phone systems allow easy
      installation and system maintenance.  Administrators can manage
      call routing, extension management, voice messaging, email and Internet
      features of our products through a single AltiWare administrator
      interface.  By using industry standards we believe that AltiGen
      systems make it easier for resellers and end-user customers to implement
      and maintain systems.
  ·
              Improved Customer Service
      Capabilities.  AltiGen phone systems provide integrated
      call center functionality.  For more advanced call center or
      centralized call recording requirements, we offer the AltiContact Manager
      software application.  Both Contact Center applications are
      designed to enhance our customers' communications with their customers by
      employing comprehensive Contact Center and call center routing, reporting
      and recording technologies.
  ·
              Integrated Centralized Call
      Recording.  Voice calls can be recorded on demand by
      employees, agents and supervisors or automatically centrally recorded by
      the phone system.  Traditional phone systems require a separate
      system to be tied to a PBX to centrally record calls.  Modular
      feature licensing allows businesses to add capabilities on a per-feature
      or per-user basis offering a reduced up-front
  investment.
  3
  ·
              True Employee
      Mobility.  We provide flexible and useable mobility
      options while retaining accountability.  We provide several
      powerful options. MaxMobile is a native smart phone application designed
      to allow any phone with a direct telephone number to be enabled as a live
      extension on the system.  Call handling, call transfer,
      conferencing and voicemail capability are retained.  Our "One
      Number Access" feature allows the system to search and then transfer a
      call at up to four numbers.  For remote employees, we offer a
      VoIP telephone to connect to an employee's high speed Internet
      access.  Our mobility options are flexible and simple to
      use.
  PRODUCTS
  The
following is a list of our products that are material to our current operations
from a financial standpoint:
 
 Product
                      
                      DescriptionMAXCS
                      
                      MAXCS
      server software consists of a comprehensive suite of software applications
      to provide a high value, all-in-one solution.  The systems
      include software and licensing necessary to support analog and VoIP
      telephones, operator software, and desktop call control software for each
      extension on the system.  By providing a bundled approach, we
      maintain quality and reliability while providing for easy
      deployment.  The platforms are scalable, and are packaged
      according to the size of the customer.AltiContact
      Manager
                      
                      AltiContact
      Manager is available as a software upgrade to an existing AltiGen phone
      system.  This product is capable of skills-based routing,
      priority queuing, centralized call recording and advanced monitoring and
      reporting.  This capability may be added on a per
      agent/supervisor basis as a company's needs grow.  This allows a
      smaller business or branch office to enjoy the same capability as a larger
      organization with a professional call center.  If a company has
      more than one location, calls to call centers can automatically be routed
      to other locations based on conditions the customer
    chooses.IP720
      Voice over IP Telephone
                      
                      The
      IP720 is a fully featured SIP-compatible IP telephone designed to empower
      the user.  Bringing stylish form and functionality to the
      desktop, the IP720 makes sophisticated features simple and intuitive to
      use.  Users have single button access to voicemail,
      activity/presence selection, voicemail greeting selections, call
      recording, call conferencing, call transferring, and even placing calls to
      employees in other countries.  The IP720 has integrated Power
      over Ethernet and Gigabit Ethernet support.IP705
      Voice over IP Telephone
                      
                      The
      IP705 is a mid-level SIP-based VoIP phone designed to empower the user and
      has integrated Power over Ethernet. Users have convenient single button
      access to voicemail, call conferencing, call transferring, redial and call
      log lists. The IP705 has five programmable keys, speakerphone and
      intercom.
  4
  Product
                    
                    DescriptionMaxMobile
                    
                    MaxMobile
      extends a complete set of business PBX functionality to smart phone
      devices, often eliminating the need for a separate desktop phone. When
      users log in to MaxMobile, the smart phone is registered as the “business”
      PBX extension. All inbound business calls are routed through the PBX (so
      employees don’t have to publish their mobile phone numbers). Outbound
      calls can be routed through the PBX (in accordance with corporate
      policies) or directly through the cellular network. In every case,
      MaxMobile graphical user interface extends a multitude of business PBX
      features to smart phone devices.MAXCommunicator
                    
                    MAXCommunicator
      is a Windows-based desktop application that provides call control and
      visual voice mail management to the desktop.  It allows users to
      receive and place calls, listen to voicemail messages, identify the caller
      phone number and manage extension
      configuration.  MAXCommunicator is standard with all AltiGen
      systems.MAXCommunicator,
      Agent Edition
                    
                    MAXCommunicator,
      Agent Edition is a Windows-based desktop application to bring call control
      and workgroup information to call center agents.  Users can view
      a call queue, monitor work group status, check caller identification,
      measure performance, review log-on history, receive and place calls and
      listen to and manage voicemail messages.MAXCommunicator,
      Supervisor Edition
                    
                    MAXCommunicator,
      Supervisor Edition is a Windows-based desktop application for call center
      supervisors.  The application allows a call center or workgroup
      supervisor to effectively manage a workgroup.  MAXCommunicator,
      Supervisor Edition provides four major real time module views for
      workgroup management: agent status, agent statistics, group statistics,
      and queue status with a quality of services
      capability.  MAXCommunicator, Supervisor Edition allows
      coaching, silent monitoring of agents with barge-in call participation and
      call recording functionality.Triton
      IP Board
                    
                    The
      Triton IP Board is a microprocessor-controlled board supporting VoIP
      communications.  This allows voice conversations to be carried
      over public and private data networks that support Internet
      protocol.  The Triton IP Board is a 12-port board that can be
      software configured to 30 ports.  The Triton IP Board can be
      used for Internet protocol trunks connecting multiple networked MAXCS
      systems or to support VoIP telephone extensions and VoIP agent
      extensions.Triton
      T1, E1, T1/PRI Board
                    
                    The
      Triton T1, E1, T1/PRI Board is a microprocessor-controlled board that
      allows MAXCS systems to connect to T1, E1 or T1/PRI digital high-capacity
      central office telephone lines.  This board can be configured
      with software to support provisioning for T1, E1 or T1/PRI communication
      protocols.
  5
  Product
                    
                    DescriptionTriton
      Trunk Board
                    
                    The
      Triton Trunk Board is 12 port, microprocessor-controlled board that allows
      MAXCS systems to connect to analog central office telephone
      lines.  This allows outbound and inbound calls to be carried
      over traditional analog central office telephone lines.Triton
      Extension Board
                    
                    The
      Triton Extension Board is a 12 port, microprocessor-controlled board that
      allows MAXCS systems to support 12 analog telephone extensions with each
      Triton Extension Board.Triton
      Conference Board
                    
                    The
      Triton Conference Board allows up to 30 simultaneous callers per
      conference and includes a scheduling application to control access and
      attendees.MAX
      4x4xT1 Access Board
                    
                    The
      MAX 4x4xT1 Access Board is a microprocessor-controlled board that allows
      the MAX1000 phone system to connect to four analog trunk lines, four
      analog telephone extensions, and one (1) T1/E1/PRI digital central office
      telephone line.MAX
      4x8 Access Board
                    
                    The
      MAX 4x8 Access Board is a microprocessor-controlled board that allows the
      MAX1000 phone system to connect to four analog trunk lines and eight
      analog telephone extensions.MAX
      8x4 Access Board
                    
                    The
      MAX 8x4 Access Board is a microprocessor-controlled board that allows the
      MAX1000 phone system to connect to eight analog trunk lines and four
      analog telephone extension.MAX
      0x12 Access Board
                    
                    The
      MAX 0x12 Access Board is a microprocessor-controlled board that allows the
      MAX1000 phone system to connect twelve analog telephone
      extensions.
  AltiGen
Hardware and Firmware
  We have
developed a single base circuit board with high performance digital signal
processing technology, which means that the circuit board has an integrated
computer built on it that can run special, high-speed software programs, called
firmware.  Firmware can receive, send and modify digital information
for communications with network services.  Our digital signal
processing boards, Triton and MAX are designed to allow us to create different
circuit boards to meet many communication requirements by simply adding a few
hardware and/or software components to the basic board.  For example,
the Triton digital signal processing board can become a T1, E1 or Integrated
Services Digital Network communication circuit board or a circuit board
supporting VoIP with simple changes in on-board software and, in some cases, new
circuits.
  This
modular design not only enables us to provide new capabilities, but we also
believe that it enables our products to achieve a high degree of reliability and
cost reduction since the underlying technology is consistent across our
products.
  AltiGen
Modular Software
  Our
software products are based on modular software components similar to the
concept described above for our hardware and firmware.  The service
provider layer of software is composed of separate software components, each of
which communicates with a hardware circuit board within the AltiGen phone
system.  The middleware layer interacts with all the service providers
in the system and manages their resources.  This middleware layer
communicates with the hardware and allows application programs to provide
specific features.  The application program layer consists of
components that implement the application logic, such as voicemail and auto
attendant menus.  These applications do not depend on any particular
hardware integration.
  6
  We
believe that the layered architectural structure of our MAXCS products provides
important benefits:
  ·
              New
      features can be developed without changing
  hardware.
 ·
              Development
      time is generally shorter.
 ·
              New
      hardware and software features can be added to installed
      systems.
 ·
              Changing
      one component in the system does not require other components to be
      changed.
  7
  Service
Support Programs
  In
September 2007, we introduced our Software Assurance Program, which provides our
customers with the latest updates, new releases, and technical support for the
applications they are licensed to use. In fiscal year 2008, we initiated our
Premier Service Plan, which includes software assurance and extended hardware
warranty. These programs have an annual subscription and can range from one to
three years. Sales from our service support programs are recorded as deferred
revenue and recognized as revenue over the terms of their
subscriptions.
 
 The
following table sets forth percentages of net revenue by product type with
respect to such revenue for the periods indicated:
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008Hardware
                
                
                64
                %
                
                
                71
                %
                
                
                86
                %Software
                
                
                14
                %
                
                
                13
                %
                
                
                14
                %Service
      Support Plans (1)
                
                
                22
                %
                
                
                16
                %
                
                
                —Total
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
 
 (1)
                In
      fiscal year 2008, revenue generated from these service support plans
      accounted for less than 1% of our total
revenue.
  MARKETING,
SALES AND CUSTOMER SUPPORT
  Marketing
  Our
marketing efforts currently focus on increasing demand for our products in the
Americas, Europe and Asia Pacific.  We are working to increase market
awareness of our technology and demand for our products for medium and
enterprise sized businesses and call center markets through public relations,
print, email and web campaigns.
  To assist
our distributors, dealers and strategic partners, we provide market development
funds, marketing tools and technical and sales training developed specifically
for our products.  We expect that these programs will allow us to
leverage the expertise and contacts of the local and regional reseller channels
to create strong lead generation.
  Sales
  We use a
broad distribution channel to bring our products and solutions to our customers.
Our distribution channel is comprised of distributors and resellers. In the
United States, in fiscal year 2010, we added additional strategic account
managers and business development personnel. In addition, we added new resellers
and distribution partners in the United Kingdom and Italy.
  We are
organized and operate as two operating segments, the Americas and
International.  The Americas segment is comprised of the United
States, Canada, Mexico, Central America and the Caribbean.  The
International segment is comprised of China, the United Kingdom, Italy and
Holland. Our two geographical segments both sell similar products to similar
types of customers.
  8
  The
following table sets forth percentages of net revenue by geographic region with
respect to such revenue for the periods indicated:
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008Americas
                
                
                86
                %
                
                
                86
                %
                
                
                87
                %International
                
                
                14
                %
                
                
                14
                %
                
                
                13
                %Total
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
  The
following table sets forth a measure of profit or loss for each operating
segment for the periods indicated (in thousands):
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008Americas
                
                $
                (621
                )
                
                $
                (3
                )
                
                $
                (211
                )International
                
                $
                (1,087
                )
                
                $
                (4,707
                )
                
                $
                (3,726
                )Total
                
                $
                (1,708
                )
                
                $
                (4,710
                )
                
                $
                (3,937
                )
  The
following table sets forth the total assets for each operating segment as of the
periods indicated (in thousands):
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008Americas
                
                $
                7,606
                
                
                $
                8,060
                
                
                $
                11,438International
                
                $
                2,755
                
                
                $
                3,271
                
                
                $
                3,338Total
                
                $
                10,361
                
                
                $
                11,331
                
                
                $
                14,776
  We
currently have sales and support staff in more than 10 locations in the United
States.  Our inside sales group answers incoming calls from end users
and refers new leads to a qualified dealer near each end user's
location.  The inside sales group is also responsible for account
management of our smaller resellers.  Our outside sales force, which
is primarily based in the Americas, includes enterprise account executives and
technology solutions managers who work with direct enterprise accounts and
larger resellers. In fiscal year 2010, we began to shift our legacy channel
based sales force into a direct enterprise account team.
  Customers
 
 Our
customers are primarily end-users, resellers and distributors. We have
distribution agreements with Altisys Communications, Inc., and Synnex
Corporation in the Americas. Our agreements with Altisys and Synnex have initial
terms of one year. Each of these agreements are renewed automatically for
additional one year terms, provided that each party has the right to terminate
the agreement for convenience upon ninety (90) days’ written notice prior
to the end of the initial term or any subsequent term of the agreement. In
addition, our agreements with Altisys and Synnex also provide for termination,
with or without cause and without penalty, by either party upon thirty
(30) days’ written notice to the other party or upon insolvency or
bankruptcy. For a period of sixty (60) days following termination of the
agreement, Altisys and Synnex may distribute any products in their possession at
the time of termination or, at their option, return any products to us that are
in their inventories. Upon termination of the distribution agreement, all
outstanding invoices for the products will become due and payable within thirty
(30) days of the termination.
  9
 
 We also
have a reseller agreement with Fiserv Solutions, Inc. for the Americas. Our
agreement with Fiserv has an initial term of ten years ending on August 28,
2019, and shall be renewed automatically for additional five year terms unless
either party provides the other party with ninety (90) days’ written notice of
termination prior to the end of the initial term or any subsequent term of the
agreement. The agreement can also be terminated for, among other things,
material breach or insolvency of either party. Upon termination, AltiGen would
continue to have support obligations for products that Fiserv distributed
subject to Fiserv’s obligation to remain current on maintenance
fees.
  The
following table sets forth our net revenue by customers that individually
accounted for more than 10% of our revenue for the periods
indicated:
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008Synnex
                
                
                36
                %
                
                
                30
                %
                
                
                34
                %Jenne
      (1)
                
                
                —
                
                
                
                15
                %
                
                
                12
                %Fiserv
      (2)
                
                
                10
                %
                
                
                10
                %
                
                
                —Altisys
      (3)
                
                
                —
                
                
                
                —
                
                
                
                12
                %Total
                
                
                46
                %
                
                
                55
                %
                
                
                58
                %
 
 (1)
              In
      September 2009, we terminated our distribution agreement with Jenne. The
      termination of our relationship with Jenne did not have a material impact
      on our business for fiscal year
2010.
 (2)
                In
      August 2009, we entered into a reseller agreement with Fiserv Solutions,
      Inc. Our agreement with Fiserv has an initial term of ten years and will
      renew automatically for additional five year terms, provided that each
      party has the right to terminate the agreement for convenience upon ninety
      (90) days' written notice prior to the end of the initial term or any
      subsequent term of the
agreement.
 (3)
              During
      fiscal years 2010 and 2009, revenue generated from Altisys was less than
      10% of our total revenue.
  We also
have over 200 authorized resellers who sell our products directly to a broad
range of end-users.  We review our resellers' performance quarterly
and discontinue distribution for those who do not meet our revenue or technical
standards.
  Customer
Support
  We
believe that consistent, high-quality service and support are key factors in
attracting and retaining customers.  Our customer support groups,
located in California, Texas, Colorado, Minnesota and Shanghai, China coordinate
service and technical support of our products and provide service twenty-four
hours a day, seven days a week.  Our support personnel assist our
distributors and resellers in resolving installation and support issues that
arise from their sales to end users and also provide limited support to
end-users to supplement dealer support.  Resellers and end-user
customers can also access technical information and receive technical support
through our web site.
  RESEARCH
AND DEVELOPMENT
  The
market for our products is characterized by rapidly changing technology,
evolving industry standards and frequent product introductions.  We
believe that our future success depends in large part upon our ability to
continue to enhance the functionality and uses of our core
technology.  We intend to extend the functionality and uses of our
hardware and software technology and develop new products by continuing to
invest in research and development.
  We are
currently developing enhancements to our products to provide greater
functionality and increased capacity that we expect will enable us to enhance
our position in the Internet protocol phone system market space, enter new
geographical markets, and allow us to continue to penetrate the call center
market.
  We
currently conduct the majority of our product development in-house. We also use
a small number of independent contractors to assist with certain product
development and testing activities. We intend to continue working with our
strategic partners to enhance our products.  As of September 30,
2010, we employed 58 employees in engineering, research and development and
support. A total of 34 of those employees were located in Shanghai,
China.
  10
  We
believe our future success relies on continued product enhancement. To
accomplish this objective, we seek to improve product reliability, advance and
broaden employed technologies while maintaining or reducing product cost. In
addition, we actively pursue development of potential new products. Our efforts
to enhance existing products and develop new products require an extensive
investment in research and development. We expense research and development
costs relating to both present and potential future products as incurred. These
expenses totaled $4.6 million, $4.9 million and $4.2 million during fiscal years
2010, 2009 and 2008, respectively.
 
 We intend
to continue to focus on product innovation, quality improvement, performance
enhancement and on-time delivery while striving for product cost improvements to
promote added value for our products. We seek growth opportunities through: 1)
the development of new applications for existing products, 2) technological
improvements for both new and existing markets and 3) the acquisition and
development of new products and competencies.
  COMPETITION
  The
markets for our products are intensely competitive, continually evolving and
subject to changing technologies.  We currently compete with Internet
protocol and Internet protocol-enabled telecommunications systems, such as Avaya
Inc., Mitel Networks Corporation, Shoretel Inc, and Cisco Systems,
Inc.  Many of our competitors are substantially larger than us and
have significantly greater name recognition, financial, sales and marketing,
technical, customer support, manufacturing and other resources.  These
competitors also may have more established distribution channels and stronger
relationships with local, long distance and Internet service
providers.  These competitors may be able to respond more rapidly to
new or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their
products.
  These
competitors may enter our existing or future markets with products that may be
less expensive, that may provide higher performance or additional features or
that may be introduced more quickly than our products.  In fiscal
2010, we believe that we continued to be both feature and price
competitive.  Additionally, we believe we provide a low ongoing cost
of ownership.  We believe that our principal competitive advantages
include:
  ·
              Leading
      provider of 100 percent Microsoft-based VoIP business phone systems and
      Unified Communications solutions;
 
 ·
              Ability
      to reduce communications costs;
  ·
              Ease
      of system manageability;
  ·
              Ease
      of use;
  ·
              Simple
      deployment in single and multi-site
  implementations;
  ·
              Ability
      to achieve rapid product
development;
  ·
              Experience
      in service and technical support of Internet protocol
      telephony;
  ·
              Complete
      call center application now standard with all MAXCS
    systems;
  ·
              Decentralized
      voice processing support for advanced and integrated telephony
      application;
  ·
              Innovative
      mobility capabilities supporting mobile telephone devices such as the
      telephone system extensions; and
  ·
              Reliable
      redundant configurations supported.
  We
believe that we compete favorably with our competitors on the basis of these
factors. However, if we are not able to compete successfully against our current
and future competitors, it will be difficult to acquire and retain customers,
and we may experience revenue declines, reduced operating margins, loss of
market share and diminished value in our services.
  11
  INTELLECTUAL
PROPERTY
  We
generally rely upon patent, copyright, trademark and trade secret laws to
protect and maintain our proprietary rights for our technology and
products.  As of September 30, 2009, we have been issued three
registered trademarks, "AltiGenTM," "AltiServTM" and "ZoomerangTM."  In
addition, the AltiGen logo is a trademark of ours in the United States and other
jurisdictions.  All other trademarks and trade names used in this
Form 10-K are the property of their respective owners.
  We have
filed several U.S. patent applications relating to various aspects of our client
and server software, mixed-media communications and computer
telephony.  As of September 30, 2010, we have been issued sixteen
U.S. patents. The duration of our patents is determined by the laws of the
country of issuance and for U.S. patents may be 20 years from the date of its
filing depending upon when the patent application was filed.  We
expect to continue to file patent applications to protect our technology and
products.  We cannot be sure that our patent applications will result
in the issuance of patents, or that any issued patents will provide commercially
significant protection for our technology. We maintain a policy requiring our
employees, consultants and other third parties to enter into confidentiality and
proprietary rights agreements and to control access to software, documentation
and other proprietary information.  Notwithstanding the steps we have
taken to protect our intellectual property rights, third parties may infringe or
misappropriate our proprietary rights. Competitors may also independently
develop technologies that are substantially equivalent or superior to the
technologies we employ in our services.
  MANUFACTURING
AND ASSEMBLY
  Our
manufacturing operations consist of two phases.  In the first phase,
we send out components of our products to a third party
assembler.  The third party assembler auto-inserts the components into
the printed circuit boards.  In the second phase, we insert the
assembled circuit boards into the burn-in process for a minimum of two weeks and
after that we perform the final test of the circuit boards.  In fiscal
year 2010, we engaged All Quality Services in Fremont, California and ISIS
Surface Mounting, Inc. in San Jose, California as our third party
assemblers.  During fiscal 2010, four suppliers, Advantech
Corporation, BCM Communications, Inc., Avnet Electronics and AAEON Electronics,
Inc., provided us with approximately 74% of our hardware product
components.  We purchase fully-assembled chassis from Advantech
Corporation, Internet protocol phones from BCM Communications, Inc., single
board computers for our MAX product from AAEON Electronics, Inc. and raw
material components from Avnet Electronics.  As of September 30,
2010, our in-house manufacturing operations occupied approximately 6,000 square
feet of our corporate headquarters in San Jose, California.
  We test
our products after the assembly process using internally developed product
assurance testing procedures, which include visual inspection, functional
testing and final systems testing.  Although we generally use standard
components for our products and try to maintain alternative sources of supply,
we purchase some key components from sole source suppliers for which alternative
sources are not currently available.  We incorporate the following
sole-sourced components in our products:
  ·
              Zarlink
      Corporation chips are included in all of our boards and are the means by
      which our boards communicate with each other to enable our products to
      function correctly.
  ·
              Texas
      Instruments' digital signal processor ("DSP") chips are included in our
      Triton family of boards.  The DSP chip is designed to perform
      the mathematics, data compression and other tasks required to manipulate
      voice communications that are routed through our
  products.
  ·
              Xilinx,
      Inc provides chips for our Triton family of boards which allow our boards
      to work with digital communications
lines.
  ·
              Infineon
      Technologies provides chips for our Triton Analog product line which allow
      our board to work with analog communications
  lines.
  ·
              PMC
      Sierra, Inc. provides chips for our Triton Digital product line which
      allow our board to work with digital communications
  lines.
  ·
              Advantech
      Corporation provides the chassis for our MAXCS Office products and some of
      our larger systems based on our
specifications.
  ·
              BCM
      Communications, Inc. manufactures our Internet protocol phone loaded with
      customized firmware to work with our
system.
  ·
              AAEON
      Electronics, Inc. manufactures single board computers for our MAX
      products.
  The loss
of any key component supplier would adversely impact our
business.
  12
  EMPLOYEES
  As of
September 30, 2010, we had 112 full-time employees, including 58 in
research and development and support, 33 in marketing and sales, 8 in
operations, and 13 in finance and administration.  Of these full-time
employees, 61 were located in the United States and 51 in China.  Our
future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical, marketing, engineering and
management personnel.
  We were
incorporated in California in May 1994, and we reincorporated into Delaware in
June 1999. Our corporate headquarters are located at 410 East Plumeria Drive,
San Jose, California 95134. Our telephone number is (408) 597-9000. We maintain
an Internet website at http://www.altigen.com. Our
most recent annual report on Form 10-K and certain of our other filings
with the Securities and Exchange Commission (SEC) are available through the
Investor Relations section of our website. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and other
required filings and amendments to these filings are available on the SEC
website at http://www.sec.gov, which can
be reached from our Investor Relations website. In addition, you may read and
copy any material we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
  Item
1A.  RISK FACTORS
  CERTAIN
FACTORS AFFECTING BUSINESS, OPERATING RESULTS, AND FINANCIAL
CONDITION
  In
addition to other information contained in this Form 10-K, investors should
carefully consider the following factors that could adversely affect our
business, financial condition and operating results as well as adversely affect
the value of an investment in our common stock.  This Annual Report on
Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange
Act.  All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
statements regarding: projections of revenues, future research and development
expenses, future selling, general and administrative expenses, other expenses,
gross profit, gross margin, or other financial items; the plans and objectives
of management for future operations; our exposure to interest rate risk; future
economic conditions or performance; plans to focus on cost control; In some
cases, forward-looking statements can be identified by the use of terminology
such as "may," "will," "expects," "plans," "anticipates," "estimates,"
"potential," or "continue," or the negative thereof or other comparable
terminology.  Although we believe that the expectations reflected in
the forward-looking statements contained herein are reasonable, there can be no
assurance that such expectations or any of the forward-looking statements will
prove to be correct, and actual results could differ materially from those
projected or assumed in the forward-looking statements.  Our future
financial condition and results of operations, as well as any forward-looking
statements, are subject to risks and uncertainties, including but not limited to
the factors set forth below and elsewhere in this report.  All
forward-looking statements and reasons why results may differ included in this
Annual Report are made as of the date hereof, and we assume no obligation to
update any such forward-looking statement or reason why actual results may
differ.
 
 Risks
Related to Ownership of our Common Stock
 
 Our
common stock no longer trades on the NASDAQ Capital Market
 
 In March
2010, we voluntarily delisted our common stock from the NASDAQ Capital Market
and moved our common stock listing to the OTCQX over-the-counter
market.  As a result, investors may find it more difficult to dispose
of or obtain accurate quotations as to the market value of our common stock, and
the ability of our stockholders to sell our securities in the secondary market
may be materially limited.
 
 Our
stock price may be volatile.
 
 The
trading price of our common stock has been and may continue to be volatile and
could be subject to wide fluctuations in response to various factors, some of
which are beyond our control. Factors that could affect the trading price of our
common stock could include:
 
 ·
              variations
      in our operating results;
 ·
              announcements
      of technological innovations, new products or product enhancements,
      strategic alliances or significant agreements by us or by our
      competitors;
 ·
              the
      gain or loss of significant
customers;
  13
 
 ·
              recruitment
      or departure of key personnel;
 ·
              the
      impact of unfavorable worldwide economic and market conditions, including
      the restricted credit environment impacting our customers’ ability to
      obtain credit;
 ·
              changes
      in estimates of our operating results or changes in recommendations by any
      securities analysts who follow our common
stock;
 ·
              significant
      sales, or announcement of significant sales, of our common stock by us or
      our stockholders; and
 ·
              adoption
      or modification of regulations, policies, procedures or programs
      applicable to our business.
 
 In
addition, the stock market in general, and the market for technology companies
in particular, has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of those
companies. Broad market and industry factors may seriously affect the market
price of our common stock, regardless of our actual operating performance. In
addition, in the past, following periods of volatility in the overall market and
the market price of a particular company’s securities, securities class action
litigation has often been instituted against these companies. This litigation,
if instituted against us, could result in substantial costs and a diversion of
our management’s attention and resources.
 
 We
may choose to raise additional capital. Such capital may not be available, or
may be available on unfavorable terms, which would adversely affect our ability
to operate our business.
 
 We expect
that our existing cash balances will be sufficient to meet our working capital
and capital expenditure needs for the foreseeable future. If we choose to raise
additional funds, due to unforeseen circumstances or material expenditures, we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all, and any additional financings could result in
additional dilution to our existing stockholders.
 
 Provisions
in our charter documents, Delaware law, employment arrangements with certain of
our executive officers and Preferred Stock Rights Agreement could discourage a
takeover that stockholders may consider favorable.
 
 Provisions
in our certificate of incorporation and bylaws may have the effect of delaying
or preventing a change of control or changes in our management. These provisions
include but are not limited to the following:
 
 ·
              our
      board of directors has the right to increase the size of the board of
      directors and to elect directors to fill a vacancy created by the
      expansion of the board of directors or the resignation, death or removal
      of a director, which prevents stockholders from being able to fill
      vacancies on our board of
directors;
 ·
              our
      board of directors is staggered into three (3) classes and each member is
      elected for a term of 3 years, which prevents stockholders from being able
      to assume control of the board of
directors;
 ·
              our
      stockholders may not act by written consent  and are limited in
      their ability to call special stockholders’ meetings; as a result, a
      holder, or holders controlling a majority of our capital stock would be
      limited in their ability to take certain actions other than at annual
      stockholders’ meetings or special stockholders’ meetings called by the
      board of directors, the chairman of the board or the
      president;
 ·
              our
      certificate of incorporation prohibits cumulative voting in the election
      of directors, which limits the ability of minority stockholders to elect
      director candidates;
 ·
              stockholders
      must provide advance notice to nominate individuals for election to the
      board of directors or to propose matters that can be acted upon at a
      stockholders’ meeting, which may discourage or deter a potential acquiror
      from conducting a solicitation of proxies to elect the acquiror’s own
      slate of directors or otherwise attempting to obtain control of our
      company; and
 ·
              our board of directors may issue,
      without stockholder approval, shares of undesignated preferred stock; the
      ability to issue undesignated preferred stock makes it possible for our
      board of directors to issue preferred stock with voting or other rights or
      preferences that could impede the success of any attempt to acquire
      us.
  14
  As a
Delaware corporation, we are also subject to certain Delaware anti-takeover
provisions. Under Delaware law, a corporation may not engage in a business
combination with any holder of 15% or more of its capital stock unless the
holder has held the stock for three years or, among other things, the board of
directors has approved the transaction. Our board of directors could rely on
Delaware law to prevent or delay an acquisition of us.
 
 Certain
of our executive officers may be entitled to accelerated vesting of their
options pursuant to the terms of their employment arrangements upon a change of
control of AltiGen. In addition to the arrangements currently in place with some
of our executive officers, we may enter into similar arrangements in the future
with other officers. Such arrangements could delay or discourage a potential
acquisition of AltiGen.
 
 Our board
of directors declared a dividend of one (1) right for each share of Common Stock
under the terms and conditions of a Preferred Stock Rights Agreement by and
between AltiGen and Computershare Trust Company, N.A., as rights agent, dated
April 21, 2009, which right is exercisable for shares of AltiGen’s Preferred
Stock after the date on which a hostile acquiror obtains, or announces a tender
offer for, 15% or more of the Company’s Common Stock.  If an acquiror
obtains 15% or more of the Company’s Common Stock, each stockholder (except the
acquiror) may purchase either our Common Stock or in certain circumstances, the
acquiror’s Common Stock, at a discount, resulting in substantial dilution to the
acquiror’s interest.  Such rights could delay or discourage a
potential acquisition of AltiGen.
 
 If
securities or industry analysts do not publish research or reports about our
business, or if they issue an adverse or misleading opinion regarding our stock,
our stock price and trading volume could decline.
 
 The
trading market for our common stock may be influenced by the research and
reports that industry or securities analysts publish about us or our business.
If any of the analysts who cover us issue an adverse or misleading opinion
regarding our stock, our stock price would likely decline. If one or more of
these analysts cease coverage of our company or fail to publish reports on us
regularly, we could lose visibility in the financial markets, which in turn
could cause our stock price or trading volume to decline.
  Risks
Related to Our Business
 
 Our
extensive research and development efforts may not result in products that are
successful in the marketplace.
 
 To
maintain our market share for existing products and to gain market share in new
markets, we must invest heavily each year in research and development spending.
This research and development spending often involves new technologies or
updates to existing technology. We can provide no assurance that our research
and development efforts to develop new technology will be successful or that new
products we may develop through such efforts will be successful in the
marketplace.
 
 Our
business could be harmed by adverse global economic conditions in our target
markets or reduced spending on information technology and telecommunication
products.
 
 Current
uncertainty in global economic conditions pose a risk to the overall economy as
consumers and businesses may defer purchases in response to tighter credit and
negative financial news, which could negatively affect product demand and other
related matters.  Our business depends on the overall demand for
information technology, and in particular for telecommunications
systems.  The market we serve is emerging and the purchase of our
products involves significant upfront expenditures.  In addition, the
purchase of our products can be discretionary and may involve a significant
commitment of capital and other resources.  Weak economic conditions
in our target markets, or a reduction in information technology or
telecommunications spending even if economic conditions improve, would likely
adversely impact our business, operating results and financial condition in a
number of ways, including longer sales cycles, lower prices for our products and
reduced unit sales.
  15
  We
have had a history of losses and may incur future losses, which may prevent us
from attaining profitability.
 
 We have
had a history of operating losses since our inception and, as of September 30,
2010, we had an accumulated deficit of $62.4 million as compared to $60.7
million as of September 30, 2009.  We may incur operating losses in
the future, and these losses could be substantial and impact our ability to
attain profitability.  We do not expect to significantly increase
expenditures for product development, general and administrative expenses, and
sales and marketing expenses; however, if we cannot maintain current revenue or
revenue growth, we will not achieve or sustain profitability or positive
operating cash flows.  Even if we achieve profitability and positive
operating cash flows, we may not be able to sustain or increase profitability or
positive operating cash flows on a quarterly or annual basis.
 
 Our
operating results vary, making future operating results difficult to
predict.
 
 Our
quarterly and annual operating results have varied significantly in the past and
likely will vary significantly in the future.  A number of factors,
many of which are beyond our control, have caused and may cause our operating
results to vary, including:
 
 ·
              our
      ability to respond effectively to competitive pricing
      pressures;
 ·
              our
      ability to establish or increase market acceptance of our technology,
      products and systems;
 ·
              our
      success in expanding our network of distributors, dealers and companies
      that buy our products in bulk, customize them for particular applications
      or customers, and resell them under their own
  names;
 ·
              market
      acceptance of products and systems incorporating our technology and
      enhancements to our product applications on a timely
  basis;
 ·
              our
      success in supporting our products and
systems;
 ·
              our
      sales cycle, which may vary substantially from customer to
      customer;
 ·
              unfavorable
      changes in the prices and delivery of the components we
      purchase;
 ·
              the
      size and timing of orders for our products, which may vary depending on
      the season, and the contractual terms of the
  orders;
 ·
              the
      size and timing of our expenses, including operating expenses and expenses
      of developing new products and product
  enhancements;
 ·
              deferrals
      of customer orders in anticipation of new products, services or product
      enhancements introduced by us or by our competitors;
  and
 ·
              our
      ability to attain and maintain production volumes and quality levels for
      our products.
 
 Our
future projected budgets and commitments are based in part on our expectations
of future sales.  If our sales do not meet expectations, it will be
difficult for us to reduce our expenses quickly and, consequently, our operating
results may suffer.
 
 Our
dealers often require immediate shipment and installation of our
products.  As a result, we have historically operated with limited
backlog, and our sales and operating results in any quarter primarily depend on
orders booked and shipped during that quarter.
 
 Any of
the above factors could harm our business, financial condition and results of
operations.  We believe that period-to-period comparisons of our
results of operations are not meaningful, and you should not rely upon them as
indicators of our future performance.
 
 Our
market is highly competitive and we may not have the resources to adequately
compete.
 
 The
market for our integrated, multifunction telecommunications systems is new,
rapidly evolving and highly competitive.  We expect competition to
intensify in the future as existing competitors develop new products and new
competitors enter the market.  We believe that a critical component to
success in this market is the ability to establish and maintain strong partner
and customer relationships with a wide variety of domestic and international
providers.  If we fail to establish or maintain these relationships,
we will be at a serious competitive disadvantage.
 
  16
  We face
competition from companies providing traditional private telephone
systems.  Our principal competitors that produce these telephone
systems are Avaya Communications and Mitel Networks Corporation.  We
also compete against providers of multi-function telecommunications systems,
including Shoretel and Cisco Systems, as well as any number of future
competitors.  Many of our competitors are substantially larger than we
are and have significantly greater name recognition, financial resources, sales
and marketing teams, technical and customer support, manufacturing capabilities
and other resources.  These competitors also may have more established
distribution channels and stronger relationships with service
providers.  These competitors may be able to respond more rapidly to
new or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their
products.  These competitors may enter our existing or future markets
with products that may be less expensive, provide higher performance or
additional features or be introduced earlier than our phone
systems.  We also expect that other companies may enter our market
with better products and technologies.  If any technology that is
competing with ours is more reliable, faster, less expensive or has other
advantages over our technology, then the demand for our products and services
could decrease and harm our business.
 
 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, our
sales or market acceptance of our products and services could be reduced, price
competition could be increased or our products could become
obsolete.  To remain competitive, therefore, 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.
 
 We
sell the majority of our products through dealers and distributors, which limits
our ability to control the timing of our sales, and which makes it more
difficult to predict our revenue.
 
 We do not
recognize revenue from the sale of our products to our distributors until these
products are sold to either resellers or end-users.  We have little
control over the timing of product sales to resellers and end
users.  Our lack of control over the revenue that we recognize from
our distributors’ sales to resellers and end-users limits our ability to predict
revenue for any given period.  Our future projected budgets and
commitments are based in part on our expectations of future sales.  If
our sales do not meet expectations, it will be difficult for us to reduce our
expenses quickly, and consequently our operating results may
suffer.
 
 We
rely on resellers to promote, sell, install and support our products, and their
failure to do so or our inability to recruit or retain resellers may
substantially reduce our sales and thus seriously harm our
business.
 
 We rely
on resellers who can provide high quality sales and support
services.  As with our distributors, we compete with other
telecommunications systems providers for our resellers’ business as our
resellers generally market competing products.  If a reseller promotes
a competitor’s products to the detriment of our products or otherwise fails to
market our products and services effectively, we could lose market
share.  In addition, the loss of a key reseller or the failure of
resellers to provide adequate customer service could cause our business to
suffer.  If we do not properly train our resellers to sell, install
and service our products, our business will suffer.
 
 Software
or hardware errors may seriously harm our business and damage our reputation,
causing loss of customers and revenue.
 
 Users
expect telephone systems to provide a high level of reliability.  Our
products are inherently complex and may have undetected software or hardware
errors.  We have detected and may continue to detect errors and
product defects in our installed base of products, new product releases and
product upgrades.  End users may install, maintain and use our
products improperly or for purposes for which they were not
designed.  These problems may degrade or terminate the operation of
our products, which could cause end users to lose telephone service, cause us to
incur significant warranty and repair costs, damage our reputation and cause
significant customer relations problems.  Any significant delay in the
commercial introduction of our products due to errors or defects, any design
modifications required to correct these errors or defects or any negative effect
on customer satisfaction as a result of errors or defects could seriously harm
our business, financial condition and results of operations.
 
 Any
claims brought because of problems with our products or services could seriously
harm our business, financial condition and results of operations.  We
currently offer a one-year hardware guarantee to end-users.  If our
products fail within the first year, we face replacement costs.  Our
insurance policies may not provide sufficient or any coverage should a claim be
asserted.  In addition, our introduction of products and systems with
reliability, quality or compatibility problems could result in reduced revenue,
uncollectible accounts receivable, delays in collecting accounts receivable,
warranties and additional costs.  Our customers, end users or
employees could find errors in our products and systems after we have begun to
sell them, resulting in product redevelopment costs and loss of, or delay in,
their acceptance by the markets in which we compete.  Further, we may
experience significant product returns in the future.  Any of these
events could have a material adverse effect on our business, financial condition
and results of operations.
  17
 
 Our
market is subject to changing preferences; failure to keep up with these changes
would result in our losing market share, thus seriously harming our business,
financial condition and results of operations.
 
 Our
customers and end users expect frequent product introductions and have changing
requirements for new products and features.  In order to be
competitive, we need to develop and market new products and product enhancements
that respond to these changing requirements on a timely and cost-effective
basis.  Our failure to do so promptly and cost effectively would
seriously harm our business, financial condition and results of
operations.  Also, introducing new products could require us to
write-off existing inventory as obsolete, which could harm our results of
operations.
 
 We
depend on attracting and retaining qualified personnel to maintain and expand
our business; our failure to promptly attract and retain qualified personnel may
seriously harm our business, financial condition and results of
operations.
 
 We
depend, in large part, on our ability to attract and retain highly skilled
personnel, particularly engineers and sales and marketing
personnel.  We need highly trained technical personnel to design and
support our server-based telecommunications systems.  In addition, we
need highly trained sales and marketing personnel to expand our marketing and
sales operations in order to increase market awareness of our products and
generate increased revenue.  Competition for highly trained personnel
can at times be intense, especially in the San Francisco Bay Area where most of
our operations are located.  We cannot be certain that we will be
successful in our recruitment and retention efforts.  If we fail to
attract or retain qualified personnel or suffer from delays in hiring required
personnel, our business, financial condition and results of operations may be
seriously harmed.
 
 Losing
any of our key distributors would harm our business. We also need to establish
and maintain relationships with additional distributors and original equipment
manufacturers.
 
 Sales
through our distributors, Altisys Communications, Inc., Synnex Corporation and
Fiserv Solutions, Inc. accounted for 56% of our net revenue in fiscal year ended
September 30, 2010. Our business and operating results will suffer if any one of
these distributors does not continue distributing our products, fails to
distribute the volume of our products that it currently distributes or fails to
expand our customer base.  We also need to establish and maintain
relationships with additional distributors and original equipment manufacturers.
In September 2009, we terminated our distribution agreement with Jenne
Distributors, Inc. The termination of our relationship with Jenne Distributors,
Inc. did not have a material impact on our business for fiscal year
2010.
 
 We may
not be able to establish, or successfully manage, relationships with additional
distribution partners.  In addition, our agreements with distributors
typically provide for termination by either party upon written notice to the
other party.  For example, our agreement with Synnex provides for
termination, with or without cause, by either party upon 30 days’ written notice
to the other party, or upon insolvency or bankruptcy.  Generally,
these agreements are non-exclusive and distributors sell products that compete
with ours.  If we fail to establish or maintain relationships with
distributors and original equipment manufacturers, our ability to increase or
maintain our sales and our customer base will be substantially
harmed.
  18
  We
rely on sole-sourced components and third party technology and products; if
these components are not available, our business may suffer.
 
 We
purchase technology that is incorporated into many of our products, including
virtually all of our hardware products, from a single third-party
supplier.  We order sole-sourced components using purchase orders and
do not have supply contracts for them.  One sole-sourced component, a
TI DSP chip, is particularly important to our business because it is included in
virtually all of our hardware products.  If we were unable to purchase
an adequate supply of these sole-sourced components on a timely basis, we would
be required to develop alternative products, which could entail qualifying an
alternative source or redesigning our products based on different
components.  Our inability to obtain these sole-sourced components,
especially the TI DSP chip, could significantly delay shipment of our products,
which could have a negative effect on our business, financial condition and
results of operations.
 
 Our
facility is vulnerable to damage from earthquakes and other natural disasters
and other business interruptions; any such damage could seriously or completely
impair our business.
 
 We
perform final assembly, software installation and testing of our products at our
facility in San Jose, California.  Our facility is located on or near
known earthquake fault zones and may be subject to rolling electrical blackouts
and is vulnerable to damage or interruption from fire, floods, earthquakes,
power loss, telecommunications failures and similar events.  If such a
disaster or interruption occurs, our ability to perform final assembly, software
installation and testing of our products at our facility would be seriously, if
not completely, impaired.  If we were unable to obtain an alternative
place or way to perform these functions, our business, financial condition and
results of operations would suffer.  The insurance we maintain may not
be adequate to cover our losses against fires, floods, earthquakes and general
business interruptions.
 
 Our
strategy to outsource assembly and test functions in the future could delay
delivery of products, decrease quality or increase costs.
 
 We may
begin to outsource a substantial amount of our product assembly and test
functions.  This outsourcing strategy involves certain risks,
including the potential lack of adequate capacity and reduced control over
delivery schedules, manufacturing yield, quality and costs.  In the
event that any significant subcontractors were to become unable or unwilling to
continue to manufacture or test our products in the required volumes, we would
have to identify and qualify acceptable replacements.  Finding
replacements could take time and we cannot be sure that additional sources would
be available to us on a timely basis.  Any delay or increase in costs
in the assembly and testing of products by third-party subcontractors could
seriously harm our business, financial condition and results of
operations.
  Our
expansion in international markets has been slow and steady.  However,
our plan is to accelerate this growth rate and will involve new risks that our
previous domestic operations have not prepared us to address; our failure to
address these risks could harm our business, financial condition and results of
operations.
 
 For
fiscal year 2010, approximately 14% of our net revenue came from customers
outside of the Americas.  We intend to expand our international sales
and marketing efforts.  Our efforts are subject to a variety of risks
associated with conducting business internationally, any of which could
seriously harm our business, financial condition and results of
operations.  These risks include:
 
 ·
              tariffs,
      duties, price controls or other restrictions on foreign currencies or
      trade barriers, such as import or export licensing imposed by foreign
      countries, especially on
technology;
 ·
              potential
      adverse tax consequences, including restrictions on repatriation of cash
      or earnings;
 ·
              fluctuations
      in foreign currency exchange rates, which could make our products
      relatively more expensive in foreign markets;
  and
 ·
              conflicting
      regulatory requirements in different countries that may require us to
      invest significant resources customizing our products for each
      country.
  19
  Any
failure by us to protect our intellectual property could harm our business and
competitive position.
 
 Our
success depends, to a certain extent, upon our proprietary
technology.  We currently rely on a combination of patent, trade
secret, copyright and trademark law, together with non-disclosure and invention
assignment agreements, to establish and protect the proprietary rights in the
technology used in our products.
 
 Although
we have been issued sixteen patents and expect to continue to file patent
applications, we are not certain that our patent applications will result in the
issuance of patents, or that any patents issued will provide commercially
significant protection of our technology.  In addition, other
individuals or companies may independently develop substantially equivalent
proprietary information not covered by the patents to which we own rights, may
obtain access to our know-how or may claim to have issued patents that prevent
the sale of one or more of our products.  Also, it may be possible for
third parties to obtain and use our proprietary information without our
authorization.  Further, the laws of some countries, such as those in
Japan, one of our target markets, may not adequately protect our intellectual
property or such protection may be uncertain.  Our success also
depends on trade secrets that cannot be patented and are difficult to
protect.  If we fail to protect our proprietary information
effectively, or if third parties use our proprietary technology without
authorization, our competitive position and business will suffer.
 
 If
we are unable to raise additional capital when needed, we may be unable to
develop or enhance our products and services.
 
 We may
seek additional funding in the future.  If we cannot raise funds on
acceptable terms, we may be unable to develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.  We also may be required to
reduce operating costs through lay-offs or reduce our sales and marketing or
research and development efforts.  If we issue equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of our common
stock.
 
 We
may face infringement issues that could harm our business by requiring us to
license technology on unfavorable terms or temporarily or permanently cease
sales of key products.
 
 We may
become parties to litigation in the normal course of our
business.  Litigation in general, and intellectual property and
securities litigation in particular, can be expensive and disruptive to normal
business operations.  Moreover, the results of complex litigation are
difficult to predict.  We were previously a defendant in a patent
infringement suit brought by Vertical Networks.  On October 4,
2007, the parties entered into a stipulation dismissing the lawsuit in its
entirety without prejudice.  Consequently, Vertical Networks may
reassert these or related claims in one or more separate
proceedings.
 
 More generally, litigation related to
these types of claims may require us to acquire licenses under third party
patents that may not be available on acceptable terms, if at all.  We
believe that an increasing portion of our revenue in the future will come from
sales of software applications for our hardware products.  The
software market traditionally has experienced widespread unauthorized
reproduction of products in violation of developers’ intellectual property
rights.  This activity is difficult to detect, and legal proceedings
to enforce developers’ intellectual property rights are often burdensome and
involve a high degree of uncertainty and substantial costs.
 
 Our
products may not meet the legal standards required for their sale in some
countries; if we cannot sell our products in these countries, our results of
operations may be seriously harmed.
 
 The
United States and other countries in which we intend to sell our products have
standards for safety and other certifications that must be met for our products
to be legally sold in those countries. We have tried to design our products to
meet the requirements of the countries where we sell or plan to sell them. We
also have obtained or are trying to obtain the certifications that we believe
are required to sell our products in these countries. We cannot, however,
guarantee that our products meet all of these standards or that we will be able
to obtain any certifications required. In addition, there is, and will likely
continue to be, an increasing number of laws and regulations pertaining to the
products we offer and may offer in the future. These laws or regulations may
include, for example, more stringent safety standards, requirements for
additional or more burdensome certifications or more stringent consumer
protection laws.
 
 If our
products do not meet a country’s standards or we do not receive the
certifications required by a country's laws or regulations, then we may not be
able to sell our products in that country. This inability to sell our products
may seriously harm our results of operation by reducing our sales or requiring
us to invest significant resources to conform our products to these
standards.
  20
 
 Risks
Related to the Industry
 
 Integrated,
multifunction telecommunications systems may not achieve widespread
acceptance.
 
 The
market for integrated, multifunction telecommunications systems is relatively
new and rapidly evolving.  Businesses have invested substantial
resources in the existing telecommunications infrastructure, including
traditional private telephone systems, and may be unwilling to replace these
systems in the near term or at all.  Businesses also may be reluctant
to adopt integrated, multifunction telecommunications systems because of their
concern about the current limitations of data networks, including the
Internet.  For example, end users sometimes experience delays in
receiving calls and reduced voice quality during calls when routing calls over
data networks.  Moreover, businesses that begin to route calls over
the same networks that currently carry only their data also may experience these
problems if the networks do not have sufficient capacity to carry all of these
communications at the same time.
 
 Evolving
standards may delay our product introductions, increase our product development
costs or cause end users to defer or cancel plans to purchase our products, any
of which could adversely affect our business.
 
 The
standards in our market are still evolving.  These standards are
designed to ensure that integrated, multifunction telecommunications products
from different manufacturers can operate together.  Some of these
standards are proposed by other participants in our market, including some of
our competitors, and include proprietary technology.  In recent years,
these standards have changed, and new standards have been proposed, in response
to developments in our market.  Our failure to conform our products to
existing or future standards may limit their acceptance by market
participants.  We may not anticipate which standards will achieve the
broadest acceptance in our market in the future, and we may take a significant
amount of time and expense to adapt our products to these
standards.  We also may have to pay additional royalties to developers
of proprietary technologies that become standards in our
market.  These delays and expenses may seriously harm our results of
operations.  In addition, customers and users may defer or cancel
plans to purchase our products due to concerns about the ability of our products
to conform to existing standards or to adapt to new or changed standards, and
this could seriously harm our results of operations.
 
 Future
regulation or legislation could harm our business or increase our cost of doing
business.
 
 The
Federal Communications Commission (FCC) has submitted a report to Congress
stating that it may regulate certain Internet services if it determines that
such Internet services are functionally equivalent to conventional
telecommunications services.  The increasing growth of the voice over
data network market and the popularity of supporting products and services,
heighten the risk that national governments will seek to regulate the
transmission of voice communications over networks such as the
Internet.  In addition, large telecommunications companies may devote
substantial lobbying efforts to influence the regulation of this market so as to
benefit their interests, which may be contrary to our
interests.  These regulations may include, for example, assessing
access or settlement charges, imposing tariffs or imposing regulations based on
encryption concerns or the characteristics and quality of products and
services.  In February 2004, the FCC found that an entirely Internet
based voice over Internet protocol service was an unregulated information
service.  At the same time, the FCC began a broader proceeding to
examine what its role should be in this new environment of increased consumer
choice and what can be done to meet its role of safeguarding the public
interest.  Future laws, legal decisions or regulations, as well as
changes in interpretations of existing laws and regulations, could require us to
expend significant resources to comply with them.  In addition, these
future events or changes may create uncertainty in our market that could reduce
demand for our products.
  21
  Item
1B.  UNRESOLVED STAFF COMMENTS
  None.
  Item
2.  PROPERTIES
  We lease
approximately 27,576 square feet of space in San Jose, California in which our
headquarters, sales, manufacturing and research and development facilities are
located and which is used primarily by our Americas Segment. We have a lease
agreement covering this property through June 2014. The agreement contains
renewal options.  Outside the United States, we lease approximately
13,744 square feet of a facility in Shanghai, China, where we conduct
administration, research and development, sales and marketing, and another 4,841
square feet of a facility in Beijing, China to serve sales and marketing
functions, which is used primarily by our International segment.  We
believe that our existing facilities both in the United States and China are
adequate for our present needs in all material respects. If we require
additional space, we believe that we will be able to obtain this space on
commercially reasonable terms.
  Item
3.  LEGAL PROCEEDINGS
  From time to time, we may become party
to litigation and subject to various routine claims and legal proceedings that
arise in the ordinary course of our business. In accordance with SFAS No. 5,Accounting
Contingencies, we make a
provision for liability when it is both probable that the liability has been
incurred and the amount of the loss can be reasonably estimated. To date, these
actions have not had a material adverse effect on our financial position, result
of operations or cash flows. Although the results of litigation and claims
cannot be predicted with certainty, we believe that the final outcome of such
matters would not have a material adverse effect on our business, financial
position, results of operation and cash flows.
  Item
4.  REMOVED AND RESERVED
  22
  PART
II
  Item
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
  The
information required by this item regarding equity compensation plans is
incorporated by reference to the information set forth in Item 12 of this
Annual Report on Form 10-K.
  COMMON
STOCK PRICE RANGE
  From
October 4, 1999, the date of our initial public offering, to June 11,
2002, our common stock was traded on the NASDAQ National Market under the symbol
ATGN. From June 12, 2002 to March 15, 2010, our common stock was traded on
the NASDAQ Capital Market under the symbol ATGN. Since March 16, 2010, our
common stock has traded on the OTCQX over-the-counter market under the symbol
ATGN.PK. The following table sets forth the high and low closing prices as
reported on the NASDAQ Capital Market during fiscal year 2009 and from October
1, 2009 to March 15, 2010. The table also sets forth the high and low sale
prices as reported on the OTCQX from March 16, 2010 to September 30, 2010. As of
September 30, 2010, we had approximately 78 stockholders of record. We have not
paid and do not anticipate that we will pay, cash dividends on our common
stock.
 
 Fiscal 2010
                
                
                Fiscal 2009High
                
                
                Low
                
                
                High
                
                
                Low1st
      Quarter
                
                $
                1.05
                
                
                $
                0.75
                
                
                $
                1.00
                
                
                $
                0.502nd
      Quarter
                
                $
                1.00
                
                
                $
                0.58
                
                
                $
                0.96
                
                
                $
                0.623rd
      Quarter
                
                $
                0.95
                
                
                $
                0.61
                
                
                $
                0.80
                
                
                $
                0.614th Quarter
                
                $
                0.79
                
                
                $
                0.60
                
                
                $
                1.10
                
                
                $
                0.62
  COMPANY
STOCK PERFORMANCE
  The
following performance graph and related information shall not be deemed
“soliciting material” or to be “filed” with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities Exchange Act of
1934, each as amended, except to the extent that we specifically incorporate it
by reference into such filing.
  The
following graph compares the cumulative total stockholder return data for our
stock for the period beginning September 30, 2005 and ending on
September 30, 2010 to the cumulative return over such period of
(i) The NASDAQ National Market Composite Index and (ii) the NASDAQ
Telecommunications Index. The graph assumes $100 was invested on
September 30, 2005 in our Common Stock and in each of the comparative
indices, assuming the reinvestment of any dividends. Note that the historic
stock price performance on the following graph is not necessarily indicative of
future stock price performance.
  23
  COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
 Among
AltiGen Communications, Inc., The NASDAQ Composite Index
 and
The NASDAQ Telecommunications Index
  
  9/05
                    
                    
                    
                    9/06
                    
                    
                    
                    9/07
                    
                    
                    
                    9/08
                    
                    
                    
                    9/09
                    
                    
                    
                    9/10AltiGen
      Communications, Inc.
                    
                    
                    100.00
                    
                    
                    
                    86.78
                    
                    
                    
                    90.23
                    
                    
                    
                    56.90
                    
                    
                    
                    57.47
                    
                    
                    
                    43.10NASDAQ
      Composite
                    
                    
                    100.00
                    
                    
                    
                    106.22
                    
                    
                    
                    126.95
                    
                    
                    
                    96.41
                    
                    
                    
                    99.84
                    
                    
                    
                    112.47NASDAQ
      Telecommunications
                    
                    
                    100.00
                    
                    
                    
                    104.62
                    
                    
                    
                    149.78
                    
                    
                    
                    100.60
                    
                    
                    
                    106.68
                    
                    
                    
                    113.20
  *$100
invested on 9/30/05 in stock & index-including reinvestment of
dividends. Fiscal year ending September 30.
  STOCK
REPURCHASE PLAN
 
 On
October 23, 2007, our Board of Directors approved the repurchase of up to $2.0
million of our common stock in the open market through November 12, 2008. On
November 11, 2008, our Board of Directors extended the repurchase program by
another year to November 14, 2009. Stock repurchases under this program were
made from time to time at our management’s discretion through November 14, 2009.
When exercising such discretion, management considered a variety of factors such
as our stock price, general business and market conditions and other investment
opportunities. The repurchases were made in the open market and funded from
available working capital. Pursuant to the 2007 authority, we repurchased
231,135 shares during the twelve months ended September 30, 2008 at an aggregate
cost of $367,000. Pursuant to the 2008 authority, we repurchased 23,800 shares
during the twelve months ended September 30, 2009 at an aggregate cost of
$19,000. In April 2009, our Board of Directors suspended further purchases of
stock under this program. On November 16, 2010, our Board of Directors approved
the termination of the repurchase program effective
immediately.
  24
  The
following table summarizes repurchases of our stock:
 
 Period
                        
                        Total
                          Number
                          of Shares
                          Purchased
                        
                        
                        Average
                          Price
                          Paid per
                          Share
                        
                        
                        Shares
                          Purchased
                          as Part of
                          Publicly
                          Announced
                          Program
                        
                        
                        Approximate
                          Dollar
                          Value of
                          Shares that
                          May Yet be
                          Purchased
                          as Part of
                          the ProgramNovember 1,
      2007 through November 30,2007
                        
                        
                        16,413
                        
                        
                        $
                        1.59
                        
                        
                        
                        16,413
                        
                        
                        $
                        1,973,965December 1,
      2007 through December 31, 2007
                        
                        
                        92,965
                        
                        
                        
                        1.60
                        
                        
                        
                        92,965
                        
                        
                        
                        1,825,685February 1,
      2008 through February 29, 2008
                        
                        
                        80,218
                        
                        
                        
                        1.66
                        
                        
                        
                        80,218
                        
                        
                        
                        1,692,660March 1,
      2008 through March 31, 2008
                        
                        
                        23,919
                        
                        
                        
                        1.61
                        
                        
                        
                        23,919
                        
                        
                        
                        1,654,084August 1,
      2008 through August 31, 2008
                        
                        
                        7,211
                        
                        
                        
                        1.21
                        
                        
                        
                        7,211
                        
                        
                        
                        1,645,374September
      1, 2008 through September 30, 2008
                        
                        
                        10,409
                        
                        
                        
                        1.16
                        
                        
                        
                        10,409
                        
                        
                        
                        1,633,338December 1,
      2008 through December 31, 2008
                        
                        
                        10,400
                        
                        
                        
                        0.77
                        
                        
                        
                        10,400
                        
                        
                        
                        1,625,311January
      1, 2009 through January 31, 2009
                        
                        
                        4,275
                        
                        
                        
                        0.79
                        
                        
                        
                        4,275
                        
                        
                        
                        1,621,953February 1,
      2009 through February 28, 2009
                        
                        
                        3,325
                        
                        
                        
                        0.87
                        
                        
                        
                        3,325
                        
                        
                        
                        1,619,045March 1,
      2009 through March 31, 2009
                        
                        
                        5,800
                        
                        
                        
                        0.79
                        
                        
                        
                        5,800
                        
                        
                        
                        1,614,461April
      1, 2009 through September 30, 2010
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
                        
                        
                        254,935
                        
                        
                        $
                        1.51
                        
                        
                        
                        254,935
                        
                        
                        $
                        1,614,461
  STOCK
OPTION EXCHANGE
  On
September 1, 2009, we completed a stock option exchange program (the “Exchange
Offer”).  Pursuant to the Exchange Offer, eligible employees tendered,
and we accepted for cancellation, eligible options to purchase 2,927,300 shares
of our common stock, representing approximately 95% of the total shares of
common stock underlying options eligible for exchange in the Exchange
Offer.  On September 1, 2009, the Company granted new options to
eligible employees to purchase 2,927,300 shares of common stock in exchange for
the cancellation of the tendered eligible options.  The exercise price
per share of the new options granted in the Exchange Offer was $0.86, the
closing price of our common stock as reported by the NASDAQ Capital Market on
September 1, 2009.
  25
  Item 6.  SELECTED
FINANCIAL DATA
  This
section presents selected historical financial data of AltiGen Communications,
Inc. This section should be read carefully in conjunction with "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
the consolidated financial statements included in this Form 10-K, including
the notes to the consolidated financial statements. The selected data in this
section is not intended to replace our consolidated financial
statements.
 
 Fiscal Year Ended September 30,2010
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006(In thousands, except per share data)Consolidated
      Statements of Operations Data:Net
      revenue
                          
                          $
                          16,645
                          
                          
                          $
                          17,385
                          
                          
                          $
                          18,897
                          
                          
                          $
                          17,888
                          
                          
                          $
                          17,896Cost
      of revenue
                          
                          
                          5,487
                          
                          
                          
                          6,604
                          
                          
                          
                          8,059
                          
                          
                          
                          8,123
                          
                          
                          
                          8,082Gross
      profit
                          
                          
                          11,158
                          
                          
                          
                          10,781
                          
                          
                          
                          10,838
                          
                          
                          
                          9,765
                          
                          
                          
                          9,814Operating
      expenses:Research
      and development
                          
                          
                          4,577
                          
                          
                          
                          4,924
                          
                          
                          
                          4,216
                          
                          
                          
                          3,373
                          
                          
                          
                          3,740Sales
      and marketing
                          
                          
                          5,248
                          
                          
                          
                          7,037
                          
                          
                          
                          7,552
                          
                          
                          
                          5,277
                          
                          
                          
                          4,353General
      and administrative
                          
                          
                          3,114
                          
                          
                          
                          3,654
                          
                          
                          
                          3,322
                          
                          
                          
                          2,497
                          
                          
                          
                          2,058Total
      operating expenses
                          
                          
                          12,939
                          
                          
                          
                          15,615
                          
                          
                          
                          15,090
                          
                          
                          
                          11,147
                          
                          
                          
                          10,151Loss
      from operations
                          
                          
                          (1,781
                          )
                          
                          
                          (4,834
                          )
                          
                          
                          (4,252
                          )
                          
                          
                          (1,382
                          )
                          
                          
                          (337
                          )Equity
      in net income (loss) of  investee
                          
                          
                          (4
                          )
                          
                          
                          (9
                          )
                          
                          
                          5
                          
                          
                          
                          (4
                          )
                          
                          
                          (36
                          )Interest
      and other income, net
                          
                          
                          43
                          
                          
                          
                          118
                          
                          
                          
                          310
                          
                          
                          
                          461
                          
                          
                          
                          380Net
      income (loss) before income taxes
                          
                          
                          (1,742
                          )
                          
                          
                          (4,725
                          )
                          
                          
                          (3,937
                          )
                          
                          
                          (925
                          )
                          
                          
                          7Income
      taxes
                          
                          
                          34
                          
                          
                          
                          15
                          
                          
                          
                          —
                          
                          
                          
                          (11
                          )
                          
                          
                          (19
                          )Net
      loss
                          
                          $
                          (1,708
                          )
                          
                          $
                          (4,710
                          )
                          
                          $
                          (3,937
                          )
                          
                          $
                          (936
                          )
                          
                          $
                          (12
                          )Basic
      and diluted net loss per share
                          
                          $
                          (0.10
                          )
                          
                          $
                          (0.30
                          )
                          
                          $
                          (0.25
                          )
                          
                          $
                          (0.06
                          )
                          
                          $
                          (0.00
                          )Weighted
      average and diluted shares used in computing basic net loss per
      share
                          
                          
                          16,417
                          
                          
                          
                          15,937
                          
                          
                          
                          15,745
                          
                          
                          
                          15,363
                          
                          
                          
                          14,964
  2010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Consolidated
      Balance Sheets Data:Cash,
      cash equivalents and short-term investments
                  
                  $
                  6,524
                  
                  
                  $
                  7,397
                  
                  
                  $
                  9,867
                  
                  
                  $
                  9,907
                  
                  
                  $
                  9,922Working
      capital(1)
                  
                  
                  4,187
                  
                  
                  
                  4,994
                  
                  
                  
                  8,687
                  
                  
                  
                  11,551
                  
                  
                  
                  11,027Total
      liabilities
                  
                  
                  5,554
                  
                  
                  
                  5,574
                  
                  
                  
                  5,479
                  
                  
                  
                  2,905
                  
                  
                  
                  2,807Total
      assets
                  
                  
                  10,361
                  
                  
                  
                  11,331
                  
                  
                  
                  14,776
                  
                  
                  
                  15,250
                  
                  
                  
                  14,644Accumulated
      deficit
                  
                  
                  (62,449
                  )
                  
                  
                  (60,741
                  )
                  
                  
                  (56,031
                  )
                  
                  
                  (52,094
                  )
                  
                  
                  (51,158
                  )Total
      stockholders' equity
                  
                  
                  4,807
                  
                  
                  
                  5,757
                  
                  
                  
                  9,297
                  
                  
                  
                  12,345
                  
                  
                  
                  11,837
  
 (1)  Working capital
is defined as total current assets less total current
liabilities.
  26
  Item 7.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  FORWARD-LOOKING
INFORMATION
 This
Annual Report on Form 10-K includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act.  All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
statements regarding: projections of revenues, future research and development
expenses, future selling, general and administrative expenses, other expenses,
gross profit, gross margin, or other financial items; the plans and objectives
of management for future operations; our exposure to interest rate risk; future
economic conditions or performance; plans to focus on cost control. In some
cases, forward-looking statements can be identified by the use of terminology
such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,”
“potential,” or “continue,” or the negative thereof or other comparable
terminology.  These statements are based on the beliefs and
assumptions of our management based on information currently available to
management. Such forward-looking statements are subject to risks, uncertainties
and other important factors that could cause actual results and the timing of
certain events to differ materially from future results expressed or implied by
such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in Item 1A “Risk Factors” included elsewhere in this Annual Report on
Form 10-K and in our other filings with the SEC. Furthermore, such
forward-looking statements speak only as of the date of this report. We
undertake no obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
  OVERVIEW
  AltiGen
Communications, Inc. (“we” or the “Company”) is a leading provider of 100%
Microsoft-based VoIP business phone systems and Unified Communications
solutions. We design, deliver and support VoIP phone systems, mobile convergence
and call center solutions that combine high reliability with integrated IP
communications applications.  As one of the first companies to offer
VoIP solutions, AltiGen has been deploying systems since 1996. We have more than
10,000 customers worldwide with over 15,000 systems in use. Our telephony
solutions are primarily used by medium and enterprise sized businesses,
companies with multiple locations, corporate branch offices, and call
centers.
  AltiGen’s
systems are designed with an open architecture, built on industry standard
IntelTM based servers, SIPTM compliant phones, and Microsoft WindowsTM based IP
applications. This adherence to widely used standards allows our solutions to
both integrate with and leverage a company's existing technology investment.
AltiGen’s award winning, integrated IP applications suite provides customers
with a complete business communications solution. Voicemail, Contact Center,
Unified Messaging, Automatic Call Distribution, Call Recording, Call Activity
Reporting, and Mobility solutions take advantage of the convergence of voice and
data communications to achieve superior business results. We believe this
enables our customers to implement communication systems solutions that have an
increased return on investment versus past technology investments.
  We
generated net revenue of $16.6 million with a net loss of $1.7 million
during fiscal year 2010.  As of September 30, 2010, we had an
accumulated deficit of $62.4 million. Net cash used in operating activities was
$743,000 in fiscal year 2010.
  We derive
our revenue from sales of our VoIP communications systems and call center
solutions. Product revenue is comprised of direct sales to end-users and
resellers and sales to distributors. Revenue from product sales to end users and
resellers are recognized upon shipment. We defer recognition of revenue for
sales to distributors until they resell our products to their customers. Upon
shipment, we also provide a reserve for the estimated cost that may be incurred
for product warranty. Under our distribution contracts, a distributor has the
right, in certain circumstances, to return products it determines are
overstocked, so long as it provides an offsetting purchase order for products in
an amount equal to or greater than the dollar value of the returned products. In
addition, we provide distributors protection from subsequent price
reductions.
  27
  Our cost
of revenue consists of component and material costs, direct labor costs,
provisions for excess and obsolete inventory, warranty costs and overhead
related to the manufacturing of our products. Several factors that have affected
and will continue to affect our revenue growth are the state of the economy, the
market acceptance of our products, our ability to add new resellers and our
ability to design, develop, and release new products. We engage third-party
assemblers, which in fiscal year 2010 were All Quality Services in Fremont,
California and ISIS Surface Mounting, Inc. in San Jose, California to insert the
hardware components into the printed circuit board. We purchase fully-assembled
chassis from Advantech Corporation, Internet protocol phones from BCM
Communications, Inc., single board computers for our MAX product from AAEON
Electronics, Inc. and raw material components from Avnet Electronics. We
selected our manufacturing partners with the goals of ensuring a reliable supply
of high-quality finished products and lowering per unit product costs as a
result of manufacturing economies of scale. We cannot assure you that we will
maintain the volumes required to realize these economies of scale or when or if
such cost reductions will occur. The failure to obtain such cost reductions
could materially adversely affect our gross margins and operating
results.
  We
continue to focus on developing enhancements to our current products to provide
greater functionality and increased capabilities, based on our market research,
customer feedback and our competitors' product offerings, as well as creating
new product offerings to both enhance our position in our target market segment
and enter new geographical markets. Additionally, we intend to continue selling
our products to small- to medium-sized businesses, enterprise businesses,
multisite businesses, corporate and branch offices and call centers. Also, we
plan to continue to recruit additional resellers and distributors to focus on
selling phone systems to our target customers. We believe that the adoption rate
for this Internet telephony is much faster with small- to medium-sized
businesses because many of these businesses have not yet made a significant
investment for a traditional phone system. Also, we believe that small- to
medium-sized businesses are looking for call center-type administration to
increase the productivity and efficiency of their contacts with
customers.
  CRITICAL
ACCOUNTING POLICIES
 
 Revenue Recognition. Revenue
from sales of our hardware and software products consists of direct sales to
end-users, resellers and distributors. Revenue from sales to end-users and
resellers is recognized upon shipment, when risk of loss has passed to the
customer, collection of the receivable is reasonably assured, persuasive
evidence of an arrangement exists, and the sales price is fixed and
determinable. We provide for estimated sales returns and allowances and warranty
costs related to such sales at the time of shipment. Net revenue consists of
product revenue reduced by estimated sales returns and allowances. The Company’s
sales returns were $230,000 and $133,000 for fiscal years ended September 30,
2010 and 2009, respectively. Sales to distributors are made under terms allowing
certain rights of return and protection against subsequent price declines on our
products held by the distributors. Upon termination of such distribution
agreements, any unsold products may be returned by the distributor for a full
refund. These agreements may be canceled without cause for convenience following
a specified notice period. As a result of these provisions, we defer recognition
of distributor revenue until such distributors resell our products to their
customers. The amounts deferred as a result of this policy are reflected as
“deferred revenue” in the accompanying consolidated balance sheets. The related
cost of revenue is also deferred and reported in the consolidated balance sheets
as inventory. We do not recognize revenue derived from sales to customers in
Asia until both of the following elements are satisfied: customer has taken
ownership upon shipment and we have received payment for the purchase. As of
September 30, 2010 and 2009, we had approximately $2.4 million and $2.6 million,
respectively in short-term deferred revenue, of which $2.0 million and $2.1
million, respectively, comprised of service support revenue, and $408,000 and
$501,000, respectively, comprised of deferred channel revenue. Long-term
deferred revenue is primarily comprised of revenue generated from our service
support programs and is discussed below under the heading “Service Support
Programs”.
 
 Service Support
Programs.Our Software Assurance Program provides
our customers with the latest updates, new releases, and technical support for
the applications they are licensed to use. Our Premier Service Plan includes
software assurance and extended hardware warranty. These programs have an annual
subscription and can range from one to three years. Sales from our service
support programs are recorded as deferred revenue and recognized as revenue over
the terms of their subscriptions. As described above, short-term service support
revenue was approximately $2.0 million and $2.1 million as of September 30, 2010
and 2009, respectively. Long-term deferred revenue was approximately $272,000,
as compared to $154,000 as of September 30, 2010 and 2009, respectively. Our
service plan offering remains a key part of our business as we continue to add
new service customers.
 
 Cash and Cash Equivalent.We
consider all highly liquid investments purchased with an initial maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
invested in various investment grade institutional money market accounts, U.S.
Agency securities and commercial paper. The Company's investment policy requires
investments to be rated single-A or better. As of September 30, 2010 and 2009,
the Company had $3.8 million and $7.4 million, respectively in cash and cash
equivalents. Of this amount, the Company’s total cash and cash equivalents held
in Asia was $1.8 million and $2.4 million as of September 30, 2010 and 2009,
respectively. In Asia, cash and cash equivalents are primarily comprised of bank
term deposits. Of the total cash and cash equivalents held in Asia, $1.4 million
and $2.2 million comprised of term deposits as of September 30, 2010 and 2009,
respectively.
  28
 
 Short-Term Investment.The
Company’s policy is to invest in highly-rated securities with strong liquidity
and requires investments to be rated single-A or better. Short-term investments
are comprised of commercial paper. Short-term investments are highly liquid
financial instruments with original maturities greater than three months but
less than one year and are classified as “available-for-sale” investments. We
classify our available-for-sale securities as current assets and report them at
their fair value. Further, we recognize unrealized gains and losses related to
these securities as an increase or reduction in stockholders’ equity. As of
September 30, 2010, the Company had $2.7 million in short-term investments. The
Company did not hold any short-term investments at September 30,
2009.
 
 Inventory.Inventory is
stated at the lower of cost (first-in, first-out method) or market. Our
inventory balance was $1.4 million and $1.3 million as of September 30, 2010 and
2009, respectively. We perform a detailed review of inventory each fiscal
quarter, with consideration given to future customer demand for our products,
obsolescence from rapidly changing technology, product development plans, and
other factors. If future demand or market conditions for our products are less
favorable than those projected by management, or if our estimates prove to be
inaccurate due to unforeseen technological changes, we may be required to record
additional inventory obsolescence provision which would negatively affect gross
margins in the period when the write-downs were recorded. In prior periods, we
had established a reserve to write off excess inventory that management believed
would not be sold. For the fiscal year ended September 30, 2010, we disposed of
fully-reserved inventory with a carrying value of zero and an original cost at
$33,000. The disposal of such inventory had no material impact on our revenue,
gross margins and net loss for the twelve months ended September 30, 2010.
During fiscal years 2010 and 2009, we recognized a provision of $3,000 and
$17,000, respectively, for excess and obsolete inventories. Inventory allowance
was $662,000 and $692,000 as of September 30, 2010 and 2009,
respectively.
 
 Warranty Cost.  We
accrue for warranty costs based on estimated product return rates and the
expected material and labor costs to provide warranty services. If actual
products return rates, repair cost or replacement costs differ significantly
from our estimates, then our gross margin could be adversely affected. The
reserve for product warranties was $119,000 and $122,000 as of September 30,
2010 and September 30, 2009, respectively.
 
 Stock-Based Compensation. The
Company has estimated the fair value of stock-based compensation for stock
options at the date of the grant using the Black-Scholes option-pricing model.
The Black-Scholes option-pricing model incorporates various assumptions
including expected volatility, expected life and interest rate. The Company uses
historical data to estimate option forfeitures. Expected volatility is based on
historical volatility and the risk-free interest rate is based on U.S. Treasury
yield in effect at the time of the grant for the expected life of the options.
The Company does not anticipate paying any dividends in the foreseeable future
and therefore used an expected dividend yield of zero in the option valuation
model.
  29
 
 Results
of Operations
  The
following table sets forth consolidated statements of operations data for the
periods indicated as a percentage of net revenue.
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008Consolidated
      Statements of Operations Data:Net
      revenue:Hardware
                
                
                63.4
                %
                
                
                70.6
                %
                
                
                80.4
                %Software
                
                
                14.4
                
                
                
                13.3
                
                
                
                13.8Service
      support
                
                
                22.2
                
                
                
                16.1
                
                
                
                5.8Total
      net revenue
                
                
                100.0
                
                
                
                100.0
                
                
                
                100.0Cost
      of revenue:Hardware
                
                
                32.9
                
                
                
                37.9
                
                
                
                41.4Software
                
                
                0.1
                
                
                
                0.1
                
                
                
                1.2Service
      support (1)
                
                
                —
                
                
                
                —
                
                
                
                —Total
      cost of revenue
                
                
                33.0
                
                
                
                38.0
                
                
                
                42.6Gross
      profit
                
                
                67.0
                
                
                
                62.0
                
                
                
                57.4Operating
      expenses:Research
      and development
                
                
                27.5
                
                
                
                28.3
                
                
                
                22.3Sales
      and marketing
                
                
                31.5
                
                
                
                40.5
                
                
                
                40.0General
      and administrative
                
                
                18.7
                
                
                
                21.0
                
                
                
                17.6Total
      operating expenses
                
                
                77.7
                
                
                
                89.8
                
                
                
                79.9Loss
      from operations
                
                
                (10.7
                )
                
                
                (27.8
                )
                
                
                (22.5
                )Equity
      in net loss of investee
                
                
                —
                
                
                
                (0.1
                )
                
                
                —Interest
      and other income, net
                
                
                0.2
                
                
                
                0.7
                
                
                
                1.7Net
      loss before income taxes
                
                
                (10.5
                )
                
                
                (27.2
                )
                
                
                (20.8
                )Provision
      for income taxes
                
                
                0.2
                
                
                
                0.1
                
                
                
                —Net
      loss
                
                
                (10.3
                )
      %
                
                
                (27.1
                )
      %
                
                
                (20.8
                )
      %
 
 (1)
Service support cost represents less than 0.1% of our total cost of
revenue.
  Fiscal
Year Ended September 30, 2010 Compared to Fiscal Year Ended
September 30, 2009
  Net
Revenue
  Net
revenue consists primarily of revenue from direct sales to end-users, resellers
and distributors.
  We are
organized and operate as two operating segments, the Americas and
International.  The Americas segment is comprised of the United
States, Canada, Mexico, Central America and the Caribbean.  The
International segment is comprised of China, the United Kingdom, Italy and
Holland.
  30
  The
following table sets forth percentages of net revenue by geographic region with
respect to such revenue for the periods indicated:
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009Americas
                
                
                86
                %
                
                
                86
                %International
                
                
                14
                %
                
                
                14
                %Total
                
                
                100
                %
                
                
                100
                %
  Net
revenue by customers that individually accounted for more than 10% of our
revenue for the twelve months ended September 30, 2010 and 2009,
respectively, were as follows:
 
 Fiscal
      Year Ended
                        September 30,2010
                    
                    
                    2009Synnex
                    
                    
                    36
                    %
                    
                    
                    30
                    %Jenne
      (1)
                    
                    
                    —
                    
                    
                    
                    15
                    %Fiserv
      (2)
                    
                    
                    10
                    %
                    
                    
                    10
                    %Total
                    
                    
                    46
                    %
                    
                    
                    55
                    %
 
 (1)
              In
      September 2009, we terminated our distribution agreement with Jenne. The
      termination of our relationship with Jenne did not have a material impact
      on our business for fiscal year
2010.
 (2)
                In
      August 2009, we entered into a reseller agreement with Fiserv Solutions,
      Inc. Our agreement with Fiserv has an initial term of ten years and will
      renew automatically for additional five year terms, provided that each
      party has the right to terminate the agreement for convenience upon ninety
      (90) days' written notice prior to the end of the initial term or any
      subsequent term of the
agreement.
  The
following table sets forth percentages of net revenue by product type with
respect to such revenue for the periods indicated:
 
 Fiscal Year Ended
                    September 30,2010
                  
                  
                  2009Hardware
                  
                  
                  64
                  %
                  
                  
                  71
                  %Software
                  
                  
                  14
                  %
                  
                  
                  13
                  %Service
      Support Plans
                  
                  
                  22
                  %
                  
                  
                  16
                  %Total
                  
                  
                  100
                  %
                  
                  
                  100
                  %
 
 Net
revenue was $16.6 million in fiscal year 2010 as compared to $17.4 million
in fiscal year 2009. Revenue generated in the Americas segment accounted for
$14.2 million, or 86% of total net revenue, for fiscal year ended September 30,
2010 as compared to $15.0 million, or 86% of total net revenue, for fiscal year
ended September 30, 2009. Revenue generated in the International segment
accounted for $2.4 million, or 14% of our total net revenue for both fiscal
years ending September 30, 2010 and 2009, respectively. In the Americas segment,
during the twelve months ended September 30, 2010 and 2009, we generated
approximately $3.8 million and $2.8 million, respectively, in non-system related
revenue. Non-system related revenue is primarily comprised of revenue generated
from our service support plans. In the Americas segment, the decreased in net
revenue excluding non-system related revenue was approximately 12%. This
decrease in net revenue in the Americas segment was primarily attributable to
lower number of systems shipped over the prior year. Sales in all markets
continued to be affected by the global economic recession. We will continue to
focus our sales efforts on larger enterprise customers which we believe will
result in increased sales of our products.
  31
  Cost
of Revenue
  Our cost
of product revenue consists primarily of component and material costs, direct
labor costs, provisions for excess and obsolete inventory, warranty costs and
overhead related to the manufacturing of our products. The majority of these
costs vary with the unit volumes of product sold.
 
 Cost of
revenue decreased to $5.5 million in fiscal year 2010 compared to $6.6 million
in fiscal year 2009.  This decrease was primarily caused by a shift in
our product mix and the impact of lower sales volume over the prior year. Cost
of revenue as a percentage of net revenue decreased to 33% for fiscal year ended
September 30, 2010 from 38% in fiscal year 2009. This change was primarily
attributable to an increase of our non-system related revenue.
 
 Research
and Development Expenses
 
 Research
and development expenses consist primarily of costs related to personnel and
overhead expenses, consultant expenses and other costs associated with the
design, development, prototyping and testing of our products and enhancements of
our converged telephone system software. Research and development expenses
decreased 7% to $4.6 million in fiscal year 2010 from $4.9 million in
fiscal year 2009. This decrease in absolute dollars was primarily attributable
to reduced personnel-related expenses of approximately $356,000. Research and
development expense as a percentage of net revenue for both fiscal years 2010
and 2009 were 28%. The expense decrease in fiscal year 2010 as compared with
fiscal year 2009 is attributable to the Company’s ongoing efforts to reduce
operating expenses, including our April 2009 salary reduction program described
below.
 
 Notwithstanding
the reductions to research and development expenses described above, we intend
to continue to make investments in our research and development and we believe
that focused investments in research and development are critical to the future
growth and our ability to enhance our competitive position in the marketplace.
We believe that our ability to develop and meet enterprise customer requirements
is essential to our success. Accordingly, we have assembled a team of engineers
with expertise in various fields, including voice and IP communications, unified
communications network design, data networking and software engineering. Our
principal research and development activities are conducted in San Jose,
California and our subsidiary in Shanghai, China. Management continues to focus
on cost control until business conditions improve. If business conditions
deteriorate or the rate of improvement does not meet our expectations, we may
implement additional cost-cutting actions.
  Sales
and Marketing Expenses
  Sales and
marketing expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales and customer support
functions, as well as trade shows, advertising, and promotional expenses. Sales
and marketing expenses decreased 25% to $5.2 million in fiscal year 2010 from
$7.0 million in fiscal year 2009. The decrease was primarily driven by $944,000
of reduced personnel-related and overhead expenses, a decrease of $173,000 in
service related expenditures, a decrease of $187,000 in travel related expenses,
$126,000 decrease in consulting related services and $288,000 decrease in
advertising and partner conference expenses. The most significant factor in the
expense decrease in fiscal year 2010 compared to prior fiscal year 2009 is
attributable to the Company’s ongoing efforts to reduce operating expenses,
including our April 2009 salary reduction program described below. Sales and
marketing expenses as a percentage of revenue decreased from 40% in fiscal year
2009 to 32% in fiscal year 2010.
  We plan
to continue investing in our domestic and international marketing activities to
help build brand awareness and create sales leads for our channel
partners.  Management continues to focus on cost control until
business conditions improve. If business conditions deteriorate or the rate of
improvement does not meet our expectations, we may implement additional
cost-cutting actions.
 
 General
and Administrative Expenses
 
 General
and administrative expenses consist of salaries and related expenses for
executive, finance and administrative personnel, facilities, allowance for
doubtful accounts, legal and other general corporate expenses. General and
administrative expenses decreased 15% to $3.1 million in 2010 from
$3.6 million in 2009. The decrease in absolute dollars in general and
administrative was primarily driven by a decrease of $187,000 in
personnel-related and overhead expense, a decrease in service related
expenditures of $178,000 and a decrease of $198,000 in non-cash stock based compensation
expenses. The most significant factor in the expense decrease in fiscal
year 2010 compared to prior fiscal year 2009 is attributable to the Company’s
ongoing efforts to reduce operating expenses, including our April 2009 salary
reduction program described below. General and administrative expenses as a
percentage of revenue decreased from 21% in fiscal year 2009 to 19% in fiscal
year 2010.
  32
  Management
continues to focus on cost control until business conditions improve. If
business conditions deteriorate or the rate of improvement does not meet our
expectations, we may implement additional cost-cutting actions.
 
 Restructuring
and Salary Reduction Program
 
 Due to
the ongoing economic recession and related decreased product demand, we
initiated several measures designed to restructure and lower the costs of our
operations. In the third quarter of fiscal 2009, we implemented a
reduction-in-workforce of approximately 11 employees, or 14% of our workforce,
primarily in sales, manufacturing and engineering. Additionally, in the third
quarter of fiscal 2009, we implemented a mandatory salary reduction for all of
our employees, including our executive officers. These salary reductions
ranged between 5% and 15%, depending on several factors, including, but not
limited to, participation in commission plans and the original base salary. The
salaries of all of our executive officers were reduced by 15%.
  Equity
Investment in Common Stock of Private Company
  In July
2004, we purchased common stock of a private Korean telecommunications company
for approximately $79,000. As a result of this investment, we acquired
approximately 23% of the voting power of the company. This gives us the right to
nominate and elect one of the three members of the company's current board of
directors. We are accounting for this investment using the equity method and
record our minority interest of their results in our results of operations. For
the fiscal years ended September 30, 2010 and 2009, product sales revenue
from this company was approximately $3,000 and $19,000, respectively. Accounts
receivable balance from this company was $0 and $22,000 as of September 30, 2010
and 2009, respectively. As of September 30, 2010 and 2009, total equity in net
losses of the Korea investee was approximately $4,000 and $9,000, respectively.
Our investment in the Korean company had a book value of approximately $3,000
and $7,000 as of September 30, 2010 and 2009, respectively.
  Interest
Expense and Other Income, Net
 
 Interest
expense primarily consists of interest incurred on our capital lease commitments
and other income primarily consists of interest earned on cash, cash equivalents
and short-term investments. Net interest and other income decreased to $42,000
in fiscal year 2010 from $118,000 in fiscal year 2009. The decrease in interest
and other income, net in fiscal year 2010 as compared to fiscal year 2009 was a
combination of lower invested balances, reduced cash balances and reduced rates
of interest available for cash and investments in financial assets in fiscal
year 2010. In the longer term, we may generate less interest income if our total
invested balance decreases and these decreases are not offset by rising interest
rates or increased cash generated from operations or other
sources.
  33
  Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
  Net
Revenue
  Net sales
consist primarily of revenue from direct sales to end-users, resellers and
distributors.
  We are
organized and operate as two operating segments, the Americas and
International.  The Americas segment is comprised of the United
States, Canada, Mexico, Central America and the Caribbean.  The
International segment is comprised of China, the United Kingdom, Italy and
Holland.
  The
following table sets forth percentages of net revenue by geographic region with
respect to such revenue for the periods indicated:
 
 FiscalYearEnded
                    September 30,2009
                
                
                2008Americas
                
                
                86
                %
                
                
                87
                %International
                
                
                14
                %
                
                
                13
                %Total
                
                
                100
                %
                
                
                100
                %
  Net
revenue by customers that individually accounted for more than 10% of our
revenue for the twelve months ended September 30, 2009 and 2008,
respectively, were as follows:
 
 FiscalYearEnded
                      September 30,2009
                  
                  
                  2008Synnex
                  
                  
                  30
                  %
                  
                  
                  34
                  %Jenne
      (1)
                  
                  
                  15
                  %
                  
                  
                  12
                  %Fiserv
      (2)
                  
                  
                  10
                  %
                  
                  
                  —Altisys
      (3)
                  
                  
                  —
                  
                  
                  
                  12
                  %Total
                  
                  
                  55
                  %
                  
                  
                  58
                  %
 
 (1)
              In
      September 2009, we terminated our distribution agreement with Jenne. The
      termination of our relationship with Jenne did not have a material impact
      on our business for fiscal year
2010.
 (2)
                In
      August 2009, we entered into a reseller agreement with Fiserv Solutions,
      Inc. Our agreement with Fiserv has an initial term of ten years and will
      renew automatically for additional five year terms, provided that each
      party has the right to terminate the agreement for convenience upon ninety
      (90) days' written notice prior to the end of the initial term or any
      subsequent term of the
agreement.
 (3)
              During
      fiscal year 2009, revenue generated from Altisys was less than 10% of our
      total revenue.
  The
following table sets forth percentages of net revenue by product type with
respect to such revenue for the periods indicated:
 
 FiscalYearEnded
                    September 30,2009
                
                
                2008Hardware
                
                
                71
                %
                
                
                86
                %Software
                
                
                13
                %
                
                
                14
                %Service
      Support Plans (1)
                
                
                16
                %
                
                
                —Total
                
                
                100
                %
                
                
                100
                %
 
 (1)  In
fiscal year 2008, revenue generated from these service support plans accounted
for less than 1% of our total revenue.
  34
  Net
revenue was $17.4 million in fiscal year 2009 as compared to $18.9 million
in fiscal year 2008. Revenue generated in the Americas segment accounted for
$15.0 million, or 86% of total net revenue, for fiscal year ended
September 30, 2009 as compared to $16.5 million, or 87% of total net
revenue, for fiscal year ended September 30, 2008. Revenue generated in the
International segment accounted for $2.4 million, or 14% of our total net
revenue, as compared to $2.4 million, or 13% of our total net revenue, for
fiscal year ending September 30, 2009 and 2008, respectively. In the
Americas segment, in fiscal year 2009, we generated $2.8 million in non-system
related revenue, which is primarily revenue generated from our service support
plans, as compared to $1.0 million in fiscal year 2008. The change in net
revenue excluding non-system related revenue was a decrease of approximately
23%. This decrease in the Americas segment was primarily the result of changes
in unit sales volume of existing products. The number of systems shipped in
fiscal year 2009 was approximately 28% lower than the previous year. However,
the average revenue per system was higher by approximately 7% because our
smaller systems, with lower profit margins, decreased while sales of our larger
systems, with higher profit margins, increased. The decrease in net revenue for
the Americas is primarily due to reduced incoming orders because of the global
economic downturn.
  Cost
of Revenue
  Our cost
of product revenue consists primarily of component and material costs, direct
labor costs, provisions for excess and obsolete inventory, warranty costs and
overhead related to the manufacturing of our products. The majority of these
costs vary with the unit volumes of product sold.
  Cost of
revenue decreased to $6.6 million in fiscal year 2009 compared to $8.1 million
in fiscal year 2008.  This decrease was primarily caused by a shift in
our product mix and the impact of lower sales volume over the prior year. Cost
of revenue as a percentage of net revenue decreased to 38% for fiscal year ended
September 30, 2009 from 43% in fiscal year 2008. This change was primarily
attributable to an increase of our non-system related revenue.
  Research
and Development Expenses
  Research
and development expenses consist primarily of costs related to personnel and
overhead, consultant expenses and other costs associated with design,
development, prototyping and testing of our products and enhancements of our
converged telephone system software. Research and development expenses increased
17% to $4.9 million in 2009 from $4.2 million in fiscal year 2008. The
increase in R&D expense in absolute dollars was driven by an increase in
personnel-related expense of approximately $353,000 and an increase of $110,000
in consulting related services. Research and development expenses as a
percentage of revenue increased from 22% in fiscal year 2008 to 28% in fiscal
year 2009.
  Sales
and Marketing Expenses
  Sales and
marketing expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales and customer support
functions, as well as trade shows, advertising, and promotional expenses. Sales
and marketing expenses decreased by approximately $515,000, or 7% from
$7.6 million in fiscal year 2008 to $7.0 million in fiscal year 2009.
The expense decrease in fiscal 2009, as compared to fiscal 2008 in absolute
dollars, was primarily driven by a decrease of approximately $81,000 in partner
conference expenses and $394,000 in advertising expenses. Sales and marketing
expenses as a percentage of net revenue for both fiscal years 2009 and 2008 were
40%.
  General
and Administrative Expenses
  General
and administrative expenses consist of salaries and related expenses for
executive, finance, human resources and administrative personnel, facilities,
allowance for doubtful accounts, legal and other general corporate expenses.
General and administrative expenses increased 10% to $3.6 million in 2009
from $3.3 million in 2008. The increase in absolute dollars in general and
administrative was primarily attributable to an increase of $353,000 in legal
expenses associated with corporate governance matters, such as expenses related
to our special meeting of stockholders held on June 18, 2009, the adoption of
our 2009 Stock Plan and our 2009 Purchase Plan, and the preferred stock rights
agreement filed with the SEC on April 23, 2009. Other factors included an
increase of $133,000 in service-related expenses.  These increased
expenses were partially offset by a decrease of $132,000 in non-cash stock based
compensation expenses and a decrease of $47,000 in travel related expenses.
General and administrative expenses as a percentage of revenue increased from
18% in fiscal year 2008 to 21% in fiscal year 2009.
  35
  Equity
Investment in Common Stock of Private Company
  In July
2004, we purchased common stock of a private Korean telecommunications company
for approximately $79,000. As a result of this investment, we acquired
approximately 23% of the voting power of the company. This gives us the right to
nominate and elect one of the three members of the company's current board of
directors. We are accounting for this investment using the equity method and
record our minority interest of their results in our results of operations. For
the fiscal years ended September 30, 2009 and 2008, product sales revenue
from this company was approximately $19,000 and $49,000, respectively. Our
accounts receivable from this company increased to $22,000 as of September 30,
2009 from $18,000 as of September 30, 2008. As of September 30, 2009 and 2008,
total equity in net losses of the Korea investee was approximately $9,000 and
$3,000, respectively. Our investment in the Korean company had a book value of
approximately $7,000 and $16,000 as of September 30, 2009 and 2008,
respectively.
  Interest
Expense and Other Income, Net
 
 Interest
expense primarily consists of interest incurred on our capital lease commitments
and other income primarily consists of interest earned on cash, cash equivalents
and short-term investments. Net interest and other income decreased to $118,000
in fiscal year 2009 from $310,000 in fiscal year 2008. The decrease in interest
and other income, net in fiscal year 2009 as compared to fiscal year 2008 was a
combination of lower invested balances, reduced cash balances and reduced rates
of interest available for cash and investments in financial assets in fiscal
2009.
  Liquidity
and Capital Resources
 
 Cash,
cash equivalents and short-term investments as of September 30, 2010 were $6.5
million, a decrease of approximately $873,000 compared to the balance of $7.4
million as of September 30, 2009. These balances were comprised of the
following:
 
 2010
                
                
                2009
                
                
                2008(Inthousands)Cash
      and cash equivalents
                
                $
                3,776
                
                
                $
                7,397
                
                
                $
                9,467Short-term
      investments
                
                
                2,748
                
                
                
                —
                
                
                
                400Total cash, cash equivalents and short-term
      investments
                
                $
                6,524
                
                
                $
                7,397
                
                
                $
                9,867
 
 The
following table shows the major components of our consolidated statements of
cash flows for the last three fiscal years:
 
 FiscalYearEndedSeptember 30,2010
                
                
                2009
                
                
                2008(Inthousands)Cash
      and cash equivalents, beginning of period
                
                $
                7,397
                
                
                $
                9,467
                
                
                $
                6,111Cash
      (used in) provided by operating activities
                
                
                (743
                )
                
                
                (2,196
                )
                
                
                77Cash
      (used in) provided by investing activities
                
                
                (3,034
                )
                
                
                (139
                )
                
                
                3,300Cash
      (used in) provided by financing activities
                
                
                93
                
                
                
                103
                
                
                
                (21
                )Effect
      of exchange rate changes on cash and cash equivalents
                
                
                63
                
                
                
                162
                
                
                
                —Cash
      and equivalents, end of period
                
                $
                3,776
                
                
                $
                7,397
                
                
                $
                9,467
  36
  In fiscal
year 2010, our net cash used in operating activities was $743,000, as compared
to net cash used in operating activities of $2.2 million during the same period
in fiscal 2009. This was primarily attributable to our net loss of $1.7 million
for fiscal year 2010, a decrease of $527,000 in accounts receivable, an increase
of $119,000 in net inventories and an increase of $217,000 in prepaid and other
current assets. The cash impact of the loss for the twelve months ended
September 30, 2010 was partially offset by a non-cash expense of $602,000 in
stock-based compensation and $188,000 in depreciation and amortization costs.
The decrease in accounts receivable was primarily due to lower shipments during
fiscal year 2010 and good collections during the fourth quarter of fiscal year
2010. Accounts receivable are generally collected within 30 days of the agreed
terms.
  Net
accounts receivable decreased 34% from $1.5 million at September 30, 2009 to
$1.0 million at September 30, 2010. Accounts receivable number of days’ sales
outstanding (DSO) decreased from 29 days as of September 30, 2009 to 24 days as
of September 30, 2010. The net accounts receivable and DSO decrease was
primarily due to lower revenue during fiscal year 2010 and good collection
activity during the fourth quarter of fiscal year 2010.
 
 Net
inventories increased 9% from $1.3 million at September 30, 2009 to
$1.4 million at September 20, 2010. The increase in net inventories during
this period was the result of routine period to period fluctuations. Our
annualized inventory turn rate, which represents the number of times inventory
is replenished during the year, decreased from 5.5 turns as of September 30,
2009 to 3.6 turns as of September 30, 2010. While the amount of inventory we
carry fluctuates each period based on the timing of large inventory purchases
from overseas suppliers, the Company is working to reduce inventory levels
modestly while still meeting customer needs. Inventory management will continue
to be an area of focus as we balance the need to maintain strategic inventory
levels to help ensure competitive lead times with the risk of inventory
obsolescence due to rapidly changing technology and customer
requirements.
 
 We ended
fiscal year 2010 with a cash conversion cycle of 21 days, as compared to 55 days
during fiscal year 2009. The cash conversion cycle is the duration between
purchase of inventories and services and the collection of the cash from the
sale of our products and services and is a metric on which we have focused as we
continue to try to efficiently manage our assets. The cash conversion cycle
results from the calculation of (a) the days of sales outstanding added to (b)
the days of supply in inventories and reduced by (c) the days of payable
outstanding.  The decrease in our cash conversion cycle was primarily
due to quicker collections during the fourth quarter of fiscal
2010.
 
 Net cash
used in investing activities was $3.0 million in fiscal year 2010, as compared
to net cash used in investing activities of 139,000 in fiscal year 2009. This
was directly related to proceeds from maturities of short-term investments of
approximately $2.2 million and purchases of short-term investments of
approximately $5.0 million in fiscal year 2010 as compared to proceeds from
maturities of short-term investments of approximately $5.8 million and purchases
of short-term investments of approximately $5.4 million during fiscal 2009. The
maturities of the Company’s short term investments are staggered throughout the
year so that cash requirements are met. During fiscal year 2010, the Company
spent approximately $300,000 on purchases of property and equipment compared to
$328,000 in fiscal year 2009.
  Net cash provided by financing
activities was approximately $93,000, as compared to net cash provided by
financing activities of $103,000 during fiscal 2009. During fiscal 2010,
proceeds from issuance of common stock under employee stock plans represented
approximately $93,000, as compared to $122,000 in fiscal
2009.
  We
believe our existing balances of cash, cash equivalents and short-term
investments, as well as cash expected to be generated from operating activities,
will be sufficient to satisfy our working capital needs, capital expenditures
and other liquidity requirements associated with our existing operations over
the next 12 months.
  Our cash
needs depend on numerous factors, including market acceptance of and demand for
our products, our ability to develop and introduce new products and enhancements
to existing products, the prices at which we can sell our products, the
resources we devote to developing, marketing, selling and supporting our
products, the timing and expense associated with expanding our distribution
channels, increases in manufacturing costs and the prices of the components we
purchase, as well as other factors. If we are unable to raise additional capital
or if sales from our new products or enhancements are lower than expected, we
will be required to make additional reductions in operating expenses and capital
expenditures to ensure that we will have adequate cash reserves to fund
operations.
 
 Additional
financing, if required, may not be available on acceptable terms, or at all. We
also may require additional capital to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
If we cannot raise additional funds in the future if needed, on acceptable
terms, we may not be able to further develop or enhance our products, take
advantage of opportunities, or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business. Even if additional
financing is available, we may be required to obtain the consent of our
stockholders, which we may or may not be able to obtain. In addition, the
issuance of equity or equity-related securities will dilute the ownership
interest of our stockholders and the issuance of debt securities could increase
the risk or perceived risk of investing in our securities.
  37
  We did
not have any material commitments for capital expenditures as of September 30,
2010. We had total outstanding commitments on noncancelable operating leases of
$2.1 million as of September 30, 2010. Lease terms on our existing facility
operating leases generally range from three to nine years. We believe that we
have sufficient cash reserves to allow us to continue our current operations for
more than a year.
  Contractual
Obligations
  The
Company leases certain facilities under various operating lease agreements
expiring on various dates through December 2014. The following table presents
certain commitments that will require the use of cash in future periods under
contractual obligations with minimum firm commitments as of September 30,
2010:
 
 Payments Due by PeriodContractual Obligations
                                          
                                          Total
                                          
                                          
                                          Payments
                                            Due in Less
                                            Than 1 Year
                                          
                                          
                                          Payments
                                            Due in
                                            1 - 3 Years
                                          
                                          
                                          Payments
                                            Due in
                                            4 - 5Years
                                          
                                          
                                          Payments
                                            Due in More
                                            Than 5 Years(In
      thousands)Operating
      leases obligation(1)
                                          
                                          $
                                          2,148
                                          
                                          
                                          $
                                          520
                                          
                                          
                                          $
                                          1,606
                                          
                                          
                                          $
                                          22
                                          
                                          
                                          $
                                          —
 (1)  Refer
to discussion of “Commitments
and Contingencies,”Note to Consolidated Financial
Statements.
  Recently
Issued Accounting Pronouncements
 
 For
additional information regarding recently issued accounting pronouncements, see
Note 2 to our Consolidated Financial Statements in Item 8 of this
Annual Report on Form 10-K.
  Item 7A.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Market
Risk Disclosures
 
 At
September 30, 2010, our investment portfolio consisted of investment-grade fixed
income securities, excluding those classified as cash and cash equivalents, with
fair value of $2.7 million. These securities are subject to interest rate risk
and will decline in value if market interest rates increase. Our interest income
and expense is most sensitive to fluctuations in the general level of U.S.
interest rates. As such, changes in U.S. interest rates affect the interest
earned on our cash, cash equivalents and short-term investments, and the fair
value of those investments. Due to the short duration and conservative nature of
these instruments, we do not believe that we have a material exposure to
interest rate risk. For example, if market interest rates were to increase
immediately and uniformly by 10% from levels as of September 30, 2010, the
decline in the fair value of the portfolio would not have a material effect on
our results of operations over the next fiscal year.
  Foreign
Currency Exchange Risk
 
 We
transact a portion of our business in non-U.S. currencies, primarily the Chinese
Yuan (Renminbi). We bill a majority of our customers in U.S.
dollars.  Although the fluctuation of currency exchange rates may
impact our customers, and thus indirectly impact us, we do not attempt to hedge
this indirect and speculative risk.  We monitor our foreign currency
exposure; however, as of September 30, 2010, we believe our foreign currency
exposure is not material enough to warrant foreign currency hedging. In the
short term, we do not foresee foreign exchange currency fluctuations to pose a
material market risk to us. In future periods over the long term, we anticipate
we will be exposed to fluctuations in foreign currency exchange rates on
accounts receivable from sales in these foreign currencies and the net monetary
assets and liabilities of the related foreign subsidiary located in Shanghai,
China. A hypothetical 10% favorable or unfavorable change in foreign currency
exchange rates would not have a material impact on our results of
operations.
  38
  Item 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
  The
financial statements required by this item are incorporated by reference from
Part IV Item 15(a) 1 and 2 hereof.
  1.           INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  The
following Consolidated Financial Statements are filed as part of this
report:
 
 PageReport
      of Independent Registered Public Accounting Firm
              56Consolidated
      Balance Sheets as of September 30, 2010 and 2009
              57Consolidated
      Statements of Operations for the years ended September 30, 2010, 2009
      and 2008
              58Consolidated
      Statements of Stockholders' Equity and Comprehensive Income for the years
      ended September 30, 2010, 2009, and 2008
              59Consolidated
      Statements of Cash Flows for the years ended September 30, 2010,
      2009, and 2008
              60Notes
      to Consolidated Financial Statements
              61Selected
      Quarterly Financial Data
              78
  2.           INDEX
TO FINANCIAL STATEMENT SCHEDULE
  The
following financial statement schedule is submitted herewith:
 
 Schedule II—Valuation
      and Qualifying Accounts
                79
  39
  Item
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  None.
  Item
9A.  CONTROL AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
 
 We
maintain “disclosure controls and procedures,” as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
  Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we recently implemented
additional disclosure controls and procedures and carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rule 13a-15(e)) as of September 30,
2010.  Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2010.
  Management’s
Report on Internal Controls over Financial Reporting
 
 Management
is responsible for establishing and maintaining an adequate system of internal
controls over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles (“GAAP”).
 
 Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that:
  ·
              pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect our transactions and dispositions of our
      assets;
  ·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that
      receipts and expenditures of our business are being made only in
      accordance with authorizations of our management and directors;
      and
  ·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.
 
 Management
has conducted, with the involvement of our Chief Executive Officer and Chief
Financial Officer, an assessment, including testing of the effectiveness of our
internal controls over financial reporting as of September 30,
2010.  Management’s assessment of internal controls over financial
reporting was based on the framework in Internal Control over Financial
Reporting — Guidance for Smaller Public Companies (2006) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.  Based on this
assessment, management concluded that our system of internal controls over
financial reporting was effective as of September 30, 2010.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this annual report.
  40
  Changes
in Internal Control over Financial Reporting
 
 There
have not been any changes in the Company’s internal control over financial
reporting during the fourth quarter of fiscal 2010 that have materially
affected, or are reasonably likely to materially affect the Company’s internal
control over financial reporting.
 
 We
believe that our present internal control program has been effective at a
reasonable assurance level to ensure that our financial reporting has not been
materially misstated.  Nonetheless, we will continue to review, and
where necessary, enhance our internal control design and documentation, ongoing
risk assessment, and management review as part of our internal control
program.
  Item
9B.  OTHER INFORMATION
 
 On
February 23, 2010, the Board of Directors of the Company unanimously approved a
plan to voluntarily delist the Company’s common stock from the NASDAQ Capital
Market and to move its common stock listing to the OTCQX U.S. over-the-counter
market. In connection therewith, the Company notified the NASDAQ Capital
Market on March 5, 2010 of its intention to delist and filed a Form 25 with the
SEC on March 15, 2010, which became effective ten (10) days following its
filing.
 
 Following
delisting from the NASDAQ Capital Market, the Company’s common stock was quoted
on the OTCQX U.S., a centralized electronic quotation service for
over-the-counter securities, operated by Pink OTC Markets, Inc. The Company
intends to continue to comply with OTCQX alternate reporting standards,
including annual audited financial statements beginning in the first quarter of
fiscal year 2011. The Company expects that its common stock will continue to
trade on OTCQX so long as market makers demonstrate an interest in trading in
the common stock and the Company maintains compliance with applicable rules and
regulations.
 
 On
November 2, 2010, the Company filed a Certification of Notice of Termination of
Registration on Form 15 with the Securities and Exchange Commission (SEC) to
voluntarily deregister its common stock and suspend its reporting obligations
under the Securities Exchange Act of 1934. The Company expects the Certification
of Notice of Termination of Registration to take effect within ninety (90) days
of the filing with the SEC. Following the filing of this annual report, the
Company’s obligations to file certain reports with the SEC, including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K, will immediately be suspended. We expect that this annual report will
be the last filing made by the Company under the Exchange Act. The Company’s
common stock will continue to be quoted on the OTCQX U.S. over-the-counter
market, operated by Pink OTC Markets, Inc. after deregistration. We intend to
continue to make current financial information available on a regular basis
consistent with the applicable rules of Pink OTC Markets, Inc and OTCQX
U.S.
  41
  PART
III
  Item
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  1.     Directors
and Executive Officers:
   THE
BOARD OF DIRECTORS
  Pursuant
to our Bylaws, our Board of Directors is divided into three (3) classes. The
directors are elected to serve staggered three-year terms, such that the term of
one class of directors expires each year. We currently have five (5) directors
divided among the three classes as follows: Class I— Tacheng Chester Wang
and Alan Howe; Class II—Mike Mon Yen Tsai and Jeremiah J. Fleming; and
Class III—Gilbert Hu.
 
 Set forth
below is information regarding our incumbent directors.
 
 Name
                                            
                                            Age
                                            
                                            TermClass
      III DirectorGilbert
      Hu
                                            
                                            54
                                            
                                            Term
      expiring in 2011Class
      I DirectorsTacheng
      Chester Wang(1)(2)
                                            
                                            63
                                            
                                            Term
      expiring in 2012Alan
      B. Howe(1)
                                            
                                            49
                                            
                                            Term
      expiring in 2012Class
      II DirectorsJeremiah
      J. Fleming
                                            
                                            53
                                            
                                            Term
      expiring in 2013Mike
      Mon Yen Tsai(1)(2)(3)
                                            
                                            60
                                            
                                            Term
      expiring in
2013
 
 (1)   Member
of the Audit Committee
 (2)   Member
of the Compensation Committee
 (3)   Member
of the Nominating and Corporate Governance Committee
 
 Gilbert Hu founded AltiGen
Communications, Inc. in May 1994. He has served as Chairman of the Board of
Directors of the Company since its inception in May 1994. From May 1994 until
September 2010, he served as Chief Executive Officer of the Company. Since
October 2010, Mr. Hu has served as President of Asia Pacific of AltiGen. Prior
to AltiGen, Mr. Hu was founder, President and CEO of Centrum Communications, a
pioneer in the remote networking industry, which was acquired by 3Com
Corporation in early 1994. Mr. Hu has also served in technical and managerial
roles at Vitalink Corporation, Convergent Technologies, and Luxcom. Mr. Hu
earned an M.S. in Electrical Engineering from Arizona State University and
received a B.S. in Electrical Engineering from National Chiao-Tung University in
Taiwan.
 
 Jeremiah J. Fleming is
currently Chief Executive Officer, President and Director. Mr. Fleming has been
a member of the Board of Directors of AltiGen since July 2007and served as
President and Chief Operating Officer from April 2007 to September 2010. From
March 1997 to March 2007, Mr. Fleming has served as a member of the executive
management team of Interactive Intelligence, Inc. When Interactive Intelligence
launched its Vonexus subsidiary in 2004 to focus on Microsoft-based IP
communications solutions, Mr. Fleming was appointed President of Vonexus. In
that role, he was responsible for corporate strategy, management, business
development and overall financial performance. Mr. Fleming originally joined
Interactive Intelligence, Inc. as Vice President of Sales in 1997 to drive the
inaugural launch of the company’s enterprise communications software. Following
Interactive Intelligence’s initial public offering in 1999, Mr. Fleming was
promoted to Executive Vice President of Sales for the Americas, Europe, Middle
East and Africa. Previously, he spent five years at Software Artistry Inc. in
various management positions, including Vice President, Domestic Sales from
January 1995 to February 1997. Mr. Fleming holds a B.A. and an M.B.A. from the
University of Missouri.
 
 Tacheng Chester Wang has
served as a member of the Board of Directors of AltiGen since October 2003.
In April 2000, Mr. Wang co-founded Acorn Campus, LLC, a
$100 million incubator/venture fund, where he currently serves as a general
partner. Mr. Wang is also a founding member of Acorn Angels, an investor
development support conglomerate. From April 1984 to April 2000,
Mr. Wang served as the Chairman of Pacific Rim Financial Corp., a real
estate development company. Mr. Wang received a B.S. in Physics from
Tsinghua University in Taiwan and a Ph.D. in Physics from the University of
Oregon.
  42
 
 Mike Mon Yen Tsai has been a
member of the Board of Directors of AltiGen since July 2004. Since September
2005, Mr. Tsai has served as the Chairman and CEO of UpperVision, Inc., a
pioneer in enterprise security policy management. Since August 1995, Mr. Tsai
has also served as the Chairman of Salutron, Inc., a consumer electronics
company. From February 2004 to July 2004, Mr. Tsai served as the General Manager
and Executive Vice President of Verisity, Ltd, an electronics design automation
company.  From January 1997 to February 2004, Mr. Tsai served as the
President and Chief Executive Officer of Axis Systems, Inc., an electronics
design automation company. Mr. Tsai is also an active investor in emerging
growth companies. Mr. Tsai received a Ph.D. from University of Illinois at
Urbana-Champaign in Electrical Engineering in 1978.
 
 Alan B. Howe has been a member
of the Board of Directors of AltiGen since April 2009. Mr. Howe is currently
Managing Partner of Broadband Initiatives, LLC and oversees the firm’s
operations. Mr. Howe also serves as Managing Director at B. Riley & Co.,
LLC, in their Corporate Governance Advisory Services Group in Los Angeles. Mr.
Howe is also a member of the board of directors of Ditech Networks (Nasdaq:
 DITC), Co-Chairman of Selectica, Inc. (Nasdaq:  SLTC) and Chairman of
Proxim Wireless (OTCQX: PRXM). In addition, Mr. Howe serves on a number of
private boards. From the period beginning May of 2005 to October of 2008, Mr.
Howe also served as Vice President of Strategic Development for Covad
Communications Group, Inc., a nationwide provider of integrated voice and data
communications. From April 1995 to April 2001, Mr. Howe served as the Vice
President of Finance and Corporate Development and Chief Financial Officer of
Teletrac, Inc. Previously, Mr. Howe worked in several positions with Sprint
Corporation, including Director of Corporate Development, and as Assistant Vice
President for Manufacturers Hanover Trust (now JP Morgan). Mr. Howe holds a B.S.
in Business Administration and Marketing from the University of Illinois, and an
MBA in Finance from Indiana University’s Kelley Graduate School of
Business.
 
 2.     Committees
of the Board of Directors
 
 The Audit
Committee currently consists of Messrs. Wang, Tsai and Howe. The Board has
determined that each member of the Audit Committee is an "independent director"
as defined in Rule 5605 of the Nasdaq Marketplace Rules, as may be modified
or supplemented to date. Furthermore, the Board has determined that at least one
member of the Audit Committee, Mr. Wang, serves as our audit committee financial
expert. The Audit Committee held four meetings during the last fiscal year. The
Audit Committee is responsible for retaining our independent auditors,
pre-approving all audit and non-audit services provided by AltiGen’s auditors,
reviewing and discussing with management the results and scope of audit and
other services provided by the independent auditors and reviewing the accounting
principles and auditing practices and procedures to be used in our financial
statements. The Board of Directors adopted an amended and restated charter for
the Audit Committee in July 2004.
 
 The
Compensation Committee currently consists of Messrs. Wang and Tsai.
Messrs. Wang and Tsai are each considered to be "independent directors" as
defined in Rule 5605 of the Nasdaq Marketplace Rules, as may be modified or
supplemented to date. The Compensation Committee met four times in the last
fiscal year. The Compensation Committee reviews and makes recommendations to the
Board of Directors regarding the compensation of executive officers and other
managerial employees. The Compensation Committee also reviews and approves
option grants.
 
 The
Nominating Committee currently consists of Mr. Tsai.  The Board has
determined that Mr. Tsai is considered to be an "independent director" as
defined in Rule 5605 of the Nasdaq Marketplace Rules, as may be modified or
supplemented to date.  The Nominating Committee was formed in July
2004. Prior to such time, the Company did not have a Nominating Committee. The
Nominating Committee assists the Board in identifying qualified individuals to
become directors, monitors the process to assess Board effectiveness and helps
develop and implement the Company’s corporate governance guidelines. The
Nominating Committee also considers nominees proposed by
stockholders.
  43
  3.     Code
of Business Conduct and Ethics
 
 Our Board
of Directors adopted a Code of Conduct for all directors, officers and employees
on July 26, 2004. Our Code of Conduct is posted on our website at http://www.altigen.com/company_investors-conduct.html.
We intend to disclose any amendment to, or waivers of, the provisions of our
Code of Conduct that apply specifically to our Chief Executive Officer, Chief
Financial Officer, Controller or persons performing similar functions by posting
such information on our website. A copy of this Code of Conduct can be obtained
free of charge through our investor relations department.
 
 4.    Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Securities Exchange Act of 1934, generally requires the Company's
directors, executive officers and persons who own more than 10% of a registered
class of the Company's equity securities (“10% owners”) to file with the
Securities and Exchange Commission (“SEC”) initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company.  Directors, executive officers and 10% owners are
required by SEC regulations to furnish the Company with copies of all Section
16(a) reports that they file.  To the Company's knowledge, based
solely on review of copies of such reports furnished to us and verbal
representations that no other reports were required to be filed during the
fiscal year ended September 30, 2010, all Section 16(a) filing requirements
applicable to our directors, executive officers and 10% owners were
met.
 
 5.Independent
RegisteredPublic
Accounting Firm and Audit Committee Financial Experts
 
 Established
in June 1999, the Audit Committee makes recommendations to the Board of
Directors regarding the selection of the independent registered public
accounting firm, pre-approves all audit and non-audit services provided by
AltiGen’s independent public accountants, reviews and discusses with management
the results and scope of audit and other services provided by the independent
registered public accounting firm and reviews the accounting principles and
auditing practices and procedures to be used in AltiGen's financial statements.
Each member of the Audit Committee is an “independent director” as defined in
Rule 5605 of the National Association of Securities Dealers' listing
standards. Tacheng Chester Wang serves as our audit committee financial
expert.
  Item
11.  EXECUTIVE COMPENSATION
  COMPENSATION
DISCUSSION AND ANALYSIS
 
 Overview
 
 The
Compensation Committee acts on behalf of the board of directors and, by
extension, the stockholders of the Company to establish, implement and
continually monitor adherence with the Company’s compensation philosophy. The
Compensation Committee ensures that the total compensation paid to the Company’s
executive officers is competitive and consistent with the Company’s compensation
philosophy and the Compensation Committee’s charter, a copy of which may be
obtained on the Company’s website at www.altigen.com. The
Compensation Committee generally relies upon management, but may also consider
outside compensation consultants to provide information and recommendations to
establish specific compensation packages for executives.
 
 Philosophy
and Objectives
 
 AltiGen’s
executive compensation policies are designed to attract and retain qualified
executives who will contribute to its long-term success, to reward executives
for achieving AltiGen’s financial goals, and to align executive compensation and
stockholder interests through equity-based plans. The Compensation Committee
believes that strong financial performance, on a sustained basis, is the most
certain avenue through which AltiGen can positively affect long-term stockholder
return. Furthermore, the Compensation Committee believes that, in order to
attract and retain the most qualified executives in the industry, AltiGen’s
compensation policies must be competitive with other companies of comparable
size and in similar industries and must reinforce strategic performance
objectives through the use of incentive compensation programs. In order to
provide incentives to executive officers, a portion of their annual compensation
is paid as a bonus. The amount of the bonus for each person is determined on the
basis of several indicators of corporate performance as outlined
below.
  44
  Role
of Executive Officers in Compensation Decisions
 
 The
Compensation Committee makes all compensation decisions for the named executive
officers and approves recommendations regarding equity awards to all
employees.
 
 The Chief
Executive Officer annually reviews the performance of each other executive
officer and makes recommendations to the Compensation Committee regarding salary
adjustments, annual bonus targets and amounts and annual stock option grants.
The Compensation Committee reviews the performance of the Chief Executive
Officer. The Compensation Committee decisions are based in part, on these annual
performance reviews, including with respect to salary adjustments, annual bonus
amounts and annual stock option grants. The Compensation Committee can exercise
its discretion to modify any recommendations of the Chief Executive
Officer.
 
 Setting
Executive Compensation
 
 Based on
the foregoing goals, the Compensation Committee has structured the Company’s
overall executive compensation in order to make the Company competitive from a
compensation standpoint when compared to its peers and to reward strong
performance.  In order to aid the Compensation Committee in obtaining
its objectives, the Compensation Committee relies upon management and may engage
an outside compensation consulting firm to provide it with information and
recommendations with respect to compensation matters. The Compensation Committee
also considers the Company’s overall performance as well as the individual
performance of its executive officers when determining cash bonuses and salary
adjustments.
 
 In making
compensation decisions, the Compensation Committee gathers and analyzes data and
suggestions, including data on the compensation peer group of publicly-traded
and privately-held technology companies. This peer group consists of companies
against which the Compensation Committee believes the Company must compete for
talent and for stockholder investment.
 
 While
AltiGen typically competes with many larger companies for executive talent, the
Compensation Committee maintains total compensation at levels appropriate for a
company of its size. The Compensation Committee believes that the potential for
increase in the value of the equity underlying the Company’s stock option grants
creates a powerful incentive for its employees when compared to the awards
issued by larger companies.
 
 2010
Executive Compensation Components
 
 For the
fiscal year ended September 30, 2010, the principal components of compensation
for named executive officers were:
  ·
              Base
      salary;
  ·
              Cash
      bonus;
  ·
              Stock
      option grants;
  ·
              Retirement
      and other benefits; and
  ·
              Perquisites
      and other benefits.
 
 Base
Salary
 
 The
Compensation Committee reviews each executive officer’s base salary
annually.  The Compensation Committee believes that executive salaries
must be sufficiently competitive to attract and retain key
executives.  Base pay and annual increases are determined
(A) primarily through an analysis of each individual’s salary and total
target compensation relative to salaries for similar positions within AltiGen
and peer companies and (B) to a lesser extent, through a subjective
analysis of each individual’s contributions to AltiGen’s success.
 
 Salary
levels are typically considered annually as part of AltiGen’s performance review
process.  Stock price performance has not been a factor in determining
annual base salary compensation because the price of the Company's common stock
is subject to a variety of factors outside our control.
  45
 
 Cash
Bonus
 
 AltiGen’s
executive bonus plan provides for incentive compensation to some but not all of
its executive officers and other key employees and will be determined by a
percentage of AltiGen’s revenue or accounts receivable
collected.  Individual performance is measured based on goals related
to each person's function within the organization.  Bonuses generally
are awarded to executives if AltiGen meets or exceeds prescribed revenue
objectives.  If AltiGen fails to meet these objectives, awards may be
significantly reduced or even eliminated if minimum thresholds are not achieved.
Conversely, if AltiGen overachieves these objectives, awards may be
significantly increased above target thresholds.  In the fiscal year
ended September 30, 2010, the Compensation Committee established a total
2010 target incentive bonus amount (“Target Bonus”) for three of AltiGen’s
executive officers (including the CEO). The Target Bonus ranged from 0.44% to
0.87% of annual target revenue. The Compensation Committee used AltiGen’s
historical data to determine target bonuses and award actual bonuses. Bonus pay
ranges from monthly to quarterly. Bonus targets are established at the beginning
of the year.
 
 Long-Term
Incentive Compensation—Stock Option Grants
 
 AltiGen’s
option plans provide for long-term incentive compensation for employees of
AltiGen, including executive officers. Grants under our equity compensation
programs enable the Company to:
  ·
              Enhance
      the link between the creation of stockholder value and long-term executive
      incentive compensation;
  ·
              Provide
      an opportunity for increased equity ownership by executives;
      and
  ·
              Maintain
      competitive levels of total compensation, thereby helping AltiGen to
      attract and retain valuable
executives.
 
 AltiGen
currently grants equity awards to executive officers in the form of stock
options. The Compensation Committee continues to choose stock options as
AltiGen’s equity compensation vehicle because stock options provide high
incentives to build stockholder value. Stock options have value only if the fair
market value of AltiGen’s common stock increases, thereby aligning the interests
of executive officers and stockholders and providing incentives to maximize
stockholder value. Further, stock options granted to executive officers
generally vest over four years. This vesting schedule not only encourages the
executive officers to remain with AltiGen over that period of time, but also
encourages the executive officers to build value that can be sustained over
time.
 
 Stock
option awards are granted at the Compensation Committees’ meetings throughout
the year and are determined by the Compensation Committee in its sole
discretion.  Continuing executive officers generally receive annual
stock option grants at the meeting in the second quarter of the year; however,
when appropriate throughout the year, the Compensation Committee grants new hire
options, promotion options and, if it feels it is appropriate, additional
supplemental option grants.  In November of 2009, the Compensation
Committee granted common stock to certain of its employees as a bonus in order
to retain its valued employees in light of the Company-wide salary reduction in
April of 2009. During fiscal year 2010, Messrs. Wang and Tsai served on the
Compensation Committee, which held 4 meetings over the course of the year. The
Compensation Committee considers recommendations by management with respect to
grants to newly hired or promoted executives at the first meeting following such
employee’s hire or promotion, as the case may be. The Compensation Committee may
make grants at other times in connection with employee retention or
otherwise.
 
 Stock
options are awarded at an exercise price equal to the closing price of AltiGen’s
common stock on the date of the grant. The Compensation Committee has never
granted options with an exercise price that is less than the closing price of
AltiGen’s common stock on the grant date. AltiGen has no program or practice to
time option grants in connection with the release of material non-public
information.
 
 Options
generally vest over multiple years, which provides incentives for the executive
officers to remain with AltiGen. The number of options the Compensation
Committee grants to each officer and each option’s vesting schedule are
determined based on a variety of factors, including (1) the executive’s position
at AltiGen, (2) his or her individual performance as assessed by the Chief
Executive Officer in his annual review and by the Compensation Committee with
respect to the Chief Executive Officer's performance, and (3) other factors,
including independent equity compensation survey data.
  46
 
 Vesting
ceases upon termination of employment, and the vested stock options may
generally be exercised for three months following the date of
termination.  Prior to the exercise of an option, the holder has no
rights as a stockholder with respect to the shares subject to such option,
including voting rights and the right to receive dividends or dividend
equivalents. At this time, AltiGen has not adopted stock ownership guidelines
with respect to the executive officers or otherwise. AltiGen has an insider
trading policy that prohibits, among other things, short sales, hedging of stock
ownership positions, and transactions involving derivative securities relating
to AltiGen’s common stock.
 
 Retirement
and Other Benefits
 
 All
employees in the United States, including our executive officers, are eligible
to participate in the our 401(k) plan, medical and dental insurance, employee
stock purchase plan, as well as our life and disability insurance policy. The
401(k) plan and other generally available benefit programs allow AltiGen to
remain competitive for employee talent, and we believe that the availability of
such benefit programs enhances employee loyalty and productivity. The benefit
programs are primarily intended to provide all eligible employees with
competitive and quality healthcare and financial protection for retirement.
These benefit programs typically do not factor into decisions regarding
executive compensation packages.
 
 Profit
Sharing Plan
 
 AltiGen
also maintains a profit-sharing plan.  The employee profit-sharing
plan has been established to share with each employee, including executive
officers, the rewards of a profitable company. The profit sharing pool will
consist of approximately ten percent (10%) of our quarterly profit from
operations before taxes.
 
 Perquisites
and Other Personal Benefits
 
 AltiGen
does not provide perquisites and other personal benefits.
 
 Compensation
of the Chief Executive Officer
 
 The
Compensation Committee determines the CEO’s compensation following criteria
similar to those used to determine the compensation for our other executive
officers.  Our CEO is the person most responsible for AltiGen’s
overall performance and as such a greater portion of his potential compensation
is tied to the financial performance of AltiGen.
  Severance
and Change of Control Protection
 
 We
believe that severance protections can play a valuable role in retaining and
attracting executive officers.  For this reason, in March 2009, we
entered into employment agreements with Gilbert Hu, Chairman of the Board of
Directors and President of Asia Pacific, and Philip McDermott, our Chief
Financial Officer and in December 2007, we had entered into an employment
agreement with Jeremiah J. Fleming, our Chief Executive Officer and President.
Through these agreements, AltiGen provides severance compensation in the form of
severance pay, continued payment of health care premiums and acceleration of
outstanding equity awards if the executive’s employment is terminated under
certain conditions, including a termination without cause or for good
reason.  The Compensation Committee believes these arrangements are
necessary to ensure that these three senior executives are focused on AltiGen’s
goals and objectives as well as the best interests of stockholders rather than
potential personal economic exposure under these particular
circumstances.
 
 In
addition, the agreements provide some benefits in connection with a change of
control, including that each of the executive’s stock options will vest
immediately upon a change of control and that if any “golden parachute” excise
taxes are triggered in connection with the change of control, AltiGen will
“gross-up” the executives for this tax liability, so that the executive retains
the same amount of value as if the excise tax had not been applied. We recognize
that it is possible that AltiGen may be involved in a transaction involving a
change of control, and that this possibility could result in the departure or
distraction of our executives to the detriment of our business.  We
also recognize that the occurrence, or potential occurrence, of a change of
control transaction will create uncertainty regarding the continued employment
of our executive officers.  To allow our executives to focus solely on
making decisions that are in the best interests of our stockholders in the event
of a possible, threatened, or pending change of control, and to encourage them
to remain with AltiGen despite the possibility that the change of control might
affect them adversely, we have provided these three executives with protection
from change of control-related excise taxes and with option acceleration, which
also provides these executives with an incentive to maximize the value of our
common stock upon a change of control for the benefit of all
stockholders.
  47
  Accounting
and Tax Implications
 
 Deductibility
of Executive Compensation
 
 Section 162(m)
of the Internal Revenue Code imposes limitations on the deductibility for
federal income tax purposes of compensation in excess of $1 million paid to
certain executive officers in a taxable year. Compensation in excess of
$1 million may only be deducted if it is “performance-based compensation”
within the meaning of the Code.  For fiscal year 2010, AltiGen’s stock
options and bonuses did not qualify as performance-based compensation and
therefore counted toward the $1 million limit.  For fiscal year
2010, the compensation paid to the executive officers did not exceed
$1 million and therefore was fully deductible to AltiGen.
 
 The
Compensation Committee currently intends to continue to consider the
advisability of qualifying its executive compensation as performance-based
compensation for purposes of Code Section 162(m) deductibility. To the
extent we determine it is in the best interests of AltiGen, we may in the future
seek to qualify certain compensation paid to the executive officers as
performance-based compensation.  Currently, the Compensation Committee
believes that the total compensation paid by AltiGen will not affect the tax
deductions available to it with respect to the compensation of any of its
executive officers.
 
 Accounting
for Stock-Based Compensation
 
 Beginning
on October 1, 2005, the Company began accounting for stock-based payments
in accordance with the requirements of SFAS 123(R).
 
 Compensation
of Executive Officers
 
 The
following table summarizes the compensation paid during the years ended
September 30, 2010 and 2009 to the Company's Principal Executive Officer and the
Company’s two highly compensated executive officers other than the Principal
Executive Officer, all of whom are collectively referred to as the “Named
Officers.”
 
 Name and Principal Position
                                Fiscal
                                  Year
                                
                                Salary ($)
                                
                                
                                Bonus ($)
                                
                                
                                Option
                                  Awards ($)(1)
                                
                                
                                Non-Equity
                                  Incentive Plan
                                  Compensation
                                  ($)(2)
                                
                                
                                All Other
                                  Compensation
                                  ($)(3)
                                
                                
                                Total ($)Gilbert
      Hu
                                2010
                                
                                
                                177,508
                                
                                
                                
                                115,093
                                
                                
                                
                                35,760
                                
                                
                                
                                —
                                
                                
                                
                                4,892
                                
                                
                                
                                333,253Chairman
      of the Board and President of Asia Pacific
                                2009
                                
                                
                                188,754
                                
                                
                                
                                114,609
                                
                                
                                
                                50,954
                                
                                
                                
                                —
                                
                                
                                
                                5,400
                                
                                
                                
                                359,717Jeremiah
      J. Fleming
                                2010
                                
                                
                                170,000
                                
                                
                                
                                148,929
                                
                                
                                
                                80,121
                                
                                
                                
                                —
                                
                                
                                
                                6,522
                                
                                
                                
                                405,572Chief
      Executive Officer, President and Director
                                2009
                                
                                
                                185,000
                                
                                
                                
                                155,527
                                
                                
                                
                                120,766
                                
                                
                                
                                —
                                
                                
                                
                                7,200
                                
                                
                                
                                468,493Philip
      M. McDermott
                                2010
                                
                                
                                170,000
                                
                                
                                
                                77,909
                                
                                
                                
                                37,687
                                
                                
                                
                                —
                                
                                
                                
                                6,522
                                
                                
                                
                                292,118Chief
      Financial Officer
                                2009
                                
                                
                                185,000
                                
                                
                                
                                77,581
                                
                                
                                
                                46,907
                                
                                
                                
                                —
                                
                                
                                
                                7,200
                                
                                
                                
                                316,688
 
 (1)
              The
      amounts shown in this column represent the share-based compensation
      expense the Company recognized, in our Consolidated Statement of
      Operations for fiscal years 2010 and 2009, in conformity with SFAS 123(R).
      The amounts shown here do not represent actual payments received by the
      Named Officer. Instead, the amounts shown are the aggregate expense
      recognized for financial statement reporting purposes in 2010, as
      determined pursuant to SFAS 123R.
 (2)
              Non-Equity
      Incentive Plan Compensation includes profit sharing paid to the above
      Named Officers. The employee profit sharing plan has been established to
      share with each employee the rewards of a profitable company. The profit
      sharing pool will consist of approximately ten percent (10%) of AltiGen’s
      quarterly profit from operations before
taxes.
 (3)
              All
      other compensation includes issuance of common stock as a
      bonus.  The awards granted to the Named Officers in fiscal year
      2010 fully vested on date of grant. Additionally, the recipient did not
      pay a purchase or exercise price. We recorded stock-based compensation
      cost for these stock award bonuses based on the closing fair market value
      of the Company’s common stock on the date of
  grant.
  48
  Stock
Options Granted in the Fiscal Year Ended September 30, 2010
  The
following table summarized the fiscal 2010 stock options granted to the Named
Officers and directors.
 
 Name
                
                Grant Date
                
                Number of
                    Shares of Stock
                    Awards Granted
                    (#) (1)
                
                
                Number of
                    Securities
                    Underlying
                    Options Granted
                    (#) (2)
                
                
                Exercise of
                    Base Price
                    of Option
                    Awards
                    ($/Share)
                
                
                Grant Date
                    Fair Value of
                    Option
                    Awards
                    ($) (4)Gilbert
      Hu
                
                08/31/2010
                
                
                
                
                
                100,000
                (2)
                
                
                0.74
                
                
                
                57,31911/17/2009
                
                
                5,436
                
                
                
                
                
                
                
                
                
                
                
                4,892Jeremiah
      J. Fleming
                
                08/31/2010
                
                
                
                
                
                
                100,000
                (2)
                
                
                0.74
                
                
                
                57,31911/17/2009
                
                
                7,247
                
                
                
                
                
                
                
                
                
                
                
                6,522Philip
      McDermott
                
                08/31/2010
                
                
                
                
                
                
                100,000
                (2)
                
                
                0.74
                
                
                
                57,31911/17/2009
                
                
                7,247
                
                
                
                
                
                
                
                
                
                
                
                6,522Tacheng
      Chester Wang
                
                08/31/2010
                
                
                —
                
                
                
                20,000
                (3)
                
                
                0.74
                
                
                
                6,322Mike
      Mon Yen Tsai
                
                08/31/2010
                
                
                —
                
                
                
                20,000
                (3)
                
                
                0.74
                
                
                
                6,322Alan B. Howe
                
                08/31/2010
                
                
                —
                
                
                
                20,000
                (3)
                
                
                0.74
                
                
                
                6,322
 
 (1)
              On
      November 17, 2009, the Compensation Committee granted common stock to
      certain of its employees as a bonus in order to retain its valued
      employees in light of the Company-wide reduction in April of
      2009.  In connection therewith, each of Messrs. Hu, Fleming and
      McDermott received stock award shares as a
  bonus.
 (2)
              Each
      of these options was granted pursuant to the Company's 2009 Stock Option
      Plan. All such options vest over a four-year period, subject to continued
      employment with the Company. The exercise price of each option set forth
      above was the closing price of our stock on the OTCQX market on the grant
      date.
 (3)
              Each
      of these options was granted pursuant to the Company's 2009 Stock Option
      Plan. All such options vest over twelve months period and the option
      provided for 100% acceleration upon change of control. The exercise price
      of each option set forth above was the closing price of our stock on the
      OTCQX market on the grant date.
 (4)
              The
      value of option awards is based on the fair value as of the grant date of
      such award determined pursuant to FAS 123R.  The exercise price
      for all options granted to the Named Executive Officers is 100% of the
      fair market value of the shares on the grant date. The option exercise
      price has not been deducted from the amounts indicated above. Regardless
      of whatever value is placed on a stock option on the grant date, the
      actual value of the option will depend on the market value of AltiGen’s
      common stock at such date in the future when the option is exercised. The
      proceeds to be paid to the individual following this exercise do not
      include the option exercise
price.
  49
  Outstanding
Equity Awards at September 30, 2010
 
 The
following table summarizes the value of options held at September 30, 2010
by our Named Officers.  The value of unexercised in-the-money options
at September 30, 2010 figures are based on the difference between $0.75,
which is the closing price of our common stock as quoted on the OTCQX market as
of the close of business on September 30, 2010, and each option’s per-share
exercise price, multiplied by the number of shares issued upon exercise of the
option.
 
 Option AwardsNumber of Securities Underlying
                                          Unexercised Options (#)Name
                                        
                                        Option Grant
                                          Date
                                        
                                        
                                        Exercisable
                                        
                                        
                                        Unexercisable
                                        
                                        
                                        Option Exercise
                                          Price ($)
                                        
                                        Option
                                          Expiration DateGilbert
      Hu
                                        
                                        11/11/2002
                                        (1)
                                        
                                        
                                        80,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        0.60
                                        
                                        11/11/201208/31/2010
                                        (2)
                                        
                                        
                                        2,083
                                        
                                        
                                        
                                        97,917
                                        
                                        
                                        
                                        0.74
                                        
                                        08/31/2020Jeremiah
      J. Fleming
                                        
                                        08/31/2010
                                        (2)
                                        
                                        
                                        2,083
                                        
                                        
                                        
                                        97,917
                                        
                                        
                                        
                                        0.74
                                        
                                        08/31/2020Philip
      McDermott
                                        
                                        11/11/2002
                                        (1)
                                        
                                        
                                        46,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        0.60
                                        
                                        11/11/201208/31/2010
                                        (2)
                                        
                                        
                                        2,083
                                        
                                        
                                        
                                        97,917
                                        
                                        
                                        
                                        0.74
                                        
                                        08/31/2020
 
 (1)
              Each of these options was granted
      pursuant to the Company’s 1999 Stock Option Plan. All such options vest
      over a four-year period, subject to continued employment with the Company
      in accordance with the following vesting schedule: 25% of the shares
      subject to the option shall vest twelve (12) months after the grant date
      and 1/48th of the shares subject to the option shall vest each month
      thereafter.  The exercise price of each option set forth above
      was the closing price of our stock on NASDAQ Capital Market on the grant
      date.
 (2)
              Each
      of these options was granted pursuant to the Company’s 2009 Stock Option
      Plan. All such options vest over a four-year period, subject to continued
      employment with the Company in accordance with the following vesting
      schedule: option shall vest monthly in equal installments. The exercise
      price of each option set forth above was the closing price of our stock on
      OTCQX market on the grant date.
  Option
Exercises and Value Realized on Exercise
 
 During
fiscal year ended September 30, 2010, our Named Officers did not exercise any of
their vested options.
 
 Director
Compensation
 
 The table
below summarizes the cash, equity awards and stock awards earned by or paid or
awarded to each of our directors during the fiscal year ended September 30,
2010.
 
 Name
                      
                      Fees Earned
                        or Paid in
                        Cash ($)
                      
                      
                      Value of
                        Outstanding
                        Option wards
                        ($) (1)
                      
                      
                      Value of Stock
                        Awards ($)(2)
                      
                      
                      Total ($)Gilbert
      Hu
                      
                      
                      4,000
                      
                      
                      
                      35,760
                      
                      
                      
                      4,892
                      
                      
                      
                      44,652Jeremiah
      J. Fleming
                      
                      
                      4,000
                      
                      
                      
                      80,121
                      
                      
                      
                      6,522
                      
                      
                      
                      90,643Tacheng
      Chester Wang
                      
                      
                      12,625
                      
                      
                      
                      4,890
                      
                      
                      
                      —
                      
                      
                      
                      17,515Mike
      Mon Yen Tsai
                      
                      
                      12,625
                      
                      
                      
                      4,890
                      
                      
                      
                      —
                      
                      
                      
                      17,515Alan B. Howe
                      
                      
                      12,625
                      
                      
                      
                      7,347
                      
                      
                      
                      —
                      
                      
                      
                      19,972
 
 (1)
              These
      dollar amounts reflect the compensation expenses recognized by our company
      in fiscal year 2010 for financial statement reporting purposes in
      accordance with Statement of Financial Accounting Standard No. 123,
      Share-Based Compensation (“FAS 123R”). These amounts do not represent
      payments actually received by the
directors.
 (2)
              On
      November 17, 2009, the Compensation Committee granted common stock to
      certain of its employees as a bonus in order to retain its valued
      employees in light of the Company-wide reduction in April of 2009. In
      connection therewith, each of Messrs. Hu and Fleming received stock awards
      as bonuses.
  50
  Item
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 
 The
following table sets forth information regarding the beneficial ownership of
shares of our common stock as of November 30, 2010.  The table shows
ownership by:
  ·
              each
      person or entity known to us to beneficially own five percent (5%) or more
      of the shares of our outstanding
stock;
  ·
              each
      of our directors;
  ·
              each
      of our Named Officers;
  ·
              each
      nominee for director, if such person is not currently a director or
      executive officer; and
  ·
              all
      of our directors, executive officers and director nominees as a
      group.
 
 This
information is based on information received from or on behalf of the named
individuals.  The column entitled “Options” consists of shares of
common stock subject to options exercisable or currently exercisable within 60
days of November 30, 2010, which are deemed to be outstanding for the purpose of
computing the percentage ownership of the person holding the
options.  As of November 30, 2010, AltiGen had 16,494,758 shares
outstanding.
 
 Unless
otherwise indicated, the principal address of each of the stockholders below is:
c/o AltiGen Communications, Inc., 410 East Plumeria Drive, San Jose, California
95134.  Except as otherwise indicated in the footnotes to this table,
and subject to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares of our
common stock beneficially owned by them.
 
 Name and Address of Beneficial Owner
                      
                      Number of
                        Shares
                        Beneficially
                        Owned
                      
                      
                      Options
                      
                      
                      Percentage of
                        Shares
                        Beneficially
                        Owned5%
      Stockholders:Lloyd
      I. Miller, III (1)
                        4650
      Gordon Drive
                        Naples,
      FL 34102
                      
                      
                      2,043,461
                      
                      
                      
                      —
                      
                      
                      
                      12.4
                      %Eric
      D. Wanger (2)
                        401
      N. Michigan Avenue, Suite 1301
                        Chicago,
      IL 60611
                      
                      
                      1,618,617
                      
                      
                      
                      —
                      
                      
                      
                      9.8
                      %Norman
      H. Pessin (3)
                        366
      Madison Avenue, 14th
      Floor
                        New
      York, NY 10017
                      
                      
                      1,202,720
                      
                      
                      
                      —
                      
                      
                      
                      7..3
                      %Directors
      and Executive Officers:Gilbert
      Hu (4)
                      
                      
                      865,103
                      
                      
                      
                      405,971
                      
                      
                      
                      7.5
                      %Jeremiah
      J. Fleming
                      
                      
                      615,815
                      
                      
                      
                      242,970
                      
                      
                      
                      5.1
                      %Philip
      McDermott
                      
                      
                      46,940
                      
                      
                      
                      264,816
                      
                      
                      
                      1.9
                      %Mike
      Mon Yen Tsai
                      
                      
                      —
                      
                      
                      
                      55,834
                      
                      
                      
                      *Tacheng
      Chester Wang
                      
                      
                      —
                      
                      
                      
                      55,834
                      
                      
                      
                      *Alan
      B. Howe
                      
                      
                      —
                      
                      
                      
                      7,500
                      
                      
                      
                      *All directors and executive officers as a group (6
      persons)
                      
                      
                      1,527,858
                      
                      
                      
                      1,032,925
                      
                      
                      
                      14.5
                      %
 
 *
              Less
      than 1%.
 (1)
              According
      to a Form 4 filed with the SEC on September 8, 2010 by Lloyd I. Miller,
      III, Mr. Miller has sole voting and dispositive power with respect to
      1,454,975 reported shares as a manager of a limited liability company that
      is the general partner of a certain limited partnership and shared voting
      and dispositive power with respect to 588,486 reported shares as an
      investment advisor to the trustee of certain family
  trusts.
 (2)
                According
      to a Schedule 13D/A filed with the SEC on October 20, 2009, 1,618,617
      shares are held of record by Wanger Long Term Opportunity II, LP
      (“WLTOF”). Each of WLTOF, Wanger Investment Management, Inc. ("WIM") as an
      investment portfolio manager for WLTOF, WLTOF GP LLC ("GP") as general
      partner of WLTOF, and Mr. Wanger as President of WIM and managing
      member of GP, has shared voting and dispositive power with respect to the
      shares held by WLTOF.  WIM disclaims beneficial ownership of the
      shares held by WLTOF.  GP and Mr. Wanger disclaim
      beneficial ownership of the shares held by WLTOF except to the extent of
      any beneficial interest in
WLTOF.
  51
 
 (3)
                According
      to a Schedule 13D/A filed with the SEC on October 18, 2010 by Norman
      H. Pessin and Sandra F. Pessin. Mr. Pessin has sole voting and dispositive
      power with respect to 1,022,484 shares of common stock and Sandra F.
      Pessin has sole voting and dispositive power with respect to 180,236
      shares.
 (4)
              Includes
      11,978 shares registered in the name of Mr. Hu's wife
      May Kuei-Rong Hu, 30,000 shares registered in the name of
      Mr. Hu’s daughter, Michelle Hu, and 99,841 shares registered in the
      name of Mr. Hu's daughter, Stephanie
Hu.
  Equity
Compensation Plan Information
  The
following table summarizes information about our existing equity compensation
plans as of September 30, 2010. All outstanding awards relate to our common
stock.
 
 Plan category
                      
                      Number of securities
                        to be issued upon
                        exercise of
                        outstanding options,
                        warrants and rights
                        (a)
                      
                      
                      Weighted-
                        average exercise
                        price of
                        outstanding
                        options,
                        warrants and
                        rights
                        (b)
                      
                      
                      Number of
                        securities
                        remaining available
                        for future issuance
                        under equity
                        compensation
                        plans (excluding
                        securities reflected
                        in column (a)) (c)Equity
      compensation plans approved bysecurity
      holders:Option
      plans
                      
                      
                      5,094,740
                      
                      
                      $
                      0.89
                      
                      
                      
                      1,744,087Employee
      stock purchase plan
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,363,904Equity
      compensation plans not approved by security holders
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      
                      5,094,740
                      
                      
                      $
                      0.89
                      
                      
                      
                      3,107,991
  Item
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
 Policies
and Procedures
 
 The
Company has a policy regarding the review and approval of related party
transactions. Potential related party transactions are identified through an
internal review process and those transactions that are determined to be
interested transactions with related parties are submitted for review and
approval or ratification by the Audit Committee.  In determining
whether to approve or ratify an interested transaction, the Audit Committee
takes into account, among other factors it deems appropriate, whether the
interested transaction is on terms no less favorable than terms generally
available to an unaffiliated third party under the same or similar circumstances
and the extent of the related person’s interest in the
transaction.  No director shall participate in the approval of an
interested transaction for which he or she is a related party, except that the
director shall provide all material information concerning the transaction to
the Audit Committee.
 
 Board
Meetings and Committees
 
 Our Board
of Directors held a total of four meetings during the fiscal year ended
September 30, 2010. The committees of the Board of Directors include an
Audit Committee, a Compensation Committee and the Nominating Committee. During
the last fiscal year, no director attended fewer than 75% of the sum of the
total number of meetings of the Board of Directors and the total number of
meetings of the committees upon which that director served, held subsequent to
his becoming a director or his appointment to such committee. The independent
directors of the Board of Directors periodically meet separately in executive
sessions (i.e., without any members of management present) to discuss corporate
business and governance. During the last fiscal year, one such executive session
was held. While members of our Board of Directors are not required to attend our
annual meeting of stockholders, they are encouraged to attend. Last year,
Jeremiah J. Fleming attended our annual meeting.
  52
 
 Director
Independence
 
 The Board
of Directors has determined that Messrs. Wang, Tsai and Howe constitute a
majority of the Board of Directors, that during 2010 each was independent under
the rules applicable to NASDAQ listed companies, and none of them are believed
to have any relationships that, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a Director. The Company moved its stock listing from the
NASDAQ to the OTCQX U.S. effective March 16, 2010 and no longer is required to
meet the NASDAQ requirements for director independence.
  Item
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Audit
Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
 
 The Audit
Committee pre-approves all audit and permissible non-audit services provided by
the independent auditors. These services may include audit services,
audit-related services, tax services and other services. The Audit Committee has
adopted a policy for the pre-approval of services provided by the independent
auditors. Under the policy, pre-approval generally is provided for up to one (1)
year and any pre-approval is detailed as to the particular service or category
of services and is subject to a specific budget. In addition, the Audit
Committee may also pre-approve particular services on a case-by-case basis. For
each proposed service, the independent auditor is required to provide detailed
back-up documentation at the time of approval. The Audit Committee may delegate
pre-approval authority to one or more of its members. Such member must report
any decisions to the Audit Committee at the next scheduled meeting.
 
 Audit
and Non-Audit Fees
 
 The
following table presents fees for professional audit services rendered by Moss
Adams LLP for the audit of our annual financial statements for the year ended
September 30, 2010 and 2009 and fees billed for other services rendered by Moss
Adams LLP during those periods. All services provided by Moss Adams LLP in
fiscal years 2010 and 2009 were pre-approved by the Audit
Committee.
 
 Fiscal Year Ended
                          September 30,2010
                        
                        
                        2009(In thousands)Audit
      Fees(1)
                        
                        $
                        266
                        
                        
                        $
                        245Audit-Related
      Fees(2)
                        
                        
                        4
                        
                        
                        
                        24Tax
      Fees(3)
                        
                        
                        26
                        
                        
                        
                        24All
      Other Fees(4)
                        
                        
                        —
                        
                        
                        
                        —Total
                        
                        $
                        296
                        
                        
                        $
                        293
 
 (1)
              Audit
      Fees consist of fees related to professional services rendered in
      connection with the audit of our consolidated annual financial statements,
      quarterly review of the interim consolidated financial statements included
      in our Forms 10-Q, and audit services provided in connection with other
      statutory and regulatory filings.
 (2)
              Audit-Related
      Fees consist of fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of our
      consolidated financial statements and are not reported under “Audit Fees.”
      These services include consultations concerning financial accounting and
      reporting standards.
 (3)
              Tax
      Fees consist of fees related to professional services rendered for tax
      compliance and tax planning (domestic and international). These services
      include assistance regarding federal, state and international tax
      compliance and tax planning.
 (4)
              All
      Other Fees consist of fees for products and services other than the
      services reported above. During fiscal 2010 and 2009, Moss Adams LLP did
      not provide any services other than as described
  above.
  53
  PART
IV
  Item
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  (a)           The
following documents are filed as a part of this Annual Report on
Form 10-K.
  1.
              Financial
      Statements and Financial Statement Schedule – See Index to Financial
      Statements and Financial Statement Schedule at Item 8 of this annual
      report on Form 10-K.
  2.
              Exhibits.
      The following exhibits are filed as part of, or incorporated by reference
      into, this Report (numbered in accordance with Item 601 of Regulation
      S-K):
 
 Exhibit
                        Number
                      
                      Description3.1(1)
                      
                      Amended
      and Restated Certificate of Incorporation.3.2(5)
                      
                      Second
      Amended and Restated Bylaws.3.3(10)
                      
                      Certificate
      of Designation of Rights, Preferences and Privileges of Series A
      Participating Preferred Stock of AltiGen Communications,
    Inc.4.1(11)
                      
                      Preferred
      Stock Rights Agreement, dated as of April 21, 2009, between AltiGen
      Communications, Inc. and Computershare Trust Company, N.A., including the
      Certificate of Designation, the form of Rights Certificate and the Summary
      of Rights attached thereto as Exhibits A, B and C,
      respectively.4.2(1)
                      
                      Specimen
      common stock certificates.4.3(1)
                      
                      Third
      Amended and Restated Rights Agreement dated May 7, 1999 by and among
      AltiGen Communications, Inc. and the Investors and Founder named
      therein.10.1(1)
                      
                      Form
      of Indemnification Agreement.10.2(1)
                      
                      1994
      Stock Option Plan, as amended, and form of stock option
      agreement.10.3(4)
                      
                      1999
      Stock Plan, as amended, and form of stock option
  agreement.10.4(3)
                      
                      1999
      Employee Stock Purchase Plan, as amended, and forms of subscription
      agreement and notice of withdrawal.10.5
                      
                      Lease
      agreement: 410 East Plumeria Drive, San Jose, California between FSP
      Montague Business Center Corp., a Delaware Corporation and AltiGen
      Communications, Inc., dated April 16, 2009.10.6(1)
                      
                      Employment
      Agreement by and between the Registrant and Philip McDermott, dated
      June 8, 1999.10.7(9)
                      
                      Amended
      and Restated Executive Employment Agreement by and between Philip
      McDermott and the Company, dated March 6, 2009.10.8(7)
                      
                      Executive
      Employment Agreement by and between Jeremiah J. Fleming and the Company,
      dated December 18, 2007.10.9(9)
                      
                      Executive
      Employment Agreement by and between Gilbert Hu and the Company, dated
      March 6, 2009.10.10(2)++
                      
                      OEM
      Agreement between AltiSys Communications and AltiGen Communications, Inc.,
      dated January 18, 1999.10.12(4)++
                      
                      Distribution
      Agreement between Synnex Information Technologies, Inc. and AltiGen
      Communications, Inc. dated December 22, 1999.10.14++
                      
                      Reseller
      Agreement between Fiserv Solutions, Inc. and AltiGen Communications, Inc.
      dated August 28, 2009.10.15(12)
                      
                      2009
      Equity Incentive Plan and form of stock option agreement
      thereunder.10.16(12)
                      
                      2009
      Employee Stock Purchase Plan.21.1(1)
                      
                      Subsidiaries
      of the
Registrant.
  54
  23.1
                
                Consent
      of Independent Registered Public Accounting Firm.24.1
                
                Power
      of Attorney (included on signature page).31.1
                
                Certification
      of Principal Executive Officer, filed herewith.31.2
                
                Certification
      of Principal Financial Officer, filed herewith.32.1
                
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
      filed herewith.32.2
                
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
      filed herewith.
 
 (1)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form S-1 (No. 333-80037) declared effective on October 4,
      1999.
 (2)
              Incorporated
      by reference to exhibit filed with the Registrant's Quarterly Report on
      Form 10-Q for the quarter ended December 31,
  2001.
 (3)
              Incorporated
      by reference to exhibit filed with the Registrant's Annual Report on
      Form 10-K for the fiscal year ended September 30,
      2002.
 (4)
              Incorporated
      by reference to exhibit filed with the Registrant's Annual Report on
      Form 10-K for the fiscal year ended September 30,
      2003.
 (5)
              Incorporated
      by reference to exhibit filed with the Registrant's Quarterly Report on
      Form 10-Q for the quarter ended March 31,
  2004.
 (7)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-K
(No. 000-27427).
 (8)
              Incorporated
      by reference to exhibit filed with the Registrant's Annual Report on
      Form 10-K for the fiscal year ended September 30, 2007
      (No. 000-27427).
 (9)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-K on March 10, 2009.
 (10)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-A on April 23, 2009.
 (11)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-K on April 23, 2009.
 (12)
                Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form S-8 on June 29, 2009.
 ++
              Confidential
      treatment was granted for certain portions of this
  exhibit.
 
 (b)
              Exhibits:
      See list of exhibits under (a)(2)
above.
 
 (c)
              Financial
      Statement Schedules: See list of schedules under (a)(1)
    above.
  55
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders of
 AltiGen
Communications, Inc.
 San Jose,
California
  We have
audited the accompanying consolidated balance sheets of AltiGen Communications,
Inc. and subsidiary (the "Company") as of September 30, 2010 and 2009, and the
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 2010, 2009 and 2008. Our audits also included the
financial statement schedule for the years ended September 30, 2010 and
2009 listed in the Index at Item 15(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AltiGen Communications, Inc.
and subsidiary as of September 30, 2010 and 2009, and the consolidated
results of their operations and their cash flows for the periods ended
September 30, 2010, 2009 and 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
  /s/ MOSS
ADAMS LLP
  Santa
Clara, California
 December 13,
2010
  56
  ALTIGEN
COMMUNICATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 
 September 30,2010
                      
                      
                      2009(In thousands, except share
                        and per shareamounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      3,776
                      
                      
                      $
                      7,397Short-term
      investments
                      
                      
                      2,748
                      
                      
                      
                      —Accounts
      receivable, less allowance for doubtful accounts of $10 and $35,
      respectively
                      
                      
                      1,018
                      
                      
                      
                      1,545Inventories
                      
                      
                      1,385
                      
                      
                      
                      1,266Prepaid
      expenses and other current assets
                      
                      
                      345
                      
                      
                      
                      128Total
      current assets
                      
                      
                      9,272
                      
                      
                      
                      10,336Property,
      plant and equipment, net
                      
                      
                      613
                      
                      
                      
                      501Long-term
      investments
                      
                      
                      198
                      
                      
                      
                      202Long-term
      deposit
                      
                      
                      278
                      
                      
                      
                      292Total
      assets
                      
                      $
                      10,361
                      
                      
                      $
                      11,331LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                      
                      $
                      1,306
                      
                      
                      $
                      1,165Accrued
      liabilities:Payroll
      and related benefits
                      
                      
                      381
                      
                      
                      
                      672Warranty
                      
                      
                      119
                      
                      
                      
                      122Marketing
                      
                      
                      130
                      
                      
                      
                      111Accrued
      expenses
                      
                      
                      266
                      
                      
                      
                      215Other
      accrued liabilities
                      
                      
                      435
                      
                      
                      
                      484Total
      accrued liabilities
                      
                      
                      1,331
                      
                      
                      
                      1,604Deferred
      revenue, short-term
                      
                      
                      2,448
                      
                      
                      
                      2,573Total
      current liabilities
                      
                      
                      5,085
                      
                      
                      
                      5,342Other
      long-term liabilities
                      
                      
                      469
                      
                      
                      
                      232Commitments
      and contingencies (Note 4)Stockholders’
      equity:Convertible
      preferred stock, $0.001 par value; Authorized—5,000,000 shares;
      Outstanding—none at September 30, 2010 and September 30,
      2009
                      
                      
                      —
                      
                      
                      
                      —Common
      stock, $0.001 par value; Authorized—50,000,000 shares;
      Outstanding—16,494,758 shares at September 30, 2010 and 16,188,857 shares
      at September 30, 2009
                      
                      
                      18
                      
                      
                      
                      17Treasury
      stock at cost—1,318,830 shares at September 30, 2010 and
      September 30, 2009
                      
                      
                      (1,400
                      )
                      
                      
                      (1,400
                      )Additional
      paid-in capital
                      
                      
                      68,410
                      
                      
                      
                      67,716Accumulated
      other comprehensive income
                      
                      
                      228
                      
                      
                      
                      165Accumulated
      deficit
                      
                      
                      (62,449
                      )
                      
                      
                      (60,741
                      )Total
      stockholders’ equity
                      
                      
                      4,807
                      
                      
                      
                      5,757Total
      liabilities and stockholders’ equity
                      
                      $
                      10,361
                      
                      
                      $
                      11,331
  The
accompanying notes are an integral part of the financial
statements.
  57
  ALTIGEN
COMMUNICATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 Fiscal Year Ended September 30,2010
                
                
                2009
                
                
                2008(In thousands, except per share
                  amounts)Net
      revenue:Hardware
                
                $
                10,552
                
                
                $
                12,279
                
                
                $
                15,192Software
                
                
                2,394
                
                
                
                2,304
                
                
                
                2,614Service
      support
                
                
                3,699
                
                
                
                2,802
                
                
                
                1,091Total
      net revenue
                
                
                16,645
                
                
                
                17,385
                
                
                
                18,897Cost
      of revenue:Hardware
                
                
                5,467
                
                
                
                6,588
                
                
                
                7,828Software
                
                
                20
                
                
                
                16
                
                
                
                231Service
      support
                
                
                —
                
                
                
                —
                
                
                
                —Total
      cost of revenue
                
                
                5,487
                
                
                
                6,604
                
                
                
                8,059Gross
      profit
                
                
                11,158
                
                
                
                10,781
                
                
                
                10,838Operating
      expenses:Research
      and development
                
                
                4,577
                
                
                
                4,924
                
                
                
                4,216Sales
      and marketing
                
                
                5,248
                
                
                
                7,037
                
                
                
                7,552General
      and administrative
                
                
                3,114
                
                
                
                3,654
                
                
                
                3,322Total
      operating expenses
                
                
                12,939
                
                
                
                15,615
                
                
                
                15,090Loss
      from operations
                
                
                (1,781
                )
                
                
                (4,834
                )
                
                
                (4,252
                )Equity
      in net income (loss) of investee
                
                
                (4
                )
                
                
                (9
                )
                
                
                5Interest
      and other income, net
                
                
                43
                
                
                
                118
                
                
                
                310Net
      loss before taxes
                
                
                (1,742
                )
                
                
                (4,725
                )
                
                
                (3,937
                )Income
      taxes
                
                
                34
                
                
                
                15
                
                
                
                —Net
      loss
                
                $
                (1,708
                )
                
                $
                (4,710
                )
                
                $
                (3,937
                )Basic
      and diluted net loss per share
                
                $
                (0.10
                )
                
                $
                (0.30
                )
                
                $
                (0.25
                )Weighted
      average shares used in computing basic and diluted net loss per
      share
                
                
                16,417
                
                
                
                15,937
                
                
                
                15,745
  The
accompanying notes are an integral part of the financial
statements.
  58
  ALTIGEN
COMMUNICATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 Common
      Stock
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Additional
                                                                    
                                                                    
                                                                    Accumulated
                                                                      Other
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    TotalShares
                                                                    
                                                                    
                                                                    Amount
                                                                    
                                                                    
                                                                    Treasury
                                                                      Stock
                                                                    
                                                                    
                                                                    Paid-in
                                                                      Capital
                                                                    
                                                                    
                                                                    Comprehensive
                                                                      Loss
                                                                    
                                                                    
                                                                    AccumulatedDeficit
                                                                    
                                                                    
                                                                    Stockholders’
                                                                      Equity(In
      thousands, except per share data)BALANCE,
      SEPTEMBER 30, 2007
                                                                    
                                                                    
                                                                    15,669,657
                                                                    
                                                                    
                                                                    $
                                                                    16
                                                                    
                                                                    
                                                                    $
                                                                    (1,014
                                                                    )
                                                                    
                                                                    $
                                                                    65,434
                                                                    
                                                                    
                                                                    $
                                                                    3
                                                                    
                                                                    
                                                                    $
                                                                    (52,094
                                                                    )
                                                                    
                                                                    $
                                                                    12,345Net
      loss
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (3,937
                                                                    )
                                                                    
                                                                    
                                                                    (3,937
                                                                    )Change
      in unrealized loss on investments
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    —Cumulative
      foreign currency translation
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    —Total
      comprehensive loss
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (3,937
                                                                    )Repurchase
      of treasury stock
                                                                    
                                                                    
                                                                    (231,135
                                                                    )
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (367
                                                                    )
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (367
                                                                    )Common
      stock issued under stock plans
                                                                    
                                                                    
                                                                    338,781
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    345
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    346Stock-based
      compensation
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    910
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    910BALANCE,
      SEPTEMBER 30, 2008
                                                                    
                                                                    
                                                                    15,777,303
                                                                    
                                                                    
                                                                    
                                                                    17
                                                                    
                                                                    
                                                                    
                                                                    (1,381
                                                                    )
                                                                    
                                                                    
                                                                    66,689
                                                                    
                                                                    
                                                                    
                                                                    3
                                                                    
                                                                    
                                                                    
                                                                    (56,031
                                                                    )
                                                                    
                                                                    
                                                                    9,297Net
      loss
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (4,710
                                                                    )
                                                                    
                                                                    
                                                                    (4,710
                                                                    )Change
      in unrealized loss on investments
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (3
                                                                    )
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (3
                                                                    )Cumulative
      foreign currency translation
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    165
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    165Total
      comprehensive loss
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (4,548
                                                                    )Repurchase
      of treasury stock
                                                                    
                                                                    
                                                                    (23,800
                                                                    )
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (19
                                                                    )
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (19
                                                                    )Common
      stock issued under stock plans
                                                                    
                                                                    
                                                                    435,354
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    286
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    286Stock-based
      compensation
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    741
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    741BALANCE,
      SEPTEMBER 30, 2009
                                                                    
                                                                    
                                                                    16,188,857
                                                                    
                                                                    
                                                                    
                                                                    17
                                                                    
                                                                    
                                                                    
                                                                    (1,400
                                                                    )
                                                                    
                                                                    
                                                                    67,716
                                                                    
                                                                    
                                                                    
                                                                    165
                                                                    
                                                                    
                                                                    
                                                                    (60,741
                                                                    )
                                                                    
                                                                    
                                                                    5,757Net
      loss
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (1,708
                                                                    )
                                                                    
                                                                    
                                                                    (1,708
                                                                    )Change
      in unrealized loss on investments
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    —Cumulative
      foreign currency translation
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    63
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    63Total
      comprehensive loss
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (1,645
                                                                    )Repurchase
      of treasury stock
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    —Common
      stock issued under stock plans
                                                                    
                                                                    
                                                                    305,901
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    237
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    238Stock-based
      compensation
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    457
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    457BALANCE,
      SEPTEMBER 30, 2010
                                                                    
                                                                    
                                                                    16,494,758
                                                                    
                                                                    
                                                                    $
                                                                    18
                                                                    
                                                                    
                                                                    $
                                                                    (1,400
                                                                    )
                                                                    
                                                                    $
                                                                    68,410
                                                                    
                                                                    
                                                                    $
                                                                    228
                                                                    
                                                                    
                                                                    $
                                                                    (62,449
                                                                    )
                                                                    
                                                                    $
                                                                    4,807
  The
accompanying notes are an integral part of the financial
statements.
  59
  ALTIGEN
COMMUNICATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 FiscalYearEndedSeptember 30,2010
                
                
                2009
                
                
                2008(In
      thousands)Cash
      flows from operating activities:Net
      loss
                
                $
                (1,708
                )
                
                $
                (4,710
                )
                
                $
                (3,937
                )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                
                
                188
                
                
                
                250
                
                
                
                265Stock-based
      compensation
                
                
                602
                
                
                
                905
                
                
                
                910Equity
      in net income (loss) of investee
                
                
                4
                
                
                
                9
                
                
                
                (2
                )Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                527
                
                
                
                878
                
                
                
                233Inventories
                
                
                (119
                )
                
                
                328
                
                
                
                (27
                )Prepaid
      expenses and other current assets
                
                
                (217
                )
                
                
                48
                
                
                
                61Accounts
      payable
                
                
                141
                
                
                
                (69
                )
                
                
                413Accrued
      liabilities
                
                
                (273
                )
                
                
                (46
                )
                
                
                221Deferred
      revenue, short-term
                
                
                (8
                )
                
                
                165
                
                
                
                1,924Other
      long-term liabilities
                
                
                120
                
                
                
                46
                
                
                
                16Net
      cash (used in) provided by operating activities
                
                
                (743
                )
                
                
                (2,196
                )
                
                
                77Cash
      flows from investing activities:Purchases
      of short-term investments
                
                
                (4,995
                )
                
                
                (5,460
                )
                
                
                (45,097
                )Proceeds
      from sale of short-term investments
                
                
                2,247
                
                
                
                5,860
                
                
                
                48,493Changes
      in long-term deposits
                
                
                14
                
                
                
                (211
                )
                
                
                86Purchases
      of property and equipment
                
                
                (300
                )
                
                
                (328
                )
                
                
                (182
                )Net
      cash (used in) provided by investing activities
                
                
                (3,034
                )
                
                
                (139
                )
                
                
                3,300Cash
      flows from financing activities:Proceeds
      from issuances of common stock, net of issuance costs
                
                
                93
                
                
                
                122
                
                
                
                346Repurchase
      of treasury stock
                
                
                —
                
                
                
                (19
                )
                
                
                (367
                )Net
      cash (used in) provided by financing activities
                
                
                93
                
                
                
                103
                
                
                
                (21
                )Effect
      of changes in exchange rates on cash and cash equivalents
                
                
                63
                
                
                
                162
                
                
                
                —Net
      change in cash and cash equivalents during year
                
                
                (3,621
                )
                
                
                (2,070
                )
                
                
                3,356Cash
      and cash equivalents, beginning of year
                
                
                7,397
                
                
                
                9,467
                
                
                
                6,111Cash
      and cash equivalents, end of year
                
                $
                3,776
                
                
                $
                7,397
                
                
                $
                9,467
  The
accompanying notes are an integral part of the financial
statements.
  60
  ALTIGEN
COMMUNICATIONS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  1.           ORGANIZATION
OF THE COMPANY
  We are a
leading provider of 100 percent Microsoft-based VoIP business phone systems and
Unified Communications solutions. We design, deliver and support VoIP phone
systems and call center solutions that combine high reliability with integrated
IP communications applications.  As one of the first companies to
offer VoIP solutions, AltiGen has been deploying systems since 1996. We have
more than 10,000 customers worldwide with over 15,000 systems in use. Our
telephony solutions are primarily used by small- to medium-sized businesses,
companies with multiple locations, corporate branch offices, and call
centers.
  2.           SIGNIFICANT
ACCOUNTING POLICIES
  Principles
of Presentation
  Our
consolidated financial statements reflect the operations of AltiGen
Communications, Inc. and our wholly-owned subsidiary. The subsidiary is located
in Shanghai, China and was incorporated in November 1998. As of
September 30, 2010, we had approximately $55,000 in long-lived assets
located in China as compared to $45,000 in fiscal year 2009. Our hardware
tooling used to develop the face plate for our MAX1000 Voice over IP phone
system as well as tooling used to develop the IP720 and IP705 phones are located
in Taiwan. All significant intercompany transactions and balances have been
eliminated. Our fiscal year end is September 30. Unless otherwise stated,
all references to fiscal years 2010, 2009, and 2008 refer to the twelve months
ended September 30 of that year.
  Use
of Estimates in Preparation of Financial Statements
  The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Key estimates include provisions for excess and obsolete inventories,
warranty, doubtful account reserve, valuation on tax assets and long-term
investments. Actual results could differ from those estimates.
  Subsequent
Events
 
 The
Company has performed an evaluation of subsequent events through December 13,
2010, the date on which this Annual Report on Form 10-K was filed with the SEC.
Please refer to Part IV, “Subsequent Events,” Notes to
Consolidated Financial Statements for further details.
 
 Concentration
of Risk and Certain Significant Risks and Uncertainties
  We
purchase substantially all our hardware product components from four suppliers
and purchase other manufacturing services from a relatively small number of
suppliers. Our purchases are concentrated with these four suppliers and certain
key chip components of our products are sole sourced. For fiscal years 2010 and
2009 these four suppliers provided 74% and 79%, respectively, of all raw
materials purchased. Loss of one of these suppliers could adversely impact our
operations.
 
 We
believe that changes in any of the following areas could have a material adverse
effect on the Company’s future financial position or results of
operations:
 
 ·
              availability
      of necessary components;
 ·
              changes
      in customer relationships;
 ·
              risks
      associated with having a concentration of a few suppliers;
      and
 ·
              risks
      associated with changes in domestic and international economic and/or
      political conditions or
regulations.
  61
 
 Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash, cash equivalents, investments and
accounts receivable. The Company invests its cash, cash equivalents and
short-term investments in high credit-quality financial institutions. The
Company is exposed to credit riskin the event of default
by these institutions to the extent of the amount recorded on the consolidated
balance sheet. To date, the Company has not experienced losses on these
investments.
  Cash,
Cash Equivalents and Short-Term Investments
  The
Company's policy is to invest in highly-rated securities with strong liquidity
and requires investments to be rated single-A or better. Our investment
portfolio consists principally of investment grade institutional money market
funds, bank term deposits, U.S. Agency securities, corporate bonds and notes and
commercial paper. We consider all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. Short-term
investments are highly liquid financial instruments with original maturities
greater than three months but less than one year and are classified as
"available-for-sale" investments. We classify our available-for-sale securities
as current assets and report them at their fair value. Further, we recognize
unrealized gains and losses related to these securities as an increase or
reduction in shareholders' equity. We evaluate our available-for-sale securities
for impairment quarterly. During fiscal years 2010, 2009 and 2008, we did not
record any impairment on outstanding securities. The Company did not hold any
short-term investments at September 30, 2009.
  The
following table summarizes the Company’s cash and available-for-sale securities
by significant investment category as of September 30, 2010 and September 30,
2009 (in thousands):
  
 September 30,2010SecurityDescription
                  
                  Amortized
                      Cost
                  
                  
                  Unrealized
                      Gains
                  
                  
                  Unrealized
                      Losses
                  
                  
                  Estimated
                      FairValueCash
      and cash equivalents:Cash
                  
                  $
                  2,141
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  2,141Cash
      equivalentsMoney
      market mutual funds
                  
                  
                  1,385
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,385Commercial
      paper
                  
                  
                  250
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  250Total
      cash equivalents
                  
                  
                  1,635
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,635Total
      cash and cash equivalents
                  
                  
                  3,776
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,776Short-term
      investments:Commercial
      paper
                  
                  
                  2,748
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,748Total
      short-term investments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total cash, cash equivalents and short-term
      investments
                  
                  $
                  6,524
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  6,524
  September 30,2009SecurityDescription
                  
                  Amortized
                      Cost
                  
                  
                  Unrealized
                      Gains
                  
                  
                  Unrealized
                      Losses
                  
                  
                  Estimated
                      FairValueCash
      and cash equivalents:Cash
                  
                  $
                  2,769
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  2,769Cash
      equivalentsMoney
      market mutual funds
                  
                  
                  4,628
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,628Commercial
      paper
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      cash equivalents
                  
                  
                  4,628
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,628Total
      cash and cash equivalents
                  
                  
                  7,397
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,397Short-term
      investments:Commercial
      paper
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      short-term investments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      cash, cash equivalents and short-term investments
                  
                  $
                  7,397
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  7,397
 
 Unrealized
gains and losses and realized gains were not significant for both fiscal years
2010 and 2009. The Company reports unrealized gains and losses on its
“available-for-sale” securities in other comprehensive income, a component of
stockholders’ equity.
  62
  Inventories
  Inventories
(which include costs associated with components assembled by third-party
assembly manufacturers, as well as internal labor and allocable overhead) are
stated at the lower of standard cost (which approximates actual cost on a
first-in, first-out basis) or market value. Provisions, when required, are made
to reduce excess and obsolete inventories to their estimated net realizable
values. We regularly monitor inventory quantities on hand and record a provision
for excess and obsolete inventories based primarily on our estimated forecast of
product demand and production requirements for the next six months. We record a
write-down for product and component inventories that have become obsolete or
are in excess of anticipated demand or net realizable value. Raw material
inventory is considered obsolete and is fully reserved if it has not moved in
365 days. In fiscal year 2010, we disposed of fully-reserved inventory with a
carrying value of zero and an original cost at $33,000. The disposal of such
inventory had no material impact on our revenue, gross margins and net loss for
the twelve months ended September 30, 2010. During fiscal years 2010, 2009 and
2008, we recognized a provision of $3,000, $17,000 and $12,000, respectively,
for excess and obsolete inventories. The components of inventories, net of
inventory reserves, include (in thousands):
 
 September 30,2010
                
                
                2009Raw
      materials
                
                $
                562
                
                
                $
                450Work-in-progress
                
                
                12
                
                
                
                29Finished
      goods
                
                
                811
                
                
                
                787Total
                
                $
                1,385
                
                
                $
                1,266
  Property,
Plant and Equipment, Net
  Property,
plant, and equipment are stated at cost. Cost includes purchase cost, applicable
taxes and freight costs. We compute depreciation and amortization using the
straight-line method over the estimated useful lives of the assets, which is
three years except for tooling and leasehold improvements. Our tooling is
depreciated using the greater value between the five year straight-line method
or the number of phones shipped in the period. We depreciate leasehold
improvements over the shorter of the lease term or the improvement’s estimated
useful life. Depreciation expense for fiscal years 2010, 2009 and 2008, was
approximately $132,000, $250,000 and $265,000, respectively. All repairs and
maintenance costs are expensed as incurred.
  Property,
plant and equipment, net, consist of (in thousands):
 
 September 30,2010
                
                
                2009Machinery
      and equipment
                
                $
                395
                
                
                $
                342Furniture
      and equipment
                
                
                1,224
                
                
                
                1,266Tooling
                
                
                675
                
                
                
                675Computer
      software
                
                
                949
                
                
                
                949Leasehold
      improvements
                
                
                106
                
                
                
                77Construction-in-progress
                
                
                235
                
                
                
                31Total
                
                
                3,584
                
                
                
                3,340Accumulated
      depreciation and amortization
                
                
                (2,971
                )
                
                
                (2,839
                )Property
      and equipment, net
                
                $
                613
                
                
                $
                501
  Long-Term
Investments
  As of
September 30, 2010 and September 30, 2009, we held an investment of common
stock of a private Taiwanese telecommunication company valued at approximately
$195,000. This investment is valued using the cost method. Our interest in the
company is approximately 2%, which interest does not allow us to exercise
significant influence.
  63
  In July
2004, we purchased common stock of a private Korean telecommunications company
for approximately $79,000. As a result of this investment, we acquired
approximately 23% of the voting power of the company. This gives us the right to
nominate and elect one of the three members of the Company's current board of
directors. We are accounting for this investment using the equity method and
record our minority interest of their results in our results of operations. As
of September 30, 2010, 2009 and 2008, our investment in the Korean company
had a book value of approximately $3,000, $7,000 and $16,000, respectively. We
recorded $4,000, $9,000 and $3,000 in our proportionate share of the net losses
of our investee for the fiscal years 2010, 2009 and 2008,
respectively.
  We
perform periodic reviews of our investments for impairment. Our investments are
considered impaired when a review of the issuer's operations and other
indicators of impairment indicate that the carrying value of the investment is
not likely to be recoverable. Such indicators include, but are not limited to,
limited capital resources, limited prospects of receiving additional financing,
and limited prospects for liquidity of the related securities. No write-downs
were recorded during fiscal years 2010, 2009 or 2008.
  Foreign
Currency Translation
  The
functional currency of the Company’s foreign subsidiary is the Chinese Yuen
(Renminbi). In consolidation, the Company translates the assets and liabilities
of its Chinese subsidiary at the exchange rate in effect at the balance sheet
date.  The Company translates revenue and expense accounts at average
exchange rates during the period in which the transaction takes
place.  The foreign currency translation is included in accumulated
other comprehensive income, a component of stockholders’ equity.
  Software
Development Cost
  The
Company capitalizes eligible computer software development costs upon the
establishment of technological feasibility, which it has defined as completion
of a working model. The amount of costs eligible for capitalization, after
consideration of factors such as realizable value, were not material and,
accordingly, all software development costs have been charged to research and
development expense in the accompanying consolidated statements of
operations.
  Revenue
Recognition
 
 Revenue
consists of direct sales to end-users, resellers and distributors. Revenue from
sales to end-users and resellers is recognized upon shipment, when risk of loss
has passed to the customer, collection of the receivable is reasonably assured,
persuasive evidence of an arrangement exists, and the sales price is fixed and
determinable. We provide for estimated sales returns and allowances and warrant
costs related to such sales at the time of shipment. Net revenue consists of
product revenue reduced by estimated sales returns and allowances. Sales returns
average was approximately 0.9% and 1.8% of sales for fiscal years ended
September 30, 2010 and 2009, respectively. Sales to distributors are made under
terms allowing certain rights of return and protection against subsequent price
declines on our products held by the distributors. Upon termination of such
distribution agreements, any unsold products may be returned by the distributor
for a full refund. These agreements may be canceled without cause for
convenience following a specified notice period. As a result of these
provisions, we defer recognition of distributor revenue until such distributors
resell our products to their customers. The amounts deferred as a result of this
policy are reflected as “deferred revenue” in the accompanying consolidated
balance sheets. The related cost of revenue is also deferred and reported in the
consolidated balance sheets as inventory. We do not recognize revenue derived
from sales to customers in Asia until both of the following elements are
satisfied: customer has taken ownership upon shipment and we have received
payment for the purchase.
  64
  Software
components are generally not sold separately from our hardware components.
Software revenue consists of license revenue that is recognized
upon delivery of the application products or features. We provide software
assurance consisting primarily of the latest software updates, patches, new
releases and technical support. Revenue earned on software arrangements
involving multiple elements is allocated to each element based upon the relative
fair value of the elements. The revenue allocated to software support programs
is recognized with the initial licensing fee on delivery of the
software. This software assurance revenue is in addition to the initial
license fee and is recognized over a period of one to three years. The estimated
cost of providing software assurance during the arrangement is insignificant
and the upgrades and enhancements offered at no cost during software
assurance arrangements have historically been, and are expected to continue to
be, minimal and infrequent. All estimated costs of providing the services,
including upgrades and enhancements, are spread over the life of the software
assurance contract term.
 
 Net
revenue by customers that individually accounted for more than 10% of our
revenue during fiscal years 2010, 2009, 2008 is as follows:
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008Synnex
                
                
                36
                %
                
                
                30
                %
                
                
                34
                %Jenne
      (1)
                
                
                —
                
                
                
                15
                %
                
                
                12
                %Fiserv
      (2)
                
                
                10
                %
                
                
                10
                %
                
                
                —Altisys
      (3)
                
                
                —
                
                
                
                —
                
                
                
                12
                %Total
                
                
                46
                %
                
                
                55
                %
                
                
                58
                %
 
 (1)
              In
      September 2009, we terminated our distribution agreement with Jenne. The
      termination of our relationship with Jenne did not have a material impact
      on our business for fiscal year
2010.
 (2)
                In
      August 2009, we entered into a reseller agreement with Fiserv Solutions,
      Inc. Our agreement with Fiserv has an initial term of ten years and will
      renew automatically for additional five year terms, provided that each
      party has the right to terminate the agreement for convenience upon ninety
      (90) days' written notice prior to the end of the initial term or any
      subsequent term of the
agreement.
 (3)
              During
      fiscal years 2010 and 2009, revenue generated from Altisys was less than
      10% of our total revenue.
  Segment
Reporting
  The
Company manages its business primarily on a geographic basis. Accordingly, the
Company determined its operating segments, which are generally based on the
nature and location of its customers, to be the Americas and International. The
Company's two geographical segments, all sell the same products to the same
types of customers. The Company's reportable operating segments are comprised of
the Americas and International operations. The Americas segment includes the
United States, Canada, Mexico, Central America and the Caribbean. The
International segment is comprised of China, United Kingdom, Italy and
Holland.
  65
  The
following table shows our sales by geographic region as percentage of total
sales for the periods indicated:
 
 FiscalYearEnded
                      September 30,2010
                  
                  
                  2009
                  
                  
                  2008Americas
                  
                  
                  86
                  %
                  
                  
                  86
                  %
                  
                  
                  87
                  %International
                  
                  
                  14
                  %
                  
                  
                  14
                  %
                  
                  
                  13
                  %Total
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %
  Product
Warranty
  The
Company provides a warranty for hardware products for a period of one year
following shipment to end users. We have historically experienced minimal
warranty costs. Factors that affect our reserves for warranty liability include
the number of installed units, historical experience and management's judgment
regarding anticipated rates of warranty claims and cost per claim. We assess the
adequacy of our reserves for warranty liability every quarter and make
adjustments to those reserves if necessary.
  Changes
in the Company's warranty liability for the fiscal years ended
September 30, 2010 and 2009, respectively, are as follows (in
thousands):
 
 September 30,2010
                  
                  
                  2009(In
      thousands)Accrued
      warranty, beginning of year
                  
                  $
                  122
                  
                  
                  $
                  137Provision
      for warranty liability
                  
                  
                  176
                  
                  
                  
                  111Warranty
      cost including labor, components and scrap
                  
                  
                  (179
                  )
                  
                  
                  (126
                  )Accrued
      warranty, end of year
                  
                  $
                  119
                  
                  
                  $
                  122
  Recently
Issued Accounting Pronouncements
 
 In July
2010, FASB issued ASU 2010-20, Disclosures about Credit Quality of Financing
Receivables and Allowance for Credit Losses, which adds new requirements for
disclosures about an entity’s allowance for credit losses and the credit quality
of its financing receivables. The amendment is effective the first reporting
period beginning after December 15, 2011. The Company is currently assessing the
future impact of this new accounting pronouncement to its consolidated financial
statements.
 
 In
February 2010, the Financial Accounting Standards Board
(“FASB”) issued an Accounting Standards Update (“ASU”), which eliminates
the requirement for public companies to disclose the date through which
subsequent events have been evaluated. The Company will continue to evaluate
subsequent events through the date of the issuance of the financial statements,
however, consistent with the guidance, this date will no longer be disclosed.
ASU 2010-09 does not have any impact on the Company’s results of operations,
financial condition or liquidity.
 
 In January 2010, the FASB issued an ASU
which clarifies and provides additional disclosure requirements on the transfers
of assets and liabilities between Level 1 (quoted prices in active market for
identical assets or liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the reasons for and
the timing of the transfers. Additionally, the guidance requires a roll forward
of activities on purchases, sales, issuance, and settlements of the assets and
liabilities measured using significant unobservable inputs (Level 3 fair value
measurements). This standard is effective for interim and annual reporting
periods beginning after December 15, 2009 with the exception of revised Level 3
disclosure requirements which are effective for interim and annual reporting
periods beginning after December 15, 2010. Comparative disclosures are not
required in the year of adoption. Such adoption did not have a material impact
on our financial position or results of operation.
  66
 
 In
October 2009, FASB issued ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-13,
ASC Topic 605 has been amended (1) to provide updated guidance on whether
multiple deliverables exist, how the deliverables in an arrangement should be
separated, and the consideration allocated; (2) to require an entity to
allocate revenue in an arrangement using estimated selling prices of
deliverables if a vendor does not have vendor-specific objective evidence
(“VSOE”) or third-party evidence of selling price; and (3) to eliminate the
use of the residual method and require an entity to allocate revenue using the
relative selling price method. The accounting changes summarized in ASU 2009-14
and ASU 2009-13 are both effective for fiscal years beginning on or after
June 15, 2010, with early adoption permitted. Adoption may either be on a
prospective basis or by retrospective application. The Company is currently
assessing the impact of this guidance to its consolidated financial
statements.
 
 In
October 2009, FASB issued ASU 2009-14, Software (Topic 985)—Certain Revenue
Arrangements That Include Software Elements. This standard changes the
accounting model for revenue arrangements that include both tangible products
and software elements. Under this guidance, tangible products containing
software components and non-software components that function together to
deliver the tangible product’s essential functionality are excluded from the
software revenue guidance in Subtopic 985-605, Software-Revenue Recognition. In
addition, hardware components of a tangible product containing software
components are always excluded from the software revenue guidance. FASB
Accounting Standards Updates 2009-14 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. The Company is currently
assessing the impact of this guidance to its consolidated financial
statements.
 
 In June
2009, the Company adopted FASB ASC 855-10, Subsequent Events – Overall (“ASC
855-10”). ASC 855-10 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It required
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date – that is, whether that date represents the
date the financial statements were issued or were available to be
issued. This disclosure should alert all users of financial statements that
an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. In February 2010, the FASB issued ASU
2010-09, Amendments to Certain Recognition and Disclosure Requirements (“ASU
2010-09”). ASU 2010-09 amended the guidance on subsequent events to remove the
requirement for SEC filers to disclose the date through which an entity has
evaluated subsequent events. Adoption of ASC 855-10, as amended, did not have a
material impact on the Company’s results of operations, financial position or
liquidity.
 
 In
October 2009, the Company adopted the fair value disclosure provision that
requires the reporting of interim disclosures about the fair value of financial
instruments previously only disclosed on an annual basis. The adoption did not
have any impact on the Company’s Condensed Consolidated Financial Statements as
it relates only to disclosures. The required disclosures are included in Note 1
of Notes to Condensed Consolidated Financial Statements.
  67
  Computation
of Basic and Diluted Net Loss Per Share
  The
Company bases its basic net loss per share upon the weighted average number of
common shares outstanding during the period. Basic net loss per common share is
computed by dividing the net loss by the weighted-average number of shares of
common stock outstanding during the period. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
  The
following table sets forth the computation of basic and diluted net loss per
share (in thousands, except net loss per share amounts):
 
 FiscalYearEndedSeptember 30,2010
                
                
                2009
                
                
                2008Net
      loss
                
                $
                (1,708
                )
                
                $
                (4,710
                )
                
                $
                (3,937
                )Weighted
      average shares outstanding—basic and diluted loss per
share
                
                
                16,417
                
                
                
                15,937
                
                
                
                15,745Basic
      and diluted net loss per share
                
                $
                (0.10
                )
                
                $
                (0.30
                )
                
                $
                (0.25
                )
  Options
to purchase 5.1 million, 4.4 million and 4.5 million shares of common
stock were outstanding for the years ended September 30, 2010, 2009 and
2008, respectively, and were excluded from the computation of diluted net
earnings per share for these periods because their effect would have been
antidilutive.
  Comprehensive
Income (Loss)
 
 Comprehensive
income (loss) consists of two components–net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) refers to gains
and losses that under U.S. generally accepted accounting principles are recorded
as an element of stockholders’ equity but are excluded from net income. The
Company’s other comprehensive income (loss) consists of unrealized gains and
losses on short-term investments categorized as available-for-sale and foreign
exchange gains and losses.
 
 As of
September 30, 2010 and September 30, 2009, accumulated other comprehensive
income consisted of $228,000 and $165,000, respectively, of accumulated foreign
currency translation gains. The amounts comprising unrealized gains and losses
on marketable securities and the related changes as of September 30, 2010, 2009
and 2008 were immaterial.
  3.           STOCKHOLDERS’
EQUITY AND STOCK-BASED COMPENSATION
  Stock Option Plans
 
 On March
10, 2009, our 1999 Stock Plan and our 1999 Employee Stock Purchase Plan (the
“1999 Purchase Plan”) expired.  These plans will, however, continue to
govern the securities previously granted under them.  On April 21,
2009, our Board of Directors approved a 2009 Equity Incentive Plan (the “2009
Stock Plan”), which was approved by our stockholders on June 18,
2009.  The 2009 Stock Plan replaced all previous stock plans and the
shares available for future grants under those prior plans. Under the Plans, the
Board of Directors may grant incentive stock options, non-qualified stock
options, restricted stock awards, restricted stock units, stock appreciation
rights, performance units and performance shares to eligible employees,
directors and consultants. In accordance with the 2009 Stock Plan, the exercise
price per share for stock options cannot be less than 100% of the fair market
value, as determined by the Board of Directors, on the date of grant.
Additionally, the exercise price of options granted to a greater than 10%
stockholder may not be less than 110% of the fair market value on the date of
grant. The value of common stock subject to incentive stock options that become
exercisable by any one employee in any calendar year may not exceed $100,000.
Options under this Plan will generally expire ten years after the date of grant.
Upon approval of the 2009 Stock Plan, 6.5 million shares were reserved for
issuance.
  68
  As of
September 30, 2010, shares of common stock issuable pursuant to outstanding
awards granted under the 2009 Stock Plan and our previous stock plans were 5.1
million shares and there were 1.7 million shares reserved for future
grants.
 
 The
following table summarizes the Company's stock option plans under the Stock
Plans as of September 30, 2007 and changes during the three fiscal years
ended September 30, 2010:
 
 Options
                    Outstanding
                
                
                Weighted
                    Average
                    Exercise
      PriceOutstanding
      at September 30, 2007
                
                
                3,701,205
                
                
                $
                3.62Options
      granted
                
                
                1,180,320
                
                
                $
                1.30Options
      exercised
                
                
                (140,950
                )
                
                $
                0.86Options
      forfeited or expired
                
                
                (188,753
                )
                
                $
                2.70Outstanding
      at September 30, 2008
                
                
                4,551,822
                
                
                $
                3.14Options
      granted
                
                
                3,196,107
                
                
                $
                0.85Options
      exercised
                
                
                (13,700
                )
                
                $
                0.60Options
      forfeited or expired
                
                
                (3,371,338
                )
                
                $
                3.87Outstanding
      at September 30, 2009
                
                
                4,362,891
                
                
                $
                0.91Options
      granted
                
                
                989,000
                
                
                $
                0.75Options
      exercised
                
                
                (7,531
                )
                
                $
                0.68Options
      forfeited or expired
                
                
                (249,620
                )
                
                $
                0.97Outstanding
      at September 30, 2010
                
                
                5,094,740
                
                
                $
                0.89Exercisable
      at September 30, 2008
                
                
                3,184,036
                
                
                $
                3.91Exercisable
      at September 30, 2009
                
                
                1,564,566
                
                
                $
                0.97Exercisable at September 30,
      2010
                
                
                2,344,125
                
                
                $
                0.94
  At
September 30, 2010, the aggregate intrinsic value of stock options
outstanding was $62,000. Total stock options vested and expected to vest at
September 30, 2010 were 4.3 million shares with a weighted average exercise
price of $0.89, aggregate intrinsic value of $59,000, and a weighted average
remaining contractual term of 7.4 years. The total exercisable stock options as
of September 30, 2010 were 2.3 million shares with an aggregate intrinsic
value of $50,000, weighted average exercise price of $0.94, and a weighted
average remaining contractual term of 5.8 years.
 
 The
Company has unamortized share-based compensation expense relating to options
outstanding of $954,000, which will be amortized to expense over a weighted
average period of 2.86 years.
  69
  The table
below provides the range of exercise prices of stock options outstanding and
stock options exercisable at September 30, 2010.
 
 Options Outstanding
                  
                  
                  Options ExercisableRange of Exercise Prices
                  
                  Number
                    Outstanding
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term
                    (years)
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    Exercisable
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price$0.60
      – $0.73
                  
                  
                  455,485
                  
                  
                  
                  3.84
                  
                  
                  $
                  0.63
                  
                  
                  
                  364,870
                  
                  
                  $
                  0.610.74
      – 0.74
                  
                  
                  897,000
                  
                  
                  
                  9.92
                  
                  
                  $
                  0.74
                  
                  
                  
                  22,437
                  
                  
                  $
                  0.740.78
      – 0.80
                  
                  
                  303,218
                  
                  
                  
                  0.80
                  
                  
                  $
                  0.78
                  
                  
                  
                  303,218
                  
                  
                  $
                  0.780.86
      – 0.86
                  
                  
                  2,928,278
                  
                  
                  
                  8.86
                  
                  
                  $
                  0.86
                  
                  
                  
                  1,226,755
                  
                  
                  $
                  0.860.90
      – 1.56
                  
                  
                  399,759
                  
                  
                  
                  4.27
                  
                  
                  $
                  1.09
                  
                  
                  
                  315,845
                  
                  
                  $
                  1.081.83
      – 1.83
                  
                  
                  20,000
                  
                  
                  
                  5.56
                  
                  
                  $
                  1.83
                  
                  
                  
                  20,000
                  
                  
                  $
                  1.832.00
      – 2.00
                  
                  
                  3,000
                  
                  
                  
                  4.82
                  
                  
                  $
                  2.00
                  
                  
                  
                  3,000
                  
                  
                  $
                  2.002.43
      – 2.43
                  
                  
                  20,000
                  
                  
                  
                  3.82
                  
                  
                  $
                  2.43
                  
                  
                  
                  20,000
                  
                  
                  $
                  2.432.98
      – 2.98
                  
                  
                  40,000
                  
                  
                  
                  4.12
                  
                  
                  $
                  2.98
                  
                  
                  
                  40,000
                  
                  
                  $
                  2.983.82
      – 3.82
                  
                  
                  28,000
                  
                  
                  
                  3.27
                  
                  
                  $
                  3.82
                  
                  
                  
                  28,000
                  
                  
                  $
                  3.82$0.60
      – $3.82
                  
                  
                  5,094,740
                  
                  
                  
                  7.65
                  
                  
                  $
                  0.88
                  
                  
                  
                  2,344,125
                  
                  
                  $
                  0.94
  Employee
Stock Purchase Plan
  On March
10, 2009, our 1999 Stock Plan and our 1999 Employee Stock Purchase Plan (the
“1999 Purchase Plan”) expired. These plans will, however, continue to govern the
securities previously granted under them. On April 21, 2009, our Board of
Directors approved a 2009 Equity Incentive Plan and a 2009 Employee Stock
Purchase Plan (the “2009 Purchase Plan”), which were both approved by our
stockholders on June 18, 2009.  The 2009 Purchase Plan allows eligible
employees to purchase shares of Company stock at a discount through payroll
deductions. The 2009 Purchase Plan consists of six-month offering periods
commencing on June 1st and December 1st, each year. Employees purchase shares in
the purchase period at 85% of the market value of the Company’s common stock at
either the beginning of the offering period or the end of the offering period,
whichever price is lower.
  Participants
under the 2009 Purchase Plan generally may not purchase shares on any exercise
date to the extent that, immediately after the grant, the participant would own
stock totaling 5% or more of the total combined voting power of all stock of the
Company, or greater than $25,000 worth of stock in any calendar year. The
maximum number of shares of common stock that any employee may purchase under
the 2009 Purchase Plan during any offering period is 10,000 shares.
  The
Company reserved 1.5 million shares of the Company’s common stock for future
issuance under the 2009 Purchase Plan. During fiscal year 2010, 136,096 shares
were purchased by and distributed to employees at a price of $0.63 per
share.
  Share-Based
Compensation
  The
Company accounts for stock-based compensation, including grants of stock
options, as an operating expense in the income statement at fair value. The
Company has estimated the fair value of stock-based compensation for stock
options at the date of the grant using the Black-Scholes option-pricing model.
The Black-Scholes option-pricing model incorporates various assumptions
including expected volatility, expected life and interest rate. The Company uses
historical data to estimate option forfeitures. Expected volatility is based on
historical volatility and the risk-free interest rate is based on U.S. Treasury
yield in effect at the time of the grant for the expected life of the options.
The Company does not anticipate paying any dividends in the foreseeable future
and therefore used an expected dividend yield of zero in the option valuation
model.
  70
  The
underlying weighted-average assumptions used in the Black-Scholes model and the
resulting estimates of fair value per share were as follows for options granted
during the twelve months ended September 30, 2010, 2009 and 2008:
 
 EmployeeStockOptionPlans
                    FiscalYear
                    EndedSeptember 30,
                
                
                EmployeeStockPurchasePlan
                    FiscalYear
                    EndedSeptember 30,2010
                
                
                2009
                
                
                2008
                
                
                2010
                
                
                2009
                
                
                2008Expected
      life (in years)
                
                
                7
                
                
                
                6
                
                
                
                6
                
                
                
                0.5
                
                
                
                0.5
                
                
                
                0.5Risk-free
      interest rate
                
                
                1.6-2.5
                %
                
                
                1.6-2.4
                %
                
                
                2.8-3.7
                %
                
                
                0.15-0.23
                %
                
                
                0.21-1.2
                %
                
                
                1.5-4.2
                %Volatility
                
                
                90
                %
                
                
                138%-141
                %
                
                
                87%-88
                %
                
                
                90
                %
                
                
                138%-140
                %
                
                
                87%-89
                %Expected
      dividend
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %
 
 The
following table summarizes stock-based compensation expense related to employee
and director stock options and employee stock purchases for the years ended
September 30, 2010, 2009 and 2008:
 
 FiscalYearEnded
                    September 30,2010
                
                
                2009
                
                
                2008(Inthousands)Cost
      of goods sold
                
                $
                20
                
                
                $
                15
                
                
                $
                18Research
      and development
                
                
                234
                
                
                
                246
                
                
                
                197Sales
      and marketing
                
                
                184
                
                
                
                279
                
                
                
                226General
      and administrative
                
                
                164
                
                
                
                365
                
                
                
                469Total
                
                $
                602
                
                
                $
                905
                
                
                $
                910
  Issuance
of Common Stock as Bonuses
  In July
2009, our Board of Directors approved the issuance of our common stock to
employees as bonuses. The stock bonuses would be granted in four quarterly
installments based on the evaluation of the Company’s overall financial
performance for each respective quarter. The stock awards are immediately vested
on the date of grant. We recorded stock-based compensation cost for these stock
award bonuses based on the closing fair market value of the Company’s common
stock on the date of grant. During fiscal year 2009, the Company issued 228,243
shares of common stock to its employees and recorded total expense of $164,335.
During fiscal year 2010, the Company issued 162,274 shares of common stock to
its employees and recorded total expense of $146,047 for bonus awards earned in
the fourth quarter of fiscal year 2009. Our Board of Directors suspended further
issuance of common stock as bonus under this program during the first quarter of
fiscal year 2010.
  Stock
Option Exchange
  On
September 1, 2009, we completed a stock option exchange program (the “Exchange
Offer”).  Pursuant to the Exchange Offer, eligible employees tendered,
and we accepted for cancellation, eligible options to purchase 2,927,300 shares
of our common stock, representing approximately 95% of the total shares of
common stock underlying options eligible for exchange in the Exchange
Offer.  On September 1, 2009, the Company granted new options to
eligible employees to purchase 2,927,300 shares of common stock in exchange for
the cancellation of the tendered eligible options.  The exercise price
per share of the new options granted in the Exchange Offer was $0.86, the
closing price of our common stock as reported by the NASDAQ Capital Market on
September 1, 2009. Expense related to modification of the stock options was not
material for the year ended September 30, 2009.
  71
  Under the
terms of the Exchange Offer, eligible options were exchanged for new options on
a one-for-one basis except for the new options granted to the named executive
officers. Named executive officers received two types of new options. The first
type of new option, called the similar value option, subject to an exchange
ratio intended to result in a new option that has a similar accounting value as
the eligible option it replaces. Based on the applicable ratio, each similar
value option will cover fewer shares than the eligible option it
replaces.  Each similar value option will retain the same vesting
schedule as the eligible option it replaces, and will remain vested to the
extent the eligible option it replaces was vested. Because the named executive
officers are receiving a lesser number of similar value options in return for
each eligible option, the executive members will receive an additional stock
option grant called the make-up option. This make-up option will cover just
enough shares so that when combined with the number of shares subject to the
similar value option, the executive member will have new options covering the
same number of shares as the eligible option they replace. The make-up options
will only vest if and when our common stock price closes at or above $2.50 per
share during the term of the make-up option (subject to any acceleration
provisions contained in any employment agreement or other similar arrangement
with the Company or provided for under the terms of the Exchanged Option it
replaces).
 
 Pursuant
to the accounting standards, we are required to recognize additional
compensation expense to the extent the new options have a greater value than the
exchanged options they replaced. The fair value of each stock option is
estimated on the date of grant using the Black-Scholes option-pricing model for
the non-executive options and the similar value options granted to the named
executive officers. Make-up options were valued using the Binomial Model.
Similar to the Black-Scholes model, the Binomial Model takes into account
variables such as volatility, dividend yield rate, and risk free interest rate.
In addition, the Binomial Model incorporates actual option-pricing behavior and
changes in volatility over the option’s contractual term. For options granted
under the Exchange Offer, the following assumptions were used:
 
 ValuationofOptionsExpected
      life (in years)
                  
                  
                  5Risk-free
      interest rate
                  
                  
                  2.3
                  %Forfeiture
      rate
                  
                  
                  0
                  %Volatility
                  
                  
                  138
                  %Expected dividend
                  
                  
                  0.0
                  %
  Stock
Repurchase Plan
 
 On
October 23, 2007, our Board of Directors approved the repurchase of up to $2.0
million of our common stock in the open market through November 12, 2008. On
November 11, 2008, our Board of Directors extended the repurchase program by
another year to November 14, 2009. Stock repurchases under this program were
made from time to time at our management’s discretion through November 14, 2009.
When exercising such discretion, management considered a variety of factors such
as our stock price, general business and market conditions and other investment
opportunities. The repurchases were made in the open market and funded from
available working capital. Pursuant to the 2007 authority, we repurchased
231,135 shares during the twelve months ended September 30, 2008 at an aggregate
cost of $367,000. Pursuant to the 2008 authority, we repurchased 23,800 shares
during the twelve months ended September 30, 2009 at an aggregate cost of
$19,000. In April 2009, our Board of Directors suspended further purchases of
stock under this program. On November 16, 2010, our Board of Directors approved
the termination of the repurchase program effective
immediately.
  72
  4.           COMMITMENTS
AND CONTINGENCIES
  Commitments
 
 We lease
our facilities under various operating lease agreements expiring on various
dates through December 2014. Generally, these leases have multiple options to
extend for a period of years upon termination of the original lease term. We
believe that our facilities are adequate for our present needs in all material
respects.
 
 In April
2009, the Company entered into a lease for a new corporate headquarters for a
period of five years with an option to extend for an additional five years. This
facility is leased through June 2014 and serves as our headquarters for
corporate administration, research and development, manufacturing, and sales and
marketing facility in San Jose, California. The terms of the lease include rent
escalations and a tenant allowance for certain leasehold improvements. Under the
terms of the lease agreement, total rent payment is approximately $1.4 million
for a period of five years commencing on June 12, 2009. Additionally, under the
terms of the lease agreement, the Company received up to $127,000 cash incentive
as moving allowance. As of September 30, 2010, the Company recorded $126,928 of
this allowance as part of deferred rent liability to be amortized over the term
of the lease. The Company reserved $200,000 as collateral for an irrevocable and
negotiable standby letter of credit (the “Letter of Credit”) as security for the
facility lease. The $200,000 is restricted by the bank and recorded as part of
the long-term deposit in our consolidated balance sheet as of September 30,
2010. Under the terms of the agreement, the Letter of Credit will expire in July
2014. We believe that the new facility will be suitable, adequate and sufficient
to meet the needs of the Company through July 2014.
 
 In June
2010, the Company’s Shanghai branch entered into a new lease agreement for a
period of four years. This facility is leased through October 2014 and serves as
our international headquarters for administration, research and development, and
sales and marketing. Under the terms of the lease agreement, total rent payment
is approximately $978,648 for a period of four years commencing on July 1, 2010
and includes rent escalations with four rent free periods at the initial portion
of the lease term.
 
 Rent
expense for all operating leases totaled approximately $812,000, $758,000 and
$688,000, for fiscal years 2010, 2009 and 2008, respectively. Deferred rent was
$231,000 and $111,000 as of September 30, 2010 and 2009, respectively. The
minimum future lease payments under all non-cancellable operating leases as of
September 30, 2010 are shown in the following table (in
thousands):
 
 FutureLease
                      PaymentsFiscal
      Year2011
                  
                  $
                  5202012
                  
                  
                  5402013
                  
                  
                  5572014
                  
                  
                  5092015
                  
                  
                  22Thereafter
                  
                  
                  —Total
                  
                  $
                  2,148
  Contingencies
 
 From time
to time, we may become party to litigation in the normal course of our business.
Litigation in general and intellectual property and securities litigation in
particular, can be expensive and disruptive to normal business operations.
Moreover, the results of complex litigation are difficult to
predict.
 
  73
  The
Company has also agreed to indemnify its directors and executive officers for
costs associated with any fees, expenses, judgments, fines and settlement
amounts incurred by them in any action or proceeding to which any of them is, or
is threatened to be, made a party by reason of his or her service as a director
or officer, arising out of his or her services as the Company’s director or
officer.  Historically, the Company has not been required to make
payments under these obligations and the Company has recorded no liabilities for
these obligations in its condensed consolidated balance sheets.
 
 The Company typically warrants its
hardware products for a period of one year following shipment to end users in a
manner consistent with general industry standards that are reasonably applicable
under normal use and circumstances. Historically, the Company has experienced
minimal warranty costs.  In addition, the Company provides distributors
protection from subsequent price reductions.
  5.           SHAREHOLDER
RIGHTS PLAN
 
 The
Company has adopted a Shareholder Rights Plan (“the Plan”) and declared a
dividend distribution of one right for each outstanding share of the Company’s
common stock.  The record date for the distribution was May 7,
2009.  The Company designed the plan to protect the long-term value of
the Company for its shareholders during any future unsolicited acquisition
attempt.  The Company did not adopt the Plan in response to any
specific attempt to acquire the Company or its shares and the Company is not
aware of any current efforts to do so.  These rights will become
exercisable only upon the occurrence of certain events specified in the plan,
including the acquisition of 15% of the Company’s outstanding common stock by a
person or group.  Should a person or group acquire 15% or more of the
outstanding common stock or announce an unsolicited tender offer, the
consummation of which would result in a person or group acquiring 15% or more of
the outstanding common stock, shareholders other than the acquiring person may
exercise the rights, unless the Board of Directors has approved the transaction
in advance.  Each right will initially entitle stockholders to
purchase a fractional share of the company’s preferred stock for
$4.00.  However, the rights are not immediately exercisable and will
become exercisable only upon the occurrence of certain events.  If a
person or group acquires, or announces a tender or exchange offer that would
result in the acquisition of, fifteen percent (15%) or more of our common stock
while the stockholder rights plan remains in place, then, unless the rights are
redeemed by us for $0.001 per right, the rights will become exercisable by all
rights holders, except the acquiring person or group, for shares of AltiGen or
shares of the third party acquirer having a value of twice the right’s
then-current exercise price. The Rights will expire on May 7,
2019.
  6.           FAIR
VALUE MEASUREMENTS
 
 ASC
820-10 establishes a fair value hierarchy that requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. Observable inputs are obtained from independent sources
and can be validated by a third party, whereas unobservable inputs reflect
assumptions regarding what a third party would use in pricing an asset or
liability. A financial instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. ASC 820-10 establishes three levels of inputs that may
be used to measure fair value:
  Level 1 - Observable inputs
that reflect quoted prices (unadjusted) for identical assets or liabilities in
active markets.
  Level 2 - Inputs other than
Level 1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
  Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
 
 In
accordance with ASC 820-10, we measure our cash equivalents at fair value and
classify them within Level 1 or Level 2 of the fair value hierarchy.
The classification has been determined based on the manner in which we value our
cash equivalents, primarily using quoted market prices or alternative pricing
sources and models utilizing market observable inputs.
 
 74
  Quoted Prices in Active
                    Markets for Identical
                    Instruments
                    (Level 1)
                
                
                Significant Other
                    Observable
                    Inputs (Level 2)
                
                
                Total
                    Balance(In
      thousands)Cash
      equivalents:Money
      market mutual funds
                
                $
                1,385
                
                
                $
                —
                
                
                $
                1,385Commercial
      paper
                
                
                —
                
                
                
                250
                
                
                
                2501,385
                
                
                
                250
                
                
                
                1,635Short-term
      investments:Commercial
      paper
                
                
                —
                
                
                
                2,748
                
                
                
                2,748Total assets measured at fair
      value
                
                $
                1,385
                
                
                $
                2,998
                
                
                $
                4,383
  7.           INCOME
TAXES
  Worldwide
loss from continuing operations before provision for income taxes consists of
the following (in thousands):
 
 YearsEndedSeptember 30,2010
                
                
                2009
                
                
                2008United
      States
                
                $
                (1,121
                )
                
                $
                (4,722
                )
                
                $
                (3,726
                )Foreign
                
                
                (621
                )
                
                
                (3
                )
                
                
                (211
                )Loss
      from continuing operations
                
                $
                (1,742
                )
                
                $
                (4,725
                )
                
                $
                (3,937
                )
  The
provision for income taxes consisted of the following and is attributable to
federal and state minimum taxes (in thousands):
 
 YearsEndedSeptember 30,2010
                
                
                2009
                
                
                2008Federal
                
                $
                (35
                )
                
                $
                (1
                )
                
                $
                —State
                
                
                1
                
                
                
                (14
                )
                
                
                —Foreign
                
                
                —
                
                
                
                —
                
                
                
                —Income
      tax provision
                
                $
                (34
                )
                
                $
                (15
                )
                
                $
                —
  The
Company records a tax provision for the anticipated tax consequences of the
reported results of operations. In accordance with ASC 740, Accounting for Income Taxes,
the provision for income taxes is computed using the asset and liability method,
under which deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities, and for operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the
currently enacted tax rates that apply to taxable income in effect for the years
in which those tax assets are expected to be realized or settled. The Company
records a valuation allowance to reduce deferred tax assets to the amount that
is believed more likely than not to be realized. The following is a summary of
the significant components of the deferred tax asset (in
thousands):
 
 YearsEndedSeptember 30,2010
                
                
                2009Net
      operating loss carryforwards
                
                $
                18,923
                
                
                $
                18,696Reserve
      and other cumulative temporary differences
                
                
                1,030
                
                
                
                1,143Research
      and development credit carryforward
                
                
                854
                
                
                
                762Net
      capitalized research and development expenses
                
                
                17
                
                
                
                6820,824
                
                
                
                20,669Valuation
      allowance
                
                
                (20,824
                )
                
                
                (20,669
                )Net
      deferred tax asset
                
                $
                —
                
                
                $
                —
  As of
September 30, 2010, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $50.3 million that expire at
various dates through 2030, and federal research and development tax credits of
approximately $634,000 that expire at various dates through 2030. The Company
also had net operating loss carryforwards for state income tax purposes of
approximately $29.1 million that expire at various dates through 2030, and
state research and development tax credits of approximately $387,000 which do
not have an expiration date and may be carried forward indefinitely. Utilization
of the Company's net operating loss and tax credit carryforwards may be subject
to substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss
carryforwards before utilization.
  75
  The
Company's subsidiary in China is entitled to a five-year tax holiday, pursuant
to which it is exempted from paying the enterprise income tax for calendar 2008
through 2009. After the two-year exemption period, the Company's subsidiary in
China will be entitled to approximately a 50% exemption for calendar years 2010
through 2011.
  A
valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties regarding realization of the asset, including limited
operating history of the Company, lack of profitability to date and uncertainty
over future operating profitability and taxable income. During fiscal year 2010,
2009 and 2008, valuation allowance increased $155,000, $1.7 million and
$573,000, respectively. As of September 30, 2010 and 2009, the Company had
no significant deferred tax liabilities.
  Reconciliation
between the Company's effective tax rate and the U.S. statutory rate is as
follows:
 
 YearsEndedSeptember 30,2010
                
                
                2009
                
                
                2008Tax
      computed at federal statutory rate
                
                
                35.0
                %
                
                
                35.0
                %
                
                
                35.0
                %Change
      in valuation allowance
                
                
                (8.9
                )
                
                
                (36.4
                )
                
                
                (14.6
                )State
      taxes
                
                
                4.5
                
                
                
                4.6
                
                
                
                4.5Meals &
      entertainment
                
                
                (0.8
                )
                
                
                (0.5
                )
                
                
                (0.6
                )Unbenefitted
      foreign loss
                
                
                (0.7
                )
                
                
                —
                
                
                
                (1.9
                )Stock-based
      compensation
                
                
                (8.7
                )
                
                
                (5.5
                )
                
                
                (6.6
                )FIN
      48 liability
                
                
                (20.7
                )
                
                
                —
                
                
                
                (5.9
                )Other
                
                
                2.2
                
                
                
                3.1
                
                
                
                (9.9
                )Provision
      for income taxes
                
                
                1.9
                %
                
                
                0.3
                %
                
                
                —
  In
October 2007, the Company adopted the FASB’s updated guidance related to income
taxes, which establishes a single model to address accounting for uncertain tax
positions. This updated guidance clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also provides guidance
on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company has
reviewed its income tax positions and identified approximately $274,000 of total
gross unrecognized tax benefits of which none, if recognized, would impact the
effective tax rate as the Company has a valuation allowance on its carryforward
attributes. The Company does not expect its unrecognized tax benefits to change
materially over the next 12 months.
  76
  A
reconciliation of the beginning and ending balances of the total amounts of
gross unrecognized tax benefits is as follows (in thousands):
 
 TotalGross
                        Unrecognized
                        TaxBenefitsBalance
      at October 1, 2009
                      
                      $
                      274Additions
      based on tax positions related to the current year
                      
                      
                      205Additions
      based on tax positions of prior years
                      
                      
                      156Settlements
      of tax positions
                      
                      
                      —Balance at September 30,
      2010
                      
                      $
                      635
  Interest
and penalties related to unrecognized tax benefits within the provision for
taxes on the consolidated condensed statements of operations did not change as a
result of implementing the provisions of FIN 48. Management determined that no
accrual for interest and penalties was required as of September 30,
2010.
  The
Company filed a consolidated U.S. income tax return and tax returns in various
state and local jurisdictions, and foreign jurisdictions. In the normal course
of business, we are subject to examination by taxing authorities throughout the
world, including such jurisdictions as United States and China. With some
exceptions, the Company is no longer subject to U.S. federal, state or foreign
income tax examinations for fiscal years before 1994. However, to the extent
allowed by law, the tax authorities may have the right to examine prior periods
where net operating losses or tax credits were generated and carried forward,
and make adjustments up to the amount of the net operating loss or credit
carryforward amount.
  In the
ordinary course of the Company's business there are transactions where the
ultimate tax determination is uncertain. The Company believes that is has
adequately provided for income tax issues not yet resolved with federal, state,
local and foreign tax authorities. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, an additional
charge to expense would result.
  8.           RELATED
PARTY TRANSACTIONS
  The
Company holds ownership interests in two privately held companies, which are
also the Company’s customers.
  As of
September 30, 2010 and September 30, 2009, the Company held an investment
of common stock of a private Taiwanese telecommunication company valued at
approximately $195,000. The Company is accounting for this investment using the
cost method. Our interest in the company is approximately 2%, which interest
does not allow us to exercise significant influence. For the fiscal years ended
September 30, 2010, 2009 and 2008, product sales revenues from this company
were approximately $43,000, $216,000 and $72,000, respectively. Accounts
receivable balances from this company were $46,000 and $4,000 as of September
30, 2010 and 2009, respectively.
  In July
2004, the Company purchased common stock of a private Korean telecommunications
company for approximately $79,000. As a result of this investment, the Company
acquired approximately 23% of the voting power of the company. This gives us the
right to nominate and elect one of the three members of the Company's current
board of directors. The Company is accounting for this investment using the
equity method and records its minority interest of their results in our results
of operations. For the fiscal years ended September 30, 2010, 2009 and
2008, product sales revenues from this company were approximately $3,000,
$19,000 and $49,000, respectively. Accounts receivable balances from this
company were $0, $22,000 and $18,000 as of September 30, 2010, 2009 and 2008,
respectively. Our investment in the Korean company had a book value of
approximately $3,000, $7,000 and $16,000 as of September 30, 2010, 2009 and
2008, respectively.
  77
  9.           SUBSEQUENT
EVENTS
  The
Company has performed an evaluation of subsequent events through December 13,
2010, the date on which this Annual Report on Form 10-K was filed with the
SEC.
 
 On
November 2, 2010, the Company filed a Certification of Notice of Termination of
Registration on Form 15 with the Securities and Exchange Commission (SEC) to
voluntarily deregister its common stock and suspend its reporting obligations
under the Securities Exchange Act of 1934. The Company expects the Certification
of Notice of Termination of Registration to take effect within ninety (90) days
of the filing with the SEC. Following the filing of this annual report, the
Company's obligations to file certain reports with the SEC, including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K, will immediately be suspended. We expect that this annual report will
be the last filing made by the Company under the Exchange Act. The Company’s
common stock will continue to be quoted on the OTCQX U.S. over-the-counter
market, operated by Pink OTC Markets, Inc. after deregistration. We intend to
continue to make current financial information available on a regular basis
consistent with the applicable rules of Pink OTC Markets, Inc and OTCQX
U.S.
 
 On
November 16, 2010, our Board of Directors approved the termination of the
repurchase program effective immediately.
  10.           SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
  Following
is a summary of our quarterly operating results and share data for the years
ended September 30, 2010, 2009 and 2008.
 
 FortheQuarterEndedDecember31,
                
                
                March31,
                
                
                June30,
                
                
                September30,(Inthousands,exceptpersharedata)Consolidated
      Statements of Operations Data:Fiscal
      year ended September 30, 2010:Net
      revenue
                
                $
                4,221
                
                
                $
                4,421
                
                
                $
                4,199
                
                
                $
                3,804Gross
      profit
                
                
                2,810
                
                
                
                2,924
                
                
                
                2,859
                
                
                
                2,565Net
      loss
                
                $
                (470
                )
                
                $
                (340
                )
                
                $
                (259
                )
                
                $
                (639
                )Basic
      and diluted net loss per share
                
                $
                (0.03
                )
                
                $
                (0.02
                )
                
                $
                (0.02
                )
                
                $
                (0.04
                )Weighted
      average shares used in computing basic and diluted net loss per
      share
                
                
                16,293
                
                
                
                16,430
                
                
                
                16,453
                
                
                
                16,495Fiscal
      year ended September 30, 2009:Net
      revenue
                
                $
                4,860
                
                
                $
                3,577
                
                
                $
                4,082
                
                
                $
                4,866Gross
      profit
                
                
                2,962
                
                
                
                2,107
                
                
                
                2,545
                
                
                
                3,167Net
      loss
                
                $
                (1,268
                )
                
                $
                (1,767
                )
                
                $
                (945
                )
                
                $
                (730
                )Basic
      and diluted net loss per share
                
                $
                (0.08
                )
                
                $
                (0.11
                )
                
                $
                (0.06
                )
                
                $
                (0.05
                )Weighted
      average shares used in computing basic and diluted net loss per
      share
                
                
                15,838
                
                
                
                15,862
                
                
                
                15,923
                
                
                
                16,137Fiscal
      year ended September 30, 2008:Net
      revenue
                
                $
                4,260
                
                
                $
                4,712
                
                
                $
                4,812
                
                
                $
                5,113Gross
      profit
                
                
                2,406
                
                
                
                2,619
                
                
                
                2,827
                
                
                
                2,986Net
      loss
                
                $
                (971
                )
                
                $
                (1,127
                )
                
                $
                (1,029
                )
                
                $
                (810
                )Basic
      and diluted net loss per share
                
                $
                (0.06
                )
                
                $
                (0.07
                )
                
                $
                (0.07
                )
                
                $
                (0.05
                )Weighted average shares used in computing basic
      and diluted net loss per share
                
                
                15,728
                
                
                
                15,708
                
                
                
                15,697
                
                
                
                15,777
  78
  ALTIGEN
COMMUNICATIONS, INC. AND SUBSIDIARY
 SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
 Classification
                    
                    Balance at
                      Beginning of
                      Fiscal Year
                    
                    
                    Chargedto
                      Costsand
                      Expenses
                    
                    
                    Deductions
                    
                    
                    Balance at
                      End of
                      Fiscal Year(In
      thousands)Allowance
      for doubtful accounts:Fiscal
      year ending September 30, 2010
                    
                    $
                    35
                    
                    
                    $
                    —
                    
                    
                    $
                    (25
                    )
                    
                    $
                    10Fiscal
      year ending September 30, 2009
                    
                    $
                    19
                    
                    
                    $
                    19
                    
                    
                    $
                    (3
                    )
                    
                    $
                    35Fiscal
      year ending September 30, 2008
                    
                    $
                    33
                    
                    
                    $
                    —
                    
                    
                    $
                    (14
                    )
                    
                    $
                    19Inventory
      reserve:Fiscal
      year ending September 30, 2010
                    
                    $
                    691
                    
                    
                    $
                    3
                    
                    
                    $
                    (33
                    )
                    
                    $
                    661Fiscal
      year ending September 30, 2009
                    
                    $
                    850
                    
                    
                    $
                    17
                    
                    
                    $
                    (176
                    )
                    
                    $
                    691Fiscal year ending September 30,
      2008
                    
                    $
                    2,375
                    
                    
                    $
                    —
                    
                    
                    $
                    (1,525
                    )
                    
                    $
                    850
  79
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) 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.
 
 Date:
      December 13, 2010
                            ALTIGEN
      COMMUNICATIONS, INC.By:
                            /s/
      JEREMIAH FLEMINGJeremiah
      FlemingChief
      Executive
Officer
  POWER
OF ATTORNEY
  KNOW ALL
PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Jeremiah Fleming and Philip M. McDermott, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this report on
Form 10-K, and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue
hereof.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
  
 Signature
                  
                  Title
                  
                  Date/s/ JEREMIAH FLEMING
                  
                  Chief
      Executive Officer (principal
                  
                  December
      13, 2010Jeremiah
      Fleming
                  
                  executive
      officer), President and Director/s/ GILBERT HU
                  
                  Chairman
      of the Board and
                  
                  December
      13, 2010Gilbert
      Hu
                  
                  President
      of Asia Pacific/s/ PHILIP M. MCDERMOTT
                  
                  Chief
      Financial Officer (principal
                  
                  December
      13, 2010Philip
      McDermott
                  
                  financial
      and accounting officer)/s/ TACHENG CHESTER WANG
                  
                  Director
                  
                  December
      13, 2010Tacheng
      Chester Wang/s/ MIKE MON YEN TSAI
                  
                  Director
                  
                  December
      13, 2010Mike
      Mon Yen Tsai/s/ ALAN HOWE
                  
                  Director
                  
                  December
      13, 2010Alan
      Howe
  80
  AltiGen
Communications, Inc.
  Exhibit
Index
 
 Exhibit
                    Number
                  
                  Description3.1(1)
                  
                  Amended
      and Restated Certificate of Incorporation.3.2(5)
                  
                  Second
      Amended and Restated Bylaws.3.3(10)
                  
                  Certificate
      of Designation of Rights, Preferences and Privileges of Series A
      Participating Preferred Stock of AltiGen Communications,
    Inc.4.1(11)
                  
                  Preferred
      Stock Rights Agreement, dated as of April 21, 2009, between AltiGen
      Communications, Inc. and Computershare Trust Company, N.A., including the
      Certificate of Designation, the form of Rights Certificate and the Summary
      of Rights attached thereto as Exhibits A, B and C,
      respectively.4.2(1)
                  
                  Specimen
      common stock certificates.4.3(1)
                  
                  Third
      Amended and Restated Rights Agreement dated May 7, 1999 by and among
      AltiGen Communications, Inc. and the Investors and Founder named
      therein.10.1(1)
                  
                  Form
      of Indemnification Agreement.10.2(1)
                  
                  1994
      Stock Option Plan, as amended, and form of stock option
      agreement.10.3(4)
                  
                  1999
      Stock Plan, as amended, and form of stock option
  agreement.10.4(3)
                  
                  1999
      Employee Stock Purchase Plan, as amended, and forms of subscription
      agreement and notice of withdrawal.10.5
                  
                  Lease
      agreement: 410 East Plumeria Drive, San Jose, California between FSP
      Montague Business Center Corp., a Delaware Corporation and AltiGen
      Communications, Inc., dated April 16, 2009.10.6(1)
                  
                  Employment
      Agreement by and between the Registrant and Philip McDermott, dated
      June 8, 1999.10.7(9)
                  
                  Amended
      and Restated Executive Employment Agreement by and between Philip
      McDermott and the Company, dated March 6, 2009.10.8(7)
                  
                  Executive
      Employment Agreement by and between Jeremiah J. Fleming and the Company,
      dated December 18, 2007.10.9(9)
                  
                  Executive
      Employment Agreement by and between Gilbert Hu and the Company, dated
      March 6, 2009.10.10(2)++
                  
                  OEM
      Agreement between AltiSys Communications and AltiGen Communications, Inc.,
      dated January 18, 1999.10.12(4)++
                  
                  Distribution
      Agreement between Synnex Information Technologies, Inc. and AltiGen
      Communications, Inc. dated December 22, 1999.10.14++
                  
                  Reseller
      Agreement between Fiserv Solutions, Inc. and AltiGen Communications, Inc.
      dated August 28, 2009.10.15(12)
                  
                  2009
      Equity Incentive Plan and form of stock option agreement
      thereunder.10.16(12)
                  
                  2009
      Employee Stock Purchase Plan.21.1(1)
                  
                  Subsidiaries
      of the Registrant.23.1
                  
                  Consent
      of Independent Registered Public Accounting Firm.24.1
                  
                  Power
      of Attorney (included on signature page).31.1
                  
                  Certification
      of Principal Executive Officer, filed herewith.31.2
                  
                  Certification
      of Principal Financial Officer, filed herewith.32.1
                  
                  Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
      filed herewith.
  81
  32.2
                
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
      filed herewith.
 
 (1)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form S-1 (No. 333-80037) declared effective on October 4,
      1999.
 (2)
              Incorporated
      by reference to exhibit filed with the Registrant's Quarterly Report on
      Form 10-Q for the quarter ended December 31,
  2001.
 (3)
              Incorporated
      by reference to exhibit filed with the Registrant's Annual Report on
      Form 10-K for the fiscal year ended September 30,
      2002.
 (4)
              Incorporated
      by reference to exhibit filed with the Registrant's Annual Report on
      Form 10-K for the fiscal year ended September 30,
      2003.
 (5)
              Incorporated
      by reference to exhibit filed with the Registrant's Quarterly Report on
      Form 10-Q for the quarter ended March 31,
  2004.
 (7)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-K
(No. 000-27427).
 (8)
              Incorporated
      by reference to exhibit filed with the Registrant's Annual Report on
      Form 10-K for the fiscal year ended September 30, 2007
      (No. 000-27427).
 (9)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-K on March 10, 2009.
 (10)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-A on April 23, 2009.
 (11)
              Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form 8-K on April 23, 2009.
 (12)
                Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form S-8 on June 29, 2009.
 ++
              Confidential
      treatment was granted for certain portions of this
  exhibit.
  82