<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
     SECURITY EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
                                      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 or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                     Identification Number)

        47427 Fremont Boulevard
             Fremont, CA                                       94538
-----------------------------------------           -------------------------
 (address of principal executive offices)                    (zip code)

      Registrant's telephone number, including area code: (510) 252-9712
       Securities registered pursuant to Section 12(b) of the Act:  None
   Securities registered pursuant to Section 12(g) of the Act:  Common Stock

      (Title of Class)

                              _________________

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.

Yes   X   NO ___
    -----

     AS OF AUGUST 7, 2000, 13,500,765 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.

================================================================================
<PAGE>

                               Table of Contents


PART I.  FINANCIAL INFORMATION

  Item 1. Unaudited Condensed Consolidated Financial Statements:

          Unaudited Condensed Consolidated Balance Sheets as of June 30, 2000
          and September 30, 1999

          Unaudited Condensed Consolidated Statements of Operations for the
          Three and Nine Months Ended June 30, 2000 and 1999

          Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
          Months Ended June 30, 2000 and 1999

          Notes to Unaudited Condensed Consolidated Financial Statements


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


  Item 3. Quantitative and Qualitative Disclosures about Market Risk

PART II. OTHER INFORMATION

  Item 1. Legal Proceedings

  Item 2. Changes in Securities and Use of Proceeds

  Item 3. Defaults Upon Senior Securities

  Item 4. Submission of Matters to a Vote of Security Holders

  Item 5. Other Information

  Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

                                       2
<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

<TABLE>
<CAPTION>
                                                                                                June 30,      September 30,
                                                                                                  2000            1999
                                                                                              ------------    -------------
<S>                                                                                           <C>             <C>
                                          ASSETS
                                          ------
Current assets:
     Cash and cash equivalents ............................................................   $ 12,021,513    $  5,934,070
     Short-term investments ...............................................................     20,743,441              --
     Accounts receivable, net of allowances of $403,977 and $226,481, respectively ........      2,539,253       1,684,032
     Inventories ..........................................................................      2,942,089       2,200,796
     Prepaid expenses and other current assets ............................................        783,802       1,953,621
                                                                                              ------------    ------------
                Total current assets ......................................................     39,030,098      11,772,519
                                                                                              ------------    ------------
Property and equipment:
     Furniture and equipment ..............................................................      1,262,290         992,351
     Computer software ....................................................................        615,875         523,875
                                                                                              ------------    ------------
                                                                                                 1,878,165       1,516,226
     Less: Accumulated depreciation and amortization ......................................       (962,768)       (601,903)
                                                                                              ------------    ------------
                Net property and equipment ................................................        915,397         914,323
Long-term investments .....................................................................      1,020,622              --
                                                                                              ------------    ------------
                                                                                              $ 40,966,117    $ 12,686,842
                                                                                              ============    ============
                         LIABILITIES AND STOCKHOLDERS' EQUITY
                         ------------------------------------

Current liabilities:
     Accounts payable .....................................................................   $  1,222,142    $  1,485,672
     Accrued liabilities:
         Payroll and related benefits .....................................................        420,560         252,361
         Warranty .........................................................................        720,810         828,551
         Marketing ........................................................................        283,042         107,135
         Other ............................................................................        360,399          78,548
     Deferred revenue .....................................................................        600,491         593,955
                                                                                              ------------    ------------
                Total current liabilities .................................................      3,607,444       3,346,222
                                                                                              ------------    ------------

Commitments and contingencies (Note 3)
Stockholders' equity
    Convertible preferred stock, $.001 par value; Aggregate liquidation preference of
     $20,990,401 at September 30, 1999; Authorized-10,316,616 shares; Outstanding - none
     at June 30, 2000 and 8,146,156 shares at September 30, 1999 ..........................             --           8,146
   Common stock, $.001 par value; Authorized 23,957,117 shares; Outstanding - 13,494,602
    shares at June 30, 2000 and 1,503,633 shares at September 30, 1999 ....................         13,495           1,503
   Additional paid-in capital .............................................................     62,472,565      29,010,033
   Deferred stock compensation ............................................................     (2,227,920)     (2,957,645)
   Accumulated deficit ....................................................................    (22,899,467)    (16,721,417)
                                                                                              ------------    ------------
                Total stockholders' equity ................................................     37,358,673       9,340,620
                                                                                              ------------    ------------
                                                                                              $ 40,966,117    $ 12,686,842
                                                                                              ============    ============
</TABLE>

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

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                             Three Months Ended            Nine Months Ended
                                                                  June 30,                      June 30,
                                                          -------------------------    --------------------------
                                                              2000          1999           2000          1999
                                                          -----------   -----------    -----------    -----------
<S>                                                       <C>            <C>           <C>            <C>
Revenues, net  ........................................   $ 4,047,636   $ 1,907,137    $ 9,702,269      4,263,379
Cost of revenues ......................................     1,815,252       943,105      4,410,629      2,166,687
                                                          -----------   -----------    -----------    -----------

Gross profit ..........................................     2,232,384       964,032      5,291,640      2,096,692
                                                          -----------   -----------    -----------    -----------
Operating expenses:
    Research and development...........................     1,128,055       968,763      2,925,095      3,005,308
    Sales and marketing ...............................     2,684,080     1,076,764      6,991,172      2,827,055
    General and administrative ........................       765,905       466,083      2,381,170      1,195,480
    Deferred stock compensation (Note 5) ..............       243,241       192,590        729,721        577,770
                                                          -----------    ----------    -----------    -----------
         Total operating expenses .....................     4,821,281     2,704,200     13,027,158      7,605,613
                                                          -----------    ----------    -----------    -----------
Loss from operations ..................................    (2,588,897)   (1,740,168)    (7,735,518)    (5,508,921)
Interest and other income, net ........................       539,046        76,026      1,557,468        274,928
                                                          -----------   -----------    -----------    -----------
Net loss  .................... ........................   $(2,049,851)  $(1,664,142)   $(6,178,050)   $(5,233,993)
                                                          ===========   ===========    ===========    ===========
    Basic and diluted net loss per share ..............   $     (0.15)  $     (1.32)   $     (0.47)   $     (4.73)
                                                          ===========   ===========    ===========    ===========
    Shares used in computing basic
       and diluted net loss per share ..................   13,473,597     1,264,159     13,215,137      1,107,331
                                                          ===========   ===========    ===========    ===========
</TABLE>

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

                                       4
<PAGE>

                         ALTIGEN COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                                  June 30,
                                                                                        ------------------------------
                                                                                            2000            1999
                                                                                        ------------------------------
<S>                                                                                     <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss .......................................................................      $ (6,178,050)   $(5,233,993)
   Adjustments to reconcile net loss to net cash used
      in operating activities:
      Depreciation and amortization ...............................................           360,865        250,838
      Amortization of deferred stock compensation .................................           729,721        577,770
      Provision for accounts receivable allowance..................................           173,559        217,000
      Provision for excess and obsolete inventories ...............................           125,000        126,000
      Increase in notes payable ...................................................                --         12,798
      Change in operating assets and liabilities:
        Accounts receivable .......................................................        (1,028,780)      (532,340)
        Inventories  ..............................................................          (866,293)    (1,100,260)
        Prepaid expenses and other current assets .................................          (291,646)      (563,581)
        Accounts payable ..........................................................          (263,530)       349,703
        Accrued liabilities .......................................................           518,216        386,002
        Deferred revenue ..........................................................             6,536        224,089
                                                                                         ------------    -----------
          Net cash used in operating activities ...................................        (6,714,403)    (5,302,324)
                                                                                         ------------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of short-term investments ............................................       (32,593,441)    (4,514,183)
   Purchases of long-term investments .............................................        (1,020,622)            --
   Proceeds from sale of short term investments ...................................        11,850,000      5,567,243
   Proceeds from sale of property and equipment....................................                --         33,000
   Purchases of property and equipment  ...........................................          (361,939)      (643,397)
                                                                                         ------------    -----------
          Net cash (used in) provided by investing
          activities ..............................................................       (22,126,002)       442,663
                                                                                         ------------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from initial public offering of common
     stock, net ...................................................................        34,713,811      5,772,336
   Proceeds from exercise of stock options ........................................           214,038         44,456
                                                                                         ------------    -----------
          Net cash provided by financing activities ...............................        34,927,847      5,816,792
                                                                                         ------------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..............................         6,087,443        957,131
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................................         5,934,070      7,003,569
                                                                                         ------------    -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..........................................      $ 12,021,513    $ 7,960,700
                                                                                         ============    ===========
NONCASH FINANCING ACTIVITIES:
   Issuance of common stock as payment on notes payable ...........................                --    $   378,485

</TABLE>

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

                                       5
<PAGE>

             NOTES TO 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, multi-function 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 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. These 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 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 June 30, 2000 has been derived
from the unaudited condensed consolidated financial statements as of that date.

These financial statements should be read in conjunction with our audited
consolidated financial statements for the year ended September 30, 1999,
included in the Company's 1999 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.

INVENTORIES

Inventories (which include costs associated with components assembled by third-
party assembly manufacturers, as well as internal labor and overhead) are stated
at the lower of cost (first-in, first-out) or market.  Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. The components of inventories include:

<TABLE>
<CAPTION>
                           June 30,    September 30,
                             2000           1999
                          ----------   -------------
     <S>                  <C>          <C>
     Raw materials.....   $1,692,286     $1,078,577
     Work-in-progress..      740,635        451,453
     Finished goods....      509,168        670,766
                          ----------     ----------
                          $2,942,089     $2,200,796
                          ==========     ==========
</TABLE>

                                       6
<PAGE>

LONG-TERM INVESTMENTS

The Company accounts for its investments in debt securities pursuant to the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."  In
accordance with SFAS No. 115, debt securities are classified as held-to-maturity
and recorded at amortized cost when the Company has the positive intent and
ability to hold the securities to maturity.  Marketable debt securities not
classified as held-to-maturity are classified as available-for-sale.  Available-
for-sale securities are carried at fair value, with unrealized holding gains and
losses reported as a separate component of stockholders' equity, if significant.

REVENUE RECOGNITION

Revenues consist of sales of hardware, software and peripheral components to end
users, including dealers, and to distributors.  Revenues from sales to end users
are recognized upon shipment.  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 the 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
unaudited condensed consolidated balance sheets.

Software components are generally not sold separately from the Company's
hardware components.  Accordingly, the Company allocates revenues between the
hardware and software components of its products based on management's best
estimate of their relative fair market values.  The Company then accounts for
the recognition of software revenues in accordance with Statement of Position
(SOP) 97-2, "Software Revenue Recognition".  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/enhancements are accrued for at the time of delivery.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements."  SAB No. 101 and related
interpretations summarize the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues.  We are required
to apply the guidance in SAB No. 101 to our financial statements no later than
our fourth quarter ending September 30 2001.  We currently are reviewing the
impact of SAB No. 101 on our revenue recognition policy and the related impact
on our consolidated financial statements.  At this time, we do not believe SAB
No. 101 will have a material impact on our financial position or results of
operations.


BASIC NET LOSS PER SHARE

                                       7
<PAGE>

Basic net loss per share has been calculated under 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.  The basic net loss per share calculation has been appropriately
weighted to reflect the shares of common stock issued and preferred stock that
was converted to common stock upon the Company's initial public offering in
October 1999 (see Note 2). No diluted loss per share information has been
presented in the accompanying condensed consolidated statements of operations
since potential common shares from the conversion of preferred stock, stock
options and warrants are antidilutive. The Company evaluated the requirements of
SAB No. 98, "Computation of Earnings Per Share," and concluded that there are no
nominal issuances of common stock or potential common stock which would be
required to be shown as outstanding for all periods presented herein.

COMPREHENSIVE INCOME

For the periods presented within this Condensed Consolidated Financial
Statement, the Company does not have any other comprehensive income.
Accordingly, comprehensive loss is the same as net loss for all periods
presented.

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 and nine month
periods ended June 30, 2000 and 1999 were as follows:

<TABLE>
<CAPTION>
                                             Three Months Ended              Nine Months Ended
                                                  June 30,                         June 30,
                                          -------------------------   --------------------------
                                             2000           1999          2000           1999
                                          ----------     ----------   -----------    -----------
<S>                                       <C>            <C>          <C>            <C>
Net Revenue
     United States .....................       86%           90%            92%           91%
     International .....................       14%           10%             8%            9%
                                             ------        ------         -----         ------
                                              100%          100%           100%          100%
                                             ======        ======         ======        ======
</TABLE>

Net revenue from certain customers which individually that accounted for more
than 10% of revenue for the three month and nine month periods ended June 30,
2000 and 1999 were as follows:

<TABLE>
<CAPTION>
                             Three Months Ended    Nine Months Ended
                                   June 30,             June 30,
                             ------------------    ------------------
                              2000       1999       2000        1999
                             -------    -------    -------     ------
<S>                          <C>        <C>        <C>         <C>
   Customer A                   17%        22%        22%        25%
   Customer B                   18%        20%        17%        20%
   Customer C                   22%         8%        18%         3%
   Customer D                   15%        --         11%        --
   Others                       28%        50%        32%        52%
                             -------    -------    -------     ------
                               100%       100%       100%       100%
                             =======    =======    =======     ======
</TABLE>

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

                                       8
<PAGE>

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value.  Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting.  The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows.  In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or October 1, 2000 for AltiGen). Management does
not believe this statement will have a material impact on the financial position
or results of operations as the Company does not currently hold any derivative
instruments and does not engage in hedging activities.

Note 2. INITIAL PUBLIC OFFERING

On October 4, 1999, the Company completed the initial public offering (the
"Offering") of its Common Stock, $.001 par value.  In connection with the
Offering, 3,737,500 shares of Common Stock were sold at a price of $10.00 per
share.   All of the Company's outstanding convertible preferred stock were
converted on a one-to-one basis to common stock.

After deducting underwriting discounts and commissions of $2.6 million, the
Company received net proceeds from the Offering of approximately $34.7 million.
In addition, after deducting other previously incurred and paid Offering
expenses of $1.4 million, the Offering resulted in a net increase to
stockholders' equity of $33.3 million. The Company intends to use the proceeds
for general corporate purposes as described in the prospectus for the Offering.
None of the Company's net proceeds of the Offering were paid directly or
indirectly to any director, officer, general partner of the Company or their
associates, persons owning 10% or more of any class of equity securities of the
Company, or an affiliate of the Company.

Note 3. COMMITMENTS AND CONTINGENCIES

The Company is engaged in litigation with NetPhone, Inc. (NetPhone), a
competitor, related to alleged infringement by the Company of a NetPhone patent.
The Company has responded to NetPhone's complaint in the U.S. District Court
requesting a declaration that the Company has not infringed any valid claim of
NetPhone's patent.  NetPhone, in turn, has filed a motion against the Company,
seeking to enjoin the Company from making, importing, using, selling or offering
to sell its Quantum Board, a product which accounted for approximately 80.6% of
the Company's revenues for fiscal year 1999 and 73.3% of the Company's revenues
for the nine-month period ended June 30, 2000. The Company has responded by
filing an opposition to NetPhone's motion. The Court denied NetPhone's motion
for preliminary injunction on February 11, 2000.  On March 8, 2000, Sonoma
Systems acquired the technology and patents of NetPhone, Inc.  and has been
added to the lawsuit as a defendant and counterclaimant.  The case has been set
for trial in April 2001.  AltiGen's patent prosecution counsel does not believe
that the ultimate outcome of this matter will have a material impact on the
Company's financial condition or results of its operations.  However, litigation
of this nature is subject to inherent uncertainties and therefore, there is no
assurance that the Company will prevail in the litigation or that an adverse
outcome will not adversely affect the Company's business or financial condition.

                                       9
<PAGE>

Note 4. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions involving Stock Compensation- an interpretation of APB No.
25." FIN 44 is effective July 1, 2000. FIN 44 clarifies the application of APB
No. 25 for certain issues, specifically, (a) the definition of an employee, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Management does not
anticipate that the adoption of FIN 44 will have a material impact on the
financial position or the results of operations.

Note 5.  DEFERRED STOCK COMPENSATION

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

<TABLE>
<CAPTION>
                                                         Three Months Ended     Nine Months Ended
                                                               June 30,              June 30,
                                                         -------------------   -------------------
                                                           2000       1999       2000       1999
                                                         --------   --------   --------   --------
<S>                                                      <C>        <C>        <C>        <C>
Research and development .............................   $105,806   $ 87,110   $317,418   $261,330
Sales and marketing ..................................     88,191     66,246    264,571    198,738
General and administrative ...........................     49,244     39,234    147,732    117,702
                                                         --------   --------   --------   --------
                                                         $243,241   $192,590   $729,721   $577,770
                                                         ========   ========   ========   ========
</TABLE>

                                       10
<PAGE>

Item 2.   Management's Discussion and Analysis of Financial Conditions 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, including the Registration Statement
on Form S-1, as amended (Registration No. 333-79509), effective October 4, 1999.

OVERVIEW

We are a leading provider of integrated, multi-function telecommunications
systems.  We were incorporated in May 1994 and began operations in July 1994.
From inception through July 1996, we were a development-stage company and had no
revenues.  During this period, our operating activities consisted primarily of
developing our initial product, recruiting personnel, raising capital and
building our corporate infrastructure. We first recognized revenues from product
sales of our Quantum board and AltiWare software in July 1996. We generated net
revenues of $4.0 million and $9.7 million for the third  quarter and first nine
months of fiscal 2000, respectively, compared to net revenues of $1.9 million
and $4.3 million for the third quarter and first nine months of fiscal 1999,
respectively. As of June 30, 2000, we had an accumulated deficit of $22.9
million.

We derive our revenues from sales of our AltiServ system, which includes Quantum
boards, Triton boards and AltiWare software.  Software sales currently comprise
about 9.5% of our net revenues.  We generally do not sell software separately
from our hardware products.  We believe software sales will comprise a greater
portion of our net revenues in the future.  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 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.

Results of Operations

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

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                        Three Months Ended    Nine  Months Ended
                                                             June 30,              June 30,
                                                       -------------------   -------------------
                                                         2000       1999       2000       1999
                                                       --------   --------   --------   --------
                                                            (unaudited)           (unaudited)
<S>                                                    <C>        <C>        <C>        <C>
Revenues, net........................................     100.0%     100.0%     100.0%     100.0%
Cost of revenues.....................................      44.8       49.5       45.5       50.8
                                                        -------    -------    -------    -------
Gross profit.........................................      55.2       50.5       54.5       49.2

Operating expenses:
     Research and development........................      27.9       50.8       30.1       70.5
     Sales and marketing.............................      66.3       56.5       72.1       66.3
     General and administrative......................      18.9       24.4       24.5       28.0
     Deferred stock compensation.....................       6.0       10.1        7.5       13.6
                                                        -------    -------    -------    -------
        Total operating expenses.....................     119.1      141.8      134.2      178.4
                                                        -------    -------    -------    -------
Loss from operations.................................     (63.9)    ( 91.3)     (79.7)    (129.2)
Interest and other income, net.......................      13.3        4.0       16.0        6.4
                                                        -------    -------    -------    -------
Net loss.............................................     (50.6)%   ( 87.3)%    (63.7)%   (122.8)%
                                                        =======    =======    =======    =======
</TABLE>

Revenues, net.  Revenues consist of sales to end users (including dealers) and
to distributors.  Net revenues were $4.0 million and $9.7 million for the third
quarter and first nine months of fiscal 2000, respectively, an increase of
112.2% and 127.6% from net revenues of $1.9 million and $4.3 million for the
third quarter and first nine months of fiscal 1999, respectively. This increase
in revenue was primarily due to two factors: a) increased customer acceptance of
our product features and functionality and b) the strengthening of our dealer
network and distribution partners.  Sales through our main distributors,
AltiSys, Avnet/Hallmark, Ingram Micro, Synnex, and Tech Data accounted for
approximately 22.3%, 8.6%, 17.7%, 14.6% and 16.9%, respectively, of our revenues
for the third quarter of fiscal 2000 compared to 7.6%, 0.0% 19.8%, 0.0%, and
21.8% respectively, of our revenues for the same quarter of fiscal 1999.
Additionally, net revenues increased due to increasing demand of Triton boards,
which consist of T1 and voice over IP features.

Cost of revenues.  Cost of revenues were $1.8 million and $4.4 million for the
third quarter and first nine months of fiscal 2000, respectively, an increase of
$872,000 and $2.2 million from cost of revenues of $943,000 and $2.2 million for
the third quarter and first nine months of fiscal 1999, respectively.  The
increase was primarily due to the increase in revenue.  Cost of revenues
consists primarily of component and material costs, direct labor cost,
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 49.5% and 50.8% for the third quarter and the first nine
months of fiscal 1999, respectively, to 44.8% and 45.5% for the third quarter
and first nine months of fiscal 2000, respectively. The decrease in cost of
revenues as a percentage of net revenues was due to operational efficiencies
from increases in production.

Gross profit.  Gross profit increased to $2.2 million and $5.3 million for the
third quarter and the first nine months of fiscal 2000, respectively from
$964,000 and $2.1 million for the same periods of fiscal 1999.  As a percentage
of net revenues, gross profit increased from 50.5% and 49.2% for the third
quarter and the first nine months of fiscal 1999, respectively, to 55.2% and
54.5% for the same periods of fiscal 2000, respectively. The increase in gross
profit as a percentage of net revenues was due to  lower component and overhead
costs due to operational efficiencies from increases in production.

                                       12
<PAGE>

Although gross profit as a percentage of net revenues has increased slightly
each period, there can be no assurance that this trend will continue in the
future.

Research and development expenses.  Research and development expenses were
$969,000 and $3.0 million for the third quarter and the first nine months of
fiscal 1999, respectively, compared to $1.1 million and $2.9 million for the
same periods of fiscal 2000, respectively. 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.  We expense our research and development costs as incurred.  Research
and development expenses are expected to be maintained at the same level as the
previous quarter in the short term.  Research and development expenses may
increase in the long term, while we continue to develop new products and new
features for existing products.

Sales and marketing expenses.  Sales and marketing expenses increased to $2.7
million and $7.0 million for the third quarter and the first nine months of
fiscal 2000, respectively, from $1.1 million and $2.8 million for the same
periods of fiscal 1999, respectively.  Sales and marketing expenses consist of
compensation, commissions and related costs for personnel engaged in sales and
marketing functions, trade show expenses, selling and promotional programs,
marketing programs and related expenses.  This increase was primarily due to the
significant increase in spending on trade show and advertising activities for
building brand recognition and lead generation.  The sales and marketing
departments combined consist of thirty eight employees.  The sales and marketing
departments hired six additional employees since September 30, 1999, which
increased compensation and commissions related expenses.  Increase in expenses
are also attributed to training costs related to educating new qualified
authorized dealers.  In the near term, sales and marketing expenses are expected
to be maintained at the same level as in the previous quarter.  Long term, it
may be necessary to increase sales and marketing expenses while we continue to
pursue new channels and markets and to promote customer and end user awareness
of the features and benefits of our products.

General and administrative expenses.  General and administrative expenses
increased to $766,000 and $2.4 million for the third quarter and the first nine
months of fiscal 2000, respectively, from $466,000 and $1.2 million for the same
periods of fiscal 1999, respectively.  General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
administrative personnel, recruiting expenses, professional fees and other
general corporate expenses.  The increase was primarily due to legal fees
related to the NetPhone litigation (see Part II, Item 1, Legal Proceedings),
hiring of additional personnel in our finance and accounting, management
information systems and administrative groups, and an increase in related
facilities expenses and professional services expenses. In the near term,
general and administrative expenses are expected to be maintained at the same
level as in the previous quarter.  Long term, it may be necessary to increase
general and administrative expenses while we continue to build our
infrastructure to support the growth of our business.

Deferred stock compensation expense.  Deferred stock compensation expense was
$243,000 and  $730,000 for the third quarter and the first nine months of fiscal
2000, respectively, as compared to $193,000 and $578,000 for the same periods of
fiscal 1999, respectively.  Deferred stock compensation expense reflects the
amortization of stock compensation charges resulting from granting certain stock
options in prior periods, at exercise prices below the deemed fair value of our
common stock on the dates the options were granted.  We are amortizing these
amounts using the straight-line method over the vesting period of the stock
options. We expect to amortize approximately $973,000 of this deferred stock
compensation in fiscal year 2000, $973,000 in fiscal year 2001, $809,000 in
fiscal year 2002 and $203,000 in fiscal year 2003 and doing so will increase our
loss (or reduce any profits that we may have).

Interest and other income, net.  Net interest and other income increased to
$539,000 and $1.6 million for the third quarter and the first nine months of
fiscal 2000, respectively, from $76,000 and $275,000

                                       13
<PAGE>

for the same periods of fiscal 1999, respectively. This increase was due to
investing the proceeds from our initial public offering in October 1999.

Cash flow

Liquidity and Capital Resources

Since inception, we have financed our operations primarily from the sale of
stock. As of June 30, 2000, we had cash and cash equivalents of $12.0 million,
which consists of cash deposited in checking and money market accounts and
commercial paper with original maturities of less than three months.

Net cash used in our operating activities was $6.7 million for the nine months
ended June 30, 2000, compared to $5.3 million for the same period ended June 30,
1999.  Net cash used in operating activities primarily reflected the impact of
the net loss for each of the periods, as well as working capital required to
fund our growth of operations.

Net cash used in investing activities was $22.1 million for the nine months
ended June 30, 2000, compared to $452,000 net cash provided by investing
activities for the same period ended June 30, 1999.  The increase in cash used
for investing activities was primarily due to the increase in the net cash from
the proceeds of the initial public offering of our common stock, being invested,
into short-term and long-term investments.

Financing activities provided $34.9 million in cash for the nine months ended
June 30, 2000, compared to $5.8 million for the same period ended June 30, 1999.
The increase in net cash provided by financing activities related to the
proceeds from the issuance of common stock upon the closing of our initial
public offering and the proceeds from the exercise of stock options.

We currently believe that the remaining net proceeds from the Company's initial
public offering will provide us with sufficient funds to finance our operations
for at least the next 12 months.  Our management intends to invest our cash in
excess of current operating requirements in short-term, interest-bearing
investment-grade securities.  Subsequently, we may need to raise additional
funds, and additional financing may not be available on favorable terms, if 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 cannot raise funds, if needed, on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, financial condition, and
results of operations.  If additional funds are raised through the issuance of
equity securities, the net tangible book value per share may decrease, the
percentage ownership of then current stockholders may be diluted, and such
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock.

                                       14
<PAGE>

Year 2000 Compliance

Impact of the year 2000 problem.  The year 2000 problem refers to the potential
for system and processing failures of date-related data as a result of computer-
controlled systems using two digits rather than four to define the applicable
year.  For example, computer programs that have time-sensitive software may
recognize a date represented as "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions to
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

To date, we have not experienced any year 2000 issues with any of our internal
systems or our products, and we do not expect to experience any of them.

Notwithstanding that the Company did not experience any major problems on the
date change, management is monitoring this area and will continue to do so
during the reminder of calendar year 2000 to ensure that no major disruptions to
business occur related to this matter.

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 June 30, 2000,
we had an accumulated deficit of $22.9 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 increased expenditures for product development and
general and administrative expenses, and substantial increases in sales and
marketing expenses, 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.

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:

 .    Establish and increase market acceptance of our technology, products and
     systems;
 .    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;
 .    Introduce products and systems incorporating our technology and
     enhancements to our product applications on a timely basis;
 .    Respond effectively to competitive pressures; and
 .    Successfully market and support our products and systems.

                                       15
<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:

 .    Our sales cycle, which may vary substantially from customer to customer;
 .    Unfavorable changes in the prices and delivery of the components we
     purchase;
 .    The size and timing of orders for our products, which may vary depending on
     the season, and the contractual terms of those orders;
 .    The size and timing of our expenses, including operating expenses and
     expenses of developing new products and product enhancements;
 .    Deferrals of customer orders in anticipation of new products, services or
     product enhancements introduced by us or by our competitors; and
 .    Our ability to attain and maintain production volumes and quality levels
     for our products.

Our 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.

We face competition from companies providing traditional private telephone
systems. Our principal competitors that produce traditional private telephone
systems are Lucent Technologies and Nortel Networks. We also compete against
providers of multifunction telecommunications systems, including Picazo
Communications, Inc. and Artisoft, Inc.  We potentially face competition from
companies such as Shoreline Teleworks, Inc., NBX Corporation (acquired by 3Com
Corporation), Selsius Systems (acquired by Cisco Systems, 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

                                       16
<PAGE>

solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. We also expect that other
companies may enter our market with better products and technologies. If any
technology that is competing with ours is more reliable, faster, less expensive
or has other advantages over our technology, then the demand for our products
and services could decrease and harm our business.

We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. If our
competitors successfully introduce new products or enhance their existing
products, 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 five key distributors, AltiSys, Avnet/Hallmark, Ingram Micro,
Synnex, and Tech Data,  accounted for 80.1% of our revenues for the third
quarter of 2000.  Our business and operating results will suffer if any of these
key 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 Tech Data 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 limited
or no 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.

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 is 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 Mitel Corporation chip, is particularly
important to our business because it is included in virtually all of our
hardware products.  If we were unable to purchase an adequate supply of these
sole-sourced components on a timely basis, we would be required to develop
alternative 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 Mitel Corporation chip, could
significantly delay shipment of our products, which could have a negative effect
on our business, financial condition and results of operations.

                                       17
<PAGE>

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 and that similar or different problems may
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 cannot be certain that our products do not, or will not, infringe patents,
trademarks, copyrights or other intellectual property rights held by third
parties.  Third parties may assert infringement claims against us.  From time to
time in the ordinary course of business we have been, and we expect to continue
to be, subject to claims of alleged infringement of the patents and intellectual
property rights of others.  For example, we are currently engaged in litigation
with NetPhone, Inc.  In June 1999, we received a letter from NetPhone alleging
that we infringe a patent owned by NetPhone.  On June 30, 1999, we filed a
request for a declaration from the United States District Court for the Northern
District of California that AltiGen does not infringe any valid claim of
NetPhone's patent. NetPhone answered AltiGen's complaint on July 13, 1999 and
asserted a counterclaim against AltiGen, alleging that AltiGen infringes the
NetPhone patent.  On August 11, 1999, NetPhone filed a motion to enjoin AltiGen
from

                                       18
<PAGE>

making, importing, using, offering to sell or selling a device under the name
Quantum. On September 7, 1999, we filed our opposition to NetPhone's motion. A
hearing was held on NetPhone's motion for preliminary injunction on December 13,
1999. The Court has denied NetPhone's motion for preliminary injunction on
February 11, 2000. Sonoma Systems acquired the technology and patents of
NetPhone, Inc., and has been added to the lawsuit as a defendant and
counterclaimant. The case has been set for trial in April 2001. Any litigation
is subject to inherent uncertainties and, therefore, we cannot assure you that
we will prevail or that we can avoid an adverse outcome.

This litigation could be costly and time consuming.  An adverse outcome could
require us to obtain a license or require us to cease sales of what NetPhone
calls the "Quantum device" and possibly alter the design of some of our
products.  For the third quarter of 2000, sales of our Quantum board constituted
74.9% of our revenues.  Accordingly, an adverse outcome could materially harm
our business. See "Part II, Item 1, Legal Proceedings."

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.

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.

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.

                                       19
<PAGE>

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 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.

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
operations.

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

For the third quarter of 2000, approximately 13.8% of our net revenues came from
customers outside of the United States.  We intend to expand our international
sales and marketing efforts.  Our efforts are subject to a variety of risks
associated with conducting business internationally, any of which could
seriously harm our business, financial condition and results of operations.
These risks include:

Tariffs, duties, price controls or other restrictions on foreign currencies or
trade barriers, such as import or export licensing imposed by foreign countries,
especially on technology;
Potential adverse tax consequences, including restrictions on repatriation of
earnings;
Fluctuations in foreign currency exchange rates, which could make our products
relatively more expensive in foreign markets; and
Conflicting regulatory requirements in different countries that may require us
to invest significant resources customizing our products for each country.

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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.
Competition for highly trained personnel is intense, especially in the San
Francisco Bay Area where most of our operations are located.  We cannot be
certain that we will be successful in our recruitment and retention efforts. If
we fail to attract or retain qualified personnel or suffer from delays in hiring
required personnel, our business, financial condition and results of operations
may be seriously harmed.

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.

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 were to become unable or unwilling to
continue to manufacture or test our products in the required volumes, we would
have to identify and qualify acceptable replacements.  Finding replacements
could take time, and we cannot be sure that additional sources would be
available to us on a timely basis.  Any delay or increase in costs in the
assembly and testing of products by third-party subcontractors could seriously
harm our business, financial condition and results of operations.

Risks Related to the Industry

Integrated, multifunction telecommunications systems may not achieve widespread
acceptance, and our fixed costs in the short run could cause our operating
results and business to suffer

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

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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. We incur many
fixed costs in anticipation of a certain level of revenues. If businesses defer
purchasing or decide not to purchase integrated, multifunction
telecommunications systems and the market for our products does not grow or
grows substantially more slowly than we anticipate, our operating results will
suffer and our business will be harmed because we will be unable to reduce fixed
costs in the short term to offset the reduced revenues.

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.

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.

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Item 3.  Quantitative and Qualitative Disclosures About 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.  Therefore, no quantitative tabular disclosures are
required.

Currently, all of our sales and expenses are denominated in U.S. dollars and, as
a result, we have not experienced significant foreign exchange gains and losses
to date. We have not engaged in foreign currency hedging activities to date.

PART II

Item1.  Legal Proceedings

Generally, litigation, which could be costly and time consuming, may be
necessary to determine the scope and validity of others' proprietary rights, or
to enforce any patent issued to us, in either case, in judicial or
administrative proceedings.  For example, we are currently engaged in litigation
with NetPhone, Inc.  In June 1999, we received a letter from NetPhone alleging
that we infringe a patent owned by NetPhone.  On June 30, 1999, we filed a
request for a declaration from the United States District Court for the Northern
District of California that AltiGen does not infringe any valid claim of
NetPhone's patent.  NetPhone answered AltiGen's complaint on July 13, 1999 and
asserted a counterclaim against AltiGen alleging that AltiGen infringes the
NetPhone patent and seeking to preliminarily and permanently enjoin AltiGen from
making, importing, using, offering to sell or selling a device under the name
Quantum.  On August 11, 1999, NetPhone filed a motion for preliminary
injunction.  On September 7, 1999, we filed our opposition to NetPhone's motion.
A hearing was held on NetPhone's motion for preliminary injunction on December
13, 1999, The Court has denied NetPhone's motion on February 11, 2000. Sonoma
Systems acquired the technology and patents of NetPhone, Inc., and has been
added to the lawsuit as a defendant and counterclaimant.  The case has been set
for trial in April 2001.  Any litigation is subject to inherent uncertainties
and, therefore, we cannot assure you that we will prevail in this litigation, or
that an adverse outcome would not adversely affect our business or financial
condition.

An adverse outcome in the NetPhone litigation or any other litigation could
subject us to significant liabilities to third parties, require us to obtain
licenses from third parties, or require us to cease product sales and possibly
alter the design of our products.  Not all licenses to third-party patents or
proprietary rights may be available on acceptable terms.  In addition, the laws
of certain countries may not protect our intellectual property.

Item 2. Changes in Securities and Use of Proceeds

For the three months ended June 30, 2000, we issued 30,658 shares of common
stock pursuant to the exercise of stock options at exercise prices ranging from
$0.12 to $4.34. All of the stock options were granted under our 1994 Stock
Option Plan prior to our initial public offering. Our issuance of shares of our
common stock upon the exercise of these options was exempt from registrant
pursuant to rule 701 promulgated under the Securities Act of 1933, as amended.

Item 4. Submission of Matters to a Vote of Security Holders.

None

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Item 6. Exhibits and Report on Form 8-K

(a)  Exhibits:

     Exhibits 27.1 - Financial Data Schedule

(b)  Report on Form 8-K

     None


Item 3. and Item 5. not applicable

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 7 day of August, 2000.


                    ALTIGEN COMMUNICATIONS, INC.

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

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