**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**











**FORM
      10-Q**





**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934****FOR
                THE QUARTERLY PERIOD ENDED JUNE 30, 2008****OR****o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE 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)**4555
                Cushing Parkway**
              **Fremont,
                CA**
            
            **94538**(Address
                of principal executive offices)
            
            (Zip
                Code)Registrant’s
                telephone number, including area code:**(510)
                252-9712**











Former
      name, former address and former fiscal year, if changed since last report:
      N/A




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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definition of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
      Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not
      check if a smaller reporting company) Smaller reporting company ý





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).    Yes མ No ý





The
      number of shares of our common stock outstanding as of August
      12, 2008 was:
15,794,923 shares














**ALTIGEN
      COMMUNICATIONS, INC.**


**QUARTERLY
      REPORT ON FORM 10-Q**


**FOR
      THE QUARTER ENDED JUNE 30, 2008**


**TABLE
      OF CONTENTS**




**PART
                  I. FINANCIAL INFORMATION**Item
                  1.
              Condensed
                  Consolidated Financial Statements (Unaudited)Condensed
                  Consolidated Balance Sheets as of June 30, 2008 and September 30,
                  2007
              3Condensed
                  Consolidated Statements of Operations for the Three and Nine Months
                  Ended
                  June 30, 2008 and 2007
              4Condensed
                  Consolidated Statements of Cash Flows for the Nine Months Ended
                  June 30,
                  2008 and 2007
              5Notes
                  to Condensed Consolidated Financial Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              13Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              22Item
                  4.
              Controls
                  and Procedures
              22**PART
                  II. OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              23Item
                  2.
              Unregistered
                  Sale of Equity Securities and Use of Proceeds
              23Item
                  6.
              Exhibits
              24**SIGNATURE**
              25**EXHIBIT
                  INDEX**
              26




2




**PART
      I. FINANCIAL INFORMATION**





**Item
                1.**
            **Condensed
                Consolidated Financial
                Statements**




**ALTIGEN
      COMMUNICATIONS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(UNAUDITED)**


**(In
      thousands, except per share data)**




**June
                30,**
            
            **September
                30,****2008**
            
            **2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            7,580
            
            $
            6,111Short-term
                investments
            
            
            1,899
            
            
            3,796Accounts
                receivable, net of allowances of $47 and $33 at June 30, 2008 and
                September 30, 2007, respectively.
            
            
            2,196
            
            
            2,656Inventories,
                net
            
            
            1,958
            
            
            1,567Prepaid
                expenses and other current assets
            
            
            372
            
            
            237Total
                current assets
            
            
            14,005
            
            
            14,367Property
                and equipment:Furniture
                and equipment
            
            
            1,974
            
            
            1,837Computer
                software
            
            
            948
            
            
            9382,922
            
            
            2,775Less:
                Accumulated depreciation
            
            
            (2,457
            )
            
            (2,269
            )Net
                property and equipment
            
            
            465
            
            
            506Other
                non-current assets:Long-term
                investments
            
            
            210
            
            
            209Long-term
                deposit
            
            
            82
            
            
            168Total
                other non-current assets
            
            
            292
            
            
            377Total
                assets
            
            $
            14,762
            
            $
            15,250**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            1,037
            
            $
            821Accrued
                liabilities:Payroll
                and related benefits
            
            
            424
            
            
            459Warranty
            
            
            141
            
            
            148Marketing
            
            
            115
            
            
            79Accrued
                expense
            
            
            410
            
            
            322Other
            
            
            450
            
            
            422Deferred
                revenue
            
            
            2,297
            
            
            565Total
                current liabilities
            
            
            4,874
            
            
            2,816Long
                term liabilities.........
            
            
            42
            
            
            89Stockholders'
                equity:Convertible
                preferred stock, $0.001 par value; Authorized—5,000,000
                shares; Outstanding—none
                at June 30, 2008 and September 30, 2007
            
            
            —
            
            
            —Common
                stock, $0.001 par value; Authorized—50,000,000
                shares; Outstanding—17,016,035
                shares at June 30, 2008 and16,733,552
                shares at September 30, 2007
            
            
            17
            
            
            16Treasury
                stock at cost—1,277,410 shares at June 30, 2008 and 1,063,895 shares at September
                30,
                2007
            
            
            (1,360
            )
            
            (1,014
            )Additional
                paid-in capital
            
            
            66,410
            
            
            65,434Accumulated
                other comprehensive income
            
            
            —
            
            
            3Accumulated
                deficit
            
            
            (55,221
            )
            
            (52,094
            )Total
                stockholders' equity
            
            
            9,846
            
            
            12,345Total
                liabilities and stockholders' equity
            
            $
            14,762
            
            $
            15,250





See
      Notes
      to Consolidated Financial Statements.




3




**ALTIGEN
      COMMUNICATIONS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


**(In
      thousands, except per share data)**




**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                revenue:Hardware
            
            $
            4,117
            
            $
            3,840
            
            $
            11,875
            
            $
            11,641Software
            
            
            695
            
            
            341
            
            
            1,909
            
            
            1,057Total
                net revenue
            
            
            4,812
            
            
            4,181
            
            
            13,784
            
            
            12,698Cost
                of revenue:Hardware
            
            
            1,896
            
            
            1,920
            
            
            5,704
            
            
            5,780Software
            
            
            89
            
            
            28
            
            
            227
            
            
            83Total
                cost of revenue
            
            
            1,985
            
            
            1,948
            
            
            5,931
            
            
            5,863Gross
                profit
            
            
            2,827
            
            
            2,233
            
            
            7,853
            
            
            6,835Operating
                expenses:Research
                and development
            
            
            1,137
            
            
            860
            
            
            3,087
            
            
            2,502Sales
                and marketing
            
            
            1,926
            
            
            1,405
            
            
            5,530
            
            
            3,683General
                and administrative
            
            
            838
            
            
            604
            
            
            2,598
            
            
            1,776Total
                operating expenses
            
            
            3,901
            
            
            2,869
            
            
            11,215
            
            
            7,961Loss
                from operations
            
            
            (1,074
            )
            
            (636
            )
            
            (3,362
            )
            
            (1,126
            )Equity
                in net income (loss) of investee
            
            
            (1
            )
            
            3
            
            
            (4
            )
            
            (1
            )Interest
                and other income, net
            
            
            46
            
            
            111
            
            
            240
            
            
            347Net
                loss before taxes
            
            
            (1,029
            )
            
            (522
            )
            
            (3,126
            )
            
            (780
            )Income
                tax provision
            
            
            —
            
            
            (4
            )
            
            —
            
            
            (11
            )Net
                loss
            
            $
            (1,029
            )
            $
            (526
            )
            $
            (3,126
            )
            $
            (791
            )Basic
                and diluted net loss per share
            
            $
            (0.07
            )
            $
            (0.03
            )
            $
            (0.20
            )
            $
            (0.05
            )Weighted
                average shares used in computing basic net loss per share
            
            
            15,697
            
            
            15,505
            
            
            15,734
            
            
            15,266Weighted
                average shares used in computing diluted net loss per share
            
            
            15,697
            
            
            15,505
            
            
            15,734
            
            
            15,266





See
      Notes
      to Consolidated Financial Statements.




4




**ALTIGEN
      COMMUNICATIONS, INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


**(In
      thousands)**




**Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (3,127
            )
            $
            (791
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            187
            
            
            187Stock-based
                compensation
            
            
            696
            
            
            417Equity
                in net income (loss) of investee
            
            
            (1
            )
            
            1Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            460
            
            
            148Inventories,
                net
            
            
            (391
            )
            
            (628
            )Prepaid
                expenses and other current assets
            
            
            (135
            )
            
            (97
            )Accounts
                payable
            
            
            216
            
            
            144Accrued
                liabilities
            
            
            110
            
            
            48Deferred
                revenue
            
            
            1,732
            
            
            87Long-term
                deferred rent and other
            
            
            (47
            )
            
            (62
            )Net
                cash used in operating activities
            
            
            (300
            )
            
            (546
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of short-term investments
            
            
            (33,786
            )
            
            (17,086
            )Proceeds
                from sale of short-term investments
            
            
            35,680
            
            
            20,064Changes
                in long-term deposits
            
            
            86
            
            
            (73
            )Purchases
                of property and equipment
            
            
            (145
            )
            
            (59
            )Net
                cash provided by investing activities
            
            
            1,835
            
            
            2,846CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from issuances of common stock, net of issuance costs
            
            
            280
            
            
            820Repurchase
                of treasury stock
            
            
            (346
            )
            
            —Net
                cash provided by (used in) financing activities
            
            
            (66
            )
            
            820NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            1,469
            
            
            3,120CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            6,111
            
            
            5,053CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            7,580
            
            $
            8,173





See
      Notes
      to Consolidated Financial Statements.




5




**ALTIGEN
      COMMUNICATIONS, INC. AND SUBSIDIARY**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**BASIS
      OF PRESENTATION**




AltiGen
      Communications, Inc. (“we” or the “Company”) is a pioneer and market leader in
      Internet protocol telephony systems for small-to medium-sized businesses. We
      design, manufacture and market next generation, Internet protocol phone systems
      and contact centers that use both the Internet and the public telephone network
      to take advantage of the convergence of voice and data communications. Unlike
      traditional proprietary phone systems, our systems are designed with open
      architecture and are built on an industry standard platform. This adherence
      to
      industry standards allows our products to play an important role in the small-
      to medium- sized business market by delivering phone systems that can interface
      with other technologies and provide integrated voice and data solutions.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in conformity with generally accepted accounting principles for interim
      financial information and with the instructions for Form 10-Q and Article 8
      of Regulation S-X. Accordingly, certain information and footnote disclosures
      normally included in financial statements prepared in accordance with generally
      accepted accounting principles have been condensed, or omitted, pursuant to
      the
      rules and regulations of the Securities and Exchange Commission (the “SEC”).
      These unaudited condensed consolidated financial statements reflect the
      operations of the Company and its wholly-owned subsidiary. All significant
      intercompany transactions and balances have been eliminated. In our opinion,
      these unaudited condensed consolidated financial statements include all
      adjustments necessary (which are of a normal and recurring nature) for a fair
      presentation of the Company’s financial position, results of operations and cash
      flows for the periods presented.





These
      financial statements should be read in conjunction with our audited consolidated
      financial statements for the fiscal year ended September 30, 2007, included
      in
      the Company’s 2007 Annual Report on Form 10-K filed with the SEC on December 27,
      2007. The Company’s results of operations for any interim period are not
      necessarily indicative of the results of operations for any other interim period
      or for a full fiscal year.





**CASH
      AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS**





We
      consider all highly liquid investments with an original maturity of three months
      or less from the date of purchase to be cash equivalents. Short-term investments
      are in highly liquid financial instruments with original maturities greater
      than
      three months but less than one year and are classified as “available-for-sale”
investments. Investments are reported at their fair value, with unrealized
      gains
      and losses excluded from earnings and reported as a separate component of
      stockholders’ equity. As of June 30, 2008, our cash and cash equivalents
      consisted of commercial paper and cash deposited in checking and money market
      accounts.





**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. During the three and nine months ended June 30, 2008, we disposed
      of
      fully-reserved inventory with original cost at $543,000 and $953,000,
      respectively. We attribute this overall reduction in obsolete inventory to
      physically disposing of a portion of the reserved inventory. For the year ended September
      30, 2007, we recognized a provision of $96,000 for excess and obsolete
      inventories. For the nine months ended June 30, 2008, we recognized a provision
      of $53,000 for excess and obsolete inventories. The c omponents
      of inventories include (in thousands):





**June
                30,**
            
            **September
                30,****2008**
            
            **2007**Raw
                materials
            
            $
            606
            
            $
            675Work-in-progress
            
            
            169
            
            
            106Finished
                goods
            
            
            1,183
            
            
            786Total
            
            $
            1,958
            
            $
            1,567




6




**REVENUE
      RECOGNITION**





The
      Company recognizes revenue software in accordance with Statement of Position
      (“SOP”) 97-2, “Software Revenue Recognition.” Revenue consists of sales to
      end-users, including resellers, and to distributors. Revenue from sales to
      end-users including 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 exits, and the price is fixed and
      determinable. Sales to distributors are made under terms allowing certain rights
      of return and protection against subsequent price declines on the Company's
      products held by its 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 by either party for convenience
      following a specified notice period. As a result of these provisions, the
      Company defers 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.





**SOFTWARE
      ASSURANCE**





Effective
      September 4, 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. The program is an annual subscription
      and can range from one to three years. Sales from the software assurance program
      are recorded as deferred revenue and recognized as revenue over the terms of
      the
      subscriptions.




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. In accordance with SOP 97-2, 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 on
      this element 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 term.




**STOCK-BASED
      COMPENSATION**




The
      Company accounts for stock based compensation under the provisions of Statement
      of Financial Accounting Standard (“SFAS”) No. 123(R), “ *Share
      Based Compensation* ”
(“SFAS
      No. 123(R)”), which requires all share-based compensation, including grants of
      stock options, to be recognized in the income statement as an operating expense,
      based on their fair market values. The Company adopted SFAS No. 123(R) using
      the
      modified prospective method. Under this transition method, stock based
      compensation cost recognized subsequent to October 1, 2005 included: (i)
      compensation cost for all share-based awards granted prior to but not yet vested
      as of September 30, 2005, based on the grant-date fair value estimated in
      accordance with SFAS No. 123(R) and (ii) compensation cost for all
      share-based awards granted subsequent to September 30, 2005, based on the
      grant-date fair value estimated in accordance with SFAS No. 123(R). In
      accordance with the modified prospective method, the Company has not restated
      its results of operations and financial position for prior periods.




7





The
      Black-Scholes option pricing model was developed for use in estimating the
      fair
      value of traded options that have no vesting restrictions and are fully
      transferable. In addition, option pricing models require the input of highly
      subjective assumptions, including the expected price volatility of our stock.
      The Company estimates the expected price volatility of our stock based on
      historical volatility rates since our initial public offering, which rates
      are
      trended into future years. Because the Company’s employee stock options have
      characteristics significantly different from those of traded options and because
      changes in the subjective input assumptions can materially affect the fair
      value
      estimate, in management's opinion, the existing models do not necessarily
      provide a reliable single measure of the fair value of our options. The Company
      bases the risk-free interest rate for periods within the contractual life of
      the
      option upon the U.S. Treasury yield.





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option pricing model and is not subject to revaluation as a result
      of subsequent stock price fluctuations. The
      Company estimated the fair value of stock option awards in accordance with
      the
      provisions of SFAS 123(R) by using the Black-Scholes option valuation model
      with
      the following assumptions:




**Nine
                Months Ended**
              **J****une
                30.**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007****Employee
                Stock Option Plan**Expected
                Life (in years)
            
            
            5
            
            
            5Risk-free
                interest rate
            
            
            2.8
            %
            
            4.6
            %Volatility
            
            
            88
            %
            
            91
            %Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %**Employee
                Purchase Plan**Expected
                Life (in years)
            
            
            0.5
            
            
            0.5Risk-free
                interest rate
            
            
            1.6
            %
            
            5.0
            %Volatility
            
            
            88
            %
            
            90
            %Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %





The
      following table presents stock-based compensation expense included in the
      accompanying consolidated statement of operations (in thousands):




**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Cost
                of goods sold
            
            $
            5
            
            $
            6
            
            $
            14
            
            $
            17Research
                and development
            
            
            50
            
            
            57
            
            
            143
            
            
            146Selling,
                general and administrative
            
            
            161
            
            
            98
            
            
            539
            
            
            254Total
            
            $
            216
            
            $
            161
            
            $
            696
            
            $
            417




8




The
      following table summarizes the Company’s stock option plan as of October 1, 2007
      and changes during the nine months ended June 30, 2008:




**Number
                of Shares**
            
            **Weighted**
              **average**
              **Exercise
                Price**
            
            **Weighted-**
              **Average
                Remaining**
              **Contractual
                Life**
              **(in
                years)**Outstanding
                    at October 1, 2007
            
            
            3,701,205
            
            $
            3.62Granted
            
            
            1,071,000
            
            
            1.30Exercised
            
            
            (84,652
            )
            
            0.66Forfeitures
                and cancellations
            
            
            (164,149
            )
            
            2.89Outstanding
                at June 30, 2008
            
            
            4,523,404
            
            $
            3.15
            
            
            5.59Vested
                and expected to vest at June 30, 2008
            
            
            4,225,917
            
            $
            3.27
            
            
            5.34Exercisable
                at June 30, 2008
            
            
            3,128,158
            
            $
            3.90
            
            
            4.01





At
      June
      30, 2008, the aggregate intrinsic value of outstanding stock options was
      $398,000. At June 30, 2008, the total vested and expected to vest stock options
      represented 4.2 million shares, the weighted average exercise price was $3.27,
      the aggregate intrinsic value was $397,000, and the weighted average remaining
      contractual term was 5.3 years. At June 30, 2008, the total exercisable stock
      options represented approximately 3.1 million shares, the aggregate intrinsic
      value was $396,000, the weighted average exercise price was $3.90, and the
      weighted average remaining contractual term was 4.0 years.





At
      June
      30, 2008, the Company has $597,000 in unamortized stock-based compensation
      related to our employee stock option plan. We estimate this expense will be
      amortized and recognized over the next 4 years.





Under
      the
      1999 Employee Stock Purchase Plan (the “1999 Purchase Plan”), we had reserved,
      as of September 30, 2007, 670,890 shares of common stock for issuance to
      eligible employees at a price equal to 85% of the lower of the fair market
      value
      of the common stock on the first day of the offering period or a specified
      exercise date (last trading day in April or October). During
      the nine months ended June 30, 2008, 197,831 shares were purchased by and
      distributed to employees at a price of $1.33 per share.




**COMPUTATION
      OF BASIC AND DILUTED NET LOSS PER SHARE**





The
      Company bases its basic earnings per share upon the weighted average number
      of
      common shares outstanding during the period in accordance with SFAS
      No. 128, *Earnings
      per Share* (“SFAS
      No. 128”). Basic earnings per common share is computed by dividing income
      available to common shareholders 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. For the three
      and nine months ended June 30, 2008, basic and diluted net loss per share
      numbers were identical as potential common shares resulting from the exercise
      of
      stock options were antidilutive and consequently excluded from the Company’s
      fully diluted share capital.





Basic
      and
      diluted loss per share for each of the three and nine month periods ended June
      30, 2008 and 2007 were as follows (in thousands, except for per share data):




**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                loss
            
            $
            (1,029
            )
            $
            (526
            )
            $
            (3,126
            )
            $
            (791
            )Weighted
                average shares outstanding–basic loss per share
            
            
            15,697
            
            
            15,505
            
            
            15,734
            
            
            15,266Weighted
                average shares outstanding–diluted
                loss per share
            
            
            15,697
            
            
            15,505
            
            
            15,734
            
            
            15,266Basic
                loss per share
            
            $
            (0.07
            )
            $
            (0.03
            )
            $
            (0.20
            )
            $
            (0.05
            )Diluted
                loss per share
            
            $
            (0.07
            )
            $
            (0.03
            )
            $
            (0.20
            )
            $
            (0.05
            )





Options
      to purchase 4.5 million and 3.7 million shares of common stock were
      outstanding as of June 30, 2008 and 2007, respectively, and were excluded from
      the computation of diluted net loss per share for these periods because their
      effect would have been antidilutive.




9




**SEGMENT
      REPORTING**





We
      are
      organized and operate as two operating segments--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 and Norway.





The
      following table sets forth percentages of net revenue by geographic region
      with
      respect to such revenue for the periods indicated:




**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Americas
            
            
            87
            %
            
            92
            %
            
            87
            %
            
            91
            %International
            
            
            13
            %
            
            8
            %
            
            13
            %
            
            9
            %Total
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %





The
      International segment is comprised of revenue primarily from China, the United
      Kingdom and Norway. Most of our significant long-lived assets are located in
      the
      United States. Our hardware tooling used to develop the IP710 and the IP705
      phones as well as the tooling used to develop the face plate for the MAX1000
      Voice over IP phone system are located in Taiwan.




**CUSTOMERS**





Net
      revenue by customers that individually accounted for more than 10% of our
      revenue for the three and nine months ended June 30, 2008 and 2007,
      respectively, were as follows :





**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**AltiSys
            
            
            10
            %
            
            17
            %
            
            14
            %
            
            15
            %Synnex
            
            
            33
            %
            
            52
            %
            
            34
            %
            
            52
            %Graybar
            
            
            5
            %
            
            14
            %
            
            11
            %
            
            15
            %Jenne
            
            
            12
            %
            
            —
            
            
            9
            %
            
            —Total
            
            
            60
            %
            
            83
            %
            
            68
            %
            
            82
            %




10




**2.
      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 reserves for our warranty liability for the three and nine months ended
      June 30, 2008 and 2007, respectively, are as follows (in thousands):





**Three
                Months Ended**
              **J****une
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Beginning
                balance
            
            $
            145
            
            $
            257
            
            $
            148
            
            $
            263Provision
                for warranty liability
            
            
            36
            
            
            39
            
            
            116
            
            
            124Warranty
                cost including labor, components and scrap
            
            
            (40
            )
            
            (47
            )
            
            (123
            )
            
            (138
            )Ending
                balance
            
            $
            141
            
            $
            249
            
            $
            141
            
            $
            249




**3.
      COMMITMENTS AND CONTINGENCIES**





*Commitments*




We
      lease
      our facilities under various operating lease agreements expiring on various
      dates through February 2009. The Company leases approximately 32,000 square
      feet to serve as our headquarters for corporate administration, research and
      development, manufacturing, and sales and marketing facility in Fremont,
      California. The lease for its headquarters expires on February 21, 2009. Rent
      expense for all operating leases totaled approximately $175,000 and $513,000
      for
      the three and nine months ended June 30, 2008, respectively as compared to
      $134,000 and $417,000 for the three and nine months ended June 30, 2007,
      respectively. In June 2007, the Company’s Shanghai branch entered into a new
      lease agreement for a period of three years. The Company believes
      its current facilities are adequate to support its needs through the end of
      fiscal 2008. Additionally,
      the Company also leases certain equipment under capital lease arrangements.
      The
      minimum future lease payments under all noncancellable capital and operating
      leases as of June 30, 2008 are as follows (in thousands):




Fiscal
                Years Ending September 30,
            
            **Capital**
              **Leases**
            
            
            **Operating**
              **Leases**Remainder
                of 2008
            
            $
            11
            
            $
            1532009
            
            
            44
            
            
            4272010
            
            
            33
            
            
            3352011
            
            
            —
            
            
            16Total
                contractual lease obligation
            
            $
            88
            
            $
            931Amount
                representing interest
            
            $
            8Present
                value of minimum lease payment
            
            $
            80Current
                portion
            
            $
            38Long-term
                portion
            
            
            42Total
                capital lease commitments
            
            $
            80





*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.




11




On
      September 6, 2002, Vertical Networks, Inc. filed suit against us in the United
      States District Court for the Northern District of California,
      alleging infringement of U.S. Patents Nos. 6,266,341, 6,289,025, 6,292,482,
      6,389,009, and 6,396,849.  On October 28, 2002, Vertical Networks amended
      its complaint to add allegations of infringement of U.S. Patents Nos. 5,617,418
      and 5,687,174.  Vertical Networks filed a second amended complaint on
      November 20, 2002 to identify products and/or activities that allegedly infringe
      the seven patents-in-suit.  Vertical Networks' Complaint seeks
      an injunction against future patent infringement, an award of damages,
      including treble damages for alleged willful infringement, and attorneys' fees
      and costs.  On December 9, 2002, we filed an answer and counterclaims
      for declaratory relief, and on December 26, 2002, Vertical Networks filed its
      reply to those counterclaims.  On October 4, 2007, the parties entered into
      a stipulation dismissing the lawsuit in its entirety without
      prejudice.




**4.
      STOCK REPURCHASE PROGRAM**





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. The repurchases will be made
      from time to time through November 14, 2008 at the Company’s discretion
      depending on factors such as our stock price, general business and market
      conditions, and the availability of other corporate investment opportunities.
      The repurchase will be made in the open market and will be funded from available
      working capital. Under
      such authority, the Company has repurchased 213,515 shares in the nine months
      ended June 30, 2008 for an aggregate cost of $346,000.




12




**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





**FORWARD-LOOKING
      INFORMATION**





This
      report contains certain forward-looking statements (within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E
      of the Securities Exchange Act of 1934, as amended) and information relating
      to
      us that are based on the beliefs of our management as well as assumptions made
      by and information currently available to our management. Additional forward
      looking statements may be identified by the words "anticipate," "believe,"
      "expect," "intend," "plan," or the negative of such terms, or similar
      expressions, as they relate to us or our management.





The
      forward-looking statements contained herein reflect our judgment as of the
      date
      of this report with respect to future events, the outcome of which is subject
      to
      certain risks that may have a significant impact on our business, operating
      results or financial condition. You are cautioned that these forward-looking
      statements are inherently uncertain. Should one or more of these risks or
      uncertainties materialize, or should underlying assumptions prove incorrect,
      actual results or outcomes may vary materially from those described herein.
      Although we believe that the expectations reflected in these forward-looking
      statements are reasonable, we cannot guarantee future results, levels of
      activity, performance or achievements, or the outcome of present and future
      litigation, regulatory developments or other contingencies. You should carefully
      review the cautionary statements contained in our Annual Report on Form 10-K
      for
      the year ended September 30, 2007, including those set forth in Item 1A. “Risk
      Factors” of that report.





**OVERVIEW**





We
      are a
      pioneer and market leader in Internet protocol telephony systems for small-
      to
      medium-sized businesses. We design, manufacture and market next generation,
      Internet protocol phone systems and contact centers that use both the Internet
      and the public telephone network to take advantage of the convergence of voice
      and data communications. Unlike traditional proprietary phone systems, our
      systems are designed with open architecture and are built on an industry
      standard platform. This adherence to industry standards allows our products
      to
      play an important role in the small- to medium-sized business market by
      delivering phone systems that can interface with other technologies and provide
      integrated voice and data solutions. 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
      $4.8
      million and $13.8 million for the three and nine months ended June 30, 2008,
      respectively, compared to net revenue of $4.2 million and $12.7 million for
      the
      three and nine months ended June 30, 2007, respectively. As of June 30, 2008,
      we
      had an accumulated deficit of $55.2 million. Net cash used in operating
      activities was $300,000 for the nine months ended June 30, 2008.





We
      derive
      our revenue from sales of our telephone systems. Product revenue is comprised
      of
      direct sales to end-users (including dealers) 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.





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 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 for the nine months ended June 30, 2008, were All Quality
      Services 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, Analog phones from Fanstel Corporation
      and
      Internet protocol phones from BCM Communications, Inc. 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. Assuming that current market trends continue as a
      result of our enhanced products, we expect to see continued revenue growth
      for
      fiscal year 2008. These trends include the growth in acceptance of our call
      center products, the growth in the marketplaces of Asia, Latin America, the
      Caribbean, and the status quo of the North American economy.




13





**CRITICAL
      ACCOUNTING POLICIES**





*Revenue
      Recognition.* Net
      sales
      consist primarily of revenue from direct sales to
      end-users, including resellers, and sales to distributors. We recognize
      r evenue
      pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 104, *Revenue
      Recognition* ,
      (“SAB
      No. 104”). Revenue from sales to end-users 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 in
      accordance with SFAS No. 48, *Revenue
      Recognition when Right of Return Exists* (“SFAS
      No. 48”). Net
      revenue consists of product revenue reduced by estimated sales returns and
      allowances. 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 the above 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. Our total deferred revenue was $2.3 million and $618,000 as of
      June 30, 2008 and 2007, respectively. This increase was largely due to an
      increase of $1.4 million in our service support plans and an increase of
      approximately $307,000 in distribution channel inventory.





*Software
      Assurance.* Effective September 4, 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. The program is an annual
      subscription and can range from one to three years. Sales from the software
      assurance program are recorded as deferred revenue and recognized as revenue
      over the terms of the subscriptions. As of June 30, 2008, our software assurance
      revenue was approximately $1.2 million of which $399,000 has been recognized
      as
      revenue.




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. In accordance with SOP 97-2, 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 on
      this element 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 unspecified 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 term.





*Cash
      and Cash Equivalents* .
      Cash
      and cash equivalents include cash on hand, deposits with banks and highly liquid
      investments with a time to maturity of three months or less at the time of
      purchase.




*Short-Term
      Investment.* 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. We report our available-for-sale securities at their fair
      value. Further, we recognize unrealized gains and losses in our available-for
      sale securities as an increase or reduction in shareholders’ equity. We evaluate
      our available-for-sale securities for impairment quarterly.





*Inventory* .
      Inventory is stated at the lower of cost (first-in, first-out method) or market.
      Our inventory for both the nine months ended June 30, 2008 and June 30, 2007
      was
      $2.0 million. 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 changes, we may be required to record additional
      inventory provision which would negatively affect our 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. The reserve was reduced by $53,000 in the nine months ended June 30,
      2008
      as compared to a reduction of $22,000 during the same period in the prior year.
      During the nine months ended June 30, 2008, we disposed of fully-reserved
      inventory with original cost at $953,000. We attribute this overall reduction
      in
      obsolete inventory to physically disposing of a portion of the reserved
      inventory. As of June 30, 2008 and 2007, inventory allowance was $1.5 million
      and $2.3 million, respectively.




14




*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 $141,000 and $249,000 as of June 30, 2008 and June 30, 2007, respectively.
      This change was the result of a significant decline in the product return rate
      caused by changes in our management of the return programs. As a consequence
      of
      the Company’s standardized manufacturing processes and product testing
      procedures, returns of defective product are infrequent and the quantities
      have
      not been significant. Accordingly, historical warranty costs have not been
      material.





**Results
      of Operations**





The
      following table sets forth consolidated statements of operations data for the
      periods indicated as a percentage of net revenue.





**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Consolidated
                Statements of Operations Data:Net
                revenue:Hardware
            
            
            85.6
            %
            
            91.8
            %
            
            86.2
            %
            
            91.7
            %Software
            
            
            14.4
            
            
            8.2
            
            
            13.8
            
            
            8.3Total
                net revenue
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0Cost
                of revenue:Hardware
            
            
            39.4
            
            
            45.9
            
            
            41.4
            
            
            45.5Software
            
            
            1.8
            
            
            0.7
            
            
            1.6
            
            
            0.7Total
                cost of revenue
            
            
            41.3
            
            
            46.6
            
            
            43.0
            
            
            46.2Gross
                profit
            
            
            58.8
            
            
            53.4
            
            
            57.0
            
            
            53.8Operating
                expenses:Research
                and development
            
            
            23.6
            
            
            20.6
            
            
            22.4
            
            
            19.7Sales
                and marketing
            
            
            40.0
            
            
            33.6
            
            
            40.1
            
            
            29.0General
                and administrative
            
            
            17.4
            
            
            14.4
            
            
            18.8
            
            
            14.0Total
                operating expenses
            
            
            81.0
            
            
            68.6
            
            
            81.3
            
            
            62.7Loss
                from operations
            
            
            (22.2
            )
            
            (15.2
            )
            
            (24.3
            )
            
            (8.9
            )Equity
                in net income (loss) of investee
            
            
            (0.0
            )
            
            0.1
            
            
            (
                0.0
            )
            
            (
                0.0
            )Interest
                and other income, net
            
            
            1.0
            
            
            2.7
            
            
            1.7
            
            
            2.8Net
                loss before taxes
            
            
            (21.2
            )
            
            (12.4
            )
            
            (22.6
            )
            
            (6.1
            )Provision
                for income taxes
            
            
            (
                0.0
            )
            
            (0.1
            )
            
            (
                0.0
            )
            
            (0.1
            )Net
                loss
            
            
            (21.2
            )%
            
            (12.5
            )%
            
            (22.6
            )%
            
            (6.2
            )%




15




**Net
      Revenue**





Net
      sales
      consist primarily of revenue from direct sales to end-users, including
      resellers, and sales to distributors.





We
      are
      organized and operate as two operating segments--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 and Norway.





The
      following table sets forth percentages of net revenue by geographic region
      with
      respect to such revenue for the periods indicated:





**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Americas
            
            
            87
            %
            
            92
            %
            
            87
            %
            
            91
            %International
            
            
            13
            %
            
            8
            %
            
            13
            %
            
            9
            %Total
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %




Net
      revenue by customers that individually accounted for more than 10% of our
      revenue for the three and nine months ended June 30, 2008 and 2007,
      respectively, were as follows :





**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**AltiSys
            
            
            10
            %
            
            17
            %
            
            14
            %
            
            15
            %Synnex
            
            
            33
            %
            
            52
            %
            
            34
            %
            
            52
            %Graybar
            
            
            5
            %
            
            14
            %
            
            11
            %
            
            15
            %Jenne
            
            
            12
            %
            
            —
            
            
            9
            %
            
            —Total
            
            
            60
            %
            
            83
            %
            
            68
            %
            
            82
            %





The
      following table sets forth percentage of net revenue by product type with
      respect to such revenue for the periods indicated:





**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Hardware
            
            
            86
            %
            
            92
            %
            
            86
            %
            
            92
            %Software
            
            
            14
            %
            
            8
            %
            
            14
            %
            
            8
            %Total
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %




Net
      revenue for the three months ended June 30, 2008 was $4.8 million as compared
      to
      $4.2 million for the three months ended June 30, 2007. Revenue generated in
      the
      Americas segment accounted for $4.2 million, or 87% of our total net
      revenue, as compared to $3.8 million, or 92% of our total net revenue, for
      the
      three months ended June 30, 2008 and June 30, 2007, respectively. Revenue
      generated in the International segment accounted for $646,000, or 13% of our
      total net revenue, as compared to $335,000, or 8% of our total net revenue,
      for
      the three months ended June 30, 2008 and June 30, 2007, respectively. In the
      Americas segment, during the three months ended June 30, 2008, we generated
      $361,000 in non-system related revenue, which is primarily revenue generated
      from our service support plans. The increase in net revenue excluding non-system
      related revenue was approximately 1%.  The increase in net revenue in the
      Americas segment was primarily attributable to a change in our product mix.
      The
      number of systems shipped was approximately 2.6% lower than the corresponding
      period in the previous year. However, the average revenue per system was higher
      by approximately 3.6% because our smaller systems decreased approximately 19.6%
      while larger systems increased 100%.





Net
      revenue for the nine months ended June 30, 2008 was $13.8 million as compared
      to
      $12.7 million for the nine months ended June 30, 2007. Revenue generated in
      the
      Americas segment accounted for $11.9 million, or 87% of our total net revenue,
      as compared to $11.5 million, or 91% of our total net revenue, for the nine
      months ended June 30, 2008 and June 30, 2007, respectively. Revenue generated
      in
      the International segment accounted for $1.8 million, or 13% of our total net
      revenue, as compared to $1.2 million, or 9% of our total net revenue, for the
      nine months ended June 30, 2008 and June 30, 2007, respectively. In the Americas
      segment, during the nine months ended June 30, 2008, we generated approximately
      $551,000 in non-system related revenue. Our non-system related revenue is
      primarily comprised of revenue generated from our service support plans. The
      change in net revenue excluding non-system related revenue was a decrease of
      approximately 1.7%. The decrease in net revenue in the Americas segment was
      primarily attributable to a change in our product mix. The increase in net
      revenue in the International segment was primarily attributable to our efforts
      to develop and expand our international operations. A lthough
      we intend to focus on increasing international sales, we expect that sales
      to
      enterprise customers in the United States will continue to comprise the
      significant majority of our sales.




16





**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 for the three months ended June 30, 2008 and June 30, 2007 remained
      unchanged at $1.9 million per quarter. For both the nine months ended June
      30,
      2008 and June 30, 2007, cost of revenue was approximately $5.9 million in each
      of the periods. Cost of revenue as a percentage of net revenue decreased to
      41%
      and 43% for the three and nine months ended June 30, 2008, respectively, as
      compared to 47% and 46% for the three and nine months ended June 30, 2007,
      respectively. The change in both the three and nine months ended June 30, 2008
      and June 30, 2007 was due to an increase in our non-system related revenue.




**Research
      and Development (“R&D”)**




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
      increased to $1.1 million, or 24% of net revenue, for the three months ended
      June 30, 2008 from $860,000, or 21% of net revenue, for the same period in
      fiscal 2007. The expense increase in absolute dollars was primarily attributable
      to an increase in personnel-related expense of approximately $180,000 due to
      an
      increase in headcount and an increase of $79,000 in project related expenses.
      Research and development expense increased to $3.1 million, or 22% of net
      revenue, for the nine months ended June 30, 2008 from $2.5 million, or 20%
      of
      net revenue, for the same period in fiscal 2007. This increase in absolute
      dollars is attributable to an increase in personnel-related and overhead
      expenses of approximately $488,000, $58,000 increase in project related expense,
      and an increase of $78,000 in consulting related services. These expenses were
      partially offset by a decrease of $65,000 in travel related expenses. The
      increase in personnel-related expensed was the result of increased headcount
      of
      approximately 5%.




We
      intend
      to continue to make investments in our research and development and we
      anticipate these expenses will increase in the future periods over the long
      term. We believe that such expenses in research and development are essential
      to
      maintaining and improving our competitive position. In the short term, we expect
      research and development expenses to remain consistent as management continues
      to monitor expenses and plans to keep them in line with expected revenue
      opportunities.





**Sales
      and Marketing**




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 increased to $1.9 million, or 40% of net revenue, for
      the
      three months ended June 30, 2008 from approximately $1.4 million, or 34% of
      net
      revenue, for the three months ended June 30, 2007. This increase in absolute
      dollars was primarily attributable to an increase of $257,000 in
      personnel-related and overhead expenses, an increase of approximately $51,000
      in
      advertising expenses, an increase of $39,000 in travel related expenses, an
      increase of $14,000 in service related expenses, an increase of $11,000 in
      non-cash stock-based compensation expenses and an increase of $128,000 in sales
      and marketing expenses in China. The
      most
      significant factor contributing to the increase in personnel-related and
      overhead expenses was an increase in headcount. For
      the
      nine months ended June 30, 2008, sales and marketing expenses increased to
      $5.5
      million, or 40% of net revenue, from approximately $3.7 million, or 29% of
      net
      revenue, for the same period in fiscal 2007. The expense increase in absolute
      dollars was the result of increased advertising expenses of approximately
      $187,000, increased partner conference expenses of approximately $130,000,
      increased travel related expenses of $113,000 and increased personnel-related
      and overhead expenses of approximately $838,000 due to an increase in headcount
      of approximately 4%. Other factors included an increase of $158,000 in service
      related expenses, an increase of $54,000 in non-cash stock-based compensation
      expenses, an increase of $42,000 in consulting related expenses and an increase
      of $263,000 in sales and marketing expenses in China. The expense increase
      in
      our China operations was primarily due to our efforts to develop and expand
      our
      international operations to help increase international sales.





We
      anticipate that sales and marketing expenses will increase and will remain
      the
      largest category of our operating expenses in future periods over the long
      term.
      This is largely due to the expansion of our sales and marketing activities
      to
      increase our focus on larger enterprise customers. Additionally, 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.




17




**General
      and Administrative (“G&A”)**





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 increased to $838,000, or 17% of net revenue, for the
      three months ended June 30, 2008 from $604,000, or 14% of net revenue, for
      the
      same period in the prior year. T he
      increase in absolute dollars in general and administrative was driven by an increase
      in personnel-related expenses of approximately $52,000, an increase of $20,000
      in bad debt expenses, an increase of $51,000 in non-cash stock based
      compensation expense, as required by SFAS No. 123(R), an increase of $13,000
      in
      relocation expenses, an increase of $47,000 in service and bank fee related
      expenses and an increase of $59,000 in general and administrative expenses
      in
      China. These increased expenses were partially offset by a decrease in legal
      expenses of approximately $21,000. The increases in personnel-related, non-cash
      stock based compensation and relocation expenses are directly tied to the hiring
      of
      our new president and chief operating officer. General
      and administrative expenses for the nine months ended June 30, 2008 increased
      to
      $2.6 million, or 19% of net revenue, from $1.8 million, or 14% of net revenue,
      for the nine months ended June 30, 2007. This was mainly the result of a
      $120,000 increase in service and bank fees related expenses, approximately
      $265,000 increase in payroll related expenses, a $15,000 increase in consulting
      related services, a $56,000 increase in relocation expenses, a $41,000 increase
      in travel related expenses, an $87,000 increase in general and administrative
      expenses in China and approximately $230,000 increase in non-cash stock based
      compensation expense, as required by SFAS No. 123(R). The increase in bank
      related fees is primarily due to an increase in our online sales activities
      such
      as the software assurance. The
      increase in payroll, relocation and travel related expenses are
      directly tied to the hiring
      of
      our new president and chief operating officer.





We
      expect
      to continue to incur additional general and administrative expenses as we
      continue efforts to expand our business. Additionally, we will continue to
      incur
      cost associated with compliance with Section 404 of the Sarbanes-Oxley Act.





**Equity
      Investment in Common Stock of Private Company**





Equity
      investment in common stock of private company is primarily our allocated portion
      of the net income or losses of a private Korean telecommunications company
      in
      which we acquired an ownership
      interest in
      July
      2004 for approximately $79,000. As a result of this investment, we acquired
      approximately 23% of the voting power of the company. This power 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. For the three months ended June 30, 2008, the total equity loss with
      respect to this company was approximately $1,000, as compared to net income
      of
      $3,000 for the same period in fiscal 2007. For the nine months ended June 30,
      2008 and 2007, t he
      total
      equity loss with respect to this company was approximately $4,000 and $1,000,
      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 $46,000
      and $240,000 for the three and nine months ended June 30, 2008, respectively,
      from $112,000 and $348,000 for the same periods in fiscal 2007. The
      change was related to lower interest rates as well as decreased interest income
      from a reduced cash balance in the current fiscal year. The reduced cash balance
      was primarily the result of our stock repurchase activity. The
      weighted average interest rate earned by us on our cash, cash equivalents and
      short-term investments decreased to 3.23% in the nine months ended June 30,
      2008
      as compared to the 5.48% rate earned during the same period in fiscal 2007. We
      expect
      net interest and other income to remain relatively flat with little change
      in
      cash available to invest.




18




**Liquidity
      and Capital Resources**





Since
      inception, we have financed our operations primarily through the sale of equity
      securities. As of June 30, 2008, we held cash, cash equivalents and short-term
      investments totaling $9.5 million which represents approximately 68% of our
      total current assets. As of June 30, 2008, $7.6 million of our total assets
      are
      classified as cash and cash equivalents compared with $8.2 million as of June
      30, 2007. Short-term investments as of June 30, 2008 and 2007 were approximately
      $1.9 million, respectively.





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.





The
      following table presents selected financial information for each of the fiscal
      periods indicated below (in thousands):





**Nine
                Months Ended**
              **June
                30,****2008**
            
            **2007**Cash
                and cash equivalents
            
            $
            7,580
            
            $
            8,173Short-term
                investments
            
            
            1,899
            
            
            1,891Total
                cash, cash equivalents and short-term investments
            
            $
            9,479
            
            $
            10,064




**Nine
                Months Ended**
              **June
                30,****2008**
            
            
            **2007**Net
                cash used in operating activities
            
            $
            (300
            )
            $
            (546
            )Net
                cash provided by investing activities
            
            
            1,835
            
            
            2,846Net
                cash provided by (used in) financing activities
            
            
            (66
            )
            
            820Net
                increase in cash, cash equivalents, end of period
            
            $
            1,469
            
            $
            3,120





*Changes
      in Cash Flows*





Durin *g* the
      nine
      months ended June 30, 2008, our net cash used in operating
      activities was $300,000, which was approximately $246,000 less than the cash
      used in operating activities during the same period in fiscal 2007. This was
      primarily attributable to our net loss of $3.1 million, a decrease of $460,000
      in accounts receivable, an increase of $391,000 in net inventories, an increase
      of $216,000 in accounts payable, an increase of $1.7 million in deferred revenue
      and an increase of $110,000 in accrued liabilities. The cash impact of the
      loss
      for the nine months ended June 30, 2008 was partially offset by non-cash
      adjustments of $187,000 in depreciation and amortization costs and non-cash
      stock-based compensation expense of $696,000. The decrease in accounts
      receivable during this period was the result of routine period-to-period
      fluctuations. The change in deferred revenue was primarily due to an increase
      of
      $1.4 million in our service support plans as well as an increase of $428,000
      in
      deferred channel revenue. The deferred channel revenue increase was due to
      the
      volume of products shipped to distribution as apposed to what was sold. We
      work
      closely with our distributors to monitor channel inventory levels and attempt
      to
      ensure that appropriate levels of products are available to resellers and end
      users. Net cash used in operating activities of $546,000 in the nine months
      ended June 30, 2007  was
      primarily a result of net loss of $791,000, a decrease of $148,000 in accounts
      receivable, an increase of $628,000 in net inventories and an increase of
      $144,000 in accounts payable. These factors were partially offset by non-cash
      adjustments of $187,000 in depreciation and amortization cost and non-cash
      stock-based compensation expense of $417,000.





For
      the
      nine months ended June 30, 2008, net cash provided by investing activities
      was
      $1.8 million as compared $2.8 million during the same period in fiscal 2007.
      This decrease was related to proceeds from maturities of short-term investments
      of approximately $36,000 million and purchases of short-term investments of
      approximately $34,000 million during fiscal 2008 as compared to proceed from
      maturities of short-term investments of approximately $20,000 million and
      purchases of short-term investments of approximately $17,000 million during
      fiscal 2007.





Net
      cash
      used in financing activities for the nine months ended June 30, 2008 was
      approximately $66,000, as compared to net cash provided by financing activities
      of $820,000 during the same period in fiscal 2007. This change was primarily
      attributable to the repurchase of treasury stock of approximately $346,000
      and a
      change of $540,000 in proceeds from the exercise of employee stock options.
      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, which repurchases may be made
      from time to time at our management’s discretion through November 14, 2008. When
      exercising such discretion, management will consider variety of factors such
      as
      our stock price, general business and market conditions and other investment
      opportunities. The repurchase will be made in the open market and will be funded
      from available working capital. Under such authority, we repurchased 213,515
      shares in the nine months ended June 30, 2008 for an aggregate cost of $346,000.
      Current cash balances and the proceeds from stock option exercises and purchases
      in the stock purchase plan have funded these stock repurchases.




19





Net
      accounts receivable decreased to $2.2 million at June 30, 2008 from $2.7 million
      at September 30, 2007. This 18% decrease in net accounts receivable was
      primarily due to a decrease in the volume of sales generated in the last month
      of third quarter of fiscal 2008 as compared to the fourth quarter of fiscal
      2007.





We
      ended
      the third quarter of fiscal 2008 with a cash conversion cycle of 83 days, as
      compared to 92 days for the third quarter of fiscal 2007. 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.





Net
      inventories increased to $2.0 million at June 30, 2008 from $1.6 million at
      September 30, 2007 and our inventory turn rate decreased to 4.1 at June 30,
      2008 from 5.7 at September 30, 2007. The increased inventory level was
      primarily attributable to an increase in finished goods of approximately 61%
      due
      to the need to build up inventory for early shipments in early fourth quarter
      of
      fiscal 2008. We regularly provide forecasts to our contract manufacturers,
      and
      we order products from our contract manufacturers based on our projected sales
      levels well in advance of receiving actual orders from our customers. We seek
      to
      maintain sufficient levels of finished goods inventory to meet our forecasted
      product sales with limited levels of inventory to compensate for unanticipated
      shifts in sales volume and product mix. Our annualized inventory turn rate
      represents the number of times inventory is replenished during the year.
      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.





Accounts
      payable increased to $1.0 million at June 30, 2008 from $821,000 at
      September 30, 2007. This increase in accounts payable during this period
      was primarily attributable to an increase in the number of components purchased
      in the third quarter of fiscal 2008. Approximately $70,000 of this increase
      was
      associated with components purchased for new product development and
      approximately $90,000 was due to more inventories purchased in the last month
      of
      the quarter as a result of increased production.




*Liquidity
      and Capital Resources*





As
      of
      June 30, 2008, our principal sources of liquidity included cash, cash
      equivalents and short-term investments of approximately $9.5 million. The
      maturities of our short-term investments are staggered throughout the year
      to
      ensure we meet our cash requirements.





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 needed 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.





We
      did
      not have any material commitments for capital expenditures as of June 30, 2008.
      We had total outstanding commitments on noncancelable capital and operating
      leases of $1.0 million as of June 30, 2008. 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.




20


**Contractual
      Obligations**




The
      following table presents certain payments due by us under contractual
      obligations with minimum firm commitments as of June 30, 2008:




**Payment
                Due by Period (in thousands)****Contractual
                Obligations**
            
            **Total**
            
            **Payments
                Due in Less**
              **Than
                1 Year**
            
            **Payments
                Due in**
              **1
                - 3 Years**
            
            **Payments**
              **Due
                in**
              **3
                - 5 Years**
            
            **Payments
                Due**
              **in
                More**
              **Than
                5 Years**Operating
                leases obligation
            
            $
            931
            
            $
            153
            
            $
            778
            
            $
            —
            
            $
            —Capital
                leases obligation
            
            
            88
            
            
            11
            
            
            77
            
            
            —
            
            
            —Total
                contractual lease obligation
            
            $
            1,019
            
            $
            164
            
            $
            855
            
            $
            —
            
            $
            —





**Effects
      of Recently Issued Accounting Pronouncements**





In
      July
      2006, the FASB issued FASB Interpretation No. (“FIN”) 48, *Accounting
      for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109,
      “Accounting for Income Taxes* ,”
which
      seeks to reduce the diversity in practice associated with certain aspects of
      measurement and recognition in accounting for income taxes. In addition, FIN
      48
      provides guidance on derecognition, classification, interest penalties and
      accounting in interim periods, and requires expanded disclosure with respect
      to
      the uncertainty in income taxes. W e
      adopted
      the provisions of FIN 48 on October 1, 2007. There was no impact on our
      consolidated financial position, results of operations and cash flows as a
      result of adoption. We have no unrecognized tax benefit as of June 30, 2008,
      including no accrued amounts for interest and penalties.




21


**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





*Interest
      Rate Risk*





At
      June
      30, 2008, our investment portfolio consisted primarily of fixed income
      securities. 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, the
      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 June 30, 2008, 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). 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.
      A
      hypothetical 10% favorable or unfavorable change in foreign currency exchange
      rates would not have a material impact on our results of
      operations.





**Item
      4. Controls and Procedures**





*Evaluation
      of Disclosure Controls and Procedures*





Our
      management carried out an evaluation, under the supervision and with the
      participation of our President and Chief Executive Officer and our Chief
      Financial Officer, of the effectiveness of our disclosure controls and
      procedures as of the end of our quarter ended June 30, 2008 pursuant to Exchange
      Act Rule 13a-15(e) and 15d-15(e). The term “disclosure controls and
      procedures,” as defined under the Exchange Act, means controls and other
      procedures of a company that are designed to ensure that information required
      to
      be disclosed by a company in the reports that it files or submits under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      a
      company in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the company’s management, including its
      principal executive and principal financial officers, or persons performing
      similar functions, as appropriate to allow timely decisions regarding required
      disclosure. Based upon that evaluation, our President and Chief Executive
      Officer and our Chief Financial Officer concluded that, as of the end of our
      quarter ended June 30, 2008, our disclosure controls and procedures were
      effective.





*Changes
      in Internal Control Over Financial Reporting*





There
      have been no changes in our internal controls over financial reporting during
      the Company’s fiscal quarter ended June 30, 2008 that have materially affected,
      or are reasonably likely to materially affect, our internal controls over
      financial reporting.




22




**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





On
      September 6, 2002, Vertical Networks, Inc. filed suit against us in the United
      States District Court for the Northern District of California,
      alleging infringement of U.S. Patents Nos. 6,266,341, 6,289,025, 6,292,482,
      6,389,009, and 6,396,849.  On October 28, 2002, Vertical Networks amended
      its complaint to add allegations of infringement of U.S. Patents Nos. 5,617,418
      and 5,687,174.  Vertical Networks filed a second amended complaint on
      November 20, 2002 to identify products and/or activities that allegedly infringe
      the seven patents-in-suit.  Vertical Networks' complaint seeks
      an injunction against future patent infringement, an award of damages,
      including treble damages for alleged willful infringement, and attorneys' fees
      and costs.  On December 9, 2002, we filed an answer and counterclaims
      for declaratory relief, and on December 26, 2002, Vertical Networks filed its
      reply to those counterclaims.  On October 4, 2007, the parties entered into
      a stipulation dismissing the lawsuit in its entirety without
      prejudice.





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. 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
      2. Unregistered Sales of Equity Securities and Use of Proceeds**





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. This authorization was announced
      on November 14, 2007. Current cash balances and the proceeds from stock option
      exercises and employee stock purchase plan purchases have funded the stock
      repurchase program. Pursuant to the 2007 Board of Directors’ authorization, we
      repurchased 213,515 shares in the nine months ended June 30, 2008 at an
      approximate cost of $346,000. This authorization expires on November 14,
      2008.





Repurchases
      of our common stock under the latest Board of Directors’ authorization is
      represented in the following table:





**Period**
            
            **Total
                Number of Shares Purchased**
            
            **Average
                Price Paid per Share**
            
            **Total Number of**
              **Shares Purchased**
              **as Part of Publicly**
              **Announced Program**
            
            **Maximum Number of**
              **Shares that May Yet**
              **be Purchased Under**
              **the Program**November
                1, 2007 through November 30, 2007
            
            
            16,413
            
            $
            1.59
            
            
            16,413
            
            
            1,983,587December
                1, 2007 through December 31, 2007
            
            
            92,965
            
            
            1.60
            
            
            109,378
            
            
            1,890,622February
                1, 2008 through February 29, 2008
            
            
            80,218
            
            
            1.66
            
            
            189,596
            
            
            1,810,404March
                1, 2008 through March 31, 2008
            
            
            23,919
            
            
            1.61
            
            
            213,515
            
            
            1,786,485Total
            
            
            213,515
            
            $
            1.61
            
            
            213,515
            
            
            1,786,485




23




**Item
      6. Exhibits****.**




Please
      refer to the Exhibit Index of this report on Form 10-Q.




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**SIGNATURE**





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








ALTIGEN
                COMMUNICATIONS, INC.Date:
                August 13, 2008
            By:
            /s/
                Philip M. McDermottPhilip
                M. McDermott,Chief
                Financial Officer(Principal
                Financial and Accounting Officer)





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**EXHIBIT
      INDEX**





**Exhibit**
              **Number**
            
            **Description**3.1
                (1)
            
            Amended
                and Restated Certificate of Incorporation.3.2
                (2)
            
            Second
                Amended and Restated Bylaws.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, file
                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, file
                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 March 31,
                2004.






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