<PAGE>

================================================================================

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

                                       OR

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


          FOR THE TRANSITION PERIOD FROM ____________ TO ____________


                        COMMISSION FILE NUMBER 000-27427


                          ALTIGEN COMMUNICATIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

        DELAWARE                                        94-3204299
(State of incorporation)                 (I.R.S. Employer Identification Number)


                             47427 FREMONT BOULEVARD
                                FREMONT, CA 94538
               (Address of principal executive office, Zip Code)

       Registrant's telephone number, including area code: (510) 252-9712
                                                           --------------

                           ---------------------------

       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.
                                               [X] Yes  [ ] No

       Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
                                               [ ] Yes  [X] No

       The number of shares of registrant's common stock outstanding as of
February 10, 2003 was 13,543,580 shares.

================================================================================

<PAGE>

                          ALTIGEN COMMUNICATIONS, INC.
                                   FORM 10-Q
                                     INDEX


                          PART I FINANCIAL INFORMATION


Item 1.       Unaudited Condensed Consolidated Financial Statements           3

              Unaudited Condensed Consolidated Balance Sheets as of
              December 31, 2002 and September 30, 2002                        3

              Unaudited Condensed Consolidated Statements of Operations
              for the Three Months Ended December 31, 2002 and 2001           4

              Unaudited Condensed Consolidated Statements of Cash Flows
              for the Three Months Ended December 31, 2002 and 2001           5

              Notes to Unaudited Condensed Consolidated Financial
              Statements                                                      6

Item 2.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                      11

Item 3.       Quantitative and Qualitative Disclosures about Market Risk     24

Item 4.       Controls and Procedures                                        24

                           PART II OTHER INFORMATION

Item 1.       Legal Proceedings                                              25

Item 2.       Changes in Securities and Use of Proceeds                      25

Item 6.       Exhibits and Reports on Form 8-K                               25

SIGNATURES                                                                   26

CERTIFICATIONS                                                               27

                                       2
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<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION

ITEM 1.  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                      ALTIGEN COMMUNICATIONS, INC. AND SUBSIDIARY
                                         CONDENSED CONSOLIDATED BALANCE SHEETS
                                                      (UNAUDITED)

                                  (in thousands, except share and per share amounts)


                                                                             DECEMBER 31,               SEPTEMBER 30,
                                                                                2002                        2002
                                                                           ---------------            ---------------
<S>                                                                        <C>                        <C>
ASSETS
Current assets:
   Cash and cash equivalents.....................................          $         5,258            $         7,210
   Short-term investments........................................                    6,434                      4,938
   Accounts receivable, net of allowances of $189 and $227 at
       December 31, 2002 and September 30, 2002, respectively....                    1,530                      1,656
   Inventories ..................................................                    1,106                      1,263
   Prepaid expenses and other current assets.....................                      579                        213
   Promissory note from officer / stockholder (Note 3) ..........                       --                        343
                                                                           ---------------            ---------------
            Total current assets.................................                   14,907                     15,623
                                                                           ---------------            ---------------
Property and equipment:
   Furniture and equipment.......................................                    2,045                      2,033
   Computer software.............................................                      922                        922
                                                                           ---------------            ---------------
                                                                                     2,967                      2,955
   Less: Accumulated depreciation and amortization...............                   (2,445)                    (2,320)
                                                                           ---------------            ---------------
             Net property and equipment..........................                      522                        635
                                                                           ---------------            ---------------
Other non-current assets:
    Long-term investment.........................................                      195                        195
    Long-term deposit............................................                       --                         53
                                                                           ---------------            ---------------
             Total other non-current assets......................                      195                        248
                                                                           ---------------            ---------------
                        Total assets.............................          $        15,624            $        16,506
                                                                           ===============            ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable..............................................          $           647            $           538
   Accrued liabilities:
       Payroll and related benefits..............................                      281                        316
       Warranty (Note 4) ........................................                      625                        590
       Marketing.................................................                      431                        436
       Other.....................................................                      670                        850
   Deferred revenue..............................................                      541                        405
                                                                           ---------------            ---------------
            Total current liabilities............................                    3,195                      3,135
                                                                           ---------------            ---------------
Stockholders' equity:
   Convertible preferred stock, $0.001 par value; Authorized -
     5,000,000 shares; Outstanding none at December 31, 2002 and
     September 30, 2002, respectively ...........................                       --                         --
   Common stock, $0.001 par value; Authorized - 50,000,000 shares;
     Outstanding -  14,607,475 shares at December 31, 2002 and
     14,543,606 shares at September 30, 2002.....................                       14                         14
   Treasury stock at cost -  1,063,895  shares at December 31, 2002
     and September 30, 2002, respectively........................                   (1,014)                    (1,014)
   Additional paid-in capital....................................                   61,768                     61,740
   Deferred stock compensation...................................                      (41)                       (55)
   Accumulated other comprehensive gain..........................                        1                         --
   Accumulated deficit...........................................                  (48,299)                   (47,314)
                                                                           ---------------            ---------------
            Total stockholders' equity...........................                   12,429                     13,371
                                                                           ---------------            ---------------
                        Total liabilities and stockholders' equity         $        15,624            $        16,506
                                                                           ===============            ===============


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

                                                          3
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<PAGE>
<TABLE>
<CAPTION>

                                 ALTIGEN COMMUNICATIONS, INC. AND SUBSIDIARY
                               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                 (UNAUDITED)

                                  (in thousands, except per share amounts)


                                                                           Three Months Ended December 31,
                                                                         ----------------------------------
                                                                             2002                 2001
                                                                         -------------        -------------
<S>                                                                      <C>                  <C>
Revenues, net....................................................        $       2,890        $       1,770
Cost of revenues.................................................                1,330                  903
                                                                         -------------        -------------
Gross profit.....................................................                1,560                  867
                                                                         -------------        -------------
Operating expenses:
   Research and development......................................                  947                1,046
   Sales and marketing...........................................                1,264                1,445
   General and administrative....................................                  446                  571
   Deferred stock compensation  (Note 5) ........................                   13                   93
                                                                         -------------        -------------
      Total operating expenses...................................                2,670                3,155
                                                                         -------------        -------------
Loss from operations.............................................               (1,110)              (2,288)
Interest and other income, net...................................                  125                   98
                                                                         -------------        -------------

Net loss ........................................................        $        (985)       $      (2,190)
                                                                         ==============       ==============

   Basic and diluted net loss per share..........................        $       (0.07)       $       (0.16)
                                                                         ==============       ==============
   Shares used in computing basic
          and diluted net loss per share.........................               13,521               13,463
                                                                         ==============       ==============


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

                                                     4
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                 ALTIGEN COMMUNICATIONS, INC. AND SUBSIDIARY
                               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 (UNAUDITED)
                                               (in thousands)

                                                                                  Three Months Ended December 31,
                                                                                ----------------------------------
                                                                                    2002                  2001
                                                                                ------------         -------------
<S>                                                                           <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss.....................................................               $       (985)        $     (2,190)
    Adjustments to reconcile net loss to net cash used in operating
       activities................................................:
       Depreciation  and amortization............................                        127                  168
       Amortization of deferred stock compensation...............                         13                   93
    Changes in operating assets and liabilities
       Accounts receivable.......................................                        126                   45
       Inventories...............................................                        157                  285
       Prepaid expenses and other current assets.................                       (313)                (247)
       Accounts payable..........................................                        109                   63
       Accrued liabilities.......................................                       (185)                (145)
       Deferred revenue..........................................                        136                 (286)
                                                                                ------------         -------------
       Net cash used in operating activities.....................                       (815)              (2,214)
                                                                                ------------         ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchases of short-term investments.......................                     (6,446)              (8,644)
       Proceeds from sale and maturities of short-term investments                     4,950                3,399
       Purchases of property and equipment.......................                        (12)                 (23)
                                                                                ------------         ------------
       Net cash  used in investing activities ...................                     (1,508)              (5,268)
                                                                                -------------        ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
       Proceeds from issuances of common stock ..................                         28                   73

       Purchase of treasury stock                                                         --                 (650)
       Collection  of promissory note from officer/stockholder                           343                  359
                                                                              --------------       --------------
       Net cash  provided by (used in) financing activities .....                        371                 (218)
                                                                              --------------       --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................                     (1,952)              (7,700)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................                      7,210               11,900
                                                                              --------------       --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.........................             $        5,258       $        4,200
                                                                              ==============       ==============

NONCASH INVESTING  ACTIVITIES:
       Unrealized gain on short term investments ................             $            1                   --
                                                                              ==============       ==============


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

                                                     5
</TABLE>

<PAGE>

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

AltiGen Communications, Inc. ("AltiGen" or the "Company") designs, manufactures
and markets integrated, multifunction telecommunications systems that allow
businesses to use data networks, such as the Internet, and the traditional
telephone network interchangeably and seamlessly to carry voice and data
communications.

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 ("SEC"). These
unaudited condensed consolidated financial statements reflect the operations of
the Company and its wholly-owned subsidiary. All significant intercompany
transactions and balances have been eliminated. In our opinion, these unaudited
condensed consolidated financial statements include all adjustments necessary
(which are of a normal and recurring nature) for a fair presentation of the
Company's financial position, results of operations and cash flows for the
periods presented.

The condensed consolidated balance sheet as of September 30, 2002 has been
derived from the audited consolidated financial statements as of that date.
Certain amounts from the prior period have been reclassified to conform to the
current period presentation. Such reclassifications have no effect on net income
as previously reported.

These financial statements should be read in conjunction with our audited
consolidated financial statements for the fiscal year ended September 30, 2002,
included in the Company's 2002 Annual Report on Form 10-K. Our 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

The Company considers all highly liquid investments with an original maturity of
three months or less from the date of purchase to be cash equivalents.
Short-term investments primarily consist of high-grade debt securities with
original maturities greater than three months but less than one year and are
classified as "available-for-sale" investments. As of December 31, 2002, the
Company's cash and cash equivalents consisted of commercial paper and cash
deposited in checking and money market accounts. For the first quarter of fiscal
years 2003 and 2002, the Company did not make any cash payments for interest or
income taxes.

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 cost (first-in, first-out) or market. Provisions,
when required, are made to write down excess and obsolete inventories to their
estimated net realizable values. The components of inventories include (in
thousands):

                                        December 31,    September 30,
                                            2002            2002
                                        ------------    -------------

   Raw materials......................  $        197    $         455
   Work-in-progress...................           165               80
   Finished goods.....................           744              728
                                        ------------    -------------
                                        $      1,106    $       1,263
                                        ============    =============


                                        6
<PAGE>

LONG-TERM INVESTMENT

As of December 31, 2002, the Company has an approximately $195,000 equity
investment in a private China based telecommunications company, accounted for
using the cost method. AltiGen's interest in the company is approximately 2% and
AltiGen does not have the ability to exercise significant influence.

REVENUE RECOGNITION

The Company accounts for the recognition of revenues in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition". Revenues
consist of sales to end-users, including dealers, and to distributors. Revenues
from sales to end-users are 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. The Company provides for estimated sales returns and allowances
and warranty costs related to such sales at the time of shipment. Net revenues
consist of product revenues 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 the Company's products held by
its distributors. Upon termination, any unsold products may be returned by the
distributor for a full refund. These agreements may be canceled by either party
based on a specified notice. As a result of the above provisions, the Company
defers recognition of revenues and the proportionate costs of revenues derived
from sales to distributors until such distributors resell the Company's products
to their customers. The amounts deferred as a result of this policy are
reflected as "deferred revenue" in the accompanying consolidated balance sheets.

Software components are generally not sold separately from the Company's
hardware components. Software revenues consist of license revenues that are
recognized upon the delivery of application products. The Company provides
limited post-contract customer support ("PCS"), consisting primarily of
technical support and "bug" fixes. In accordance with SOP 97-2, revenue earned
on software arrangements involving multiple elements is allocated to each
element based upon the relative fair values of the elements. Although the
Company provides PCS, the revenue allocated to this element is recognized
together with the initial licensing fee on delivery of the software because: (1)
the PCS fee is included with the initial licensing fee; (2) the PCS included
with the initial license fee is for one year or less; (3) the estimated cost of
providing PCS during the arrangement is insignificant; and (4) unspecified
upgrades/enhancements offered for minimal or no cost during PCS arrangements
historically have been and are expected to continue to be minimal and
infrequent. All estimated costs of providing the services, including upgrades
and enhancements are accrued for at the time of delivery.

COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE

Historical net loss per share has been calculated under Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
requires companies to compute earnings per share under two methods (basic and
diluted). Basic net loss per share is calculated by dividing net loss by the
weighted average shares of common stock outstanding during the period. Basic and
diluted net loss per share numbers are the same, as potential common shares
resulting from the exercise of stock options are antidilutive. Options to
purchase 4,335,669 shares of common stock were outstanding at December 31, 2002.

COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting and presentation of comprehensive income. Comprehensive loss for the
Company consists of net loss plus the effect of foreign currency translation
adjustments and other unrealized gains and losses, which are not material for
each of the three months ended December 31, 2002. Accordingly, comprehensive
loss closely approximates actual net loss. The Company's other comprehensive
income is immaterial for all periods presented.

                                       7

<PAGE>

SEGMENT REPORTING

The Company is organized and operates as one operating segment. The Company
operates primarily in one geographic area, the United States.

Net revenue by geographic region based on customer location for the three month
periods ended December 31, 2002 and 2001 were as follows:

                                               Three Months Ended
                                                  December 31,
                                   ------------------------------------------
                                          2002                     2001
                                   ------------------       -----------------
Net Revenue
     North America............                    95%                     96%
     International ...........                     5%                      4%
                                   ------------------       -----------------
                                                 100%                    100%
                                   ==================       ==================


Net revenue by certain customers individually that account for more than 10% of
revenue for the three month periods ended December 31, 2002 and 2001 were as
follows:

                                           Three Months Ended
                                              December 31,
                               -------------------------------------------
                                      2002                     2001
                               ------------------       ------------------
   Altisys.................                   22%                      27%
   Ingram Micro............                   22%                      22%
   Synnex..................                   42%                      38%
   Others..................                   14%                      13%
                               ------------------       ------------------
                                             100%                     100%
                               ==================       ==================


              All significant long-lived assets are located in the
                    United States for all periods presented.


Note 2. RECENT ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes one accounting model to
be used for long-lived assets to be disposed of by sale, and broadens the
presentation of discontinued operations to include more disposal operations.
SFAS No. 144 supersedes both SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the
accounting and the reporting provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Unfrequently
Occurring Events and Transactions". Adoption of SFAS No. 144 did not impact
consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities".The Company will adopt the provisions of SFAS 146
for restructuring activities initiated after December 31, 2002. SFAS 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS 146 also establishes
that the liability should initially be measured and recorded at fair value.
Accordingly, SFAS 146 may affect the timing of recognizing future restructuring
costs as well as the amounts recognized.


                                       8
<PAGE>

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure"
("Statement 148"). Statement 148 amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("Statement 123")
and provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
Statement 148 also amends the disclosure requirements of Statement 123 to
require more prominent and frequent disclosures in financial statement about the
effects of stock-based compensation. Adoption of the disclosure requirements of
Statement 148 is not expected to materially impact our consolidated financial
position or results of operations.

In November 2002, the FASB issued FASB interpretation number (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which elaborates on the
disclosures to be made by guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it is issued. The
impact for the Company is to disclose the accounting and methodology along with
a tabular reconciliation of changes in the liability for our product warranty.

Note 3. PROMISSORY NOTE TO OFFICER AND STOCKHOLDER:

On August 31, 2000, the Company granted a $1 million loan to Gilbert Hu, its
Chief Executive Officer, director and significant stockholder in exchange for a
secured promissory note with a one-year term, bearing interest at 6.88% ("Prior
Note"). During fiscal 2001, the Company collected approximately $277,000 of
payment against the Prior Note.

On September 17, 2001, the Company entered into a new note ("Promissory Note"),
replacing the Prior Note, for the then unpaid principal amount of $800,000. The
Promissory Note was full recourse and was secured by a security interest in the
borrower's personal assets. During fiscal 2002, approximately $380,000 was
collected against the Promissory Note. On December 27, 2002, the remaining
balance on the Promissory Note was fully repaid.

Note 4. WARRANTIES

The Company provides a one year warranty for hardware products starting upon
shipment to end-users. We historically have experienced minimal warranty costs.
Factors that affect our 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
recorded warranty liability every quarter and make adjustments to the liability
if necessary.

Changes in our warranty liability during the period are as follows (in
thousands):


Balance as of September 30, 2002 ......................           $        590
Provisions for warranty liability for sales made during
  the quarter ended Dec 31, 2002 ......................                    117
Warranty cost including labor, components and scrap ...                    (82)
                                                                  ------------
Balance as of December 31, 2002 .......................           $        625
                                                                  ============

                                       9
<PAGE>

Note 5.  DEFERRED STOCK COMPENSATION

The amortization of deferred stock compensation relates to the following items
in the accompanying unaudited condensed consolidated statements of operations
(in thousands):

                                               Three Months Ended
                                                  December 31,
                                   -------------------------------------------
                                          2002                     2001
                                   -------------------      ------------------

 Research and development.......   $                 5      $               36
 Sales and marketing............                     1                      29
 General and administrative.....                     7                      28
                                   -------------------      ------------------
                                   $                13      $               93
                                   ===================      ==================


                                       10
<PAGE>

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

FORWARD-LOOKING INFORMATION

Certain statements in this Form 10-Q contain "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties, which may cause actual results to differ materially from those
predicted in the forward-looking statements. Forward-looking statements can be
identified by their use of such verbs as "expects," "anticipates," and
"believes" or similar verbs or conjugations of such verbs. If any of our
assumptions on which the statements are based prove incorrect or should
unanticipated circumstances arise, our actual results could materially differ
from those anticipated by such forward-looking statements. The differences could
be caused by a number of factors or combination of factors, including, but not
limited to, the "Certain Factors Affecting Business, Operating Results and
Financial Conditions" described herein and the Risk Factors described in our
Securities and Exchange Commission filings.

OVERVIEW

We are a leading provider of converged IP phone systems for small and medium
sized business. We began operations in July 1994 and we first recognized
revenues from product sales of our Quantum board and AltiWare software in July
1996. We generated net revenues of $2.9 million and $1.8 million for the three
months ended December 31, 2002 and 2001, respectively. As of December 31, 2002,
we had an accumulated deficit of $48.3 million.

We derive our revenues from sales of our AltiServ system, which includes Quantum
boards, Triton boards and AltiWare software. Product revenues consist of sales
to end users (including dealers) and to distributors. Revenues from product
sales to end users are recognized upon shipment. We defer recognition of sales
to distributors until they resell our products to their customers. Under our
distribution contracts, a distributor has the right in certain circumstances to
return products the distributor determines are overstocked, so long as they
provide 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 revenues consists of component and material costs, direct labor
costs, provisions for excess and obsolete inventory, warranty costs and overhead
related to manufacturing our products. Software sales typically carry a higher
gross margin than hardware sales. We have experienced operating losses and
negative cash flows from operations in each quarterly and annual period since
our inception and we currently expect to continue to incur losses and negative
cash flows for the foreseeable future. We have not recognized any future tax
benefits of our cumulative net operating losses due to uncertainty as to future
realizability.

CRITICAL ACCOUNTING POLICIES

Revenue recognition: Revenues consist of sales to end-users, including dealers,
and to distributors. Revenues from sales to end-users are 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 our products held by its distributors. Upon termination, any unsold
products may be returned by the distributor for a full refund. These agreements
may be canceled by either party based on a specified notice. As a result of the
above provisions, we defer recognition of revenues and the proportionate costs
of revenues derived from sales to distributors 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.

                                       11
<PAGE>

Allowance for Doubtful Accounts: The allowance for doubtful accounts is based on
our assessment of the collectibility of specific customer accounts and the aging
of the accounts receivable. If there were a deterioration of a major customer's
creditworthiness, or actual defaults were higher than our historical experience,
we could be required to increase our allowance and our earnings could be
adversely affected.

Inventory: Inventory is stated at the lower of cost (first-in, first-out method)
or market. We regularly review value of inventory in detail, with consideration
given to future customer demand for our products, obsolescence from rapidly
changing technology, and other factors. If actual market conditions are less
favorable than those projected by management, and our estimates prove to be
inaccurate, we could be required to increase our inventory provision and our
gross margins could be adversely affected.

Warranty: We accrue for warranty costs based on estimated product return rates
and the expected material and labor costs to provide warranty services. If
actual return rates and/or repair and replacement costs differ significantly
from our estimates, our gross margin could be adversely affected.

RESULTS OF OPERATIONS

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

                                              Three Months Ended December 31,
                                           -----------------------------------
                                                2002                  2001
                                           ---------------     ---------------
                                                        (unaudited)

Revenues, net.........................               100.0%              100.0%
Cost of revenues......................                46.0                51.
                                           ---------------     ---------------
Gross margin..........................                54.0                49.0
Operating expenses :
     Research and development.........                32.8                59.1
     Sales and marketing .............                43.7                81.6
     General and administrative.......                15.4                32.3
     Deferred stock compensation......                 0.5                 5.2
                                           ---------------     ---------------
          Total operating expenses....                92.4               178.2
                                           ---------------     ---------------
Loss from operations .................               (38.4)             (129.2)
Interest and other income, net .......                 4.3                 5.6
                                           ---------------     ---------------
Net loss .............................               (34.1)%            (123.6)%
                                           ===============     ===============

                                       12
<PAGE>

REVENUES, NET. Revenues consist of sales to end users (including dealers) and to
distributors. Net revenues increased 63% from $1.8 million for the first quarter
of fiscal 2002 to $2.9 million for the first quarter of fiscal 2003. Sales
through our main distributors, AltiSys, Ingram Micro and Synnex, accounted for
approximately 21.7%, 21.8%, and 41.9%, respectively, of our revenues for the
first quarter of fiscal 2003 as compared to 27.4%, 22.0%, and 38.1%,
respectively, of our revenues for the same period of fiscal 2002. The increase
in revenue for the first quarter of fiscal 2003 compared to the first quarter of
fiscal 2002 was due to increased demand for our AltiServ Office product and the
introduction of IP Phone which offers our customers a complete IP phone system.

COST OF REVENUES. Cost of revenues were $1.3 million for the first quarter of
fiscal 2003, an increase of 47% from approximately $903,000 for the same period
of fiscal 2002. Cost of revenues consists primarily of component and material
costs, direct labor costs, provisions for excess and obsolete inventory,
warranty costs and overhead related to manufacturing our products. Cost of
revenues as a percentage of net revenues decreased from 51.0% for the first
quarter of fiscal 2002 to 46.0% for the same periods of fiscal 2003. This
decrease was primarily due to lower component and overhead costs resulting from
an increase in the Company's manufacturing volume due to increased demand for
our AltiServ Office product during the quarter ended December 31, 2002 as
compared to the quarter ended December 31, 2001.

GROSS MARGIN. Gross profit increased to $1.6 million for the first quarter of
fiscal 2003 from $867,000 for the same period of fiscal 2002. As a percentage of
revenue, gross margin increased to 54.0% for the first quarter of fiscal 2003
from 49.0% for the same periods of fiscal 2002. The increase in gross profit as
a percentage of net revenues was primarily due to the previously mentioned lower
component and overhead costs resulting from an increase in the Company's
manufacturing volume.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
to $947,000 for the first quarter of fiscal 2003 from $1.1 million for the same
period of fiscal 2002. Research and development expenses consist principally of
salaries and related personnel expenses, consultant fees and prototype expenses
related to the design, development and testing of our products and enhancement
of our converged telephone system software. The year-over-year decreases were
primarily due to a reduction in headcount.

SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased to $1.3
million for the first quarter of fiscal 2003 from $1.5 million for the same
period of fiscal 2002. Sales and marketing expenses consist of salaries,
commissions and related expenses for personnel engaged in sales and marketing
functions, trade show expenses, promotional and marketing programs and related
expenses. The year-over-year decreases were primarily due to significantly lower
marketing and sales forces expenses in the first quarter of fiscal 2003
resulting from headcount reduction and cutback in promotional and advertising
activities.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to $446,000 for the first quarter of fiscal 2003 from $571,000 for the
same periods of fiscal 2002. The year-over-year decreases were primarily due to
a reduction in headcount and legal fees.

DEFERRED STOCK COMPENSATION EXPENSE. Deferred stock compensation expense was
$13,000 for the first quarter of fiscal 2003 as compared to $93,000 for the same
period of fiscal 2002. Deferred stock compensation expense reflects the
amortization of stock compensation charges resulting from granting stock options
at exercise prices below the deemed fair value of our common stock on the dates
the options were granted. The Company expects to amortize approximately $41,000
in fiscal 2003 which represents the remaining balance of this deferred stock
compensation.

                                       13
<PAGE>

INTEREST AND OTHER INCOME, NET. Net interest and other income increased to
$125,000 for the first quarter of fiscal 2003 from $98,000 for the same period
of fiscal 2002. The Company invested the proceeds from our initial public
offering in October 1999 primarily in highly liquid, short-term investments. The
increase was due to recognition of interest received from promissory notes.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the sale of
equity securities. As of December 31, 2002, we had cash and short-term
investments totaling $11.7 million, consisting of cash and cash equivalents of
$5.3 million and $6.4 million of highly liquid short-term investments.

Net cash used in our operating activities was $815,000 and $2.2 million for the
three months ended December 31, 2002 and 2001, respectively. Net cash used in
operating activities primarily reflected the impact of the net loss for each of
the periods reported.

Net cash used in investing activities was $1.5 million and $5.3 million for the
three months ended December 31, 2002 and 2001, respectively. Net cash used in
investing activities was primarily a result of purchases of short-term
investments.

Net cash provided by financing activities was $371,000 for the three months
ended December 31, 2002, consisting primarily of proceeds from issuances of
common stock under our employee stock options and stock purchase plans and
payment of promissory notes. Net cash used in financing activities was $218,000
for the three months ended December 31, 2001, which was primarily a result of
purchases of treasury stock.

We intend to invest our cash in excess of current operating requirements in
short-term, interest bearing investment-grade securities.

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
product enhancements, 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 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 may also require additional capital to acquire or invest in
complementary businesses or products, or obtain the right to use complementary
technologies. If we can not raise funds, if needed, on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities, or to 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 AltiGen.

                                       14
<PAGE>

Our common stock was transferred to the NASDAQ SmallCap Market at the opening of
business on June 12th, 2002 and was afforded the remainder of this market's 180
calendar day grace period, or until August 26, 2002, to regain compliance with
the minimum $1.00 bid price per share requirement, set forth in Marketplace Rule
4310(c)8(D). Pursuant to a letter from NASDAQ staff on August 27, 2002, we had
not regained compliance in accordance with Marketplace Rule 4310(c)8(D).
However, NASDAQ staff noted that we met the initial listing requirements for the
NASDAQ SmallCap Market under Marketplace Rule 4310(c)2(A). Specifically, AltiGen
qualified under such requirements by virtue of having at least $5,000,000 of
stockholders' equity. As of June 30, 2002, we had $14,670,080 in stockholders'
equity. Therefore, in accordance with Marketplace Rule 4310(c)8(D), we were
provided an additional 180 calendar days, or until February 24, 2003, to regain
compliance. If at any time before February 24, 2003, the bid price of our common
stock closes at $1.00 per share or more for a minimum of 10 consecutive trading
days, NASDAQ staff will provide written notification that we comply with the
rule. If compliance with this rule cannot be demonstrated by February 24, 2003,
NASDAQ staff will provide written notification that our securities will be
delisted. At that time, we may appeal NASDAQ staff's determination to a Listing
Qualification Panel.

The result of delisting from the Nasdaq SmallCap Market would be a reduction in
the liquidity of any investment in our common stock and a material adverse
effect on the price of our common stock. Delisting would reduce the ability of
holders of our common stock to purchase or sell shares as quickly and as
inexpensively as they could have done in the past. This lack of liquidity would
make it more difficult for us to raise capital in the future. Although we are
working to comply with all continued listing requirements of the Nasdaq SmallCap
Market, there can be no assurance that we will be able to satisfy such
requirements.

CERTAIN FACTORS AFFECTING BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION

RISKS RELATED TO ALTIGEN

WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES, WHICH MAY PREVENT
US FROM BECOMING PROFITABLE.

We have experienced operating losses since our inception. As of December 31,
2002 we had an accumulated deficit of $48.3 million. We expect to incur
operating losses for the foreseeable future, and these losses may be
substantial. Further, we expect our operating cash flows to be negative for the
foreseeable future. Because we expect continued expenditures for product
development, and sales and marketing activities, we will need to increase
revenues significantly to achieve profitability and positive operating cash
flows. Even if we do achieve profitability and positive operating cash flows, we
may not be able to sustain or increase profitability or positive operating cash
flows on a quarterly or annual basis.

IF WE ARE UNABLE TO COMPLY WITH NASDAQ'S CONTINUED LISTING REQUIREMENTS, OUR
COMMON STOCK COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET.

AltiGen's common stock was transferred to the NASDAQ SmallCap Market at the
opening of business on June 12th, 2002 and was afforded the remainder of this
market's 180 calendar day grace period, or until August 26, 2002, to regain
compliance with the minimum $1.00 bid price per share requirement, set forth in
Marketplace Rule 4310(c)8(D). Pursuant to a letter from NASDAQ staff on August
27, 2002, we had not regained compliance in accordance with Marketplace Rule
4310(c)8(D). However, NASDAQ staff noted that we met the initial listing
requirements for the NASDAQ SmallCap Market under Marketplace Rule 4310(c)2(A).
Specifically, AltiGen qualified under such requirements by virtue of having at
least $5,000,000 of stockholders' equity. As of June 30, 2002, we had
$14,670,080 in stockholders' equity. Therefore, in accordance with Marketplace
Rule 4310(c)8(D), we were provided an additional 180 calendar days, or until
February 24, 2003, to regain compliance. If at any time before February 24,
2003, the bid price of our common stock closes at $1.00 per share or more for a
minimum of 10 consecutive trading days, NASDAQ staff will provide written
notification that we comply with the rule. If compliance with this rule cannot
be demonstrated by February 24, 2003, NASDAQ staff will provide written
notification that our securities will be delisted. At that time, we may appeal
NASDAQ staff's determination to a Listing Qualification Panel.

                                       15
<PAGE>

The result of delisting from the Nasdaq SmallCap Market would be a reduction in
the liquidity of any investment in our common stock and a material adverse
effect on the price of our common stock. Delisting would reduce the ability of
holders of our common stock to purchase or sell shares as quickly and as
inexpensively as they could have done in the past. This lack of liquidity would
make it more difficult for us to raise capital in the future. Although we are
working to comply with all continued listing requirements of the Nasdaq SmallCap
Market, there can be no assurance that we will be able to satisfy such
requirements.

THE CURRENT ECONOMIC DOWNTURN MAY CONTINUE TO ADVERSELY AFFECT OUR REVENUES,
GROSS MARGINS AND EXPENSES.

Our annual revenue and operating results have and may continue to fluctuate due
to the effects of general economic conditions in the United States and globally,
and, in particular, market conditions in the telecommunications industry. In
recent quarters, our operating results have been adversely affected as a result
of the economic slowdown and reduced capital spending, particularly in the
United States. We experienced a lower gross margin due to inventory write-downs
needed to reflect the slowdown in telecommunications capital spending and
general downturn in the U.S. economy. We are uncertain about the extent,
severity, and length of the economic downturn. If the economic conditions in the
United States and globally do not improve, or if we experience a worsening in
the global economic slowdown, we may continue to experience material negative
effects on our business, operating results, and financial condition.

WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS AND OUR FUTURE PROSPECTS.

We shipped our first products in July 1996. As a result of our limited operating
history, we have limited financial data that you can use to evaluate our
business. You must consider our prospects in light of the risks, expenses and
challenges we might encounter because we are at an early stage of development in
a new and rapidly evolving market. To address these risks and achieve
profitability and increased sales levels, we must:

o    establish and increase market acceptance of our technology, products and
     systems;

o    expand our network of distributors, dealers and companies that buy our
     products in bulk, customize them for particular applications or customers,
     and resell them under their own names;

o    introduce products and systems incorporating our technology and
     enhancements to our product applications on a timely basis;

o    respond effectively to competitive pressures; and

o    successfully market and support our products and systems.

                                       16
<PAGE>

We may not successfully meet any of these challenges, and our failure to do so
will seriously harm our business and results of operations. In addition, because
of our limited operating history, we have limited insight into trends that may
emerge and harm our business.

OUR OPERATING RESULTS VARY, MAKING FUTURE OPERATING RESULTS DIFFICULT TO
PREDICT.

Our quarterly and annual operating results have varied significantly in the past
and will likely vary significantly in the future. A number of factors, many of
which are beyond our control, may cause our operating results to vary,
including:

o    our sales cycle, which may vary substantially from customer to customer;

o    unfavorable changes in the prices and delivery of the components we
     purchase;

o    the size and timing of orders for our products, which may vary depending on
     the season, and the contractual terms of those orders;

o    the size and timing of our expenses, including operating expenses and
     expenses of developing new products and product enhancements;

o    deferrals of customer orders in anticipation of new products, services or
     product enhancements introduced by us or by our competitors; and

o    our ability to attain and maintain production volumes and quality levels
     for our products.

Our budgets and commitments that we have made for the future are based in part
on our expectations of future sales. If our sales do not meet expectations, it
will be difficult for us to reduce our expenses quickly, and consequently our
operating results may suffer.

Our dealers often require immediate shipment and installation of our products.
As a result, we have historically operated with limited backlog, and our sales
and operating results in any quarter depend primarily on orders booked and
shipped during that quarter.

Any of the above factors could harm our business, financial condition and
results of operations. We believe that period-to-period comparisons of our
results of operations are not meaningful, and you should not rely upon them as
indicators of our future performance.

OUR MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT HAVE THE RESOURCES TO COMPETE
ADEQUATELY.

The market for our integrated, multifunction telecommunications systems is new,
rapidly evolving and highly competitive. We expect competition to intensify in
the future as existing competitors develop new products and new competitors
enter the market. We believe that a critical component to success in this market
is the ability to establish and maintain strong partner and customer
relationships with a wide variety of domestic and international providers. If we
fail to establish or maintain these relationships, we will be at a serious
competitive disadvantage.

                                       17
<PAGE>

We face competition from companies providing traditional private telephone
systems. Our principal competitors that produce traditional private telephone
systems are Avaya Communications, NEC and Nortel Networks. We also compete
against providers of multifunction telecommunications systems, including 3Com
Corporation, Artisoft, Inc., Cisco System, Inc. and Shoreline Communications,
Inc., as well as any number of future competitors. Many of our competitors are
substantially larger than we are and have significantly greater name
recognition, financial, sales and marketing, technical, customer support,
manufacturing and other resources. These competitors may also have more
established distribution channels and stronger relationships with service
providers. These competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products. These
competitors may enter our existing or future markets with solutions that may be
less expensive, provide higher performance or additional features or be
introduced earlier than our solutions. If any technology that is competing with
ours is more reliable, faster, less expensive or has other advantages over our
technology, then the demand for our products and services could decrease and
harm our business.

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

LOSING ANY OF OUR KEY DISTRIBUTORS WOULD HARM OUR BUSINESS. WE ALSO NEED TO
ESTABLISH AND MAINTAIN RELATIONSHIPS WITH ADDITIONAL DISTRIBUTORS AND ORIGINAL
EQUIPMENT MANUFACTURERS.

Sales through our three key distributors, Altisys, Synnex, and Ingram Micro
accounted for 85.4% of our net revenues in the first quarter of fiscal 2003. Our
business and operating results will suffer if either of these distributors does
not continue distributing our products, fails to distribute the volume of our
products that it currently distributes or fails to expand our customer base. We
also need to establish and maintain relationships with additional distributors
and original equipment manufacturers. We may not be able to establish, or
successfully manage, relationships with additional distribution partners. In
addition, our agreements with distributors typically provide for termination by
either party upon written notice to the other party. For example, our agreement
with Synnex provides for termination, with or without cause, by either party
upon 30 days' written notice to the other party, or upon insolvency or
bankruptcy. Generally, these agreements are non-exclusive and distributors sell
products that compete with ours. If we fail to establish or maintain
relationships with distributors and original equipment manufacturers, our
ability to increase or maintain our sales and our customer base will be
substantially harmed.

WE SELL OUR PRODUCTS THROUGH DEALERS AND DISTRIBUTORS, WHICH LIMITS OUR ABILITY
TO CONTROL THE TIMING OF OUR SALES, AND THIS MAKES IT MORE DIFFICULT TO PREDICT
OUR REVENUES.

We do not recognize revenue from the sale of our products to our distributors
until these products are sold to either dealers or end users. We have little
control over the timing of product sales to dealers and end users. Our lack of
control over the revenue which we recognize from our distributors' sales to
dealers and end users limits our ability to predict revenue for any given
period. Our budgets and commitments that we have made for the future are based
in part on our expectations of future sales. If our sales do not meet
expectations, it will be difficult for us to reduce our expenses quickly, and
consequently our operating results may suffer.

                                       18
<PAGE>

WE RELY ON SOLE-SOURCED COMPONENTS AND THIRD-PARTY TECHNOLOGY AND PRODUCTS; IF
THESE COMPONENTS ARE NOT AVAILABLE, OUR BUSINESS MAY SUFFER.

We purchase technology from third parties that are incorporated into our
products, including virtually all of our hardware products. We order
sole-sourced components using purchase orders and do not have supply contracts
for them. One sole-sourced component, a TI DSP chip, is particularly important
to our business because it is included in virtually all of our Triton family
products. If we were unable to purchase an adequate supply of these sole-sourced
components on a timely basis, we would be required to develop alternative
solutions. This could entail qualifying an alternative source or redesigning our
products based on different components. Our inability to obtain these
sole-sourced components, especially the TI DSP chip, could significantly delay
shipment of our products, which could have a negative effect on our business,
financial condition and results of operations.

WE RELY ON DEALERS TO PROMOTE, SELL, INSTALL AND SUPPORT OUR PRODUCTS, AND THEIR
FAILURE TO DO SO MAY SUBSTANTIALLY REDUCE OUR SALES AND THUS SERIOUSLY HARM OUR
BUSINESS.

We rely on dealers who can provide high quality sales and support services. As
with our distributors, we compete with other telecommunications systems
providers for our dealers' business, as our dealers generally market competing
products. If a dealer promotes a competitor's products to the detriment of our
products or otherwise fails to market our products and services effectively, we
could lose market share. In addition, the loss of a key dealer or the failure of
dealers to provide adequate customer service could cause our business to suffer.
If we do not properly train our dealers to sell, install and service our
products, our business will suffer.

SOFTWARE OR HARDWARE ERRORS MAY SERIOUSLY HARM OUR BUSINESS AND DAMAGE OUR
REPUTATION, CAUSING LOSS OF CUSTOMERS AND REVENUES.

Users expect telephone systems to provide a high level of reliability. Our
products are inherently complex and may have undetected software or hardware
errors. We have detected and may continue to detect errors and product defects
in our installed base of products, new product releases and product upgrades.
For example, a small number of our boards failed and were returned. We have
replaced these boards and made certain design changes. We cannot be sure that
the problem has been fully addressed or that similar or different problems will
not occur in existing or new boards in the future. In addition, end users may
install, maintain and use our products improperly or for purposes for which they
were not designed. These problems may degrade or terminate the operation of our
products, which could cause end users to lose telephone service, cause us to
incur significant warranty and repair costs, damage our reputation and cause
significant customer relations problems. Any significant delay in the commercial
introduction of our products due to errors or defects, any design modifications
required to correct these errors or defects or any negative effect on customer
satisfaction as a result of errors or defects could seriously harm our business,
financial condition and results of operations.

Any claims brought because of problems with our products or services could
seriously harm our business, financial condition and results of operations. We
currently offer a one-year hardware guarantee to end users. If our products fail
within the first year, we face replacement costs. Our insurance policies may not
provide sufficient or any coverage should a claim be asserted. In addition, our
introduction of products and systems with reliability, quality or compatibility
problems could result in reduced revenues, uncollectible accounts receivable,
delays in collecting accounts receivable, warranties and additional costs. Our
customers, end users or employees could find errors in our products and systems
after we have begun to sell them, resulting in product redevelopment costs and
loss of, or delay in, their acceptance by the markets in which we compete.
Further, we may experience significant product returns in the future. Any of
these events could have a material adverse effect on our business, financial
condition and results of operations.

WE MAY FACE INFRINGEMENT ISSUES THAT COULD HARM OUR BUSINESS BY REQUIRING US TO
LICENSE TECHNOLOGY ON UNFAVORABLE TERMS OR TEMPORARILY OR PERMANENTLY CEASE
SALES OF KEY PRODUCTS.

We may become parties to litigation in the normal course of our business.
Litigation in general, and intellectual property and

                                       19
<PAGE>

securities litigation in particular, can be expensive and disruptive to normal
business operations. Moreover, the results of complex litigation are difficult
to predict.

More generally, litigation related to these types of claims may require us to
acquire licenses under third-party patents which may not be available on
acceptable terms, if at all. We believe that an increasing portion of our
revenues in the future will come from sales of software applications for our
hardware products. The software market has traditionally experienced widespread
unauthorized reproduction of products in violation of developers' intellectual
property rights. This activity is difficult to detect, and legal proceedings to
enforce developers' intellectual property rights are often burdensome and
involve a high degree of uncertainty and substantial costs.

On September 6, 2002, Vertical Networks, Inc. filed suit against AltiGen
Communications, Inc. in United States District Court for the Northern District
of California, Case No. C02 04253 (WHA), alleging infringement of Vertical
Networks' United States 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 Patents Nos. 5,617,418 and 5,687,174.
Vertical Networks filed a Second Amended Complaint on November 20, 2002 to
identify the AltiGen products and/or activities that allegedly infringe the
seven patents-in-suit. Vertical Networks seeks a judgment of patent
infringement, damages, including treble damages for alleged willful
infringement, and attorneys' fees and costs. AltiGen filed an Answer and
Counterclaims for Declaratory Relief on December 9, 2002. On December 26, 2002,
Vertical Networks filed its Answer to AltiGen's Counterclaims. We are now
awaiting the Court's Scheduling Order in this case. AltiGen believes it has
strong defenses and arguments in this dispute and intends to vigorously litigate
its position.

ANY FAILURE BY US TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR BUSINESS
AND COMPETITIVE POSITION.

Our success depends, to a certain extent, upon our proprietary technology. We
currently rely on a combination of patent, trade secret, copyright and trademark
law, together with non-disclosure and invention assignment agreements, to
establish and protect the proprietary rights in the technology used in our
products.

Although we have filed patent applications, we are not certain that our patent
applications will result in the issuance of patents, or that any patents issued
will provide commercially significant protection to our technology. In addition,
others may independently develop substantially equivalent proprietary
information not covered by patents to which we own rights, may obtain access to
our know-how or may claim to have issued patents that prevent the sale of one or
more of our products. Also, it may be possible for third parties to obtain and
use our proprietary information without our authorization. Further, the laws of
some countries, such as those in Japan, one of our target markets, may not
adequately protect our intellectual property or may be uncertain. Our success
also depends on trade secrets that cannot be patented and are difficult to
protect. If we fail to protect our proprietary information effectively, or if
third parties use our proprietary technology without authorization, our
competitive position and business will suffer.

                                       20
<PAGE>

OUR PRODUCTS MAY NOT MEET THE LEGAL STANDARDS REQUIRED FOR THEIR SALE IN SOME
COUNTRIES; IF WE CANNOT SELL OUR PRODUCTS IN THESE COUNTRIES, OUR RESULTS OF
OPERATIONS MAY BE SERIOUSLY HARMED.

The United States and other countries in which we intend to sell our products
have standards for safety and other certifications that must be met for our
products to be legally sold in those countries. We have tried to design our
products to meet the requirements of the countries in which we sell or plan to
sell them. We have also obtained or are trying to obtain the certifications that
we believe are required to sell our products in these countries. However, we
cannot guarantee that our products meet all of these standards or that we will
be able to obtain any certifications required. In addition, there is, and will
likely continue to be, an increasing number of laws and regulations pertaining
to the products we offer and may offer in the future. These laws or regulations
may include, for example, more stringent safety standards, requirements for
additional or more burdensome certifications or more stringent consumer
protection laws.

If our products do not meet a country's standards or we do not receive the
certifications required by a country's laws or regulations, then we may not be
able to sell those products in that country. This may seriously harm our results
of operation by reducing our sales or requiring us to invest significant
resources to conform our products to these standards.

OUR MARKET IS SUBJECT TO CHANGING PREFERENCES; FAILURE TO KEEP UP WITH THESE
CHANGES WOULD RESULT IN OUR LOSING MARKET SHARE, THUS SERIOUSLY HARMING OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our customers and end users expect frequent product introductions and have
changing requirements for new products and features. Therefore, to be
competitive, we will need to develop and market new products and product
enhancements that respond to these changing requirements on a timely and
cost-effective basis. Our failure to do so promptly and cost-effectively would
seriously harm our business, financial condition and results of operations.
Also, introducing new products could require us to write off existing inventory
as obsolete, which could harm our results of operations.

IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL WHEN NEEDED, WE MAY BE UNABLE TO
DEVELOP OR ENHANCE OUR PRODUCTS AND SERVICES.

We may need to seek additional funding in the future. If we cannot raise funds
on acceptable terms, we may be unable to develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements. We may also be required to reduce
operating costs through lay-offs or reduce our sales and marketing or research
and development efforts. If we issue equity securities, stockholders may
experience additional dilution or the new equity securities may have rights,
preferences or privileges senior to those of our common stock.

IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS WILL SUFFER.

We may not be successful in managing any future growth. We have expanded our
operations rapidly since our inception. In order to manage this expansion and to
grow in the future, we will need to expand or enhance our management,
manufacturing, research and development and sales and marketing capabilities. We
may not be able to hire the management, staff or other personnel required to do
so.

We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned operational systems, procedures and
controls may not be adequate to support our future operations. Difficulties in
installing and implementing new systems, procedures and controls may
significantly burden our management and our internal resources. Delays in the
implementation of new systems or operational disruptions when we transition to
new systems would impair our ability to accurately forecast sales demand, manage
our product inventory and record and report financial and management information
on a timely and accurate basis.

                                       21
<PAGE>

Lead times for materials and components used in the assembly of our products
vary significantly, and depend on factors such as the supplier, contract terms
and demand for a component at a given time. If orders do not match forecasts, we
may have excess or inadequate inventory of certain materials and components,
which may seriously harm our business, financial condition and results of
operation.

OUR PLANNED EXPANSION IN INTERNATIONAL MARKETS WILL INVOLVE NEW RISKS THAT OUR
PREVIOUS DOMESTIC OPERATIONS HAVE NOT PREPARED US TO ADDRESS; OUR FAILURE TO
ADDRESS THESE RISKS COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

We intend to expand our international sales and marketing efforts. Our efforts
are subject to a variety of risks associated with conducting business
internationally, any of which could seriously harm our business, financial
condition and results of operations. These risks include:

o    tariffs, duties, price controls or other restrictions on foreign currencies
     or trade barriers, such as import or export licensing imposed by foreign
     countries, especially on technology;

o    potential adverse tax consequences, including restrictions on repatriation
     of earnings;

o    fluctuations in foreign currency exchange rates, which could make our
     products relatively more expensive in foreign markets; and

o    conflicting regulatory requirements in different countries that may require
     us to invest significant resources customizing our products for each
     country.

WE NEED ADDITIONAL QUALIFIED PERSONNEL TO MAINTAIN AND EXPAND OUR BUSINESS; OUR
FAILURE TO PROMPTLY ATTRACT AND RETAIN QUALIFIED PERSONNEL MAY SERIOUSLY HARM
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We depend, in large part, on our ability to attract and retain highly skilled
personnel, particularly engineers and sales and marketing personnel. We need
highly trained technical personnel to design and support our server-based
telecommunications systems. In addition, we need highly trained sales and
marketing personnel to expand our marketing and sales operations in order to
increase market awareness of our products and generate increased revenues. In
spite of the current economic downturn, competition for highly trained personnel
can be intense, especially in the San Francisco Bay Area where most of our
operations are located. Volatility or lack of positive performance in our stock
price may also adversely affect our ability to retain key employees, all of whom
have been granted stock options. We cannot be certain that we will be successful
in our recruitment and retention efforts. If we fail to attract or retain
qualified personnel or suffer from delays in hiring required personnel, our
business, financial condition and results of operations may be seriously harmed.

OUR FACILITY IS VULNERABLE TO DAMAGE FROM EARTHQUAKES AND OTHER NATURAL
DISASTERS; ANY SUCH DAMAGE COULD SERIOUSLY OR COMPLETELY IMPAIR OUR BUSINESS.

We perform final assembly, software installation and testing of our products at
our facility in Fremont, California. Our facility is located on or near known
earthquake fault zones and is vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures and similar events. If such
a disaster occurs, our ability to perform final assembly, software installation
and testing of our products at our facility would be seriously, if not
completely, impaired. If we were unable to obtain an alternative place or way to
perform these functions, our business, financial condition and results of
operations would suffer. The insurance we maintain may not be adequate to cover
our losses against fires, floods, earthquakes and general business
interruptions.

                                       22
<PAGE>

OUR STRATEGY TO OUTSOURCE ASSEMBLY AND TEST FUNCTIONS IN THE FUTURE COULD DELAY
DELIVERY OF PRODUCTS, DECREASE QUALITY OR INCREASE COSTS.

Based on volume or customer requirements, we may begin outsourcing some assembly
and test functions. In addition, we may determine that we need to establish
assembly and test operations overseas to better serve our international
customers. Establishing overseas assembly and test operations may be more
difficult or take longer than we anticipate. This outsourcing strategy involves
certain risks, including the potential lack of adequate capacity and reduced
control over delivery schedules, manufacturing yield, quality and costs. In the
event that any significant subcontractor was to become unable or unwilling to
continue to manufacture or test our products in the required volumes, we would
have to identify and qualify acceptable replacements. Finding replacements could
take time, and we cannot be sure that additional sources would be available to
us on a timely basis. Any delay or increase in costs in the assembly and testing
of products by third-party subcontractors could seriously harm our business,
financial condition and results of operations.

RISKS RELATED TO THE INDUSTRY

INTEGRATED, MULTIFUNCTION TELECOMMUNICATIONS SYSTEMS MAY NOT ACHIEVE WIDESPREAD
ACCEPTANCE.

The market for integrated, multifunction telecommunications systems is
relatively new and rapidly evolving. Businesses have invested substantial
resources in the existing telecommunications infrastructure, including
traditional private telephone systems, and may be unwilling to replace these
systems in the near term or at all. Businesses may also be reluctant to adopt
integrated, multifunction telecommunications systems because of their concern
about the current limitations of data networks, including the Internet. For
example, end users sometimes experience delays in receiving calls and reduced
voice quality during calls when routing calls over data networks. Moreover,
businesses that begin to route calls over the same networks that currently carry
only their data may also experience these problems if the networks do not have
sufficient capacity to carry all of these communications at the same time.

FUTURE REGULATION OR LEGISLATION COULD HARM OUR BUSINESS OR INCREASE OUR COST OF
DOING BUSINESS.

In April 1998, the Federal Communications Commission submitted a report to
Congress stating that it may regulate certain Internet services if it determines
that such Internet services are functionally equivalent to conventional
telecommunications services. The increasing growth of the voice over data
network market and the popularity of supporting products and services, however,
heighten the risk that national governments will seek to regulate the
transmission of voice communications over networks such as the Internet. In
addition, large telecommunications companies may devote substantial lobbying
efforts to influence the regulation of this market so as to benefit their
interests, which may be contrary to our interests. These regulations may
include, for example, assessing access or settlement charges, imposing tariffs
or imposing regulations based on encryption concerns or the characteristics and
quality of products and services. Future laws, legal decisions or regulations,
as well as changes in interpretations of existing laws and regulations, could
require us to expend significant resources to comply with them. In addition,
these future events or changes may create uncertainty in our market that could
reduce demand for our products.

                                       23
<PAGE>

EVOLVING STANDARDS MAY DELAY OUR PRODUCT INTRODUCTIONS, INCREASE OUR PRODUCT
DEVELOPMENT COSTS OR CAUSE END USERS TO DEFER OR CANCEL PLANS TO PURCHASE OUR
PRODUCTS, ANY OF WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

The standards in our market are still evolving. These standards are designed to
ensure that integrated, multifunction telecommunications products from different
manufacturers can operate together. Some of these standards are proposed by
other participants in our market, including some of our competitors, and include
proprietary technology. In recent years, these standards have changed, and new
standards have been proposed, in response to developments in our market. Our
failure to conform our products to existing or future standards may limit their
acceptance by market participants. We may not anticipate which standards will
achieve the broadest acceptance in our market in the future, and we may take a
significant amount of time and expense to adapt our products to these standards.
We may also have to pay additional royalties to developers of proprietary
technologies that become standards in our market. These delays and expenses may
seriously harm our results of operations. In addition, customers and users may
defer or cancel plans to purchase our products due to concerns about the ability
of our products to conform to existing standards or to adapt to new or changed
standards, and this could seriously harm our results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
cash equivalents and short-term instruments. Due to the short-term nature of our
cash equivalents and investments, we have concluded that there is no material
market risk exposure.

ITEM 4. CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934) as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, believe that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by others within
the Company.

(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or in other factors that could significantly affect our

                                       24
<PAGE>

PART II OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We may become parties to litigation in the normal course of our business.
Litigation in general, and intellectual property and securities litigation in
particular, can be expensive and disruptive to normal business operations.
Moreover, the results of complex litigation are difficult to predict.

On September 6, 2002, Vertical Networks, Inc. filed suit against AltiGen
Communications, Inc. in United States District Court for the Northern District
of California, Case No. C02 04253 (WHA), alleging infringement of Vertical
Networks' United States 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 Patents Nos. 5,617,418 and 5,687,174.
Vertical Networks filed a Second Amended Complaint on November 20, 2002 to
identify the AltiGen products and/or activities that allegedly infringe the
seven patents-in-suit. Vertical Networks seeks a judgment of patent
infringement, damages, including treble damages for alleged willful
infringement, and attorneys' fees and costs. AltiGen filed an Answer and
Counterclaims for Declaratory Relief on December 9, 2002. On December 26, 2002,
Vertical Networks filed its Answer to AltiGen's Counterclaims. We are now
awaiting the Court's Scheduling Order in this case. AltiGen believes it has
strong defenses and arguments in this dispute and intends to vigorously litigate
its position.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

For the three months ended December 31, 2002, 63,869 shares of the Company's
common stock were purchased by and distributed to employees at a price of $0.44
per share, pursuant to the Company's 1999 Employee Stock Purchase Plan. The
issuance of these shares was exempt from registration requirements pursuant to
rule 701 promulgated under the Securities Act of 1933, as amended.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

    Number              Exhibit Description

     99.1    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

     99.2    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


(b) Reports on Form 8-K:

None

                                       25
<PAGE>

                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Fremont, State of California, on the 14th day of February, 2003.


                                 ALTIGEN COMMUNICATIONS, INC.


                                 By: /s/ Philip M. McDermott
                                     -----------------------
                                     Philip M. McDermott,
                                     Chief Financial Officer
                                    (Principal Financial and Accounting Officer)


                                       26
<PAGE>

                                  CERTIFICATION

I, Gilbert Hu, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of AltiGen
     Communications, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this quarterly
          report is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     quarterly report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: February 14, 2003                   By: /s/ Gilbert Hu
                                              --------------
                                              Gilbert Hu
                                              Chief Executive Officer

                                       27
<PAGE>

                                  CERTIFICATION

I, Philip M. McDermott, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of AltiGen
     Communications, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this quarterly
          report is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     quarterly report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: February 14, 2003                   By: /s/ Philip M. McDermott
                                              -----------------------
                                              Philip M. McDermott
                                              Chief Financial Officer

                                       28