UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





xQUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR
      THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008ORoTRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE TRANSITION PERIOD
      FROM                      TOCommission
      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 ýNO  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Noý


The
number of shares of our common stock outstanding as of February 10, 2009 was:
15,875,080 shares.












ALTIGEN
COMMUNICATIONS, INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008


TABLE OF CONTENTS




PART
      I.  FINANCIAL INFORMATIONItem
      1.
                                                  Condensed
      Consolidated Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of December 31, 2008 and September 30,
      2008
                                                  
                                                  
                                                  3Condensed
      Consolidated Statements of Operations for the Three Months Ended December
      31, 2008 and 2007
                                                  
                                                  
                                                  4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended December
      31, 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
                                                  
                                                  
                                                  21Item
      4.
                                                  Controls
      and Procedures
                                                  
                                                  
                                                  21PART
      II.  OTHER INFORMATIONItem
      1.
                                                  Legal
      Proceedings
                                                  
                                                  
                                                  22Item
      2.
                                                  Unregistered
      Sale of Equity Securities and Use of Proceeds
                                                  
                                                  
                                                  22Item
      6.
                                                  Exhibits
                                                  
                                                  
                                                  23SIGNATURE
                                                  
                                                  
                                                  24EXHIBIT
      INDEX
                                                  
                                                  
                                                  25




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)




December
      31,
                                                                        
                                                                        
                                                                        September
      30,2008
                                                                        
                                                                        
                                                                        2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                                        
                                                                        $
                                                                        4,644
                                                                        
                                                                        
                                                                        $
                                                                        9,467Short-term
      investments
                                                                        
                                                                        
                                                                        4,998
                                                                        
                                                                        
                                                                        
                                                                        400Accounts receivable, net of
      allowances of $35 and $19 at December 31, 2008 and September 30, 2008,
      respectively.
                                                                        
                                                                        
                                                                        1,993
                                                                        
                                                                        
                                                                        
                                                                        2,423Inventories, net
                                                                        
                                                                        
                                                                        1,851
                                                                        
                                                                        
                                                                        
                                                                        1,594Prepaid expenses and other
      current assets
                                                                        
                                                                        
                                                                        254
                                                                        
                                                                        
                                                                        
                                                                        176Total current
      assets
                                                                        
                                                                        
                                                                        13,740
                                                                        
                                                                        
                                                                        
                                                                        14,060Property
      and equipment:Furniture and
      equipment
                                                                        
                                                                        
                                                                        2,077
                                                                        
                                                                        
                                                                        
                                                                        2,009Computer
software
                                                                        
                                                                        
                                                                        948
                                                                        
                                                                        
                                                                        
                                                                        9483,025
                                                                        
                                                                        
                                                                        
                                                                        2,957Less:
      Accumulated depreciation
                                                                        
                                                                        
                                                                        (2,584
                                                                        )
                                                                        
                                                                        
                                                                        (2,534
                                                                        )Net property and
      equipment
                                                                        
                                                                        
                                                                        441
                                                                        
                                                                        
                                                                        
                                                                        423Other
      non-current assets:Long-term
      investments
                                                                        
                                                                        
                                                                        208
                                                                        
                                                                        
                                                                        
                                                                        211Long-term
deposit
                                                                        
                                                                        
                                                                        82
                                                                        
                                                                        
                                                                        
                                                                        82Total other non-current
      assets
                                                                        
                                                                        
                                                                        290
                                                                        
                                                                        
                                                                        
                                                                        293Total assets
                                                                        
                                                                        $
                                                                        14,471
                                                                        
                                                                        
                                                                        $
                                                                        14,776LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts payable
                                                                        
                                                                        $
                                                                        1,470
                                                                        
                                                                        
                                                                        $
                                                                        1,234Accrued
      liabilities:Payroll and related
      benefits
                                                                        
                                                                        
                                                                        531
                                                                        
                                                                        
                                                                        
                                                                        550Warranty
                                                                        
                                                                        
                                                                        128
                                                                        
                                                                        
                                                                        
                                                                        137Marketing
                                                                        
                                                                        
                                                                        115
                                                                        
                                                                        
                                                                        
                                                                        136Accrued
      expense
                                                                        
                                                                        
                                                                        350
                                                                        
                                                                        
                                                                        
                                                                        200Other current
      liabilities
                                                                        
                                                                        
                                                                        472
                                                                        
                                                                        
                                                                        
                                                                        628Deferred revenue
      short-term
                                                                        
                                                                        
                                                                        2,624
                                                                        
                                                                        
                                                                        
                                                                        2,489Total current
      liabilities
                                                                        
                                                                        
                                                                        5,690
                                                                        
                                                                        
                                                                        
                                                                        5,374Other
      long-term liabilities.........
                                                                        
                                                                        
                                                                        406
                                                                        
                                                                        
                                                                        
                                                                        105Stockholders'
      equity:Convertible preferred stock,
      $0.001 par value; Authorized—5,000,000 shares;
      Outstanding—none at
      December 31, 2008 and September 30, 2008
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Common stock, $0.001 par value;
      Authorized—50,000,000
      shares; Outstanding—15,875,080shares atDecember 31, 2008and15,777,303 shares at
      September 30, 2008
                                                                        
                                                                        
                                                                        17
                                                                        
                                                                        
                                                                        
                                                                        17Treasury stock at cost — 1,305,430 shares at
      December 31, 2008 and 1,295,030 shares at September 30,
    2008
                                                                        
                                                                        
                                                                        (1,389
                                                                        )
                                                                        
                                                                        
                                                                        (1,381
                                                                        )Additional paid-in
      capital
                                                                        
                                                                        
                                                                        67,038
                                                                        
                                                                        
                                                                        
                                                                        66,689Accumulated other comprehensive
      income
                                                                        
                                                                        
                                                                        221
                                                                        
                                                                        
                                                                        
                                                                        3Accumulated
    deficit
                                                                        
                                                                        
                                                                        (57,512
                                                                        )
                                                                        
                                                                        
                                                                        (56,031
                                                                        )Total stockholders'
      equity
                                                                        
                                                                        
                                                                        8,375
                                                                        
                                                                        
                                                                        
                                                                        9,297Total liabilities and
      stockholders' equity
                                                                        
                                                                        $
                                                                        14,471
                                                                        
                                                                        
                                                                        $
                                                                        14,776





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
                  December
      31,2008
              
              
              2007Net
      revenue:Hardware
              
              $
              4,195
              
              
              $
              3,628Software
              
              
              665
              
              
              
              632Total net
    revenue
              
              
              4,860
              
              
              
              4,260Cost
      of revenue:Hardware
              
              
              1,894
              
              
              
              1,791Software
              
              
              4
              
              
              
              63Total cost of
      revenue
              
              
              1,898
              
              
              
              1,854Gross
      profit
              
              
              2,962
              
              
              
              2,406Operating
      expenses:Research and
      development
              
              
              1,225
              
              
              
              915Sales and
    marketing
              
              
              2,084
              
              
              
              1,763General and
      administrative
              
              
              971
              
              
              
              814Total operating
      expenses
              
              
              4,280
              
              
              
              3,492Loss
      from operations
              
              
              (1,318
              )
              
              
              (1,086
              )Equity
      in net income (loss) of investee
              
              
              (3
              )
              
              
              3Interest
      and other income, net
              
              
              37
              
              
              
              112Net
      loss before taxes
              
              
              (1,284
              )
              
              
              (971
              )Income
      tax provision
              
              
              16
              
              
              
              —Net
      loss
              
              $
              (1,268
              )
              
              $
              (971
              )Basic and diluted net loss per
      share
              
              $
              (0.08
              )
              
              $
              (0.06
              )Weighted average shares used in
      computing basic net loss per share
              
              
              15,838
              
              
              
              15,728Weighted average shares used in
      computing diluted net loss per share
              
              
              15,838
              
              
              
              15,728




See Notes
to Consolidated Financial Statements.




4




ALTIGEN
COMMUNICATIONS, INC. AND SUBSIDIARY


CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS


(UNAUDITED)


(In
thousands)




Three
      Months Ended
                  December
      31,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net loss
              
              $
              (1,268
              )
              
              $
              (971
              )Adjustments to reconcile net
      loss to net cash used in operating activities:Depreciation
              
              
              50
              
              
              
              61Stock-based
      compensation
              
              
              286
              
              
              
              229Equity
      in net income (loss) of investee
              
              
              3
              
              
              
              (3
              )Changes in operating assets and
      liabilities:Accounts
      receivable
              
              
              430
              
              
              
              434Inventories,
    net
              
              
              (257
              )
              
              
              (417
              )Prepaid expenses and other
      current assets
              
              
              (78
              )
              
              
              (71
              )Accounts
    payable
              
              
              236
              
              
              
              223Accrued
      liabilities
              
              
              (55
              )
              
              
              121Deferred revenue
      short-term
              
              
              135
              
              
              
              705Other long-term
      liabilities
              
              
              301
              
              
              
              (23
              )Net cash provided by (used in)
      operating activities
              
              
              (217
              )
              
              
              288CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases of short-term
      investments
              
              
              (5,460
              )
              
              
              (10,187
              )Proceeds from sale of
      short-term investments
              
              
              867
              
              
              
              9,824Changes in long-term
      deposits
              
              
              —
              
              
              
              5Purchases of property and
      equipment
              
              
              (68
              )
              
              
              (76
              )Net cash used in investing
      activities
              
              
              (4,661
              )
              
              
              (434
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuances of
      common stock, net of issuance costs
              
              
              63
              
              
              
              146Repurchase of treasury
      stock
              
              
              (8
              )
              
              
              (174
              )Net cash provided by (used in)
      financing activities
              
              
              55
              
              
              
              (28
              )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (4,823
              )
              
              
              (174
              )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              9,467
              
              
              
              6,111CASH
      AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              4,644
              
              
              $
              5,937





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 10 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 located in Shanghai,
China. 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, 2008, included in
the Company’s 2008 Annual Report on Form 10-K filed with the SEC on December 29,
2008. 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 purchased with an initial maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
invested in various investment grade institutional money market accounts, U.S.
Agency securities and commercial paper.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. The
Company's investment policy requires investments to be rated single-A or
better.





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. For the three months ended December 31, 2008, we disposed of
fully-reserved inventory with a carrying value of zero and an original cost at
$176,000. We attribute this overall reduction in obsolete inventory to
physically disposing of a portion of the reserved inventory. The disposal of
such inventory had no material impact on our revenue, gross margins and net
loss. For the three months ended December 31, 2008, we recognized a provision of
$28,000 for excess and obsolete inventories. The components of inventories
include (in thousands):








December
      31,
                    
                    
                    September
      30,2008
                    
                    
                    2008Raw
      materials
                    
                    $
                    491
                    
                    
                    $
                    479Work-in-progress
                    
                    
                    234
                    
                    
                    
                    197Finished
      goods
                    
                    
                    1,126
                    
                    
                    
                    918Total
                    
                    $
                    1,851
                    
                    
                    $
                    1,594




6




REVENUE
RECOGNITION





The
Company recognizes revenue software in accordance with Statement of Position
(“SOP”) 97-2, Software Revenue
Recognition (“SOP 97-2”). Revenue consists of sales to end-users,
resellers, and distributors. Revenue from sales to end-users and resellers is
recognized upon shipment, when risk of loss has passed to the customer,
collection of the receivable is reasonably assured, persuasive evidence of an
arrangement 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 (“Software Assurance”). 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:




Three
      Months Ended December 31,
                                              
                                              
                                              
                                              Three
      Months Ended December 31,2008
                                              
                                              
                                              
                                              2007Employee
      Stock Option Plan:Expected
      Life (in years)
                                              
                                              
                                              5
                                              
                                              
                                              
                                              5Risk-free
      interest rate
                                              
                                              
                                              2.3
                                              %
                                              
                                              
                                              3.6
                                              %Volatility
                                              
                                              
                                              141
                                              %
                                              
                                              
                                              88
                                              %Expected
      dividend
                                              
                                              
                                              0.0
                                              %
                                              
                                              
                                              0.0
                                              %Employee
      Stock Purchase Plan:Expected
      Life (in years)
                                              
                                              
                                              0.5
                                              
                                              
                                              
                                              0.5Risk-free
      interest rate
                                              
                                              
                                              1.2
                                              %
                                              
                                              
                                              4.2
                                              %Volatility
                                              
                                              
                                              140
                                              %
                                              
                                              
                                              89
                                              %Expected
      dividend
                                              
                                              
                                              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 December 31,2008
                
                
                2007Cost
      of goods sold
                
                $
                5
                
                
                $
                3Research
      and development
                
                
                65
                
                
                
                36Selling,
      general and administrative
                
                
                216
                
                
                
                190Total
                
                $
                286
                
                
                $
                229




8




The
following table summarizes the Company’s stock option plan as of October 1, 2008
and changes during the three months ended December 31, 2008:




Number of
    Shares
                                                            
                                                            
                                                            Weighted-
                                                              average
                                                              Exercise
      Price
                                                            
                                                            
                                                            Weighted-
                                                              Average
      Remaining
                                                              Contractual
      Life
                                                              (in
      years)Outstanding
      at October 1, 2008
                                                            
                                                            
                                                            4,551,822
                                                            
                                                            
                                                            $
                                                            3.14Granted
                                                            
                                                            
                                                            47,500
                                                            
                                                            
                                                            
                                                            0.68Exercised
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Forfeitures
      and cancellations
                                                            
                                                            
                                                            (55,847
                                                            )
                                                            
                                                            
                                                            3.36Outstanding
      at December 31, 2008
                                                            
                                                            
                                                            4,543,475
                                                            
                                                            
                                                            $
                                                            3.11
                                                            
                                                            
                                                            
                                                            5.14Vested
      and expected to vest at December 31, 2008
                                                            
                                                            
                                                            4,161,748
                                                            
                                                            
                                                            $
                                                            3.27
                                                            
                                                            
                                                            
                                                            4.81Exercisable
      at December 31, 2008
                                                            
                                                            
                                                            3,465,605
                                                            
                                                            
                                                            $
                                                            3.65
                                                            
                                                            
                                                            
                                                            4.00


At
December 31, 2008, the aggregate intrinsic value of outstanding stock options
was $135,000. 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 $132,000, and the weighted average remaining contractual
term was 4.8 years. The total exercisable stock options represented
approximately 3.5 million shares, the aggregate intrinsic value was $126,000,
the weighted average exercise price was $3.65, and the weighted average
remaining contractual term was 4.0 years.





At
December 31, 2008, expected future compensation expense relating to options
outstanding on December 31, 2008 is $ 359,000 over a weighted-average period of
4 years.





Under the
1999 Employee Stock Purchase Plan (the “1999 Purchase Plan”), we had reserved,
as of December 31, 2008, 473,058 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 each year). During the three months
ended December 31, 2008, 108,177 shares were purchased by and distributed to
employees at a price of $0.59 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.





The
following table sets forth the computation of basic and diluted loss per share
(in thousands, except net loss and per share amounts):





Three
      Months Ended
                  December
      31,2008
                
                
                2007Net
      loss
                
                $
                (1,268
                )
                
                $
                (971
                )Weighted
      average shares outstanding – basic loss per share
                
                
                15,838
                
                
                
                15,728Weighted
      average shares outstanding  – diluted loss per
    share
                
                
                15,838
                
                
                
                15,728Basic
      loss per share
                
                $
                (0.08
                )
                
                $
                (0.06
                )Diluted
      loss per share
                
                $
                (0.08
                )
                
                $
                (0.06
                )





Options
to purchase 4.5 million shares of common stock were outstanding as of
December 31, 2008 and were excluded from the computation of diluted net earnings
per share for these periods because their effect would have been
antidilutive.





Comprehensive
Loss





Comprehensive
income consists of two components--net income and other comprehensive income.
Other comprehensive income refers to revenue, expenses, gains, and losses that
under U.S. generally accepted accounting principles are recorded as an element
of stockholders' equity but are excluded from net income. The Company's other
comprehensive income consists of unrealized gains and losses on marketable
securities categorized as available-for-sale and foreign exchange gains and
losses.




9




FAIR
VALUE MEASUREMENTS





Effective
October 1, 2008, we adopted SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”). The Company did not record an adjustment to retained
earnings as a result of the adoption of SFAS 157, and the adoption did not have
a material effect on the Company’s results of operations. SFAS No. 157
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair
value measurements. Fair value is defined under SFAS No. 157 as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under SFAS
No. 157 must maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:





Level 1- Financial instruments for which quoted
market prices for identical instruments are available in active
markets.





Level 2-Inputs other than Level 1 that
are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.





Level 3-Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.





The
adoption of this statement with respect to our financial assets and liabilities,
did not impact our consolidated results of operations and financial condition,
but required additional disclosure for assets and liabilities measured at fair
value.  In accordance with SFAS No. 157, the following table
represents our fair value hierarchy for our financial assets (cash equivalents
and investments) measured at fair value on a recurring basis as of December 31,
2008.  Level 1 available-for-sale investments are primarily comprised of
investments in U.S. Agency securities.  These securities are valued
using market prices on active markets.  The Company had no material Level 2
or Level 3 measurements for the quarter ending December 31, 2008.





Assets measured at fair value as of
December 31, 2008 are summarized as follows:





(In
      thousands)
                      
                      Quoted
      Prices in Active
                        Markets
      for Identical
                        Instruments
                        (Level
      1)Cash
      equivalents (1)Money
      market funds
                      
                      $
                      1,317Cash
      equivalent securities (*)
                      
                      
                      5001,817Investments
      (2)Agency
      discount notes
                      
                      
                      4,998Cash
      equivalents and investments
                      
                      $
                      6,815





(1)
            Included
      in cash and cash equivalents on our condensed consolidated balance
      sheet.


(2)
            Included
      in short-term investments in marketable securities on our condensed
      consolidated balance sheet.(*)
            Cash
      equivalent securities are primarily agency discount notes with an initial
      maturity of three months or less.





10




SEGMENT
REPORTING





The
Company manages its business primarily on a geographic basis. Accordingly, the
Company determined its operating segments, which are generally based on the
nature and location of its customers, to be the Americas and International. The
Company's two geographical segments, sell the same products to the same types of
customers. The Company's reportable operating segments are comprised of the
Americas and International operations. The Americas segment includes the United
States, Canada, Mexico, Central America and the Caribbean. The International
segment is comprised of China, 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
                    December
      31,2008
                
                
                2007Americas
                
                
                86
                %
                
                
                86
                %International
                
                
                14
                %
                
                
                14
                %Total
                
                
                100
                %
                
                
                100
                %





CUSTOMERS





Our
customers are primarily end-users, resellers and distributors. We have
distribution agreements with AltiSys, Synnex and Jenne in the Americas. Our
agreements with AltiSys and Synnex have initial terms of one year and our
agreement with Jenne has an initial term of two years. Each of these agreements
are renewed automatically for additional one year terms, provided that each
party shall have the right to terminate the agreement for convenience upon
ninety (90) days' written notice prior to the end of the initial term or
any subsequent term of the agreement. In addition, our agreements with AltiSys,
Synnex and Jenne also provide for termination, with or without cause and without
penalty, by either party upon 30 days' written notice to the other party or
upon insolvency or bankruptcy. For a period of 60 days' following
termination of the agreement, AltiSys, Synnex and Jenne may distribute any
products in their possession at the time of termination or, at their option,
return any products to us that are in their inventories. Upon termination of the
distribution agreement, all outstanding invoices for the products will become
due and payable within 30 days' of the termination.





The
following table sets forth our net revenue by customers that individually
accounted for more than 10% of our revenue for the periods
indicated:





Three
      Months Ended
                    December
      31,2008
                
                
                2007AltiSys
                
                
                4
                %
                
                
                17
                %Synnex
                
                
                31
                %
                
                
                36
                %Graybar
      (*)
                
                
                —
                
                
                
                13
                %Jenne
                
                
                21
                %
                
                
                3
                %Total
                
                
                56
                %
                
                
                69
                %


(*)   In
April 2008, we terminated our distribution agreement with Graybar. This
termination of our relationship with Graybar did not have a material impact on
our business.




11




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 three months ended
December 31, 2008 and 2007, respectively, are as follows (in
thousands):





Three
      Months Ended
                      December
      31,2008
                  
                  
                  2007Beginning
      balance
                  
                  $
                  137
                  
                  
                  $
                  148Provision
      for warranty liability
                  
                  
                  33
                  
                  
                  
                  40Warranty
      cost including labor, components and scrap
                  
                  
                  (42
                  )
                  
                  
                  (43
                  )Ending
      balance
                  
                  $
                  128
                  
                  
                  $
                  145





3.  COMMITMENTS
AND CONTINGENCIES





Commitments







We lease
our facilities under various operating lease agreements expiring on various
dates through December 2011. 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. Generally, these leases have multiple options to extend for a period
of years upon termination of the original lease term. The lease for our
headquarters expires on February 21, 2009, and then on a month to month basis
and under the same conditions until terminated by either party. We are currently
evaluating potential options for other office space to serve as our
headquarters. Rent expense for all operating leases totaled approximately
$175,000 and $168,000 for the three months ended December 31, 2008 and 2007,
respectively. We also lease certain equipment under capital lease arrangements.
The minimum future lease payments under all noncancellable capital and operating
leases as of December 31, 2008 are shown in the following table (in
thousands):







Fiscal
      Years Ending September 30,
                                          
                                          Capital
                                            Leases
                                          
                                          
                                          Operating
                                            LeasesRemainder
      of 2009
                                          
                                          $
                                          33
                                          
                                          
                                          $
                                          2912010
                                          
                                          
                                          33
                                          
                                          
                                          
                                          3572011
                                          
                                          
                                          —
                                          
                                          
                                          
                                          16Total
      contractual lease obligation
                                          
                                          $
                                          66
                                          
                                          
                                          $
                                          664Amount
      representing interest
                                          
                                          $
                                          4Present
      value of minimum lease payment
                                          
                                          $
                                          62Current
      portion
                                          
                                          $
                                          30Long-term
      portion
                                          
                                          
                                          32Total
      capital lease commitments
                                          
                                          $
                                          62





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.





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.




12




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 through November 12, 2008. On
November 11, 2008, our Board of Directors extended the repurchase program by
another year to November 14, 2009. Pursuant to the 2007 authority, we
repurchased 231,135 shares in fiscal 2008 at an aggregate cost of $367,000.
Pursuant to the 2008 authority, we repurchased 10,400 shares in the three months
ended December 31, 2008 at an aggregate cost of $8,000.





The
Company intends to continue repurchasing shares under this program over time
depending upon price and share availability. Repurchases may be made from time
to time at our management’s discretion through November 14, 2009. When
exercising such discretion, management will consider a 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.




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, 2008, 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 $4.9 million and $4.3 million for the three months
ended December 31, 2008 and 2007, respectively. As of December 31, 2008, we had
an accumulated deficit of $57.3 million. Net cash used in operating activities
was $217,000 for the three months ended December 31, 2008.





We derive
our revenue from sales of our telephone systems. Product revenue is comprised of
direct sales to end-users and resellers and sales to distributors. Revenue from
product sales to end users and resellers are recognized upon shipment. We defer
recognition of revenue for sales to distributors until they resell our products
to their customers. Upon shipment, we also provide a reserve for the estimated
cost that may be incurred for product warranty. Under our distribution
contracts, a distributor has the right, in certain circumstances, to return
products it determines are overstocked, so long as it provides an offsetting
purchase order for products in an amount equal to or greater than the dollar
value of the returned products. In addition, we provide distributors protection
from subsequent price reductions.





Our cost
of revenue consists of component and material costs, direct labor costs,
provisions for excess and obsolete inventory, warranty costs and overhead
related to the manufacturing of our products. Several factors that have affected
and will continue to affect our revenue growth are the state of the economy, the
market acceptance of our products, our ability to add new resellers and our
ability to design, develop, and release new products. We engage third-party
assemblers, which for the three months ended December 31, 2008 were All Quality
Services in Fremont, California and ISIS Surface Mounting, Inc. in San Jose,
California to insert the hardware components into the printed circuit board. We
purchase fully-assembled chassis from Advantech Corporation, analog phones from
Fanstel Corporation, Internet protocol phones from BCM Communications, Inc.,
single board computers for our MAX product from AAEON Electronics, Inc. and raw
material components from Avnet Electronics. We selected our manufacturing
partners with the goals of ensuring a reliable supply of high-quality finished
products and lowering per unit product costs as a result of manufacturing
economies of scale. We cannot assure you that we will maintain the volumes
required to realize these economies of scale or when or if such cost reductions
will occur. The failure to obtain such cost reductions could materially
adversely affect our gross margins and operating results.




13




We
continue to focus on developing enhancements to our current products to provide
greater functionality and increased capabilities, based on our market research,
customer feedback and our competitors' product offerings, as well as creating
new product offerings to both enhance our position in our target market segment
and enter new geographical markets. Additionally, we intend to continue selling
our products to small- to medium-sized businesses, enterprise businesses,
multisite businesses, corporate and branch offices and call centers. Also, we
plan to continue to recruit additional resellers and distributors to focus on
selling phone systems to our target customers. We believe that the adoption rate
for this Internet telephony is much faster with small- to medium-sized
businesses because many of these businesses have not yet made a significant
investment for a traditional phone system. Also, we believe that small- to
medium-sized businesses are looking for call center-type administration to
increase the productivity and efficiency of their contacts with
customers.





CRITICAL
ACCOUNTING POLICIES





Revenue Recognition.Net
sales consist primarily of revenue from direct sales to end-users, resellers and
distributors. We recognize revenue 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. As
of December 31, 2008, our total deferred revenue was $2.6 million compared to
$1.3 million for the same period in fiscal 2008, an increase of $1.3 million
over the same period in the prior year. The increase was primarily the result of
continued growth of our new recurring revenue programs. Theseplansincludeboth theSoftwareAssuranceProgram, which provides our customers
with new software releases and support for an annual fee, and thePremierServicePlan, which includes software assurance
and extended hardware warranty.





Service Support Plans. In
September 2007, we introduced our Software Assurance Program which provides our
customers with the latest updates, new releases, and technical support for the
applications they are licensed to use. In fiscal 2008, we initiated our Premier
Service Plan, which includes software assurance and extended hardware warranty.
These programs have an annual subscription and can range from one to three
years. Sales from our service support programs are recorded as deferred revenue
and recognized as revenue over the terms of their subscriptions. As of December
31, 2008, our deferred revenue was approximately $2.1 million compared to
$363,000 for the same period in fiscal 2008. Our new service plan offering
remains a significant growth opportunity as we continue to add new service
customers.





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 Equivalent.We
consider all highly liquid investments purchased with an initial maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
invested in various investment grade institutional money market accounts, U.S.
Agency securities and commercial paper.The Company's investment policy
requires investments to be rated single-A or better.





Short-Term Investment.The
Company’s policy is to invest in highly-rated securities with strong liquidity
and requires investments to be rated single-A or better. Short-term investments
are comprised of U.S. Agency securities and commercial paper. Short-term
investments are highly liquid financial instruments with original maturities
greater than three months but less than one year and are classified as
“available-for-sale” investments. We classify our available-for-sale securities
as current assets and report them at their fair value. Further, we recognize
unrealized gains and losses related to these securities as an increase or
reduction in stockholders’ equity.




14




Inventory.  Inventory
is stated at the lower of cost (first-in, first-out method) or market. Our
inventory balance was $1.9 million and $2.0 million as of December 31, 2008 and
2007, respectively. We perform a detailed review of inventory each fiscal
quarter, with consideration given to future customer demand for our products,
obsolescence from rapidly changing technology, product development plans, and
other factors. If future demand or market conditions for our products are less
favorable than those projected by management, or if our estimates prove to be
inaccurate due to unforeseen technological changes, we may be required to record
additional inventory provision which would negatively affect gross margins in
the period when the write-downs were recorded. In prior periods, we had
established a reserve to write off excess inventory that management believed
would not be sold. For the three months ended December 31, 2008, we disposed of
fully-reserved inventory with a carrying value of zero and an original cost at
$176,000. We attribute this overall reduction in obsolete inventory to
physically disposing of a portion of the reserved inventory. The disposal of
such inventory had no material impact on our revenue, gross margins and net
loss. For the three months ended December 31 2008, we recognized a provision of
$28,000 for excess and obsolete inventories as compared to a reduction of $2,000
during the same period in the prior year. As of December 31, 2008 and 2007, our
inventory allowance was $703,000 and $2.4 million, respectively.  The
change in inventory allowance was primarily attributable to the disposal of
fully-reserved inventory with a carrying value of zero and an original cost of
$1.7 million.





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 $128,000 as of December 31, 2008 compared to
$137,000 as of September 30, 2008. 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
                                                      December
      31,2008
                                                    
                                                    
                                                    2007Consolidated
      Statements of Operations Data:Net
      revenue:Hardware
                                                    
                                                    
                                                    86.3
                                                    %
                                                    
                                                    
                                                    85.2
                                                    %Software
                                                    
                                                    
                                                    13.7
                                                    
                                                    
                                                    
                                                    14.8Total net
    revenue
                                                    
                                                    
                                                    100.0
                                                    
                                                    
                                                    
                                                    100.0Cost
      of revenue:Hardware
                                                    
                                                    
                                                    39.0
                                                    
                                                    
                                                    
                                                    42.0Software
                                                    
                                                    
                                                    0.1
                                                    
                                                    
                                                    
                                                    1.5Total cost of
      revenue
                                                    
                                                    
                                                    39.1
                                                    
                                                    
                                                    
                                                    43.5Gross
      profit
                                                    
                                                    
                                                    60.9
                                                    
                                                    
                                                    
                                                    56.5Operating
      expenses:Research
      and development
                                                    
                                                    
                                                    25.2
                                                    
                                                    
                                                    
                                                    21.5Sales
      and marketing
                                                    
                                                    
                                                    42.9
                                                    
                                                    
                                                    
                                                    41.4General
      and administrative
                                                    
                                                    
                                                    20.0
                                                    
                                                    
                                                    
                                                    19.1Total
      operating expenses
                                                    
                                                    
                                                    88.1
                                                    
                                                    
                                                    
                                                    82.0Loss
      from operations
                                                    
                                                    
                                                    (27.2
                                                    )
                                                    
                                                    
                                                    (25.5
                                                    )Equity
      in net income (loss) of investee
                                                    
                                                    
                                                    (0.1
                                                    )
                                                    
                                                    
                                                    0.1Interest
      and other income, net
                                                    
                                                    
                                                    0.8
                                                    
                                                    
                                                    
                                                    2.6Net
      loss before income taxes
                                                    
                                                    
                                                    (26.5
                                                    )
                                                    
                                                    
                                                    (22.8
                                                    )Provision
      for income taxes
                                                    
                                                    
                                                    0.3
                                                    
                                                    
                                                    
                                                    —Net
      loss
                                                    
                                                    
                                                    (26.2
                                                    )
      %
                                                    
                                                    
                                                    (22.8
                                                    )
      %
  15


Net
Revenue





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





We are
organized and operate as two operating segments, the Americas and International.
The Americas 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
                    December
      31,2008
                
                
                2007Americas
                
                
                86
                %
                
                
                86
                %International
                
                
                14
                %
                
                
                14
                %Total
                
                
                100
                %
                
                
                100
                %





Net
revenue by customers that individually accounted for more than 10% of our
revenue for the three months ended December 31, 2008 and 2007, respectively,
were as follows:





Three
      Months Ended
                    December
      31,2008
                
                
                2007AltiSys
                
                
                4
                %
                
                
                17
                %Synnex
                
                
                31
                %
                
                
                36
                %Graybar
      (*)
                
                
                —
                
                
                
                13
                %Jenne
                
                
                21
                %
                
                
                3
                %Total
                
                
                56
                %
                
                
                69
                %


(*)   In
April 2008, we terminated our distribution agreement with Graybar. The
termination of our relationship with Graybar did not have a material impact on
our business.





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





Three
      Months Ended
                    December
      31,2008
                
                
                2007Hardware
                
                
                74
                %
                
                
                85
                %Software
                
                
                14
                %
                
                
                15
                %Service
      Support Plans (1)
                
                
                12
                %
                
                
                —Total
                
                
                100
                %
                
                
                100
                %





(1)
            In
      the quarter ended December 31, 2007, revenue generated from these service
      support plans accounted for less than 10% of our total
      revenue.  For the same period, our hardware revenue includes
      service support revenue generated primarily from our service support plans
      starting in September 2007.





Net
revenue for the three months ended December 31, 2008 was $4.9 million as
compared to $4.3 million for the three months ended December 31, 2007. Revenue
generated in the Americas segment accounted for $4.2 million, or 86% of our
total net revenue, as compared to $3.6 million, or 86% of our total net revenue,
for the three months ended December 31, 2008 and 2007, respectively. Revenue
generated in the International segment accounted for $687,000, or 14% of our
total net revenue, as compared to $617,000, or 14% of our total net revenue, for
the three months ended December 31, 2008 and 2007, respectively. In the Americas
segment, during the three months ended December 31, 2008, we generated $607,000
in non-system related revenue, which is primarily revenue generated from our
service support plans. Excluding non-system related revenue, net revenue
decreased approximately 2.1%. The decrease in net revenue in the Americas
segment was primarily attributable to a change in our product mix. The number of
systems shipped was approximately 3.7% lower than the corresponding period in
the pervious year. However, the average revenue per system was higher by
approximately 1.6% because our smaller systems decreased approximately 13.1%
while larger systems increased 30.3%.




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 December 31, 2008 and 2007 remained unchanged at $1.9 million per
quarter.




Research
and Development




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. For the first quarter of fiscal 2009,
research and development expenses were $1.2 million or 25% of revenue,
compared to $915,000 or 21% of revenue for the first quarter of fiscal 2008. The
increase in absolute dollars was primarily attributable to an increase of
$78,000 in personnel-related expense, an increase of $53,000 in project related
expenses and an increase of $68,000 in consulting related services. Other
factors included an increase in non-cash stock-based compensation expense of
$29,000, an increase in travel related expense of $18,000, an increase of
$29,000 in purchases of equipment and an increase of $32,000 in overall China’s
research and development expenses.




We intend
to continue to make investments in our research and development and we believe
that focused investments in research and development are critical to the future
growth and our ability to enhance our competitive position in the marketplace.
We believe that our ability to develop and meet enterprise customer requirements
is essential to our success. Accordingly, we have assembled a team of engineers
with expertise in various fields, including voice and IP communications, unified
communications network design, data networking and software engineering. Our
principal research and development activities are conducted in Fremont,
California and Shanghai, China. We anticipate these expenses will increase in
the future periods over the long term. 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. For
the first quarter of fiscal 2009, sales and marketing expenses were
$2.1 million or 42% of revenue, compared to $1.8 million or 41% of revenue
for the first quarter of fiscal 2008. This increase in absolute dollars was
primarily attributable to an increase of $203,000 in personnel-related and
overhead expenses due to an increase in headcount, an increase of $62,000 in
service related expenses, and an increase of $38,000 in non-cash stock-based
compensation expenses.





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.





General
and Administrative





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. For the first
quarter of fiscal 2009, general and administrative expenses were $971,000 or 20%
of revenue, compared to $814,000 or 19% of revenue for the first quarter of
fiscal 2008. The increase in absolute dollars in general and administrative was
driven by an increase in personnel-related expenses of approximately $86,000, an
increase of $27,000 in service and bank related expenses and an increase of
$37,000 in overall China’s general and administrative expenses.





We expect
general and administrative expenses to remain relatively consistent in 2009
compared to 2008 as we continue to focus on controlling costs.





Equity
Investment in Common Stock of Private Company





In July
2004, we purchased common stock of a private Korean telecommunications company
for approximately $79,000. As a result of this investment, we acquired
approximately 23% of the voting power of the company. This gives us the right to
nominate and elect one of the three members of the company’s current board of
directors. We are accounting for this investment using the equity method. For
the three months ended December 31, 2008, total equity in net losses with
respect to this company was approximately $3,000 compared to net income of
$3,000 for the same period in fiscal 2008.




17




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 $37,000
for the three months ended December 31, 2008 from $112,000 for the same period
in fiscal 2008. The decrease in
interest expense and other income, net was primarily due to a decline in overall
interest rates earned on investments in marketable securities in the three
months ended December 31, 2008 as compared to the same period in fiscal 2008.The weighted average interest rate earned by us on our cash, cash
equivalents and short-term investments decreased to 2.06% in the three months
ended December 31, 2008 as compared to the 4.43% rate earned during the same
period in fiscal 2008. We expect
net interest and other income to remain relatively flat with little change in
cash available to invest.





Liquidity
and Capital Resources





Since
inception, we have financed our operations primarily through the sale of equity
securities. As of December 31, 2008, we held cash, cash equivalents and
short-term investments totaling $9.6 million.  Total cash, cash
equivalents and short-term investments represents approximately 70% of total
current assets for quarter ended December 31, 2008. As of December 31, 2008,
$4.6 million of our total assets are classified as cash and cash equivalents
compared with $9.4 million at September 30, 2008. Short-term investments were
approximately $4.9 million and $400,000 at December 31, 2008 and September 30,
2008, respectively.





For the
three months ended December 31, 2008, net cash used in investing activities was
$4.6 million as compared $434,000 during the same period in fiscal 2008. This
was directly related to proceeds from maturities of short-term investments of
approximately $862,000 and purchases of short-term investments of approximately
$5.4 million during the first three months of fiscal 2009 as compared to proceed
from maturities of short-term investments of approximately $9.8 million and
purchases of short-term investments of approximately $10.1 million during fiscal
2008.





Net cash
provided by financing activities for the three months ended December 31, 2008
was approximately $55,000, as compared to net cash used in financing activities
of $28,000 during the same period in fiscal 2008. This change was primarily
attributable to the repurchase of our treasury stock of approximately $8,000 for
the three months ended December 31, 2008 as compared to $174,000 in the first
three months of fiscal 2008. During the first three months of fiscal 2009,
proceeds from exercise of employee stock options represented approximately
$63,000 as compared to $146,000 during the same period in the prior
year.





On
October 23, 2007, our Board of Directors approved the repurchase of up to $2.0
million of our common stock in the open market through November 12, 2008. On
November 11, 2008, our Board of Directors extended the repurchase program by
another year to November 14, 2009. Pursuant to the 2007 authority, we
repurchased 231,135 shares in fiscal 2008 at an aggregate cost of $367,000.
Pursuant to the 2008 authority, we repurchased 10,400 shares in the three months
ended December 31, 2008 at an aggregate cost of $8,000. The Company intends to
continue repurchasing shares under this program over time depending upon price
and share availability. Repurchases may be made from time to time at our
management’s discretion through November 14, 2009. When exercising such
discretion, management will consider a 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.





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):




December
      31,
                                2008
                              
                              
                              September
      30,
                                2008Cash
      and cash equivalents
                              
                              $
                              4,644
                              
                              
                              $
                              9,467Short-term
      investments
                              
                              
                              4,998
                              
                              
                              
                              400Total
      cash, cash equivalents and short-term investments
                              
                              $
                              9,642
                              
                              
                              $
                              9,867
  Three
      Months Ended
                          December
      31,2008
                      
                      
                      2007Net
      cash provided by (used in) operating activities
                      
                      $
                      (217
                      )
                      
                      $
                      288Net
      cash used in investing activities
                      
                      $
                      (4,661
                      )
                      
                      $
                      (434
                      )Net
      cash provided by (used in) financing activities
                      
                      $
                      55
                      
                      
                      $
                      (28
                      )Net
      decrease in cash, cash equivalents, end of period
                      
                      $
                      (4,823
                      )
                      
                      $
                      (174
                      )




18




Changes
in Cash Flows





During
the three months ended December 31, 2008, our net cash used in operating
activities was $217,000 compared to net cash provided by operating activities of
$288,000 during the same period in fiscal 2008. This was primarily attributable
to our net loss of $1.3 million, a decrease of $430,000 in accounts receivable,
an increase of $257,000 in net inventories, an increase of $236,000 in accounts
payable, an increase of $135,000 in deferred revenue short-term and an increase
of $301,000 in deferred revenue long-term. The cash impact of the loss for the
three months ended December 31, 2008 was partially offset by a non-cash expense
of $286,000 in stock-based compensation expense. The decrease in accounts
receivable was primarily due to lower shipments and good collections during the
first three months of fiscal 2009. Accounts payable increased due to timing of
payments to vendors. Inventories increased primarily due to a shift in sales
volume and product mix. Long-term liabilities increased due to long-term
deferred revenue received from our service support plans. The increase in
deferred revenue was primarily due to an increase of $106,000 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
accounts receivable decreased to $1.9 million at December 31, 2008 from $2.4
million at September 30, 2008. The decrease in accounts receivable was primarily
due to lower shipments and good collections during the first three months of
fiscal 2009. Our days sales outstanding (DSO) decreased to 37 days as of
December 31, 2008 from 43 at September 30, 2008.





We ended
the first quarter of fiscal 2009 with a cash conversion cycle of 55 days, as
compared to 93 days for the first quarter of fiscal 2008. 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 $1.9 million at December 31, 2008 from $1.6
million at September 30, 2008 and our inventory turn rate decreased to 4.1
at December 31, 2008 from 5.3 at September 30, 2008. Our annualized
inventory turn rate represents the number of times inventory is replenished
during the year. The increase in net inventories was primarily due to a shift in
sales volume and product mix. 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.





Liquidity and Capital
Resources





As of
December 31, 2008, our principal sources of liquidity included cash, cash
equivalents and short-term investments of approximately $9.6 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 additional funds in the future if needed, on acceptable
terms, we may not be able to further develop or enhance our products, take
advantage of opportunities, or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business. Even if additional
financing is available, we may be required to obtain the consent of our
stockholders, which we may or may not be able to obtain. In addition, the
issuance of equity or equity-related securities will dilute the ownership
interest of our stockholders and the issuance of debt securities could increase
the risk or perceived risk of investing in our securities.





We did
not have any material commitments for capital expenditures as of December 31,
2008. We had total outstanding commitments on noncancelable capital and
operating leases of $730,000 as of December 31, 2008. Lease terms on our
existing facility operating leases generally range from three to nine years. The
lease for our headquarters expires on February 21, 2009, and then on a month to
month basis and under the same conditions until terminated by either party. We
are currently evaluating potential options for other office space to serve as
our headquarters.




19




Contractual
Obligations




The
following table presents certain payments due by us under contractual
obligations with minimum firm commitments as of December 31, 2008 (in
thousands):







Payment
      Due by PeriodContractual
      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 YearsOperating
      leases obligation
                      
                      $
                      664
                      
                      
                      $
                      291
                      
                      
                      $
                      373
                      
                      
                      $
                      —
                      
                      
                      $
                      —Capital
      leases obligation
                      
                      
                      66
                      
                      
                      
                      33
                      
                      
                      
                      33
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      contractual lease obligation
                      
                      $
                      730
                      
                      
                      $
                      324
                      
                      
                      $
                      406
                      
                      
                      $
                      —
                      
                      
                      $
                      —





Effects
of Recently Issued Accounting Pronouncements





Effective
October 1, 2008, we adopted SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”). The Company did not record an adjustment to retained
earnings as a result of the adoption of SFAS 157, and the adoption did not have
a material effect on the Company’s results of operations. SFAS No. 157
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair
value measurements. Fair value is defined under SFAS No. 157 as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under SFAS
No. 157 must maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:





Level 1- Financial instruments for which quoted
market prices for identical instruments are available in active
markets.





Level 2-Inputs other than Level 1 that
are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.





Level 3-Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.





Assets measured at fair value as of
December 31, 2008 are summarized as follows:





(In
      thousands)
                    
                    Quoted
      Prices in Active
                      Markets
      for Identical
                      Instruments
                      (Level
      1)Cash
      equivalents (1)Money
      market funds
                    
                    $
                    1,317Cash
      equivalent securities (*)
                    
                    
                    5001,817Investments
      (2)Agency
      discount notes
                    
                    
                    4,998Cash
      equivalents and investments
                    
                    $
                    6,815





(1)
            Included
      in cash and cash equivalents on our condensed consolidated balance
      sheet.


(2)
            Included
      in short-term investments in marketable securities on our condensed
      consolidated balance sheet.(*)
            Cash
      equivalent securities are primarily agency discount notes with an initial
      maturity of three months or less.




20




Item
3. Quantitative and Qualitative Disclosures About Market Risk





Market
Interest Rate Risk





At
December 31, 2008, our investment portfolio consisted primarily of fixed income
securities, excluding those classified as cash and cash equivalents of $1.3
million. These securities are subject to interest rate risk and will decline in
value if market interest rates increase. Our interest income and expense is most
sensitive to fluctuations in the general level of U.S. interest rates. As such,
changes in U.S. interest rates affect the interest earned on our cash, cash
equivalents and short-term investments, and the fair value of those investments.
Due to the short duration and conservative nature of these instruments, we do
not believe that we have a material exposure to interest rate risk. For example,
if market interest rates were to increase immediately and uniformly by 10% from
levels as of December 31, 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
located in Shanghai, China. A hypothetical 10% favorable or unfavorable change
in foreign currency exchange rates would not have a material impact on our
results of operations.








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 December 31, 2008 pursuant to
Exchange Act Rule 13a-15(e) and 15d-15(e). The term “disclosure controls
and procedures” is defined under the Exchange Act and 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 December 31, 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 December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.




21




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 through November 12, 2008. On
November 11, 2008, our Board of Directors extended the repurchase program by
another year to November 14, 2009. Pursuant to the 2007 authority, we
repurchased 231,135 shares in fiscal 2008 at an aggregate cost of $367,000.
Pursuant to the 2008 authority, we repurchased 10,400 shares in the three months
ended December 31, 2008 at an aggregate cost of $8,000.





The
Company intends to continue repurchasing shares under this program over time
depending upon price and share availability. Repurchases may be made from time
to time at our management’s discretion through November 14, 2009. When
exercising such discretion, management will consider a 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.





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
                      
                      
                      Shares Purchased
                        as Part of Publicly
                        Announced Program
                      
                      
                      Approximate
      Dollar
                        Value
      of
                        Shares that May Yet
                        be Purchased as
      Part of
                        the ProgramNovember
      1, 2007 through November 30, 2007
                      
                      
                      16,413
                      
                      
                      $
                      1.59
                      
                      
                      
                      16,413
                      
                      
                      $
                      1,973,965December
      1, 2007 through December 31, 2007
                      
                      
                      92,965
                      
                      
                      
                      1.60
                      
                      
                      
                      92,965
                      
                      
                      
                      1,825,685February
      1, 2008 through February 29, 2008
                      
                      
                      80,218
                      
                      
                      
                      1.66
                      
                      
                      
                      80,218
                      
                      
                      
                      1,692,660March
      1, 2008 through March 31, 2008
                      
                      
                      23,919
                      
                      
                      
                      1.61
                      
                      
                      
                      23,919
                      
                      
                      
                      1,654,084August
      1, 2008 through August 31, 2008
                      
                      
                      7,211
                      
                      
                      
                      1.21
                      
                      
                      
                      7,211
                      
                      
                      
                      1,645,374September
      1, 2008 through September 30, 2008
                      
                      
                      10,409
                      
                      
                      
                      1.16
                      
                      
                      
                      10,409
                      
                      
                      
                      1,633,338December
      1, 2008 through December 31, 2008
                      
                      
                      10,400
                      
                      
                      
                      0.77
                      
                      
                      
                      10,400
                      
                      
                      
                      1,625,311Total
                      
                      
                      241,535
                      
                      
                      $
                      1.55
                      
                      
                      
                      241,535
                      
                      
                      $
                      1,625,311




22




Item 6. Exhibits.





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







23







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:
      February 12, 2009
            By:
            /s/
      Philip M. McDermottPhilip
      M. McDermottChief
      Financial Officer







24




EXHIBIT
INDEX





Exhibit
              Number
            
            Description3.1
      (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, filed
      herewith.32.2
            
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
      herewith.


___________________________________________





(1)
            
            Incorporated
      by reference to exhibit filed with the Registrant's Registration Statement
      on Form S-1 (No. 333-80037) declared effective on
      October 4, 1999.(2)
            
            Incorporated
      by reference to exhibit filed with the Registrant's Quarterly Report on
      Form 10-Q for the quarter ended March 31,
  2004.








25